Nonprofit Organizations: Understanding D&O
Governance has a whole new set of acronyms for new board directors to get used to. One acronym that inexperienced board directors of nonprofit organizations will hear a lot is D&O. The acronym stands for “directors and officers,” which by itself is pretty self-explanatory. Where things get a bit confusing is the context in which board directors and managers use the acronym. To confuse the issue even more, D&O sometimes has different meanings for nonprofits and for-profit corporations.
In general, there are three ways that board directors use the term, D&O.
All three terms apply to for-profit corporations. Only the last two apply to nonprofit organizations.
What Are D&O Questionnaires?
D&O questionnaires are required documents for publicly listed corporations. Publicly listed corporations must distribute D&O questionnaires to their directors and officers, so they can provide information about their backgrounds, experience, securities they own, their independence from the board, insider transactions and compensation. The board uses this information to provide accurate disclosure to regulatory authorities on registration statements and annual required forms and reports.
What Are D&O Evaluations?
For-profit corporations and nonprofit organizations both use D&O evaluations. D&O evaluations are entirely optional for both types of organizations. They’re also highly recommended for both types of organizations as a tool that helps to ensure good corporate governance.
Board evaluations are assessment tools that help board directors evaluate their strengths, weaknesses and individual board director performance. The results of the assessment help boards determine whether they collectively have the necessary skills and abilities to run the organization effectively.
Boards also routinely do board assessments on the board as a whole. Whole board evaluations provide a snapshot of the board’s collective skillsets. D&O board evaluations help boards learn where they have gaps in skillsets, so they can work toward recruiting new board members who have the proper skills to form a well-rounded board.
What Is D&O Insurance?
D&O insurance is liability insurance for boards of directors. This type of insurance policy provides reimbursement for losses and defense costs if someone brings legal action against an officer or board director for alleged wrongful acts when they serve in their capacity as a director or officer.
Board directors commonly use the term “D&O” to refer to any one of the above definitions. Only D&O evaluations and D&O insurance apply to nonprofits, so here’s an expanded view of both.
D&O Evaluations for Nonprofits
If someone asked you how well your board runs, would you be able to adequately describe its strengths and weaknesses? This could prove to be a difficult task unless you’ve done individual and board evaluations. Board self-evaluations are also sometimes called board self-assessments, or D&O evaluations.
Sometimes, boards believe that the board is running well. Board evaluations help boards to dig deep and find out if that’s really the case. If not, the evaluations will point out the direction that the board needs to take to be more effective. Self-assessments will guide the way toward where they can make improvements and what they will need to do to make those improvements happen.
Nonprofit boards that haven’t made doing D&O evaluations an annual event may face resistance from some board directors. Boards that are willing to take the first step toward doing board self-evaluations usually see the evaluations’ worth in short order. They also find that once they’ve gotten a “buy-in” from the rest of the board, the assessments get easier each time they do them.
Nonprofit organizations across the world have developed easy-to-use templates to help nonprofit boards get started with board self-evaluations. Templates are a good starting point for boards to begin adding a customized set of questions that will give them the answers they need to move toward constructing a highly effective board.
D&O evaluations typically cover the following areas, at a minimum:
- Advocacy
- Strategic planning
- Conflict of interest
- Diversity
- Fundraising
- Evaluating the executive director
The answers to questions covering these areas will give board directors the ability to answer how well their boards run with complete confidence.
D&O Insurance for Nonprofit Boards
Since most directors and officers of nonprofit organizations are volunteers, some may incorrectly assume that they aren’t liable for their actions or the actions of the nonprofit. The reality is that directors and officers of nonprofits aren’t protected under the federal Volunteer Protection Act or any other laws that provide immunity against allegations of harm for volunteer workers.
Allegations of harm can come in various forms, including:
- Acts
- Errors
- Mistakes in judgment
- Misstatements
- Misleading statements
- Neglect
- Intentional acts
- Breach of duty
- Discrimination
- Wrongful termination
- Harassment
- Failure to provide services
- Mismanaging assets
Board members who refer to “D&O” are sometimes referring to D&O insurance. All nonprofits should purchase a D&O insurance policy to protect directors and officers from allegations made by vendors, donors, competitors, employees, government regulators or others.
D&O insurance policies are liability policies that protect the actions and decisions of the board officers, directors and the organization as a whole. D&O insurance policies offer reimbursements for acts that board directors are legally liable for, including defense costs, settlements and judgments brought against them or the nonprofit organization.
Smaller nonprofits and startups may believe that they don’t need to obtain a D&O insurance policy. We can learn a lot from past claims about the large sums that are often paid out as a result of lawsuits against nonprofits and their board directors. Blue Avocado nonprofit magazine states that one of every 10 claims against nonprofits nets settlements of about $100,000. An article in Blue Avocado magazine adds that average claims against nonprofits can reach up to $35,000. Given these facts, it’s easy to see how claims and settlements against nonprofit organizations can easily top the net worth of the organization and some of its directors and officers.
These facts indicate that all nonprofits, regardless of their size, budgets and missions, should have D&O insurance. It’s also important for nonprofit board directors to be aware that D&O insurance policies have limits, and that when someone brings a claim against them directly, they will be responsible for the difference between the policy limits and the settlement amount. They should also be aware that all insurance policies include additions, conditions and exclusions. A notable exclusion is that D&O insurance policies exclude intentional acts.
Clarification of the definition of the term “D&O” will help board members to better understand the context in which someone is using it. Having a good understanding of the term will aid board directors in being able to enter into discussions about D&O questionnaires, evaluations and insurance with confidence.
