Fiduciary Responsibility and - PowerPoint Presentation

1. Fiduciary Responsibility and Financial ManagementAlison Crane, Assistant General CounselDavid Keen, Chief Financial OfficerAmerican Psychiatric Association (APA)May 2019

2. A DB IS A CORPORATIONAs a corporate entity in state:Benefits:Protection from personal liability for the membersTax exemptionsAbility to conduct business in state as a collective groupObligations:Conduct business like a corporationFollow legal requirements of corporations under federal and state lawReliable methods of accountingState and federal registrationsMake annual filings for taxes and corporate statusFollow bylawsOfficers and elected officials take on fiduciary responsibilities

3. DISTRICT BRANCH ELECTED OFFICIALS AND COUNCIL MEMBERSMembers who are legally responsible for:Keeping DB true to its missionSafeguarding DB assetsOperating DB in the best interest of its shareholders (i.e., the members)Elected officials (not DB Exec) are responsible legally

4. CHIEF RESPONSIBILITIES OF OFFICERS AND COUNCIL MEMBERSProvide effective high level organizational strategic planning and set organizational policyEnsure adequate resourcesSupport the Executive Director in his/her implementation of Board plans and evaluate performanceManage resources efficientlyDetermine, monitor and strengthen DB’s programs and servicesEnhance DB’s public standingRequire legal, financial, and ethical integrity and accountability from staff and council

5. President v. DB executiveDB Presidents –Buck stops with you. Don’t be an ostrich. DB Exec is great but ultimately you are the boss and responsible for actions of the DB. Pay attention.DB Exec has same check list you do, and you should check on it with them.You need to evaluate Exec’s performance, consult the other board members for opinions, and be fair in evaluationsYou need to be cohesive as a board and keep confidencesYou make policy and strategic decisions for the organizations and Exec implements themExecs– help President and Council/Board do the above bySharing information with themHelping them get information they need to be informed about what is going on and what factors to consider in making big decisionsTell them how you are meeting the items on the checklistEvaluate their performance and be fair. Let them know if you need more guidanceRemind them of fiduciary duties, care, loyalty and obedienceLet them know how you plan to implement the decisions and problem encountered in implementation

6. COUNCIL MEMBERS ARE FIDUCIARIES“Fiduciary”is a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties, most commonly a fiduciary and a principalDB is the principalYou are the fiduciariesDuty runs from you to DB

7. FIDUCIARY DUTYHighest form of duty in lawCouncil/Board member owes 3 interconnected duties to DB:Duty of CareDuty of LoyaltyDuty of Obedience

8. FIDUCIARY DUTY

9. FIRST FIDUCIARY DUTY - CARERULE NO. 1 --DUTY OF CARE (common sense and informed judgment rule)No heads in the sandConsider all reasonably available information before making a decision Consult with experts, committee members, or other appropriate people to ensure your vote is informedSet aside what the state association, friends, specialty, University or you personally want and ask, “is this action in the best interest of the entire DB?”Exercise good faith—honesty and fair dealingREWARD FOR COMPLIANCE: Thoughtful decisions and the business judgment rule – no personal liability

10. SECOND Fiduciary Duty—Loyalty Many parts to loyaltyConflict of interestUnityConfidentiality

11. LOYALTY = NO Conflict of Interest

12. LOYALTY = NO Conflict of Interest

13. LOYALTY = NO CONFLICT OF INTERESTRULE NO. 2—DUTY OF LOYALTY (put DB first rule)Duties are owed to DB – ONLY to DBNo conflicting loyaltiesE.g. Your boss wants DB to have a dinner to recognize his accomplishments. Very helpful to you, could help the DB, but there are limited funds and other uses for them that are more beneficial to the DB.Must vote “no” if you do not conclude independently it is in DB's best interest (even if voting it down is not in your best interest)Recuse yourself if do not believe can vote independentlyBe able to articulate the independent basis for your decision (See rule 1)Fully disclose significant conflicts of interest ANDNever take an opportunity for yourself that would be a good opportunity for the DBNever use resources from DB or confidential information learned at Council meetings for your personal benefit

14. LOYALTY = ConfidentialityCouncil/Board MeetingsDuty to maintain confidentiality of the meetings when confidential information is disclosedBest practice – do not discuss Council/Board meetings other than with Council/Board if in doubtKeep discussion professional and informative—you or the DB could be held liable for what you sayStick to what is reported out

15. LOYALTY = UNITY/ONE VOICE“As Board members we need to speak with one voice. I’m suggesting Donald Duck.”

16. Third FIDUCIARY DUTY—OBEDIENCE RULE NO. 3 – Duty of Obedience (rule about following rules)Comply with federal and state law and regulations (black letter and spirit)Comply with all required filing deadlinesComply with all fiduciary dutiesComply with bylaws, ethics and proceduresSpeak thoughtfully --the world sees you as the voice of the DB

