The National Cancer Society: corporate governance in a nonprofit organization.

Elson, Raymond J. ; Holland, Phyllis G.

CASE DESCRIPTION

The primary matter of this case concerns corporate governance in a nonprofit organization. Secondary issues examined include motivation of volunteer members in an organization and organization lifecycle. The case has a difficulty level of four, appropriate for senior level (it could also be used for first year graduate studies, level five). The case is designed to be taught in two class hours and is expected to require three hours of outside preparation by students.

CASE SYNOPSIS

NCS (National Cancer Society) was an organization founded and operated by volunteers. The organization received memorial contributions and distributed them as grants to applicants who meet the organization's criteria. The group also maintained a worship space (bay) in a local church and holds regular memorial services for the deceased.

At the time of the case, the organization had existed for about 18 years. The original enthusiasm of the founding members had waned and no one had come forward to replace them. Specifically, the president had not provided the leadership needed to maintain the organization's momentum. The board of directors was divided about how to deal with this problem so that rare meeting degenerate into arguments. A former president was still collecting mail and was still the authorized signatory for checks. The state had issued delinquency notices because the organization has failed to file required informational forms. These notices provide a point of departure for discussing the future of the organization. Students should consider the responsibilities of a board in such a situation and whether the organization is viable. More specifically, the details of revitalizing or discontinuing the organization must be addressed.

Accountants may find that volunteer organizations to which they belong call on their professional expertise to fill positions of financial responsibility. These organizations may operate informally and the accountant is in a difficult position as he or she attempts to impose standards that other members do not see as necessary. This case provides opportunity to discuss such a situation.

INTRODUCTION

"This is the last straw," exclaimed Carl Jenkins. He slammed the phone in disgust as Kathy Jones' answering machine invited him to leave a message. His previous messages, left on Kathy's home and office answering machines had not been returned.

As former president and current member of the board of directors for the National Cancer Society (NCS), Carl was aware of the challenges and difficulties in keeping a volunteer organization afloat. However, he could not understand the apparent lack of interest in the organization or lack of desire to improve performance shown by the current president, Kathy Jones.

The newest problem on the horizon had prompted him to call one more time. NCS had received a delinquency notice from the State of Minnesota for its failure to file annual reports for the years 1999-2000. Severe monetary penalties would be imposed on NCS if the returns were not filed within 30 days. Carl's name was still listed as the contact person on the state's records so he really needed to reach Kathy to discuss this matter. Carl was a successful and respected businessman. He didn't like receiving such notices and was too conscientious to ignore them.

As he looked at the phone, he wondered how things had gotten to this point. He took a moment to reflect on the organization and review the time line of events leading to the current situation.

THE NATIONAL CANCER SOCIETY

The National Cancer Society (NCS) was a non-profit organization founded in 1988 with a primary objective of supporting the fight against colon cancer and was loosely affiliated with a mainline Protestant church. NCS was incorporated in the State of Minnesota and was organized as a 501(c) (3) organization for tax purposes. NCS was a volunteer based organization; it did not have a formal place of business and instead used a post office box in Minneapolis to conduct its affairs (e.g., collect donations). NCS also had a prayer bay in a large local church that it used to provide a space for the families of both cancer patients and the deceased to gather and worship. These worship services were an integral part of NCS mission.

Mission

NCS had three main purposes. The first was to provide a book of remembrance with the names of those who had died from colon cancer. The second was to offer a monthly service in memory of these individuals who had died from the disease so that families and friends could attend and celebrate their lives. The reading of the names of selected deceased was an integral part of the service. The services were led by a member of the clergy and the ministerial committee was responsible for ensuring that a minister was available for the services. The third purpose was to provide grants to other organizations involved in providing ancillary services in the battle against colon cancer. Such grants are awarded on a one-time basis with a maximum grant of approximately $1,500. This was the limit imposed by the board of directors.

Organization

NCS adopted a formal charter that provided for a board of directors and an advisory board. The board of directors was supported by the finance, grants, ministerial and nomination committees. A copy of the organization chart is shown below.

