Attorneys Advise Prudent Actions for Nonprofit Leaders

Charities In Distress: Governance and Standards of Care In Troubled Times

by Christina M. Mason and Carolyn R. Caufield

In times of economic hardship, non-profit organizations confront issues that are unique to their status. Like business entities, charities have responsibilities to their employees, to conduct their activities and to their creditors. But charities also have obligations to their donors and are accountable to the community at large for the use of their assets for charitable purposes, which may impede how those assets are used in responding to financial difficulties.  So how does a charity navigate perilous economic waters when its actions are scrutinized and governed by a multiplicity of (potentially conflicting) interests?

Of paramount concern to charitable directors and officers is whether they may be held personally liable for decisions, particularly challenging decisions such as reducing staff, borrowing against an endowment or even filing for bankruptcy.  Historically, the standard of care that applied to the governing bodies of charitable organizations was rooted in trust law which carries a greater risk of personal liability.  However, modern non-profit corporation statutes have attempted to adopt standards of care more closely attuned to the business corporation model.

… A director’s compliance with the standard of care may be complicated by the interests of donors, creditors and the general public in the activities and assets of charitable organizations. Whether legally binding or not, both the officers and directors of charities must address these sometimes conflicting interests in tapping their endowments and other institutional funds, addressing the claims of creditors and disposing of assets held for charitable purposes.

… Responsibility for addressing a charity’s financial difficulties lies with the directors, who must make a determination of what can be done as well as what should be done. Directors and officers should be familiar with applicable state laws defining the obligations of charities’ directors and officers, and the rights of donors and creditors, and with community and professional sensitivities.

The complete article, Charities In Distress: Governance and Standards of Care In Troubled Times, is available from OnPhilanthropy.