Succession Planning Success—Ensuring Good Governance Through Board Membership for Nonprofits
March 4, 2024
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Reprinted with permission from the March 1, 2024 edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
By Frannie Reilly and Meagan Truong
The word “good” has a number of different meanings—it is a condition, a salable item, a benefit —but what does it mean when we talk about good governance of nonprofit organizations? In this instance, the discussion is still at least two-fold, if not more.
Nonprofit organizations, by their essence, have a duty to serve public interests—to provide for the greater good. In order to ensure they are doing that, the Internal Revenue Service (IRS) monitors closely how these entities are governed. Nonprofit boards thus have to ensure that they are running the entity appropriately and strategically in a manner that fulfills that duty and the entity’s purpose—that they practice good governance.
One question that frequently comes up when a nonprofit organization is either being formed or during a time of high board turnover is how many board members are needed to ensure that the nonprofit organization will continue to operate and be successful. Now more than ever, nonprofit organizations are experiencing high turnover of board members and the role of lawyers in serving as board members, helping as volunteers and counseling nonprofit organizations has become crucial to ensuring continued success.
As board members, lawyers have a fiduciary duty to provide good governance to nonprofit organizations and, as volunteers, lawyers help nonprofit organizations fulfill their missions of providing for the greater good. As lawyers representing nonprofits, we have a responsibility for advising clients to maintain this adherence to the greater good and counsel clients on good governance.
This article will discuss how providing for the greater good and ensuring good governance go hand in hand in succession planning success for nonprofits.
Ensuring a Focus on the Greater Good
As part of its oversight of nonprofit organizations, the IRS seeks to confirm that an entity is actually providing a public benefit rather than covertly benefiting certain individuals. In the example below, if there are too few board members, there could be concerns about the fulfillment of this greater good aspect. The ultimate question is who is receiving a benefit from this nonprofit organization.
An example of a covert private benefit would be if an individual or entity (or a group thereof) started a nonprofit to benefit or celebrate a certain group of people—for instance, nurses. As part of that celebration, nurses were invited to come to a weekend event in their honor and were offered a discounted hotel rate; but, the hotel hosting the event was also owned by the founders of the nonprofit and would reap the benefits of hosting an event which brought guests to the hotel. In this instance, the concern would be that the nonprofit was materially benefitting a small group of people—the hotel owners—who are also the founders or board members of the entity.
While this is an extreme (and blatant) example of a nonprofit organization benefitting a small group of people, the IRS has determined a variety of questions to ask as part of its investigation into nonprofit organizations during their 501(c)(3) approval process to tease out more covert private party benefits. One item an IRS examiner will look at is the number of board members. While there is no federal requirement for a minimum number of members, we recommend having at least three to avoid voting ties and to provide some variance in opinion. Additionally, it can be a good idea to have someone who was not a part of the formation of the entity serve as a board member; this shows greater independence and separation from the reason for the nonprofit organization’s creation. Not only can a larger number of directors provide more assurance that a nonprofit organization is providing a public benefit or greater good, it can aid in good governance, as well, for the reasons to be discussed below.
Good Governance
In addition to ensuring the public benefit aspect of a nonprofit, ensuring that there are a sufficient number of individuals serving on the board is also an important factor in ensuring good governance. The board is the governing body of a nonprofit organization and with that responsibility comes the fiduciary duty to manage responsibly. This means that as board members roll off the board, the nonprofit organization must have a plan in place for the continuation of the entity; this is far easier done with a higher number of board members. Many board members question how to find new board members. Current and past board members may all be sources of identifying and connecting potential board members with the nonprofit organization. In addition, as board members are entering their last term with the nonprofit organization, they should consider who would be good candidates to serve on the board. Another resource would be for board members to look to committee members and volunteers who have demonstrated an interest and a commitment to the nonprofit.
The continued identification of new board members is crucial to ensuring that a board is exercising good governance by recognizing the need for succession planning. Without a clear succession plan in place, a nonprofit organization may face a situation in which board members complete their terms of service and are not replaced. This situation leaves a very small number of individuals (or one individual) as the governing body. As explained above, the result may be a concern of private benefit.
To mitigate this situation, a strong succession plan should be adopted by the board and discussed on an intentionally frequent basis to consider new board members.
Conclusion
Ensuring a broader number of directors and inviting directors from varied backgrounds and life stages can provide a means for continuing the succession and engagement of board members, and ensuring that the nonprofit organization will continue providing for the “greater good” beyond the tenure of any one or two board members. The continued succession, depth and diversity of the board will ultimately lead to good governance and the ability of the nonprofit organization to offer the greater good to those that it serves.
Meagan Truong is a business attorney at McNees Wallace & Nurick and serves clients from Pittsburgh. She advises private business owners of all sizes on a range of corporate and business law matters. She can be reached at mtruong@mcneeslaw.com or 412-227-2508.
Martha “Frannie” Reilly is co-chair of the firm’s public finance and government services group and chair of the firm’s charitable & nonprofit and environmental, social and governance (ESG) groups. Serving clients from Devon, she advises charitable and nonprofit organizations on fiduciary duties, compliance, planning and other matters. She can be reached at freilly@mcneeslaw.com or 484-329-8036.