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The board of directors consisted of 12 members who were elected for three-year terms. Board members could be elected for additional terms and there was no limit on how long an individual might serve as a board member. To ensure continuity, the terms of the members were staggered so that no more than four positions were available each year. Board members had diverse skill sets (e.g., financial) to support the NCS mission. The NCS charter required that a board of directors' meeting be held on a monthly basis. Minutes were kept of each meeting to record all actions taken by the board of directors. See APPENDIX for general discussion of responsibilities of Boards of Directors of charities.

The advisory board had unlimited membership. Its members were former board members or members of the community, who wished to make a contribution to NCS, but could not or were unwilling to make the commitment necessary to be full board members. As the name suggests, the advisory board served an advisory role only and did not participate in the management of NCS.

The day-to-day business of NCS was governed by the executive committee (or officers) of the board of directors. The NCS charter provided that the executive committee included a President, a Vice President, a Secretary and a Treasurer. The President was responsible for managing NCS business affairs, supported by the Vice President. The Secretary maintained the organization records including its bylaws, resolutions and board minutes. The Treasurer was the chief financial officer for NCS and was responsible for maintaining accurate financial records, preparing periodic financial statements and regulatory reports, and for coordinating the annual budgeting process. The officers and all new board members were nominated by the nominating committee and elected at the annual meeting in March of each year. The officers were generally elected for a one- year renewable term.

The committees' roles were to review issues facing NCS and to recommend a course of action to the board of directors. Each committee was comprised of at least one board member along with other interested non-board members. Members were assigned to committees based on individual skills and the committees were not of equal size. For example, the finance committee had three members while the grants committee had six members.

Organization Activities

NCS relied on contributions received from the public for its funding. NCS did not advertise and so contributions were received on an ad-hoc basis. The donors generally donated funds on behalf of a loved one who had died of colon cancer. Funds were received through the post office box, an acknowledgment was sent to the donor by either the secretary or president, and the name was forwarded to the lithographer for inscription in the "book of remembrance." The funds were deposited in a NCS designated bank account which was maintained at a local bank. These funds were earmarked as NCS general fund and were used to complete its mission.

One of the many challenges NCS had faced was to obtain funds to complete the long delayed renovation of its prayer bay. Carl viewed this as his crowning achievements as President since he found creative ways to obtain the funds (classical concerts, fund raising dinner etc.). The funds were raised during the 1997-1998 time period. The income received from the events and the associated cost to renovate the bay was segregated from NCS general funds and maintained in a separate bank account. A copy of the NCS income statement for the years 1999 and 2000 (most recent years available) is included below. It should be noted that NCS currently has approximately $35,000 in its combined bank accounts.

NCS major expenses were the grants that it provided to other organizations involved in colon cancer care. Organizations requesting funding were provided with a standard grant application. Grant applications received were reviewed by the Grants Committee for completeness and consistency with the NCS mission. Funding recommendations (which identifies the organization and amount to be funded) were made to the Board of Directors for consideration at the next board meeting. The grant was then funded once board approval was received.

Disbursements were made from either the general account (regular expenses) or the special account (fund raising related expenses), and checks approved by any two members of the executive committee. NCS major non-grant expenses were the annual board retreat held in the summer and the annual holiday party in the winter. The most recent retreat cost approximately $500 which included the cost of a facilitator (to stimulate discussion between the board members) lunch, and refreshments.

As a non-profit organization, NCS was responsible for filing an information return with the Internal Revenue Service and an annual return with the State of Minnesota. The annual report ensured that the organization was fulfilling its fiduciary responsibilities. It categorized expenses between program and administrative to ensure that the funds received were used for their intended purpose, and was made available to the public on request.

