Sometimes, things just go sideways.
Despite the best intentions of your organization’s Board, Officers, staff, and key volunteers, one misstep can threaten the entire mission. Whether there are allegations of financial malfeasance, inappropriate conduct, insufficient entity formalities, or some other variant, the Board of Directors must take quick action to decide if an internal investigation is warranted.
Once you know you need independent inquiry, who should you call to help you?
At the very least, your internal investigator must be unbiased. Ideally, an investigation is conducted by outside counsel or a special committee. And, your choice of investigators is an important as what they uncover.
In order to be productive and get meaningful results, your investigator should:
- Understand the culture of your organization.
- Commit to interviewing the correct parties, including individuals who were involved with the organization at the time period under investigation.
- Be well versed in how to conduct an investigation and how to evaluate credibility.
–(Remember, this is NOT a case of “he said/she said, so we’ll never know. Part of the investigator’s job is to make credibility assessments).
–Your investigator should know how to rely on asking open ended questions.
–Your investigator should have a delicate approach to asking questions that telegraph the subject or intention of the investigation, and should know when to ask them.
- Be adept at conducting interviews with emotional witnesses.
- NEVER use the services of an investigator unless they are licensed or subject to a licensing exemption. In Colorado, employees, attorneys, and CPAs for the entity may conduct an investigation under an exemption. Other exemptions do exist. But, for the most part, your wise and level-headed HOA President is not an appropriate person to conduct the investigation without an independent relationship to the organization.
- Always work with an investigator who understands the importance of defining the scope and purpose of the investigation with the board at the outset. In particular, you should understand what standards of proof will apply to the findings and recommendations. Miscommunications on scope will not only waste time and energy, but may result in a contaminated investigation. Once interviews have been conducted, it is difficult to revisit witnesses and receive answers that are free from outside influence or revisionist reflection.
- Always work with an investigator who has the expertise to identify and recommend ways that your organization can strengthen its policies, procedures, and formal documentation. The most productive investigations will help you minimize risks in the future.
Once your investigator has completed the investigation, the Board of Directors should use the findings and recommendations to come to a good faith, well informed decision about how to respond. Only independent Directors, those who are not implicated in the underlying issue, should make the decision. As always, Directors have a duty to act in the best interests of the organization. Hiring a competent investigator will not only help the organization reach a reasoned decision, but will protect the Board from individual liability.
If your business or nonprofit organization needs assistance with an internal investigation, contact Caroline Kert, Esq. at 303-763-1615 or email@example.com.
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
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 firstname.lastname@example.org.
Bookmark our page to read more on this topic, including important criteria to consider when selecting your investigator.
As socially conscious entrepreneurship becomes more visible and viable, you may keep hearing the terms “B Corp” and “Benefit Corporation” or “Public Benefit Corporation.” What do these terms mean and how are they relevant to a Colorado small business owner?
Many use the terms “B Corp” and “Benefit Corporation” interchangeably, but they are in fact very different things!
A B Corp is a for-profit entity that has obtained a voluntarily certification from a certain nonprofit organization headquartered in Wayne, Pennsylvania, called B Lab.
As of the date of this posting, there are 1,925 certified B Corps in 50 different countries spanning 130 different industries. Some nationally-recognized Colorado B Corps include New Belgium Brewing Co. and Bhakti Chai.
Obtaining a B Corp certification requires passing the B Lab Impact Assessment, which analyzes a company’s operations and provides a score based on meeting higher standards of transparency, accountability, performance and impact on the community. Passing the assessment test requires a score of at least 80 out of 200 points. There are many workshops and boot camps available in the Front Range area for business owners looking to hit the Impact Assessment’s various benchmarks. After passing the assessment, B Corps must pay a membership fee based on annual revenues.
Obtaining B Corp certification allows a business to join a community dedicated to creating a more just and conscious economy yet still driven by profit motives. B Corps organize various gatherings around the world, including an annual retreat, and such events provide opportunities to network and support other like-minded business owners.
