Even the most well-intentioned nonprofit can find itself facing legal or ethical challenges. Like a thriving garden, a healthy organization requires more than good soil and good intentions, it needs regular tending, watchful eyes, and the willingness to deal with problems before they spread. Boards have a duty not just to react to crises, but to anticipate and address risks before they take root.
Common Legal and Ethical Risks
The following situations should prompt immediate board attention, even when they arise without any wrongdoing or bad intent. Ignoring early warning signs rarely makes them go away, it usually just gives them more time to grow.
Governance & Compliance
Governance problems are among the most common (and most preventable) risks nonprofits face. Operating with outdated bylaws or policies can leave an organization legally exposed without anyone realizing it. Failing to file required annual reports, including IRS Form 990, the Oregon DOJ CT-12, and Secretary of State renewals, can jeopardize tax-exempt status and good standing. (While we at Law Garden are happy to help you get your tax exempt status reinstated and get you back in good standing, we would rather help you stay informed and compliant!) Conflicts of interest that are undisclosed or poorly managed can undermine public trust and create personal liability for board members. And board inaction, irregular meetings, or failure to maintain quorum can call into question the validity of major organizational decisions.
Financial
Financial red flags demand particular urgency. Unexplained discrepancies or missing funds require immediate investigation, not a wait-and-see (or look the other way and hope for the best) approach. Commingling personal and organizational accounts, even informally, creates serious legal exposure. Weak internal controls, such as having the same person sign checks and track expenditures, leave organizations vulnerable to both error and fraud. Inaccurate or incomplete recordkeeping compounds all of these risks and makes it difficult to demonstrate accountability to regulators and funders alike.
Employment
Employment issues can escalate quickly and carry significant liability. Misclassifying employees as independent contractors is one of the most common mistakes nonprofits make, and the consequences, including back taxes, penalties, and potential lawsuits, can be severe. Harassment or discrimination complaints must be taken seriously and handled through proper channels, not informally managed or quietly set aside. Terminations without documentation or a clear process leave organizations exposed to wrongful termination claims that are difficult to defend.
Programmatic or Public Trust
A nonprofit’s most valuable asset is its reputation. Misuse of restricted funds or grant dollars, even through sloppy recordkeeping rather than intentional misconduct, can trigger funder audits, grant clawbacks, and loss of future funding. Public controversy or unwanted media attention requires a coordinated response, not silence. Safety concerns involving clients, participants, or staff need to be addressed swiftly and thoroughly. And when key funders or partners begin to pull away due to internal dysfunction, this is rarely a coincidence, but a signal worth heeding.
The Board’s Duty in a Crisis
When something goes wrong, board members must act quickly, calmly, and responsibly. This is not the time to defer, delay, or hope the problem resolves itself. Think of it as catching an infestation early: the longer you wait, the harder it is to address without significant damage.
A few key steps:
- Gather information, not gossip. Request clear factual documentation and formal reports rather than relying on secondhand accounts or hallway conversations.
- Seek legal or financial advice when needed. Boards are not expected to have all the answers, but they are expected to ask the right questions and bring in expertise when the situation calls for it.
- Engage independent board voices. Avoid deferring entirely to the Executive Director or staff, particularly when the concern involves leadership or organizational management. The board’s independence is a feature, not a formality.
- Document decisions. Whatever the board decides, including decisions to investigate, wait, or seek outside counsel, keep clear minutes and written records. Documentation protects both the organization and individual board members.
- Follow your policies. Your conflict of interest, whistleblower, and personnel policies exist precisely for moments like these. Using them consistently is both legally protective and a demonstration of institutional integrity.
Preventive Measures: Keeping the Garden Healthy
Of course, the best crisis is the one that never happens. Most legal and ethical problems that derail nonprofits did not appear overnight; they developed gradually in places where no one was paying close attention. Regular, proactive tending goes a long way.
At a minimum, boards should conduct regular legal and financial check-ups to catch issues while they’re still manageable. Policies and bylaws should be reviewed and updated every few years, or sooner if the organization undergoes significant change. Basic financial controls should be in place and actively monitored, not just listed in a policy manual. A clear paper trail of decisions and oversight activity should be maintained as a matter of routine.
Finally, invest in your board. Regular training and thoughtful onboarding for new members ensures that everyone understands their responsibilities, and feels equipped to fulfill them. A well-prepared board is an organization’s best early warning system, and its strongest line of defense when challenges do arise.
If any of these red flags sound familiar, we would be glad to help you assess where things stand.
