Nonprofit Board Members: Pay-to-Play, Outside Salary, and Board v. Employer Obligations (United States)

This Wisdom of the Crowd (ACC member discussion) addresses issues related to nonprofit board members paying to serve and potential conflicts with their employers. The issues discussed include paying to serve on the board, the effect of a Director's outside salary on the nonprofit's status, and obligations to the Board v. Director's employer. This resource was compiled from questions and responses posted on the forum of the Nonprofit Organizations ACC Network.* The issues discussed include

I. Paying to Serve on the Board

II. The Effect of a Director's Outside Salary on the Nonprofit's Status

III. Obligations to the Board v. the Director's Employer

*(Permission was received from the ACC members quoted below prior to publishing their comments in this Wisdom of the Crowd resource.)

I. Paying to Serve on the Board

Question:

Any thoughts on a nonprofit board or advisory board for an industry nonprofit having members who pay for a seat at the board table?

Is that a big no-no? What are concerns to be aware of? Policies to put in place in addition to conflict of interest policies that can serve as protection?

Wisdom of the Crowd

Response #1

Board members of my nonprofit pay $1,200 annually to serve. We refer to it in our bylaws as a contribution rather than dues, and it is tax deductible. This practice is more and more frequent among nonprofits.¹

Response #2

I am not specifically familiar with industry association boards, but of course many charities do "require" a certain minimum donation by each board member. ²

Response #3

We have a (mostly) "pay to play" board. They are quite common among 501c6 trade associations. The main difficulty is in ensuring that the individual director nominated from a paying industry member company understands he/she is the director, and that the company paying the bill for the board seat is not legally the entity "on the board." Understandably some difficulties can result from companies paying to obtain a board seat but by law the director from that company must act in the best interest of the NFP organization. All in all, it is a very workable model. ³

II. The Effect of a Director's Outside Salary on the Nonprofit's Status

Question:

If a director is paid by his or her company to sit on the nonprofit's board, how does this affect the nonprofit's tax status and indemnification laws for voluntary directors?

Wisdom of the Crowd

Response #1

Sounds like a trade group, and if so it can probably have different classes of directors, etc. without affecting tax status. In most states, being paid for service on a nonprofit board might undercut the indemnification laws for voluntary directors, but again, if this is a trade group and the person is a board member on behalf of his/her company, there's probably statutory indemnification under other laws concerning company officers and employees on top [of] company D&O insurance and indemnification agreements. Maybe others can see other problems, however. ⁴

III. Obligations to the Board v. the Director's Employer

Question:

How do we resolve this tension -- between wanting the person serving to get the benefit of D&O insurance and indemnification agreements by virtue of acting on behalf of his company and wanting the person serving to be acting as an individual, not as representing his company that is presumably paying for him to be on the association board?

Wisdom of the Crowd

Response #1

[T]he issue about a director's obligations to a trade association or other nonprofit organization versus his/her employer comes up a lot. I've been outside counsel to some major trade groups and other nonprofits and I have likewise, while serving as general counsel of my companies, been an outside director of several trade groups and other nonprofits.

First, if we're attending board meetings and involved in other activities during company time and being paid by the company while engaged in these activities, there is some minimal obligation to the company. Now you can argue, the company wants good relations with the government and others which is why it is involved in the trade association (or wants to show it cares about nonprofit community organizations, or whatever) and that's why it's supporting me and others to be on this trade group or other nonprofit board. But that still doesn't avoid the point: the corporation has to have some legitimate corporate purpose for paying my time and devoting other corporate resources for my being on this board. Otherwise I'm a total volunteer, in which case I shouldn't be doing any of this on company time and using other company resources (secretary, postage, email, other company people helping with events, etc.).

That doesn't mean I don't have fiduciary and other obligations to the nonprofit. Of course I do. My task is to balance these obligations. But my obligations to my company also are relevant.

Plus, many if not most states have statutes that provide indemnification, as a statutory matter, when I am serving on another board (whether it be a for-profit or nonprofit) "at the request" of my employer (for example, California Corporations Code Section 317 and Labor Code Section 2802). Don't undercut that critical source of protection for directors.

That brings us to what often are referred to as "designated directors." Many entities have statutory, charter or bylaw provisions that provide that certain directors will come from members of certain sizes or locations, from specific categories (I believe, for example, local stations for NPR), from different states (like for the Federal Home Loan Banks), etc. and in many instances are actually elected by members in specific categories. The point is, these directors are often being elected by a specifically designated group, and even if they aren't so elected, if they are there to somehow represent the interests of designated groups, then yes, they actually have obligations to speak up on behalf of those designated groups while simultaneously fulfilling their obligations to the organization as a whole. Difficult? Not really. In the case of trade associations, it's why the associations exist in the first place. In the case of entities that have member owners, it's why the member owners are sitting on the board (not unlike directors at a for-profit). In the end, if I'm on a board on company time, I've got obligations that run to both the organization and my employer and my task is to reconcile those obligations or resign from the board. At least that's what I've found to be the case and I've never found it to be a problem. ⁵

¹ Catherine Nobile, President & General Counsel, LSU Health Sciences Foundation in Shreveport (Aug. 17, 2012). ² Carole Chervin, Esq. (Aug. 17, 2012). ³ Thomas P. Kimbis, Vice President & General Counsel, Solar Energy Industries Association (Aug. 17, 2012). ⁴ Michael Roster, former GC of Stanford University and Golden West Financial; former ACC Chair (Aug. 17, 2012). ⁵ Michael Roster, former GC of Stanford University and Golden West Financial; former ACC Chair (Aug. 18, 2012).

Published on May 1, 2013