There are several precautions that should be taken to aid in the defense of a Directors & Officers Insurance claim, and other situations that should be avoided. One of the precautionary measures that should be taken includes regular reviews of financial statements. During this process the auditor should be provided an opportunity to speak candidly to the board without the presence of management.
Secondly, board members should regularly attend board meetings. Each member’s vote whether it be for or against a proposal is important. If you are not current on what is taking place within the nonprofit organization this weakens your defense should a lawsuit be brought against the board of directors.
Third, it is vital that all members of the board have a clear understanding of the board’s role in personnel situations. There should be a clear division between the board of directors and Executive Director.
Finally, it is best practice to avoid conflicts of interest. Conflicts of interest include payment of board members for their services, and loans from a director to the nonprofit organization and vice-versa. Payment of board members for the services provided should be compared to similar organizations to ensure that the board member is demanding fair compensation for services rendered to improve the status of the nonprofit. It is for this same reason that it is ideal to avoid loaning money amongst the board of directors and the organization.