Board of Directors Responsibilities

Many people become board members of an organization because they wish to, and feel that they can make a valuable contribution to that organization. Unfortunately, in many cases, those individuals are not properly taught their responsibilities. In the majority of cases, this is not the fault of the individual new board member, but rather the fault either of the organization for not having an adequate training program and manual in place. In other situations, the obstacle is that the individual who was supposed to train this new Board member, either did not, or was not well versed enough himself to do an adequate job.

Board members must know up-front what is expected of them, what the time commitment might be, what expenses might be incurred, if any financial contribution is expected as part of the position, etc. In addition, board members must fully understand their fiduciary responsibility is, and the necessary prerequisites. Fiduciary responsibilities refer to the trust placed in each board member to act responsibility, without conflict, and to educate himself in the financial considerations necessary for the particular organization. A board member must avoid even the appearance of any conflict of interest by recusing himself from voting or discussing any matter that he may have a personal or financial conflict in.

Board members must also remember to operate using the "prudent man rule," or investing or using organization's monies only in a manner that a prudent (or careful, conservative) person would. The board member must remember that while one may consider something suitable personally, the risk one is willing to assume personally, with ones own personal funds, might not be suitable for an organization. For example, while an individual may have considered it appropriate to have invested personal funds with Bernard Madoff, it was not appropriate for organizations to decide to invest money with him. Even if the Madoff investments were legitimate and truly profitable, most experts would not consider it "prudent" for an organization to invest in any "hedge fund," because of the inherently risky nature of that kind of investment and the lack of oversight regarding hedge funds.

A board member must perform whatever duties, in terms of committee work, commitments, leading by example, etc., might be necessary to enhance the organization's viability and performance. Board members generally assume the fiscal responsibility of evaluating budgets, and understanding whatever nuances are most important and unusual and specific to the particular organization. Board members must question all aspects of a budget, until completely satisfied that all possible alternatives have been considered and that the budget is in the best interests of the organization. A board member must insist upon budgets being prepared using "zero-based budgeting" methodology. Investopedia.com defines "zero based budgeting" (ZBB) as "a method of budgeting in which all expenses must be justified for each new period." It "starts from a 'zero base' and every function within an organization is analyzed for needs and costs." While zero-based budgeting often lowers expenses by eliminating across-the-board percentage increases, it is, by its very nature, more time-consuming. Because of that, many organizations opt to only follow zero-based budgeting every few years, assuming that the amount of annual savings does not justify the expense. While there is no doubt that it is a time-consuming process, those organizations that are dutiful in following this technique, are generally run the most effectively and efficiently, while those that opt to do this only periodically, tend to continuously procrastinate and delay between budgets when zero-based is once again utilized. Using zero-based budgets is not only cost-effective, but it has the added benefit of forcing Board members to "think outside the box," and actually analyze cost/ benefits, and alternative ways of doing things.

Many organizations use their board as a "training ground" to develop future leaders of the organization. This makes it even more important that board members be properly trained and indoctrinated about all areas involved regarding the organization. After having consulted to numerous organizations over the past three decades, I have witnessed that organizations that assure that their Board is effective are almost always more effectively led. Unfortunately, as in many other areas related to leadership training as it relates to organizations, most do not adequately train their Board's either. An effective Board is even more important during periods when an organization may have a leader or leaders that are not as "strong" and effective as may be optimum.

Trustees have Fiduciary Responsibilities

While each individual is entitled to make his own investment judgments regarding appropriate vehicles for his personal funds and accounts, not-for-profit trustees are entrusted with specific fiduciary responsibilities. These fiduciary responsibilities have been established to ensure the safety, stability and security of not-for-profit's funds. Unfortunately, these rules have been rather general rather than specific in most cases, and that has led to financial disaster for certain not-for-profits.

We have all heard and read about the impact of the monies managed by Bernie Madoff, on not-for-profits that invested in those vehicles. Putting aside the issue of the legality and legitimacy of Madoff's transactions, many believe that hedge funds in general, because of their sometimes speculative nature, and lack of certain controls that other investments possess, would be inappropriate vehicles under any circumstances for any not-for-profit. The logic behind these rules is that while an individuals who speculates with his own monies only impacts himself and his family, non-profits that speculate may put at risk monies that have been entrusted to it to serve specific causes or missions.

TheFreeDictionary.com defines the "prudent man rule" as "the requirement that a trustee, investment manager of pension funds, treasurer of a city or county, or any fiduciary (a trusted agent) must only invest funds entrusted to him/ her as would a person of prudence, i.e. with discretion, care and diligence. Thus solid "blue chip" securities, secured loans, federally guaranteed mortgages, treasury certificates and other conservative investments providing a reasonable return, are within the prudent man rule."

The "prudent man rule" has been the standard since around 1830, when there was a dispute settled by the Massachusetts courts. There have been many adaptations since then, because of the different and increased number of types of vehicles available to invest in today. One of the updates has been, for example, to include the concept of "diversification" into the definition, so an organization is not over- exposed to one particular investment. Thus, if we apply that towards the Madoff investments, even if the trustees felt that the investments might have some appropriateness as one of their investments, the many non- profits who were ruined or nearly ruined financially by holding this investment were obviously not being prudent by having a very large percentage in these investments. Trustees must not be blamed when an unforeseen circumstance causes otherwise suitable investments to financially implode, but the trustees must be held to the intent of the "prudent man rule" when making investment decisions.

Trustees must re-examine investments on a recurring basis, and assure that any changing circumstances has not changed the suitability status of a particular investment. They must insist that the portfolios be diversified as to type of investment (common stocks, preferred stocks, treasury bonds, corporate bonds, etc., as appropriate), industries invested in (no over-concentration on what investment area, e.g. technology, health, pharmaceuticals, etc.), and that the portfolio is suitably diverse. Many organizations have begun to utilize some facsimile of what is known as the "20/5 Rule." This means that, for example, that no more than twenty percent of the portfolio be invested in any one industry, and that no more than five percent be invested in any single investment.

Trustees have the fiduciary responsible to assure compliance with the "prudent man rule." This is important, not solely for legal reasons, but also for moral, ethical, and safety reasons as well.