VACANCIES TO FILL

In 1999, after more than a decade of working with the NCS and the push to fund the prayer bay, many founding members were simply exhausted and wanted to spend less time working with the organization. This meant that a number of vacancies were suddenly available on the board of directors, the advisory board and the various committees. The list of vacancies included a treasurer, secretary, finance committee member, grants committee members, and two board members. The most immediate need was to fill the open board vacancies especially the treasurer and secretary positions. The task of finding perspective members resided with the nominating committee.

Finding perspective members was a difficult task, especially since the individuals approached must also be willing to serve on the board. Two of the new board members were also expected to fill the treasurer and secretary positions as well, so they had to have the required skills. After a long search, perspective board members were identified and interviewed by at least two of the committee members. The goal was to ensure they had the proper qualifications, were willing to serve on the board and the executive committee, and were committed to the mission of the NCS. The field was narrowed to two candidates, one for each position. Resumes were provided to the other board members with a recommendation to accept the candidates for the open board and executive committee positions. These candidates were approved at the next board meeting.

Approximately six months later, the newly elected secretary resigned from the board because of other commitments. A new secretary was elected from the remaining board members and the board seat remained unfilled.

In the meantime, Carl was also getting restless. Carl was completing his third term as president of NCS and did not wish to seek re-election. Not only was Carl stepping down as president, he did not want to play an active role in the organization so he would not seek a board seat either. However, as a former board member and president, Carl could serve on the advisory board, and he agreed to do so. Carl was the person who generally obtained NCS mail from the post office and he agreed to continue to perform this role as well.

Carl's natural successor was his vice president, Kathy Jones. Kathy was one of the founding members of NCS and was actively involved in the organization for many years. Over the years, she served on a number of committees including nomination, grants and communication. In fact, she was currently the chair of the grants committee and an executive committee member.

Kathy's community involvement was far reaching. In fact, she was actively involved in a number of other organizations in addition to NCS and her time commitments were also increasing with a few of them. Some board members were therefore concerned about the amount of time that she could dedicate to the NCS and quietly expressed their reservations.

Before the next annual meeting of the NCS, the nominating committee prepared its slate of officers and new board members for consideration at the meeting. Among the nominees was Kathy Jones as president. At the annual meeting, additional board members expressed reservations on Kathy's ability to serve as president. Ralph the treasurer said "I am afraid for the future of NCS because Kathy is involved in too many organizations." Karen, a board member simply piped in "I agree." Sam, another board member was more direct: "Kathy is too busy to serve as NCS President and I will not vote for her." Vicki, a founding member of NCS said "Kathy has shown her dedication to NCS over many years and she deserves the chance to be president." After much discussion and prayer, the slate of candidates was accepted at the meeting and Kathy Jones became the new president of the NCS.

A NEW PRESIDENT

Kathy's first recommendation as president was to move the frequency of board meetings from its historical monthly basis to a quarterly basis. Since this would involve a change in the organization's bylaws, Kathy worked with the board's lawyer to affect the change. The rationale was to improve the efficiencies of meetings since the amount of new business that was brought to the board on a monthly basis was minimal. The recommendation was made to the board and accepted.

The NCS president's responsibilities include scheduling the board meetings and creating the agenda for such meetings. It did not take long before the quarterly meetings were not scheduled. Again, Kathy recommended that the formal meetings be changed to a semi-annual basis since the organization was in a maintenance mode, with very little new business. She suggested that ad hoc meetings would be held as necessary between the new meeting dates and e-mail and phone calls would be used to communicate important issues to the board. Reverend Smith, a board member, expressed the frustration of other members when he said "I know that we all have busy lives but I can't understand why it is so difficult for us to meet at least quarterly. I am afraid that the longer the gap is between meetings, the less likely we are to meet." In spite of this concern, the recommendation was made by Kathy and again accepted by the board.

A TIME FOR ACTION

In Kathy's first year as president, no board meetings or worship service were held and no grants were awarded. Fortunately, Carl continued to collect the mail from the post office, and the treasurer deposited funds received and balanced the books. NCS expenses incurred were paid by the treasurer with the checks signed by the former president (Carl) and the treasurer.

