Since the passage of the Sarbanes-Oxley Act, publicly traded companies have had to comply with strict new governance standards. A significant part of the Act increased the role board members must play in terms of the firm's financial dealings and auditing procedures.
Though the same laws don't apply to nonprofit organizations, these board members should be aware of their role given today's heightened compliance environment. Yet, some organizations, especially small to midsized nonprofits, may not even be aware of these responsibilities.
Financial advisors who present themselves as experts in this field can help nonprofit organizations while simultaneously expanding their own businesses.
Nonprofit organizations, such as foundations and endowments, have not been viewed by many financial advisors as fertile prospecting territory. But the light competition in this area equates to better opportunities for the advisor who takes the time and initiative to penetrate the market.
One way to get a foot in the door is to demonstrate how you can help the organization's board members meet their fiduciary responsibilities. This may also be a way to garner financial planning business from current board members, many of whom tend to be ultra-high-net-worth individuals.
To avoid personal liability, nonprofit board members must meet certain standards of conduct. The courts usually describe these standards as Duty of Care, Duty of Loyalty and Duty of Obedience.
Duty of Care
This describes the level of competence expected by board members. In short, they must remain informed about the organization's activities. To accomplish this, they should feel comfortable answering “yes” to these types of questions:
Do you attend board meetings?
Do you read materials related to the operations of the organization?
Do you exercise reasonable care when applying your skills to the organization?
Board members should document their meetings and describe in detail the issues considered in their deliberations. The head of the organization should also encourage diversity among board members and appoint people with a range of appropriate skills and interests.
Duty of Loyalty
Board members are required to put the interest of the organization above any private interests. In particular, there should be policies in place to avoid conflicts of interest and/or self-dealing. Individual board members must not:
Use their position for any personal advantage or gain.
Vote on issues of vested interest.
Promote personal agendas.
Attend meetings on issues that personally affect themselves.
Again, documentation is critical to protect not only the board members but also the organization. In addition, the organization should have a written conflict-of-interest policy that is updated on a regular basis.
Duty of Obedience
Board members must be faithful to the organization's mission and comply with all its written policies and applicable laws. To accomplish this, procedures should be in place to monitor all of the organization's activities. For example, the board members must:
Monitor all transactions to be sure there are no unauthorized activities.
Comply with all documents pertaining to the organization's operations.
Comply with state and federal laws.
How to Present to a Nonprofit Board
Before meeting with nonprofit board members, it's imperative to do the necessary legwork and tailor your presentation accordingly. In particular, you'll want to understand the mission and purpose of the organization, learn about the projects involved and read its publications. You'll also want to ensure that you “speak their language” by using key nonprofit terminology. And, as always, be sensitive to their main issues.
If you're serious about presenting yourself as a fiduciary expert, now is the time to do so, while the ramifications of the Sarbanes-Oxley Act and corporate accounting scandals are fresh in the minds of board members. While this is far from a “quick sell,” it is a way to help protect the interests of individuals who are dedicated to helping others. It's also a way to lay the groundwork for potential incremental business that could stay on the books over a long period of time.