Avoid Legal Difficulties While Driving Performance

1. Avoid Legal Difficulties While Driving Performance Practical Suggestions for Boards Edward D. Diller - 2/1/07 888734

2. Upside-down Focus on Driving Success • Please note that in many ways, this approach is upside down • It starts with a “negative focus” but hopefully flows over to the positive Edward D. Diller - 2/1/07 888734

3. Specific Areas of Legal Liability • Contract Liability • Normally relatively nominal or predictable • Employment situations are often the most problematic • Need a clear policy on binding the institution • Tort Liability (includes breach of fiduciary liability claim) • Potentially very significant • Normally insured; stay in touch with insurance company • Regulatory Liability • Perhaps most difficult to control • Normally not insured against • Often counter-intuitive Edward D. Diller - 2/1/07 888734

4. Types of legal liability and who is responsible • Contract Liability • Almost always the institution • Be sure that institutional formalities are observed • Corporately • Contractually • Tort Liability Often the threat is beyond the institution • Main Actor • Potentially supervisors, officers and Board (although usually not found liable) • Early notification of insurance company and lawyer • Maintain physical facilities and vehicles • Regulatory Liability • Most often institution • Occasionally main actors • Possibility of Board members • Companies normally indemnify employees, officers and directors Edward D. Diller - 2/1/07 888734

5. Fundamental Board Practices to Minimize Exposure • Board Members • Appoint Strong Board members • Educate Board Members to their tasks – emphasize mission and practical issues • Discuss expectations of Board Members • Encourage Board Members to be informed and to ask questions • Adopt and follow a Conflict of Interest policy • Be sure Board focuses on public trust • Exercise ordinary business care and prudence • Control = potential liability; Board has control by definition • Formative Documents • Check periodically • Follow procedures or amend • Appoint a governance committee Edward D. Diller - 2/1/07 888734

6. Focus on Board Responsibilities and Governance Issues • Basically all Board members have the same duties: • Loyalty, Good Faith and Due Care • As a practical matter, there are four responsibilities (which drive everything) • Hire and fire the CEO • Be informed • Exercise sound judgment • Insist on legal and ethical behavior within the Board and within the staff • Why Governance? • Protect against liability – Shield • Promote institutional success – Sword Edward D. Diller - 2/1/07 888734

7. CEO/Administrator Issues • CEO – EXTREMELY CRITICAL • Appoint the best CEO possible – stretch to get the right person • Board/CEO Relationship • Insist on a focus on the mission • Expect a strategic plan • Require goals and periodic assessment • Ensure that Board advises CEO what information Board requires • Be sure Board communicates clearly with CEO, and vice versa – each side shares good and bad news • Be sure Board does not undercut CEO through side-bar conversations and demands Edward D. Diller - 2/1/07 888734

8. High Level Resources to Minimize Exposure • Professional Advisors • Be sure the organization has strong professional advisors on which it can rely and which it does consult • Organizations • Join organizations that provide updates on timely topics of interest Edward D. Diller - 2/1/07 888734

9. Insurance Checklist General Good Practices • Insurance • Be sure that institution has an annual insurance check up • Consider the purchase of Directors & Officers Insurance and Employers Liability Insurance (tell them you want to use your own attorney) • Consider operational and other recommendations of insurance company • Financial Matters • In almost all cases, require an audit • Insist on periodic financial and key indicator reports and insist that the Board review • Do not accept a deficit budget • Understand donor requirements and follow them Edward D. Diller - 2/1/07 888734

10. General Thoughts relating to Liability • The perfect can be the enemy of the good • Written documents do not disappear except when you need them • The government is not your friend • You are probably wrong, but wait just a bit to admit it • Sarbanes-Oxley has meaning for non-profit organizations • Regulation will increase Edward D. Diller - 2/1/07 888734

11. Perfect vs. Good • Institutions must act – “do things” (hopefully they are mission based) • There can be a tendency to try to know it all – we can’t – we don’t need to be so smart • Doesn’t give a license to be sloppy, but we sometimes over-analyze and over-report • Impossible to totally predict business, legal and regulatory results, impact and environment • Exercising due care and reasonable business judgment is what is required Edward D. Diller - 2/1/07 888734

12. Move On • Non-profits are seen somewhat like public for-profits, you are operating on some else’s money • Approach issues with at least the seriousness you treat your own affairs • Non-profits have a “pass” that for-profit boards and other institutions don’t • Don’t be paralyzed by fear of legal consequences (at the same time, do not be ignorant) – try to understand requirements • Be sure the mission is worthy and then drive to it Edward D. Diller - 2/1/07 888734

13. Written Documents Remain With Us • The written word takes on an exaggerated importance • everyone assumes that the words are exactly correct, and that any implication is in fact intended • Things in writing will not go away (except when you want to find them) • We forget the location of documents • We forget the content of documents • Consider writing fewer things down or writing down less about certain topics (including some Board discussions) • Stick to the facts – eliminate guesswork • Institute a periodic review of things that are written and retained Edward D. Diller - 2/1/07 888734

14. Board Related Documents • Organize basic documents • Governing documents, minutes, actions and policies, regulatory – review at least annually • Board discussions can be hindered by inclusion of too much detail and reporting in minutes Edward D. Diller - 2/1/07 888734