Carl's signature was not removed as an authorized signatory from NCS bank accounts upon the expiration of his term. This action was not taken because no request was ever made to the bank to change the authorized signatories on the account. The action should have been initiated by the president (Kathy Jones) with resolutions prepared by the secretary and approved by Kathy. The treasurer's term on the board had also expired and no election was made to elect a replacement. In fact, NCS checkbooks were still maintained by the treasurer who no longer lived in Minneapolis. However, the bank statements and invoices are received through the NCS post office box.

After approximately one year of inactivity, the president enthusiastically contacted the existing board members to gauge their interest in continuing to serve on the board. This was the first time some board members heard from the president in over a year. Her objective was to conduct a meeting in order to jump-start the organization and elect new officers and board members. Again, some of the board members had reservations about the wisdom of Kathy's presidency but decided to hold them until the actual meeting.

Carl hoped that the meeting would offer an opportunity to get NCS back on the right track. He was determined to use it to deal with the problem of un-filed annual reports and to get a change made in authorized signatories.

Call For Action

Assume that you are Carl or another concerned member of the board of directors:

* What expectations do you have for this meeting?

* What will you do to see that your expectations are met?

* What steps would you take to ensure the continuity of the organization? If these steps are not successful, should the organization be disbanded?

* What should be done with the remaining funds in NCS?

* How should the board respond to the delinquency notice from the State of Minnesota?

APPENDIX: A Guide for Board Members

From the Office of Minnesota Attorney General Mike Hatch

The Attorney General's Office has prepared this Guide for Board Members to help directors understand their responsibilities as stewards of their organizations. Under Minnesota law, directors of a Minnesota nonprofit corporation are responsible for the management of the business and affairs of the corporation. This does not mean that directors are required to manage the day to day activities of a corporation or to act in the role of an Executive Director. It does mean that directors must appoint officers and assign responsibilities to them so that the officers can effectively carry out the daily tasks of running the corporation. It also means that directors must supervise and direct the officers and govern the charity's efforts in carrying out its mission. In carrying out their responsibilities, the law imposes on directors the fiduciary duties of care, loyalty and obedience to the law. Minnesota courts have held that the law imposes the highest standard of integrity on the bearers of these duties.

This Guide is provided by the Minnesota Attorney General's Office to assist board members with the important responsibilities assumed when they volunteer their time. It is only a guide and is not meant to prescribe exactly how board members must act in all situations. Each organization possesses a distinct composition and experiences different circumstances and outcomes. This guide is merely provided as a reference tool and outline to assist directors in performing their duties..

Directors of Minnesota nonprofit corporations must discharge their duties in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.

To Exercise the Proper Duty of Care:

1. Active Participation. A director must actively participate in the management of the organization including attending meetings of the board, evaluating reports, reading minutes, reviewing the performance and compensation of the Executive Director and so on. Persons who do not have the time to participate as required should not agree to be on the board.

2. Committees. Directors may establish committees having the authority of the board and may rely on information, opinions or reports of these committees. Committees operate subject to the direction and control of the board. As a result, directors are still responsible for the committees and should periodically scrutinize their work.

3. Board Actions. A director who is present at a meeting when an action is approved by the entire board is presumed to have agreed to the action unless the director objects to the meeting because it was not lawfully called or convened and doesn't participate in the meeting, or unless the director votes against the action or the director is prohibited from voting on the action because of a conflict of interest.

4. Minutes of Meetings. Written minutes should be taken at every board meeting. The minutes should accurately reflect board discussions as well as actions taken at meetings.

5. Books and Records. A director should have general knowledge of the books and records of the organization as well as its general operation. The organization's articles, bylaws, accounting records, voting agreements and minutes must be made available to members and directors who wish to inspect them for a proper purpose.

6. Accurate Record Keeping. A director should not only be familiar with the content of the books and records, but should also assure that the organization's records and accounts are accurate. This may mean the director must take steps to require regular audits by an independent certified public accountant. At the very least, the director should be aware of what the financial records disclose and take appropriate action to make sure there are proper internal controls.

