The board of a charitable organization is responsible for understanding the major risks to which
the organization is exposed, reviewing those risks on a periodic basis, and ensuring that systems have been established to manage them. The level of risk to which the organization is exposed and the extent of the review and risk management process will vary considerably based on the size, programmatic focus, geographic location, and complexity of the organization’s operations.
Risk management generally includes a review of potential risks to the organization’s significant
assets, such as its property, its good will, and its key programs and activities, and decisions about the most appropriate ways to protect those assets from loss. All organizations should consider carefully all of the principles in this report—for effective governance, strong financial oversight, and responsible fundraising practices—as they develop appropriate policies and procedures to protect their assets.
Board members may have personal liability for fines and other penalties as a result of certain legal violations, such as failure to pay required payroll and other taxes or approval of excess benefit or self-dealing transactions. Federal and some state volunteer liability laws provide some safeguards for board members who are not compensated, other than receiving reimbursement of expenses, and who act in good faith. Nonetheless, while it is rare for a charitable organization and its board to be the target of a lawsuit, each organization should
still take steps to protect its assets in such an event. The board of directors should consider including indemnification provisions in the organization’s governing documents, based on a review of the laws of the states in which it is based or operates. The board should also assess periodically the organization’s need for insurance coverage based on its program activities and financial capacity. Insurance is only one risk management strategy, however. Other financial strategies should also be considered to protect an organization’s assets, such as establishing
reserve funds to absorb minor losses, borrowing from lenders, and negotiating with third
parties to assume certain losses. The organization should also have policies and procedures designed to reduce the risk of various occurrences, or limit the exposure of the organization to certain identified risks.
Even the smallest organizations should have procedures for backing up and preserving electronic and print copies of documents and other information vital to their governance, financial, and programmatic operations. Larger organizations may require more extensive risk management programs, including emergency preparedness and disaster response plans in case of natural or man-made disasters or other crises that may disrupt significantly its programs and operations.
Organizations that employ staff should have written personnel policies that conform to federal
and state laws. They should develop appropriate procedures to protect the health and safety of both employees and volunteers while they are at work. Organizations providing services to vulnerable individuals should ensure that appropriate screening, training and supervision procedures are in place to minimize safety risks to consumers and clients, as well as to paid and volunteer staff.
The federal Volunteer Protection Act and most state volunteer liability laws do not protect board members, regardless of whether they are compensated, and other volunteers from liability for “willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer action.”1 The federal Act and most state laws do not prevent individuals from filing lawsuits against board members and other volunteers, nor do they provide the charitable organizations immunity from legal actions, although some states place a dollar limit on the organization’s liability.
The governing documents of a charitable organization may include “indemnification provisions” that allow the organization to pay the costs of defending or paying settlements or judgments board members might incur for actions related to their board service. Federal or state laws prohibit the organization from indemnifying a board member who acted in bad faith and for other specific types of offenses.
1.The Volunteer Protection Act of 1997, Pub L. 105-119
These questions – from the Principles Workbook (PDF) – are intended to prompt discussion about the principle, assess the polices and practices of your organization, and encourage your organization to take steps to identify where improvements should be made.