HAHN AGENCY, INC.

Management of Non-Profit Organizations

Most non-profit organizations have as directors individuals with substantial experience and expertise in business matters. Too frequently though, those individuals abandon their business approach to decision making when they sit on the board of the non-profit organization. This type of approach to service on the non-profit board is contrary to the director's legal and moral duty to act like a business person, using the same degree of commitment, attention and care as directors of for-profit corporations. Ironically a non-profit directorship is often more demanding than its for-profit counterpart because some of the work will be unfamiliar and the business of the organization may be conducted under less efficient conditions than in business corporations.

Directors should demand that the organization be operated much like a for-profit business enterprise. For example, formal and well-defined operating procedures should be established, strong financial controls and systems should be implemented (including regular preparation of balance sheet and income statements rather than use of mere budgets), and risk management and loss control programs should be adopted.

Non-profit D&O's often ignore prudent business procedures in the mistaken belief that there is minimal, if any exposure arising out of the mismanagement of a non-profit organization. This myth is apparently based upon the lack of profit oriented shareholders in the nonprofit setting. However; non-profit organizations have numerous constituents who may have standing to prosecute claims for mismanagement. Every non-profit organization is operated for the benefit of some group of persons. Those intended beneficiaries, together with employees, creditors, customers, members, state regulators, and others are all potential plaintiffs against D&O's of non-profit organizations. Recent surveys indicate that more than 50% of claims against D&O's of for-profit corporations are brought by persons other than shareholders of the corporation. Although claims against non-profit D&O's are brought with less frequency than are claims against for profit D&O's, such claims are certainly not uncommon and should be a concern to non-profit managers.

Organization Loss Control

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