7. Trust Property. A director has the duty to protect, preserve, invest and manage the corporation's property and to do so consistent with donor restrictions and legal requirements. Instituting proper internal controls will aid in the protection of assets.

8. Resources. A director must assist the organization in obtaining adequate resources to enable it to further its charitable mission.

9. Charitable Trusts. A trustee of a charitable trust has a higher standard of care than a director of a nonprofit corporation. A trustee has the duty to exercise the care an ordinary person would employ in dealing with that person's own property. A trustee with a greater level of skill must use that higher skill in carrying out the trustee's duties.

10. Investigations. A director has a duty to investigate warnings or reports of officer or employee theft or mismanagement. In some situations a director may have to report misconduct to the appropriate authorities, such as the police or the Attorney General. Where appropriate, a director should consult an attorney or other professional for assistance.

Traditionally, directors have an absolute duty of complete, undivided loyalty to the organization. This means that directors should avoid using their position or the organization's assets in a way which would result in pecuniary or monetary gain for them or for any member of their family. A director should put the good of the organization first and avoid engaging in transactions with the organization from which the director will benefit.

To Exercise the Duty of Loyalty:

1. Conflicts of Interest. Under certain circumstances, a contract or transaction between a nonprofit corporation and its director or an organization in which the director has a material financial interest is acceptable. However, if the transaction is challenged, the director will have the burden of establishing that the contract or transaction was fair and reasonable, that there was full disclosure of the conflict and that the contract or transaction was approved by members or other directors in good faith.

2. Written Policy. Boards should establish a written policy on avoiding conflicts of interest.

3. Loans. A nonprofit corporation may not lend money to a director or the director's family members unless the loan or guarantee may reasonably be expected, in the judgment of the entire board, to benefit the corporation.

4. Charitable Trust. In charitable trusts, transactions which otherwise might constitute a conflict of interest are permissible if the conflict was clearly contemplated and allowed by the original settlor of the trust.

5. Corporate Opportunity. Directors of business organizations are under a fiduciary obligation not to divert a corporate business opportunity for their personal gain. A director of a nonprofit corporation is also subject to this duty. This duty means that a director may not engage in or benefit from a business opportunity that is available to and suitable for the corporation unless the corporation decides not to engage in the business opportunity and conflicts of interest procedures are followed.

6. Internal Revenue Code. Other prohibitions relating to the duty of loyalty are specified in the rules of the Internal Revenue Code regarding self-dealing. These rules apply to private foundations.

Directors have a duty to follow the organization's governing documents (articles of incorporation and bylaws), to carry out the organization's mission and to assure that funds are used for lawful purposes. Also, directors must comply with state and federal laws that relate to the organization and the way in which it conducts its business.

To Exercise The Duty of Obedience:

1. State and Federal Statutes. Directors should be familiar with state and federal statutes and laws relating to nonprofit corporations, charitable solicitations, sales and use taxes, FICA and income tax withholding, and unemployment and workers' compensation obligations. They should also be familiar with the requirements of the Internal Revenue Service. Directors should see to it that their organization's status with state and federal agencies is protected.

2. Filing Requirements. Directors must comply with deadlines for tax and financial reporting, for registering with the Attorney General, for making social security payments, for income tax withholding, and so on. Additionally, if an organization is incorporated under the Minnesota Nonprofit Corporation Act, its directors have a duty to maintain its corporate status by submitting timely filings to the Secretary of State's Office.

3. Governing Documents. Directors should be familiar with their organization's governing documents and should follow the provisions of those documents. Directors should be sure proper notice is given for meetings, that regular meetings are held, that directors are properly appointed and that the organization's mission is being accomplished.

4. Outside Help. Where appropriate, directors should obtain opinions of legal counsel or accountants

Source: www.ag.state.mn.us/charities/charDuties.html

Raymond J. Elson, Valdosta State University

Phyllis G. Holland, Valdosta State University