Video Transcript: The Formation of a Board

Welcome to Session Two of the mini course how to be a productive board  member. In this session, we talk about the formation of a board. We talk about  three things. First, we're going to talk about the steps required to form a not for  profit board of directors. Second, we'll talk about identifying initial board  members. And third, we're going to talk about three legal duties that every board member owes to the organization. So let's begin by talking about the steps  required to form a board of directors. You may be familiar with a board of  directors. You may have served on one, and but many of you have not. And so  we want to start from the beginning. What is a board of directors, and how do  they? Why do they? Why? Why do they exist? And so we're going to talk about it in the context of a not for profit board of directors, a for profit board is a different  entity that has different pursuits. A for profit corporation, board is seeking after  the best interests of its shareholders. But in a not for profit corporation, the  board of directors is seeking the best interest of the organization itself. So in not  for profit corporations, just like for profit corporations, they exist because there  are laws and regulations that authorize their existence. A corporation is treated  like a person, and it is can hold property, it can enter into transactions, and it  does so by virtue of statute. In the United States, Corporation Law is primarily  an area of state law. There are federal laws that impact corporations, of course,  tax laws and so on, regulatory laws, employment laws, but the formation of a  corporation is governed by state law. And in your country, if you're outside of the  United States, you have your own legal structure for how to form a not for profit  corporation. And it may not be called a not for profit corporation in your country,  it may be called us, might be called a society, or an NGO or some other name,  but we're talking about corporations that are not engaged in business for profit.  Now, while the subject matter is an area of state law, and the state laws in the  United States are often very similar. They each have their own peculiar  differences, features that prevent us, in this course, from being able to cover all  of the different nuances in each of the 50 states. And so when I talk about legal  requirements of board members in formation. I am speaking in general terms  and not specific terms. Each state's law has a little bit different flavor than the  next state, and so this course is not intended and should not be relied upon as  providing legal advice, but really general topical information about board  participation. I mention all of this because it's important to comply with the legal  requirements in your jurisdiction if you're going to form a not for profit  corporation, or if you're already involved with one that you may have been  involved in forming, I always recommend obtaining the services of a competent  attorney and a competent accountant when forming a not for profit entity, the  value of their expertise and the accountability that they provide to a board  cannot be overstated. The value of that is significant a lawyer will help you  comply with the corporate the corporation's legal requirements, both in forming  the organization and in operating is going forward. An accountant will help keep 

the corporation in compliance with tax laws. And in the context of a new ministry, can help you set up proper accounting and bookkeeping procedures from the  very beginning. This protects the founder and board members to have this  competent advice. It's easier for the board to make informed financial decisions  when accurate financial information is available. Now, you might think that you  can't afford an attorney or an accountant, but I would suggest that you really  can't afford not to have some form of legal and accounting support for your  organization if you are unable to afford. An attorney or an accountant or both, I  would encourage you to go and talk to one. Let them know what you're doing.  Tell them you're a startup. Tell them your vision, share your need for counsel  and advice, and ask them if they'd be willing to grow with you. Many attorneys  provide services to not for profit corporations on a pro bono basis, and  accountants are also willing to work with people who are starting out. Give them  they may sit down with you for an hour. Give you some advice on how to start  your bookkeeping practices, but better to start out on a good foundation than to  cut corners and avoid some initial expense and find out later that you have done something improper or overlooked a regulation that you didn't know about. A not  for profit corporation is typically formed by filing a document with a designated  government office in the state where I practiced law for 25 years, in Chicago,  Illinois, in that state of Illinois, the Secretary of State was the office where  documents were filed to form corporations. And there the document was called  the Articles of Incorporation in your state or in your country, that document may  be called, will likely be called something else, but whatever the name of the  document is, it's a form that's filled out, and sometimes other documentation is  required to be submitted, sometimes the bylaws of the corporation or some  other supporting documents that the state may want to see. You bring all of that  to the office, and they will review your application, and part of that application is  identifying the initial Board of Trustees who is going to be on the board. And  each jurisdiction has its own requirements for the minimum number of board  members a not for profit corporation must have in Illinois, that number was  three. Your state may be different. A corporation can always have more than the  required minimum, but whatever the statute provides in your geographic  location, in your jurisdiction, you need to display that number of directors in your  application, or the application will be denied. When the articles of incorporation  and other supporting documents are submitted to the government office, they  will review the application to determine if it complies with all the statutory  requirements of a corporation, and when that submission is approved by the  government agency, the corporation, led by the Board of Directors, becomes a  recognized entity. It is deemed to exist. That's how a board of directors is  formed. Let's talk now about identifying an initial board of directors, identifying  those board members who are going to be listed on that articles of incorporation as a productive board member. It's helpful to understand that boards have a 