A Benefit Corporation is a type of business entity (i.e., a special kind of corporation) that is authorized by state law. As of the date of this posting, 31 states – including, as of April 4, 2014, Colorado – have recently enacted legislation to allow for these entities. This legislation allows socially conscious entrepreneurs another entity option when starting a business.
The Benefit Corporation movement, largely spearheaded by B Lab, was to fix what many saw to be a major limitation in standard corporate law.
As you may know, the business and affairs of any for-profit corporation must be managed by a board of directors. Traditionally, the individuals on the board of directors have a legal duty to manage the affairs of the corporation in the company’s best interest. If they do not follow this duty, they could be liable to the corporation’s shareholders for breach of their duties.
So…what does “in the company’s best interest” actually mean? Some perceived it to mean only the maximization of shareholder value. This would severely limit the goals and the general ethos of the socially-conscious business/B Corp assessment movement. If a board of directors was trying to decide between two options, with Option 1 promising high profits but harm to the environment and Option 2 resulting in lower profits but no harm to the environment, the maximization of shareholder value theory would require the board of directors to pick Option 1.
Benefit Corporation legislation has thus been enacted to address this limitation in traditional corporate law.
Beyond corporate doctrine, however, forming a business as a Benefit Corporation may be important for reasons of marketability, relaying a message to current and potential employees and customers, and signaling participation in the socially-conscious business movement.
Colorado Public Benefit Corporations
The Public Benefit Corporation Act of Colorado (“PBCA”) contains the relevant provisions for those electing to operate their corporations as a Public Benefit Corporation (a “PBC”). A Colorado PBC is a for-profit corporation that is “intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”
What would be considered a “public benefit”? The PBCA defines public benefit as “one or more positive effects or reduction of negative effects on one or more categories of persons, entities, communities, or interests other than shareholders in their capacities as shareholders, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”
A key thing to realize is that PBCs are still subject to the rules and requirements contained in the regular corporate statutes, including the Colorado Business Corporations Act and the Colorado Corporations and Associations Act. The PBCA merely imposes “additional or different requirements, in which case such additional or different requirements apply.” The primary differences are:
- A PBC’s Articles of Incorporation must list one or more public benefit which the company must strive to achieve.
- A PBC’s name must contain the words “public benefit corporation” or the abbreviation “PBC” or “P.B.C.”
- A PBC’s board of directors must manage the company to balance (1) the pecuniary interest of the shareholders; (2) the best interest of those affected by the company’s conduct, and (3) the public benefit(s) listed in the Articles of Incorporation.
- A PBC must prepare an annual benefit report with (1) a description of how the company promoted the benefits listed in the Articles of Incorporation and any obstacles the company faced in promoting those public benefits and (2) an assessment of the overall social and environmental performance of the company against a third-party standard. This annual report must be provided to each shareholder of the PBC and posted on its website.
- Any share certificates of the PBC must consciously state the company is a public benefit corporation.
A PBC is formed the same was a traditional Colorado corporation would be formed – by filing Articles of Incorporation with the Colorado Secretary of State. Thereafter, all other documentation used to organize a PBC is extremely similar as what is used to organize a traditional Colorado corporation.
The PBCA specifically protects directors of a PBC from lawsuits by third parties who are interested in the public benefits listed in the Articles of Incorporation and by people who may be affected by the PBC’s conduct.
This section is meant to be a general summary of the PBCA and if you are thinking of creating such an entity or converting your current corporation to a PBC, consulting with an attorney is strongly advised.
 Section 7-101-501 et cet., C.R.S. Added by Laws 2013, Ch. 230, § 1, eff. April 1, 2014.
 Section 7-101-503(1), C.R.S.
 Section 7-101-503(2), C.R.S.
 Section 7-101-502, C.R.S.
 Section 7-101-503(1)(a)-(b), C.R.S.
 Section 7-101-503(4), C.R.S.
 Section 7-101-506(1), C.R.S.
 Section 7-101-507(1)(a)-(b), C.R.S.
 Section 7-101-507(4), C.R.S.
 Section 7-101-505, C.R.S.
 Section 7-101-506(2), C.R.S.