17. Oh The Troubles WE’VE Seen!Failure to file with IRS = loss of non-profit Loss of corporate status = each member liable for the debts of the DBNot following proper accounting – where could that money be going?Outdated bylaws = actions of Council/Board could be voidPublic division of council – near breakup of DBOstrich syndromeTerritorialism between Council/Board and DB Exec

18. Financial requirements you need to follow

19. Lots of Rules to follow

20. Initial ChecklistWhat type of organization are you?501(c)(3) or 501(c)(6)What are the leadership roles according to the bylaws?Is the DB current on filings?Understand the budget and the budgeting process.Review and understand the financial statementsAre there restricted accounts?PAC or contributed fundsAre their financial controls in place?Are your staff members employees or independent contractors?

21. Taxes on Non-Dues revenueUnrelated business Income taxActivity is conducted as a trade or businessRegularly carried onNot substantially related to the exempt purposeSpecific exemptionsAnnual conference revenueInvestment or interest incomeSponsorship revenueRoyalties

22. Unrelated Business IncomeExamples of UBIAdvertising in NewslettersClassified ad’s (job board)Exclusive endorsementsMarketing activitiesFile a 990-T annuallyTax is paid on net income (after expenses)$1,000 minimumStates usually follow IRS rules

23. Employees versus independent contractorsThey may do similar work, but there are important differences between employees and independent contractorsEmployee:Company must withhold income tax and pay Social Security, Medicare and unemployment tax on wages paidProvide employee a W2Independent Contractor:Company does not withhold taxes Company reports income above a certain amount to contractor on 1099Test:General rule is that that an individual is an independent contractor if the company has the right to control or direct only the result of the work, not what will be done and how it will be doneCompany controlling the “what” and “how” points to employee

24. Risk ManagementApproval of expendituresSeparation of duties, if possibleBank reconciliation & invoice paymentCheck signing authorityReimbursement PoliciesProcurement PoliciesBudgetingAnnual audit or accountants reviewDocumented policies and proceduresInsurance policies

25. DB coverage Under APA Insurance policies General Commercial LiabilityInsurance to protect the entity (DB) for bodily injury and property damage claims arising out of the premise and operations of the entityLimit = $2million total (APA, APAF and all 74 DBs) ($1million per occurrence)No deductible/retentionExecutive Risk (D&O & Employment Practices Liability)D&O/entity insurance protects the entity (DB) and its individual directors, officers and employees from decision-based exposures (i.e. losses, other than fines/penalties, incurred for decisions or actions made in good faith on behalf of company)Employment practices liability protects the entity for employment claims (e.g. harassment, discrimination) Limit = $5million (less for certain claims, e.g. Internal Revenue Code and HIPAA)$100,000 deductible for D&O; $175,000 deductible for employment practices liability (antitrust and class action claims have higher deductibles)APA pays premiums for the insurance. Whether APA or the individual DB is responsible to pay the deductible depends on how the relevant claim arises

26. Who Pays Deductible and How?If Claim arises from an action APA requires the DB to take (and the action was done properly in accordance with that requirement), APA pays. Question is, does APA have control?Ethics investigations handled in accordance with APA’s Ethics Procedures APA marketing materials distributed by DB at APA’s requestWhere DB has Control, DB paysEmployment disputesDecision made by Council of DBAssessment of Risk –Claims against DBs that hit insurance in last 8 years: just 1 employment claimRisk mitigation options –Insurance for the deductible – cheap because only need 100K-175K in coverageAPA infrastructure grant if no resourcesIndependently insure (APA policy results from 76 separate entities)

27. Examples of How It worksAggregate General Liability is $2million; Aggregate Executive Risk is $5millionClaims against APA, APAF and 74 District Branches all reduce the limitsExamples:DB has employment claim against it. Damages awarded plus attorneys’ fees equals $350,000 DB pays first $175,000, Insurance pays remainderPool left that year is $4,825,000APA has property damage claim against its general liability policy and verdict is $1M and attorneys fees were $500,000Insurance covers entire $1,500,000Pool left that year is $500,000MAXIMUM DRAWN ON POOL IN LAST 8 YEARS (IN ANY ONE YEAR) HAS BEEN < $1M.

28. Chapters of District BranchesAPA has 74 District Branches. These are the legal entities recognized by APA.Some DBs have Chapters – these should be effectively set up like offices of the DB, such that the DB is the legally responsible entity for all actions of its Chapter (e.g. tax exemption, filings etc.)The insurance coverages discussed are extended to District Branches via an endorsement to APA’s policies. Coverage is for the 74 District Branches recognized by APA only (including multiple offices of the same District Branch). Insurance thus covers only Chapters which are effectively offices of the relevant DBAPA’s insurance policies do not cover any Chapter of a DB that is a separate corporate entity

29. Need Help? Colleen 202-609-7224 Dave 202-609-7131 Alison 202-683-8317