growth cycle, and Board needs change over time, as a ministry grows so the  first board in many nonprofit corporations is referred to as the founders board. A  founder, of course, is the individual who is the visionary for the ministry or  organization. Sometimes the founder is an individual, sometimes it's a group of  like minded visionaries, but in order to form the legal entity and start the ministry, a founder must recruit the minimum number of board members required by the  jurisdictional statute to form the corporation. Now there are many resources  available online about recruiting the ideal board member, and whether you're a  founder looking for board members or a kingdom minister who has been invited  to join a board there's one thing I strongly recommend that you do, in addition to  identifying those factors of a good board member and what you're looking For  the needs of your ministry or corporation organization, but the most important  thing that I can encourage you to do when whether it's forming the initial board  or recruiting additional board members, and that is to pray board ministry is a  calling, and if you are a founder, you know, as a founder, when I formed peace  fire, I went to the Lord in prayer, asked him to send me. I needed two more  people. I had myself on the founder can be a board member, and I needed two  more people. And so I asked the Lord to send me two of his friends who would  be aligned with the vision of Peace fire, and would serve as board members with me. And he did. He sent me two men that I would never imagine the Lord would  send me to serve on this board. He sent me president Reyenga from Christian  leaders, and a brother who also served on the Christian leaders board for a  season, Ed Van Drunen. And Mr. Van Drunen, an incredible brother in the Lord,  shared a vision for reconciliation. And of course, President Reyenga knew of my vision for peace, fire, and I knew that he was aligned with our vision. And so the  Lord sent me two founding board members who were in complete alignment  with what we what the Lord had put on my heart to pursue in ministry at peace,  fire. It isn't always the case that you have that alignment right up front.  Sometimes the founders board is just two more people that will allow that  founder to file the articles, and they're just willing to serve on the board in order  for their brother or sister to pursue their vision. And they may only be on the  board for a short season, until other people come along. But founders boards  are always interesting, and there comes a time when, if the ministry group grows and the Lord blesses the work of the ministry, that the founders board will shift  into another stage of growth and development. But if I'm a founder, I'm going to  pray and ask the Lord to send me some board members who are aligned with  my vision, the vision that the Lord has given me, if I'm a potential board member, and I am invited to join a board, I'm going to ask the Lord if serving on this board is His will for me, and I'm going to examine the mission of that organization To  see if we are in alignment with one another, just as I mentioned Ed Van Druvens alignment with peace fire when I was invited to join the Fellowship of Christian  Athletes board back in the early 1990s Well, the Fellowship of Christian Athletes 

Ministry had made the Lord had used that ministry to make a tremendous  impact in my life when I was in high school. And so I knew their mission. I was  aligned with their mission. And so as I put it before the Lord, it wasn't a question  of alignment, it was a question of whether it was his will for me to join the board  at that time. So prayer is a key component to board membership. So a founder's board, as I mentioned, often consists of board members who have a close  relationship with the founder and who want to support his or her vision for  ministry. A founder is, as I also mentioned, often, a board member. But it's not  required that a founder be a board member. And as the ministry grows, the  needs of the board will change and and also grow. We'll talk more about board  recruitment in a mature board at a later in a later session. So I want to close this session with three legal duties that every board member owes to the  corporations, organizations, ministries that they serve. They are. These are  fiduciary duties, and the fiduciary duty is a legal duty to act in the best interests  of the beneficiary, and in this case, the beneficiary is the church or ministry that  the board serves. So a board role is a fiduciary role. We owe some duties to the  organization. It's not just for our benefit. A board member receives great benefit  from being on a board, but that's not the purpose of board membership. Purpose of board membership is service. It's ministry, it's calling. And so these three  duties every board member owes to the organization. The first is the duty of  care. The duty of care is exercising good judgment. Common sense means  performing duties honestly and in good faith and with reasonable diligence and  care. Exercising due care means attending board meetings, understanding the  organization's mission, reviewing financial documents, reviewing the bylaws,  understanding how the organization and the board makes decisions, and it also  involves dissenting from board action when you disagree with it. The duty of due care, it's making sure that all corporate actions, all board actions, are consistent  with the organization's bylaws or other governing documents. The duty of due  care requires board members to periodically review the performance of senior  level staff and set their compensation. The duty of care extends to financial  decisions. The presumption is that all financial decisions taken by a board are  taken for the best interests of the organization. That's the duty of due care, the  second duty that every board member owes to the corporation and the  organization that it serves, is the duty of loyalty. The duty of loyalty means doing  what is in the best interest of the not for profit. We're going to be loyal to the  organization before anyone else, whether they're on the board or on the staff or  somehow connected to the organization. It's the organization's best interest that  we serve, and we are required to do so by the duty of loyalty. To be loyal to the  nonprofit means that the nonprofit's interests prevail over my personal interest  and over my personal business interest. The duty of loyalty requires that any  transaction between the board and one of its directors be a fully disclosed be  approved by the board without the vote of the interested director and C fair and 

reasonable the that the transaction is fair and reasonable to the organization. So if the organization is going to enter into a business transaction with a board  member, that transaction needs to be fully disclosed to the rest of the board.  Discussion can be made, but when the vote is taken the interested board  member needs to leave the room, and the vote taken outside of their presence  and approved by the full board after full disclosure. And that transaction must be fair and reasonable, not to the interested director, but to the corporation. The  duty of loyalty also requires that a board member will not usurp any corporate  opportunities for themselves or for a friend or anyone outside of the corporation.  The third duty that a board member owes to the corporation is the duty of  obedience. And the duty of obedience means to be obedient to the laws of the  nonprofit. This includes adhering to the articles of incorporation, the bylaws, tax  laws, and faithfully following the organization's mission and purpose. It means  that directors know and follow all laws applying to the nonprofit, whether they be federal, state or local in nature. So let's review the topics we've covered in this  session. A corporate board is formed when a government agency approves the  corporation's application to be recognized as a not for profit entity the relevant  statute in your jurisdiction determines the minimum number of board members  required in the board of directors. Board membership is a calling, and prayer is a priority, and board members owe the fiduciary duties of due care, loyalty and  obedience to the organization. God bless you. We'll see you in the next session.