As the novel coronavirus (COVID-19) continues to disrupt all sectors of society, nonprofits stand to play central roles in local and national efforts to support and assist those in need. The individuals serving on a nonprofit board of directors bear the ultimate fiduciary duty for organizational decisions at this critical time. As boards determine how best to navigate virtually unprecedented scenarios, there are steps they can take to best discharge their oversight responsibilities and decision-making roles on behalf of the nonprofits they serve.
Ensure Governing Documents and Governance Practices are Up to Date
Nonprofits should ensure that their bylaws and other governing documents afford the necessary flexibility to continue operating in challenging circumstances.
Even during times of mandated social distancing, nonprofit boards should continue to meet as scheduled. In fact, additional special meetings may also be necessary to confront unexpected scenarios. A nonprofit should ensure that its bylaws permit board and committee members to participate in meetings via electronic means, such as telephone and video. Certain states permit board and committee members to participate in meetings virtually, even if the bylaws do not specifically authorize such participation.
The same notice and quorum requirements apply to remote meetings as in-person meetings, so a nonprofit should also review its bylaws to confirm that its remote meetings comply with the applicable provisions necessary for the board to validly take action. In some cases, it may be prudent to review applicable state law to see whether the nonprofit can modify those provisions to make it easier to convene meetings. In many jurisdictions, applicable nonprofit corporate law also permits an organization to adopt "emergency bylaws" in the event that a disaster or crisis prevents the nonprofit from complying with its normal operational procedures (such as providing standard notice of meetings to all board members and convening a quorum). Thus, if necessary, and if a nonprofit operates in a jurisdiction whose law permits such modifications, its board should adopt emergency provisions.
Remain Actively Engaged
While board members should always actively engage in their roles, a crisis scenario necessarily raises the stakes of board decisions and demands that board members pay extra care to ensure that they fully carry out their duties to the nonprofit. Any board member with relevant updates, questions, or insights should promptly communicate with the rest of the board. Likewise, board members must remain fully attentive to email and other forms of correspondence in order to be available for emergency meetings or other board convenings. If, for any reason, a board member cannot remain available, that person should notify the board chair or other leader.
Use of Experts
Fiduciary duties require that board members make decisions in good faith and in the best interests of the nonprofit, with the care of an ordinarily prudent person in similar circumstances. To that end, a board should ensure that it considers all relevant information that is reasonably available. In some instances, a board may need to engage non-board members to provide information or expertise. Board decisions are entitled to a statutory presumption of consistency with fiduciary duties, but the board must act responsibly in ensuring that such decisions are undertaken based on sufficient data and information.
Delegation of Authority to Executive Committee and Other Committees
Particularly for nonprofits with large boards, a crisis situation may require that an executive committee and/or other committees take swift action between board meetings. To that end, in addition to the customary roles of those committees, a board should consider a broad delegation of authority to its executive committee to address any emergency or sudden problem that arises during the COVID-19 pandemic. State law typically precludes an executive committee from taking certain significant fundamental steps, but those exceptions are generally limited.
Maintaining the Roles of the Board and Management
Even during an emergency, a nonprofit's professional management should continue to fulfill its day-to-day roles, and the board should not assume control of management's functions. The board need not intervene in typical management functions such as personnel issues. That being said, given that nonprofits are facing unusual and unanticipated challenges, the board chair and, potentially, the executive committee should remain available to consult with management and to weigh in on issues that management presents for consideration.
Because of the sharp downturn in the economy, nonprofits may find themselves facing unexpected financial strain, whether due to increased demands, a sudden decline in investment values, or decreased support from donors. A board must carefully consider the economic factors facing the nonprofit in determining a prudent path forward.
Review of the Organizational Budget
Within the span of a few weeks, a nonprofit's budget for FY2020 may have radically changed. Inasmuch as budgets are typically set based on information and estimates from several months in advance of a fiscal year, it may be necessary for the board to revisit its budget for the year to determine whether it requires modifications. This process should involve management.
For a nonprofit holding endowment funds, the COVID-19 crisis may justify reconsidering how best to deploy its endowment. Except for Pennsylvania, all states and Washington, DC have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which governs the manner in which nonprofits choose to appropriate funds from endowments. UPMIFA directs a board to consider relevant factors, which can include (i) general economic conditions; (ii) the possible effects of inflation or deflation; (iii) the expected total return from income and the appreciation of investments; and (iv) other resources of the nonprofit. Some of these factors may directly inform and influence a board's decision about whether to dip into endowment funds to a greater extent than it otherwise would under non-emergency circumstances. A board may also consider making an "interfund" loan from its endowment to the nonprofit's operating fund to meet cash flow needs.
Use of Debt
In addition to increasing endowment spending in response to a cash flow shortage, or as an alternative thereto, some nonprofits may wish to obtain a line of credit or otherwise borrow funds from a third-party lender. Depending on the nonprofit's governing documents, decisions to borrow funds may require specific board authorization. The board should consult closely with the nonprofit's professional leadership to fully understand the nature of any shortfall and the latest organizational needs, and the board should consider how new debt will affect the nonprofit's short- and long-term financial position.
Ultimately, the responsibilities of a board during a crisis are not different from their responsibilities during times of relative calm. However, the COVID-19 pandemic will invariably present challenges and opportunities for a board to make choices of significant consequence. By undertaking appropriate procedural steps, board members will uphold their fiduciary duties to their nonprofit and, by extension, to the communities and constituencies that are the nonprofit's beneficiaries.