Can A Board Member Ever Wear Two Hats?
By Eugene Fram
Although this is not a good idea for nonprofit organizations, it is not an unusual occurrence, especially among start-ups. A director in a start-up nonprofit will need to assume some staff responsibilities as a volunteer. But he/s will need to organizationally report to the CEO. In the event the position ceases to be a volunteer one,i.e.,the person wearing the two hats is compensated for the staff work. he/s should resign the board position. With two hats, a director would be in conflict-of-interest on important matters like salaries. Although some state statutes specifically forbids a director to hold multiple roles, enforcement of the statues is haphazard, especially among smaller nonprofits that are short of people to carry out staff functions.
For example, Director Z has an accounting skill and wants to utilize it to help the nonprofit. The CEO agrees to utilize his services for a defined time period with the director working as a volunteer employee.
This distinction is easy to understand if described in terms of a Boy Scout leader who also serves as a board member on a Boy Scout regional council. As scoutmaster interacting with the boys, he/s follows scouting guidelines and directives provided by the organization’s professionals. As a council director, she/h helps to set policy for the Boy Scout movement in that geographic area. Because these Scouting roles are so well developed over such a long time period, they are well understood within and outside the movement.
In states that allow board members to be compensated, several guidelines must be considered. Should the level be at the market rate or lower? Many professional market rates are well outside of nonprofit budget guides. How and when might conflict of interest arise? How is confidentiality and transparency handled?
Of greatest concern to the board is that the volunteer’s compensation no higher than local market ones for the position. If higher, that would legally make it an “excess benefit” and be subject to the provisions of the Intermediate Sanctions Act. When an Act violation occurs, the IRS might levy personal liability taxes on persons who sought and/or approved the excess benefit. This can happen in a wide variety of cases ranging from excess salary levels to a volunteer or donor buying a property from the nonprofit at below market levels.
The Long Term Use of Multiple Roles
A greater danger to the nonprofit organization is when a two hat policy is kept in place long after the nonprofit leaves the start-up stage. It then becomes a mature organization with full-time staff employees. One nonprofit board I recently observed voted to change its policy on the number of fund raising events to hold annually,and they decided to try a new format. The board quickly made the policy decision and then promptly went into discussions of policy implementation, giving specific directions on how to implement. This latter discussion took about one hour and really provided an example of the board micromanaging the process, not over viewing results when completed. Micromanaging seems to run in the DNA of nonprofits but never should be used by the directors beyond the start-up stage. However it frequently is!
When directors try to assume multiple roles in a mature nonprofit, they can leave themselves open to IRS financial liabilities and cripple the effectiveness of the organization.