Nonprofit Corporate Minutes: What Not to Do

Nonprofit Corporate Minutes: What Not to Do

08:00 27 October in Blog, Nonprofit

Let’s say there’s a contest to find great examples of  nonprofit corporate meeting minutes.

Well, there are some sure-fire ways to make sure you don’t make the cut.

The commentators we cited in “Breach of Duty by Ogling the Doughnuts,” and “Fun Facts About Corporate Minutes”  offer useful tips for avoiding common mistakes and trouble spots.

          Failing to Document That a Quorum Was Present

Simply put, if there is no quorum, then the meeting cannot lawfully proceed. Any action or votes purportedly taken are void.  Too often, though, corporate secretaries merely write that “(t)he meeting was called to order.”  There is no additional detail: no information specifically identifying it as a meeting of the board of directors, how many directors constitute a quorum, and how many (and who) were present for this meeting.

If someone wants to challenge an action purportedly taken at that meeting, the lack of a definitive assertion that a quorum was present (and a declaration of the facts that support a conclusion that the quorum requirement was met) may make that attack easier.

          Failing to Timely Draft and Circulate Proposed Minutes

For many corporations, when a meeting is adjourned, the notes for the minutes are put on a back burner.  Then, just before the next meeting, the corporate secretary grabs these notes and writes up the formal minutes. The directors takes their places at the conference table and, while selecting from an assortment of delectable pastries, hastily skim the document. The perfunctory motion to accept the minutes is made, seconded, and unanimously approved.

This is bad practice for several reasons: practical and legal.

First, memories fade even after a few days about what was said and done at a particular meeting. Busy professionals juggle multiple commitments. Any significant delay between one particular meeting and the first review of a draft set of minutes can result in spotty – and faulty – recollections. This creates doubt that the minutes – eventually approved – represent the true and correct intent and actions of the board.

Second, government regulators including the IRS consider any significant delay in drafting and approving meeting minutes a failure of proper governance and possibly indicative of other problems with the organization.

The revised Form 990 asks in Part VI, Section A, Question 8, whether there is contemporaneous documentation of the full board and committee minutes or written unanimous consent for the actions taken. Contemporaneous means “later of (1) the next meeting of the governing body or committee (such as approving the minutes of the prior meeting) or (2) 60 days after the date of the meeting or written action.” There is no penalty for failing to meet this requirement, but this deficiency indicates an area of concern for regulators. Because the Form 990 is public, this  omission may be a red flag for others as well: grant-makers, major donors, and the public.

          Failing to Have a Uniform Method or Template for Minutes

Having a book of minutes that is wildly inconsistent in level of detail from one meeting to the next  can create suspicions, even when there are no real grounds for these doubts.

For example, what if the April minutes are full of detail – even though the meeting covered several relatively minor matters – but the May minutes were sketchy although the board voted to approve a substantial raise for the executive director’s salary? There may have been an extensive discussion and debate on this important compensation decision, but the poorly drafted minutes suggest the board did not properly exercise its fiduciary duty or perform due diligence.

The better practice is to adopt a uniform “template” and guidelines for the organization’s minute-taking practices. That doesn’t mean the format can’t be improved over time, but sudden changes or erratic practices may signal problems. Any deviation from an established procedure should be justifiable, and not haphazard or inadvertent.

          Failing to Include Enough Explanation and Detail

Although some commentators suggest that a “minimalist” approach is an acceptable method of writing minutes, it’s probably insufficient in today’s climate of regulatory scrutiny and demand by funders and supporters for transparency.

Minutes that are too brief, and lack sufficient detail to support the reasons for significant corporate actions, may do a serious disservice … and give fodder for disgruntled insiders or others.

The Walt Disney case we mentioned in “Breach of Fiduciary Duty by Ogling the Doughnuts” is a good example. Members of this for-profit corporate board were sued for breach of duty for negligently approving a key executive’s employment contract and compensation package. But the corporate minutes were the “smoking gun”: the judge made his finding of liability largely because the minutes showed too little discussion and consideration of this important decision.

This case, and others like it, demonstrate the importance of crafting minutes that can be used as evidence that a board at all times acted appropriately and in particular gave important issues due consideration.

          Failing to Omit Harmful, Sensitive, or Confidential Material

Certain information should not be disclosed in the minutes, although, for full transparency, there should be a reference to the fact that the matters were considered.

A good example is discussions that are (or should be) protected by attorney-client privilege. There are any number of good reasons why legal counsel may be present at a board meeting; indeed, many in-house counsel regularly attend these events.

Parts of the meeting in which privileged matters are discussed should be noted in the corporate minutes, but without any further information or explanation, other than that counsel was present and a privileged discussion took place. A suggested format is:

Legal counsel for the corporation, John Doe, Esq., provided legal advice to the board concerning the proposal followed by a discussion between the board and counsel. Counsel informed the board that this portion of the meeting was privileged.

or alternatively,

A privileged discussion between the board and legal counsel for the corporation, John Doe, Esq., then occurred and for which separate privileged minutes were taken.

Failing to Have a Document Retention System

Certain documents of 501(c)(3) organizations should be kept permanently: These include the IRS application for exemption (Form 1023), the IRS determination letter (notice of tax-exemption granted), the articles of incorporation, the bylaws, and corporate meeting minutes.

There should be multiple certified (when available) and other copies for safekeeping. The fancy, gold-embossed, looseleaf binders that many new corporations buy from from online corporation services make lovely mementoes, but storage of the one and only copy of a corporation’s “official record” in this way is a bad idea.

In the electronic age, nonprofit corporations must adopt a serious document-retention system which includes multiple, (often digital or cloud-based) copies that can be quickly and easily retrieved tomorrow or ten years from now.

 

 

Comments

comments