“Nonprofit” and “No Risk” are not Bedfellows

For those  serving on staff and on the Board of nonprofits, a very real issues is upon us.  Nonprofit Quarterly posted this morning a very important article outlining the “risk” faced by nonprofits.  The case at hand is regarding the Lemington Home for the Aged of Pennsylvania who was recently found in breach of their duty of care.  At issue were financial woes and the reporting deficiencies to the Pennsylvania Department of Health at a rate of three times the average.  According to NPQ:

The U.S. Court of Appeals for the Third Circuit recently upheld a $2.25 million jury verdict against the directors of a nonprofit nursing home, holding them personally liable for breach of their duty of care. Their sin? Failing to remove the nursing home’s administrator and CFO “once the results of their mismanagement became apparent.” While the court overturned a punitive damages verdict against five directors (the jury had found nine other directors liable for compensatory damages but not punitive damages), it upheld punitive damage awards of $1 million against the CFO and $750,000 against the Administrator. The decision, while unusual, illustrates that serving on a nonprofit board is not risk-free even if as in this case, the directors do not breach their duty of loyalty or engage in any self-dealing. [In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015).]

What does this tell us in the nonprofit world about how we run our organizations and what lessons can we learn?

The Board must hire well qualified staff to lead the organization.
Someone with a great ‘heart’ and well-meaning intentions is not enough in a litigious society. Honest, competent professionals is your best front line against nonprofit litigation. Operating efficiently, with integrity and transparency, will keep naysayers at bay. The slippery slope is by its nature “slippery”. Hire staff with the right tools, training and moral compass that will steer clear of the gray areas. This most likely will keep you out of court.

The Board of Directors must take their responsibility seriously and supervise.
Most nonprofits adopt the Carver Model of governance and therefore do not get involved in the day-to-day operational decision.  But that does not absolve them from the judiciary responsibility of oversight. In the Lemington case, the directors were successfully sued for $2.25M for their dereliction of duty. However, this doesn’t mean you panic and resign your board seat. It means board members should be sure processes and bylaws are in place to provide appropriate oversight.

As a nonprofit, you can be sued.
It doesn’t happen very often, but it can be done. Board members need to be aware of this reality.

Nonprofit boards should have adequate insurance.
Because nonprofits are normally lead by a board of volunteers in the community, they need to be protected against litigation. Every nonprofit should have adequate directors’ and officers’ (D&O )insurance to shield them from potential claims.

Be willing to cut bait.
If a staff person in senior management is causing problems that threaten the organization, the Board must have the fortitude to fire that staff person. In the nonprofit world the vision drives all decision making, and should. However, when the passions that the vision enflames causes harm and potential destruction of the organization, that staff member must either change their ways or must go. This is a board responsibility.

You can read the full NPQ article here.  I highly suggest you do.

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