When A Nonprofit Proxy Goes Wrong, Really Wrong

And honestly, if a Director can’t put in the time (be it a legitimate excuse like football season or otherwise) a proxy appointment is of least concern. They should probably step down and sit on an advisory committee.

You know. Every now and again I chant for a teaching tool, just a little something to help get a point across. And every once in a while the resource gods smile upon me, the skies part and one drops out. Well, a special one came yesterday.

I’ve had my share of conversations on proxy (or proxy-like) appointments and how bad an idea they tend to be. This normally happens where a Director can’t be present and taps someone to serve in their place, like a substitute.

Currently, Senator Hayden is mixed up in controversy surrounding a local nonprofit org where an audit found the Executive Director spent funds on mission important items like vacations, spa treatments and excessively large alcohol bills.

In the center of the controversy is Senator Hayden’s seat on the Board and allegations he knew foul play was afoot. He claims he wasn’t aware. And as if this couldn’t get any more interesting not only did Hayden sit on the Board as a proxy appointment for his aunt, but (you may want to sit for this) once elected to office HE then appointed his wife to sit as a proxy for him. A proxy of a proxy, goodness.

I’ll leave the remaining details for your reading pleasure, but suffice it to say, this doesn’t help the case for proxies. In fact, I think its a good example why organizations should stay away. 

Why Do I Say That You Ask….

Well, for one reason why go through the trouble of searching for, recruiting, vetting and qualifying a Director only to have them drop someone new into the mix? Lest we forget, a cornerstone of board membership is to not only serve, but serve a fiduciary role for the organization. Meaning an organization trusts and relies on its Directors to act in its best interests. How on earth does that happen if a Director doesn’t show up? How does a Director fulfill their duty of care if they can’t inform themselves by asking questions, getting materials and being privy to conversations? More importantly, what if a major decision comes for vote? Do you really want someone with no history, foundation or skin in the game influencing the organization’s fate?

Then there’s that “otha” side…the legal side. Many States don’t allow for proxy appointments. Where they do, these are usually limited to proxy voting (ex. where a Director can vote on behalf of a non-present Director).  But even this is incredibly limited; in time, scope and the people that can do it.

Something else to think about is whether the organization’s bylaws or formation documents allow for proxy appointments.  Where a State allows them it still may require they be addressed in one of these documents.

Let’s say you’re a proxy ninja. You check the State’s laws and proxy appointments are allowed. In the original board meeting you insisted a proxy provision be included in the bylaws. Then the next foe is director liability. Many States don’t allow Directors to delegate all their liability to another person. This means a Director can (and probably will) be in part responsible for actions taken by someone acting on their behalf, whether or not directed.  On the flipside, the proxy appointment exposes themselves to liability for actions taken as a “Director” but probably isn’t covered under the organization’s D&O insurance policy because they’re not a Director as defined in the policy. Which may also jeopardize protection of other Directors as well.

ANNND volunteer statutes intended to protect Directors against lawsuits may not cover proxy appointments. Similar problems exist with indemnity protection (protection against lawsuits and damages caused by a lawsuit) if the organization offers one.

I don’t know about you, but this sounds like a whole lotta headache to me.

Possible Solutions

The reasons for a proxy appointment can, for the most part, be mitigated without using one. If a Director can’t make a meeting perhaps the bylaws might allow for a Director to attend another way, like Skype or conference calls, and still meet quorum requirements. If the appropriate consents are obtained the bylaws could allow the Board to vote on minor matters via email. Note, I say minor for a reason and wouldn’t recommend doing this too often. And honestly, if a Director can’t put in the time (be it a legitimate excuse like football season or otherwise) a proxy appointment is of least concern. They should probably step down and sit on an advisory committee.