[alicebot-archcomm] Trustee Handbook

[Dr. Richard S. Wallace]

There seems to be a lot of confusion over the role and powers of the Board
of Trustees.  I put some time into writing a Trustee Handbook for our new
Trustees.    Maybe it will help clarify some of the discussion here.  The
Board is not all-powerful but actually shares power with the executive
officers.

ALICE A.I. Foundation

Trustee Handbook

Dr. Richard S. Wallace

Draft 9/1/2002

Introduction

I'm not sure why God chose me to be the vessel for carrying the obscure
branch of knowledge that goes under the heading of corporate governance,
because I am probably the worst possible evangelist of this particular
faith.  I am by nature a rebel's rebel, anti-Establishment,
anti-authoritarian, anti-leadership, an individualist, an iconoclast, and
general irritant to the dominant paradigm.  I have been kicked off more
committees, fired from more jobs, ousted from more positions, than probably
anyone you know.  Not only that, I am not a lawyer.

But for some reason, God has blessed me with a divine skill to understand
this obscure topic called corporate governance, especially as it applies to
non-profit corporations.  I have founded several not-for-profit ventures
including the ALICE A.I. Foundation, an award winning global free software
project, and advised many more, ranging from political causes to medical
marijuana centers to universities.

Corporate Governance By the Book

One day at my club we started up a new nonprofit.  We did it by the book.

It's called the "Mental Health Patient's Union."

At noon, I started chatting with a fellow patient who had sued Social
Security and won.  I told him how frustrating it was that AIDS patients,
HEP-C patients and breast cancer patients are all so politically active
nowadays, getting a lot of media attention and funding for research on their
diseases, but mental health patients are just laying around doing nothing.
Meanwhile the media portrays mental health patients in the worst possible
stereotypes.  If there is a brutal murder on the news, they will not say,
"the killer had Cancer," or "the killer had Diabetes," but they will
certainly tell you if "the killer had a history of mental illness."

Clearly something has to be done.  We have to raise public awareness of
mental illness patients' plight.  We have to advocate for more humane and
compassionate care.  We have to demand treatment like other activists do.

The cool thing was, even though he had a head injury, this guy Jim had a
clue about corporate governance.  On a scrap of paper and the back of an
envelope, I wrote down a few notes.   By this time a few other
disenfranchised mental health patients had joined our table and before you
knew it, we had three Board members.  Then my therapist appeared and got
excited about the idea.  Because she is a good leader and works, we asked
her to be interim CEO and she agreed.  By mid afternoon I even got myself
off the Board of Directors and onto the Advisory Board and we stopped asking
for volunteers.

We all agreed to go off and think about this wonderful new idea, and
scheduled our next Board meeting for 90 days later with some concrete ideas
for the business plan.  We knew that if we couldn't come up with a business
plan, we could still part company as friends before we went too far with a
bad idea and started fighting about it.  We had fun, accomplished something,
and nobody really had to do very much work.

How Not To Do It

A group of four friends got together and decided to form a Mental Health
Patient's Union.  Their first step was to organize the members.  The put up
posters in health centers and clinics around town announcing a big meeting
at one of the friend's warehouse loft.  On the appointed night, the four
leaders sat at one big table in front of a collection of chairs arranged for
the members.

About 100 people showed up.  Half of them seemed to be friends of one of the
group's founders, this guy Dave.  The other half seemed like strangers who
responded to the ads.  This wasn't quite what the other three expected.

Suddenly Dave grabbed the microphone and began making a long speech about
the problems of mental health patients in our society, and the audience got
very excited.  But there were a few dissenters and it sparked a big, long
debate about the group's goals and agenda.  The other founders barely had a
chance to speak or introduce themselves.  Dave concluded the meeting by
announcing that they would all meet again in a month.

Afterward, Dave was really surprised that his three friends were angry at
him for "taking over" the Patients' Union with "his agenda".  He thought
they all shared the same agenda and he was the best spokesman.  After all he
was a professional voice coach.  The guy Bill whose loft they had used for
the meeting was so mad he said they couldn't use his space for the next
meeting which Dave had just announced to the 100 new members.  By the way,
did anyone bother to get an attendance list?

Independent Directors

The terms "Board of Trustees" and "Board of Directors" are interchangeable
for nonprofit corporations.  The term Trustees has more snob appeal.  The
more important concept is the independence of the Board.