15. Administrative Related Documents • Organize basic documents • Governing documents • Board minutes, actions and policies, • Regulatory • Contracts • Review periodically • Develop a records retention policy • Keep good employee records; be careful about evaluations • Words have meanings; remember that in evaluations – Be accurate and candid Edward D. Diller - 2/1/07 888734

16. Institutional Related Documents • Contracts have meanings • People get incredibly careless about contracts • Be sure you know who has the power to sign contracts and who in fact is signing contracts for you – and the limits for which they can sign • Be sure to save the contracts you have signed and know how to access them • Always understand how long contracts last and how to get out – may be most important • People are incredibly insensitive about Emails and what is retained on hard drives • People should believe that every Email and everything item which is stored on a computer may in fact see the light of day • Emails can be exhibits at trial Edward D. Diller - 2/1/07 888734

17. The Government is not your friend • Whenever you receive a request from a governmental agency for information, treat it seriously • Provide only required information, and keep a detailed listing of what you provided – if possible, consult counsel before providing • The most serious issues normally relate to “employee issues” (which includes EEOC and ERISA issues) • The War on Terror will also affect our institutions • Assume that what you say could be used against you • More Regulation is around the corner – maybe even including government power to remove Directors/Trustees • 70,000 to 80,000 new non-profits per year – how are they governed and what are they doing Edward D. Diller - 2/1/07 888734

18. Carelessness can be expensive • Failure to act properly can result in confusion and very expensive corrective actions • Push come to shove, your institution will be viewed in a court of law as just that - an institution that may have hurt an individual in some ways – that tips the scales Edward D. Diller - 2/1/07 888734

19. We love to confess • When the unexpected happens, talk about facts rather than responsibility or liability • First impressions of situations are often inaccurate and certainly incomplete • “Fixing” things too quickly may lead to unfortunate results • Accepting blame can also be harmful, because it often cannot be undone • People’s instincts are often not correct with respect to employee matters • “Beneficence” is often treated as an indication of wrongdoing • You will be viewed as an impersonal institution and the plaintiff as an injured individual – scales tipped against you – seen as having deep pockets • Be sure to consult your professional advisors and communications consultants very early in the process • Try to develop contingencies plans Edward D. Diller - 2/1/07 888734

20. Employment issues (also can apply to students) • Discrimination (age/race/sex/disability/religion) • Harassment (same characteristics as above) • Breach of contract, promissory estoppel and wrongful termination • Retaliation claims – whistleblower matters • Many states allow claimants to hold managers and supervisors personally liable in employment discrimination matters Edward D. Diller - 2/1/07 888734

21. Practical pointers on Employment issues • Have good, up-to-date policies • Distribute and train regularly • Follow • Consistency is a key • We like to think we can be “flexible” based on individual circumstances – recognize that that can lead to trouble • Document and date • If employee issues arise, document them contemporaneously and date the documents – record the facts and circumstances in a clear, concise manner – destroy drafts • Create an evaluation system that works Edward D. Diller - 2/1/07 888734

22. Sarbanes Oxley has meaning for Non-Profit Organizations • Designed mainly for public companies, but …. • Has created “standards of care and best practices” that affects everyone (“trickle down” effect) • Has had a significant effect on accountants and lawyers, regardless of whether they are dealing with GM or non-profits • Basically states that there is no reason for the Board not to know and understand what is going on with the entity, and holds them (and maybe administration) responsible • Forms of Governance which rely heavily on delegation may be effective, but will not shift ultimate responsibility • Board of Trustees/Directors are more responsible for the actions of the institution than ever • Delegation is not likely to have a material influence on that focus or ultimate liability (“we did not know” no longer works) – in fact, it may be a hindrance Edward D. Diller - 2/1/07 888734

23. Sarbanes Oxley – NACUBO • National Association of College and University Business Officers (11/03) – Focus on overall financial risks, not simply on accountability structures from business that are fundamentally different – Three primary areas • Independent Auditors: Board’s audit committee should assume responsibility for engaging and overseeing; do not obtain nonaudit services; rotate audit partner at least every seven years with a two year time out. (Current GAO standards for institutions receiving federal funding may be more restrictive.) • Senior Management: Adopt a code of ethics (including conflict of interest policy) and enforce compliance; create a confidential complaint mechanism relating to financial issues; consider implementing financial certification requirement; document and evaluate internal controls • Audit Committees: Create one; give it power and authority; make it independent; create a charter and authority language; have at least one financial expert Edward D. Diller - 2/1/07 888734

24. Regulation Will Increase • Non-profits are more like for-profit entities • The drive for resources will result in responsibility • Non-profits sometimes do not act in ways which people on the street believe are appropriate for entities supposedly focused on societal benefits • Non-profits are accumulating significant assets • These will be used for political and other purposes • Significance is not lost on the public or policy makers • Non-profits are increasingly large employers and drivers of economies (a rule of thumb I have heard is that the economic impact of a college is roughly 2.5 times its annual operating budget) • Senior managers are collecting increasingly large salaries • Non-profits have important international relationships which are typically outside government control • The government is suspicious of those relationships • Non-profits will need to justify social investment • We need to learn to play in the political sandbox Edward D. Diller - 2/1/07 888734

25. Conclusion • Boards must understand mission and accept responsibility its achievement • Institutions must act and show measurable progress toward goals • Careful action is required to minimize potential liability and public relations problems • More regulation is on the way • Lack of expertise will not be a defense to anything – Boards/administration must be strong • Non-profits must justify the tax and societal advantages given them Edward D. Diller - 2/1/07 888734