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HELP! Does Our Art Organization’s Board Need to Do an Internal Investigation?

By: Caroline R. Kert, Esq.

It is a volunteer Board member’s worst nightmare: after dedicating hours and hours of volunteer time supporting your favorite art organization, a scary issue raises its head. If you don’t deal with the concerns, you or your organization might be sued. Is the current Board to blame? What can you do to protect yourself and your organization? It may be time to hire a third party to do an internal investigation.

Arts organizations and nonprofits are unique creatures. The corporate structure is often the same as the largest for-profit companies, but many are headed by volunteers and operate on shoe string budgets. What the key employees or volunteers, Officers, and Directors sometimes lack in corporate governance experience, they make up in passion and belief in the organization’s mission.

Governance missteps can snowball into crucial issues and can leave the Board of Directors confused about what to do next. Even worse, bad PR surrounding the situation may have long term ramifications leading to the loss of committed volunteers, experienced employees, and donors. The types of issues I have helped organizations navigate cover the gambit:

  • A Board Member suggesting that the organization “cook the books”
  • A Board Member running personal expenses through the organization
  • A Board Member comingling corporate assets with those of other organization
  • An organization failing to properly pay employees under wage and hour laws
  • A Board Member accused of physically assaulting a participant at an official event
  • Volunteers serving alcohol to minors at an official event
  • Lead volunteer sexually harassing teammates

When confronted with these types of issues organizations must focus on three simple goals: reducing current liabilities, avoiding costly litigation, and minimizing the collateral damage.

Once a potential issue comes to the attention of the current Board of Directors it should ask, “If we assume the allegations are true, what are the ramifications?” Have local, state, or federal laws been violated?  Can the organization be held liable for an act or failure to act?  Have current or past board members or officers breached their fiduciary duties?  Does the swift resolution of this issue impact your very ability to survive?

If the answer to any of these questions is “Yes,” the Board has a duty to investigate and make a reasonable business decision regarding its response. If the issue is merely a staff dispute or a question of day to day operations, it may be in the Board’s best interest to allow its Executive Director or other leaders manage the problem.

Boards of all organizations have a fiduciary duty to apply good faith, care and loyalty to their actions. Under Colorado’s business judgment rule, officers and directors will not be held accountable for actions “taken in good faith and in the exercise of honest judgment in furtherance of a lawful and legitimate corporate purpose.” So, swift action that demonstrates the Board’s good faith inquiry into the circumstances will go a long way toward protecting the current Board and the organization. In order to fall under this business judgment rule, the action must be:

  • Made by independent/disinterested board members
  • Made in good faith
  • Informed

Hiring in an independent attorney to complete an investigation and present findings to the Board will help fulfill these criteria. If you or your organization need assistance with a current compliance issue or complaint, contact Caroline Kert at 303-763-1600 or carolinekert@danieltgoodwin.com.

Bookmark our page to read more on this topic, including important criteria to consider when selecting your investigator.

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