The Board and Officers of a corporation are just like two branches of a
constitutional democracy.  The Board is like the Legislature, or perhaps
more elite like the Senate,  and the Officers are like the Executive Branch.
Ultimately when disputes arise, the court system corresponds to the real
Court System.  The Board has the responsibility for founding the
corporation, just like the Continental Congress.  They are also responsible
for raising the money for the corporation and setting its broad agenda or
mission statement.  The Board also pontificates about the organizations
long-term plans.

In this weird corporate government, the Board-Senate appoints the President
of the Executive Officer branch and may remove him or her at any time.  But
the Preisdent, who is sometimes called the CEO, has charge over all the
other officers and staff in the organization.  Except for hiring and firing
the CEO, theoretcially, legally, on paper, the Board (i.e. the Trustees or
the corporate Senate) is not supposed to mess around in the Executive
branch.

This is where almost all nonprofits and many for-profits go bad.  Trustees
get involved in the day-to-day management of the organization.   Employees
take labor and scheduling disputes to the Board.  The Board interferes in
the administration of a corporate web site.  The same person serves as Board
member and department manager or worse, corporate accountant.   Many
nonprofits are so unaware of Corporate Governance that they run for years
with Directors in management roles, and suffer the consequences of endless
conflict.

When Trustees or Directors are swamped in day-to-day organizational
management problems, they have little time for their Board responsibilities
of fundraising and planning.  Remember, the Board exists to provide checks
and balances on the management.  Every quarter the CEO reports to the
Trustees.  If the reports begin to look bad, the Trustees may consider
replacing the CEO.  Or, the may wonder if their business plan makes sense.
Either question deserves considerable time for deliberation, and human
beings are limited.  The authors of nonprofit corporate governance laws had
the foresight to see that we can't do everything.  We can't be superstar CEO
's and run the business and raise money and write business plans all at the
same time.  We need to divide those jobs between different people.

All of the recent corporate scandals provide an interesting civics lesson on
corporate governance that applies to the nonprofit world as well. There is
supposed to be a clear separation of powers between the Board of Trustees
and the Officers and Management of an organization, whether for-profit or
non-profit.  Frequently in the for-profit world, this rule is violated
because stockholders elect the Board of Directors.  In many cases
stockholders are also employee managers.  Sometimes they may also be the
accountants who "cook the books".  The addition of stocks into the equation
certainly complicates everything in some ways by creating more chances for
conflicts of interest between the Board and management.  On the other hand,
the lack of clear ownership rules in a nonprofit make the role of Board and
Management politics far more important.

In the for-profit sector, even the U.S. President has called for more
independent Boards of Directors.  "On independent directors, what the
president said this week was better. He
called on stock exchanges to require companies to appoint a majority of
independent (non-executive) directors, and for audit and remuneration
committees to be all independent. However, here too Mr Bush should have gone
further. Independent directors on main boards ought to be required to meet
regularly without executive directors present: otherwise, they will find
themselves too easily led by the chief executive and his acolytes. Their job
is not to nod in approval, but to hold executives to account on
shareholders' behalf. In private, they can better remind themselves of this
and gird themselves up to keep the boss in his place."

--- http://www.economist.com/opinion/displayStory.cfm?story_id=1224181

Of course, the President was talking about for-profit shareholder
corporations.  But it is noteworthy that these corporate scandals arise from
the same kind of conflicts we have, when Board members also serve in
executive positions.

His comments about requiring board members to meet regularly are timely too.

Attendance, Communication and Courtesy

As a matter of general principle, in any organization, when the CEO or
President sends a memo to the Vice President, Webmaster, Legal Counsel or
any other officer or employee, or even a Board member, a prompt and
professional reply is expected as a matter of courtesy if nothing else.


"Nothing undermines the effectiveness of a board more than absence from
meetings.  Indeed, regular attendance at meetings is one criterion that
could be used in a legal case to judge whether a board member had exercised
reasonable care and diligence in exercising his or her trustee
responsibilities.  Participation by everyone is necessary if the board is
going to operate effectively."

-- Managing a Nonprofit Organization, p. 45

I would add only that in our special circumstances, separated by vast
distances but united by the Internet, non-participation in online
discussions creates the appearance of absence from meetings.


Fundraising

Incorporating as a nonprofit in the State of California is one thing, but
the Holy Grail of nonprofits is Federal IRS 501( c)(3) tax exempt status.
This status allows the nonprofit to raise money from U.S. taxpayers,
including corporations, who can then claim a deduction on their annual
income tax returns.   Unfortunately, due to past abuses, the IRS application
process is complex and expensive.

