A new law is poised to make governance easier for nonprofit organizations throughout New York state while improving board oversight in key areas including finance, handling conflicts of interest and whistleblower complaints. Most elements of the new law, which amends the Not-for-Profit Corporation Law and Estates, Powers and Trust Law, will take effect May 27, 2017.
The new law was developed to respond to certain problematic requirements in the Nonprofit Revitalization Act of 2013. In particular, many nonprofits encountered challenges related to certain transactions, independent directors, and the formation and operation of committees.
A working group consisting of the New York State Law Revision Commission, Lawyers Alliance for New York, New York City Bar Association, New York State Bar Association and Nonprofit Coordinating Committee joined together to draft a legislative fix to address these issues. Governor Cuomo signed the new law in late November 2016.
Based on the changes mandated by the new law, New York nonprofits may need to amend their governance documents and take other actions to come into compliance. By May 27, 2017, New York nonprofit organizations must review and revise their Bylaws, Conflict of Interest – and if they have one – Whistleblower Policies, to expand the definition of related party to include three new categories of key employees, now called “key persons,” and to require the board, instead of the corporation, to adopt and oversee implementation of the Conflict of Interest and Whistleblower policies.
Certain nonprofits operating in New York state will have to comply with the following additional requirements:
* If the board chair is an employee, two-thirds of the entire board must vote to approve a resolution authorizing the employee to continue serving in that role, and the approval should be recorded in the resolution or minutes by January 1, 2017.
* If the board has not officially voted to adopt the Conflict of Interest Policy and any existing Whistleblower Policy, it must do so before May 27, 2017.
* If the corporation has annual revenue over $1 million and 20 or more employees, by May 27, 2017 it must amend the Whistleblower Policy to require that employees may not participate in any board or committee deliberations or voting relating to the policy’s administration of the Whistleblower Policy. In addition, the person who is the subject of a whistleblower complaint may not be present at or participate in board or committee deliberations or vote on the matter relating to the complaint. He or she can provide information as background or answer questions before the deliberations and voting.
The new law also allows nonprofits to adopt the following procedures to streamline and improve efficiency in many operational areas:
* Disinterested staff, rather than the board, may now oversee transactions that are very small or in the ordinary course of business, or that constitute a benefit to a related party solely as a member of a class of charitable beneficiaries and the benefit is available to all similarly situated members of that charitable class on the same terms. Boards should determine how these changes will apply to daily transactions and amend the organization’s Conflict of Interest Policy to identify transactions that will be considered “de minimis” or that are transactions in the ordinary course that do not require board review.
* A majority of board members present at a meeting, rather than a majority of the entire board, may now form and appoint people to committees of the board. Boards should amend their bylaws to permit the creation of committees and appointment of committee members by a majority of those in attendance at board meetings.
* Oversight of Conflict of Interest and Whistleblower Policies may be conducted by a duly authorized committee, and it is no longer necessary for non-independent directors to be recused. This means that organizations that are not required to file an independent audit report with the Charities Bureau do not need to have directors who meet New York’s very specific definition of “independent director,” although they must still ensure that directors are not involved in any matters in which they have a conflict. Boards should review the membership of the committees overseeing the organization’s Conflict of Interest and Whistleblower Policies, if it is not the audit committee, and consider whether non-independent directors should be added in those roles.
* Recruiting financially literate directors to serve on the audit committee will be easier under the new law which will allow audit committee service by a business’ employees and people owning a substantial interest in the business if the nonprofit and the business exchange payments in an amount that is insignificant to the business given the size of its revenue (according to a sliding scale capped at $100,000), or if the business, for instance a utility, provides services to the nonprofit at fixed or non-negotiable rates and those services are not available from another source. Boards should review the membership of the audit committee and consider whether directors who are independent under the new definition should be added in that role.
While adopting these changes will present some short-term challenges for nonprofit managers as revisions are made and incorporated into bylaws and staff trainings, over the long term these new requirements represent important opportunities to improve governance and operations, leaving senior leaders in the nonprofit sector better able to focus on the needs of their constituents. This landmark legislation represents an encouraging example of collaboration between the nonprofit sector and government in areas of common interest that will have a significant benefit in the years ahead.
Sean Delany is the Executive Director and Laura Abel is the Senior Policy Counsel at Lawyers Alliance for New York. Lawyers Alliance provides business and transactional legal services to nonprofit organizations and social enterprises that are improving the quality of life in New York City neighborhoods, and advocates for legislative and policy change on behalf of the nonprofit sector.