By Eric Spacek
Think back to when you were first selected to be part of your church board. If your church is like most, the process probably was not very formal. I recall my first experience in becoming a church board member. I received a phone call from a member of the nominating committee asking about my interest. There was no written description for the position, just a verbal summary of the job.
Feeling honored to have been considered, I said yes. A congregational vote followed and I was in. There was no orientation or training — we were simply told when to show up for the first board meeting and we went from there. Fortunately, things ran smoothly during my term on the board and, as far as I know, no claims or lawsuits were ever filed as a result.
Churches are not always so fortunate. Claims against churches and their board members can be filed for a variety of reasons, usually focusing on the board’s handling of finances or donations and bequests of money or property, fundraising, authorization of contracts, transactions involving conflicts of interest, employment compensation, hiring and firing decisions, employee tax withholding, schisms or breaks from a denomination, allegations of sexual misconduct at church and decisions regarding the use of 15-passenger vans.
The allegation of wrongdoing
Lawsuits against board members can be styled various ways but they tend to have at least two elements in common: They allege some wrongdoing in the board’s decision-making and they ask for a substantial amount in money damages. Many times church board members are sued personally in these situations.
While volunteer nonprofit board members have immunity under federal law in certain circumstances, it is important to recognize that there are limitations to that immunity and that it can be a lengthy and expensive process for board members to prove in court that they are entitled to immunity. Relying exclusively on immunity for the protection of church board members can provide a false sense of security. It would be much better for the church to take proactive steps to protect and train its board members in advance of any difficulties.
A church should have its governing documents in order before asking a member to serve as a board member. These documents include a corporate charter or articles of incorporation (if the church is incorporated) and bylaws or other guidelines on how the church is governed.
The corporate charter or articles of incorporation usually provides basic information on the purpose and general structure of the organization. The bylaws typically provide greater detail, such as specifying the number of directors, the length of their terms, their duties and responsibilities, the manner of selecting and removing board members, voting and requirements regarding regular and special meetings of the board.
Include an indemnification provision
One safeguard for board members is to make sure that the corporate documents, such as bylaws or articles of incorporation contain an indemnification provision in which the church agrees to cover the legal expenses a board member might incur in defending claims or lawsuits related to his or her good faith service on the board.
Of course, such an indemnification provision is only as good as the church’s financial condition, so it is important for potential board members to consider the church’s financial health and, related to that, whether the church carries directors and officers (D&O) liability insurance coverage. D&O insurance is designed to provide coverage for allegations of wrongful acts of church board members and other leaders.
Persons asked to serve on the board of a church that does not carry D&O insurance should think carefully about the potential exposure he or she may face by electing to serve nonetheless. This is particularly true for churches that are not incorporated and, thus, have no indemnification provision in their governing documents.
As important as having its governing documents in order is that a church, in practice, operates in accordance with those documents. For instance, at one church where I served the corporate documents vested all power in the board of trustees, yet in practical terms the church was governed by its administrative council. Such discrepancies between what the governing documents say and what really happens at the church should serve as a red flag for those asked to serve on the board.
Develop a position description
If your church has questions or concerns about its governing documents or practices, consultation with an attorney experienced with nonprofit organizations is highly recommended. With the church’s governing documents in order and D&O insurance in place, the next safeguard is to develop a position description that describes the duties, responsibilities and expectations of prospective board members.
Much like a job description for paid staff, the position description addresses the qualifications for board service, reporting and supervisory responsibilities, term of service, meeting attendance, duties and other responsibilities.
Sadly, many churches provide little to no orientation or training to new board members. Consider supplying your new board members with basic orientation materials, such as copies of the church’s charter or articles of incorporation, bylaws or other governing documents, church policies and procedures, financial statements, prior board meeting minutes, minutes from other significant committees within the church and a copy of the state’s nonprofit corporation act as it may relate to your church.
One often overlooked orientation topic is how decisions are made by the board. Some churches employ strict parliamentary procedure, while others follow a consensus model of decision-making. It’s helpful for new board members to know which approach their board follows.
It’s particularly important for new board members to understand their role as it relates to critical liability concerns, such as the church finances, fundraising, employment issues, and major projects, such as land purchases, construction and renovation of buildings.
Training is essential
It’s crucial to also look for training opportunities for your board. These can range from seminars or workshops led by secular business leaders, to training provided by your denomination or other prominent church leaders. Also consider board training materials provided by the Nonprofit Risk Management Center (nonprofitrisk.org) and the Christian Leadership Alliance (christianleadershipalliance.com).
With the board members oriented and trained in their new role, focus on the work of the board. Most nonprofit corporation acts provide that a board member has a duty to act in good faith with the care an ordinarily prudent person in a similar position would exercise and in a manner he or she believes is in the best interest of the church.
One situation where churches can run into trouble is in conflict of interest transactions with board members. For example, what if one board member owns a construction company and the church is considering contracting with this company for an addition to the church facilities? This is a potential related-party transaction that could be a conflict of interest.
Suggestions for a material transaction
Specifically, the Evangelical Council of Financial Accountability (ECFA) suggests that such a material transaction could only take place if four criteria are met:
- the transaction is fully disclosed in the church’s audited financial statements;
- the board member is excluded from the discussion and approval of the transaction;
- a competitive bid or comparable valuation is obtained; and
- the church board has demonstrated that the transaction is in the best interest of the church.
Ideally, a process should be in place as board members near the end of their terms to transition to a new board with incoming members. Consider providing for staggered terms in the church’s governing documents so that some, but not all, board members’ terms end in a given year. This helps with board continuity and with training of new members.
One consideration that is often overlooked is an exit interview for outgoing board members, especially those who had never previously served on the board. These people can often share insightful and helpful information about their board experience that may assist with effective church governance in the future.
Service on the church board is not for everyone, but to those who willingly donate their time for this purpose, the least that the church can do is to have their administrative house in order, provide guidance to incoming board members on their duties and responsibilities, and protect board members in their service through indemnification and appropriate insurance.
Eric Spacek is senior church risk manager for GuideOne Insurance,West Des Moines, IA. [guideone.com]