There is a local resource here in SF called the Foundation Center which
provided assistance to startup nonprofits. It was foolish of me not to look
into this sooner.  I was told it should be fairly easy for us to hook up
with a large, established, non-controversial non-profit 501(c)(3) who will
act as our fiscal agent for
fundraising purposes, through the Foundation Center.

The Foundation Center also have a database of wealthy individuals who can be
approached for private donations.


Organizational Abandonment

Nonprofit corporations play by the rules of the laws established by the
State in which they are incorporated.  In addition, these rules are
augmented by the corporation's own charter and by-laws.  The really
important part of these Bylaws, concerning the Board of Trustees, are few.
They concern notification of meetings, attendance at meetings, the number of
Board members constituting a quorum at a meeting, and term of membership
(usually one year).  Whoever wrote these laws and Bylaws had the built-in
assumption of a physical meeting at a physical location starting at at a
fixed time and running for a short duration.  They certainly never
considered the case of meetings in cyberspace of people scattered across the
world communicating by email.   The reinterpretation of Corporate Governance
law, Robert's Rules of Order, and many other details of corporate
administration for the Internet Age have yet to be figured out.

One of the intents of these laws and bylaws is to avoid conflict by
enforcing some kind of schedule.  There must be at least one annual Board
Meeting.  The Board must vote to elect members each year.  The corporation
must a tax statement every year, even if there is no income, or risk
penalties.  There is no concept of a "freeze" or any legal way to halt the
operation of the corporation.   For nonprofits, the only "exit strategy" is
something called "Organizational Abandonment"

"The concept of organized abandonment is central to our understanding of
nonprofit organizations and illustrates one of the principle difficulties in
responsible governance and management.  'Organized abandonment' refers to
the planned phasing out of an organization's operation.  The word
'organized' is used to characterize a kind of disbanding that is the result
of careful deliberation rather than unwelcome financial reversals,
management upheavel, or other external or internal crises."

MNPO, p. 19

Directors are of course free to resign any time they wish.  Sometimes it can
seem risky and not worth the prestige or other benefits that accrue from
Board Trusteeship.  Actually, nonprofit boards can be a complete nightmare -
when everyone is volunteering, egos get bruised super-fast.

Board Liability

"In general, trustees cannot be held responsible for the business judgments
or financial decisions if these are informed, show no conflict of interest,
and do not appear highly irrational.  A financial decision that has an
undesirable outcome or one that involves a high degree of risk is not
sufficient grounds to hold trustees liable.  Nevertheless, if trustees never
attend meetings, if they approve major decisions involving the corporation's
funds without soliciting any background financial information, or if they
engage in any illegal financial activity, they can be held liable."

--MNPO, p. 52

"Even though the instances of lawsuits is relatively infrequent in the
nonprofit world, trustees do get sued and, to a much greater extent, they
become involved in threatened lawsuits that are settled before they ever get
to court.  Thus board members are rightly concerned to be concerned about
the risks associated with trusteeship.  While laws generally favor trustees
of nonprofit organizations, the cost of mounting a successful defense in a
lawsuit can be very high."

-- MNPO, p. 53

Why do I want to do This?

By now you may be asking, with all the risks and wait a minute, did you say
I have to raise money too?  Is it really worth my time to be a Board member
of non profit corporation?

In times gone by, the Boards of nonprofits were mainly composed of the Idle
Rich.  Philanthropists with a lot of money and free time on their hands
served on nonprofit charity boards to get ahead in the community.  It was as
simple as that.  There was a prestige value and pecking order among
charities, and serving on the boards of the best charities was equivalent to
climbing the social ladder.

Times have changed.  These days it is more popular to have "community
representation" on nonprofit Boards.  Most nonprofits are started by people
who are truly committed to their cause, whether it is sheltering the
homeless, providing medical marijuana, or developing free software.
Generally they are not in it for the money or the fame.  They truly feel a
burning commitment to their cause.

I have often said that nonprofit Board trusteeship is an excellent career
for a disabled person with a Social Security income.  Two U.S. laws
compliment each other here.  First, the disabled are not permitted to draw
income beyond a certain small amount after enrolling in Social Security.
Second, the nonprofit laws require that Trustees not draw income from the
nonprofit.  But, the Trustees may have many of their expenses reimbursed,
including when appropriate and justifiable, meals, transportation, and
lodging, by the nonprofit corporation.