It’s that time again: the meeting of the Board of Directors. Working professionals, experts in their respective fields, pillars of the community, sharp, focused, intelligent people with innovative ideas and strong wills, getting together with the common goal of directing their organization toward attaining lofty ideals and objectives…and somebody must step back from it all and write everything down.
If your eyes started to glaze over just from thinking about having to take the meeting minutes, then you don’t need me to tell you that keeping the minutes is probably the most tedious, onerous, and thankless task of any board meeting. It typically falls to the secretary or a staff person, but any board member could be requested to do it as well. When discussions start to get animated and ideas get tossed around, keeping minutes can become the last thing anyone wants to think about, but their importance cannot be underscored enough.
A Scary Tale from Walt Disney
Take the cautionary tale of a famous Walt Disney Company court case. In 1995, The Walt Disney Company hired Michael Ovitz as President, under an agreement that would have seen him at the helm of one of the most profitable corporations in the country for the next five years. Fourteen months later, The Walt Disney Company decided to terminate his contract, resulting in a severance payout of $130 million dollars. One month later, several shareholders sued The Walt Disney Company in a alleging the board of directors and officers breached their duties to shareholders relating to the hiring and firing of Ovitz. What resulted was nearly a decade of protracted and costly litigation and negative publicity culminating in one of the most definitive legal cases regarding corporate law in US history, the crux of which hinged on information contained in board meeting minutes.
The basis of the stockholder’s argument was that the board meeting minutes failed to show that there was enough deliberation or document review regarding Ovitz’s initial employment contract or the severance package. The minutes of board meetings were pulled and scrutinized by the court, and the board’s lack of adherence to best practices was even noted in the ultimate decision. Even though the Court ultimately found the directors and officers had met their obligations, they did so despite the sparseness of the minutes, stating that had best practices been followed, “there would be no dispute (and no basis for litigation) over what information was furnished to the committee members or when it was furnished”.
10 years of litigation and negative publicity that could have been avoided entirely with adequate and properly kept minutes.
Imagine if no minutes had been kept at all!
If the events involving The Walt Disney Company aren’t enough to convince you of the role minutes play, consider the following:
In California, the State Attorney General is charged with regulating nonprofit public benefit corporations. Section 6320 of the California Corporations Code requires all nonprofit public benefit corporations to keep “minutes of the proceedings of its members, board, and committees of the board…” and that those minutes be kept in “written form or some other form capable of being converted into clearly legible tangible form.” While it’s true that the Attorney General does not normally or regularly check to make sure your organization is keeping minutes as required, it will become an issue if anything happens within or to your organization that triggers state scrutiny, for example- if your tax-exempt status is called into question, if you get sued by a former employee, or if your organization or an employee in your organization intentionally or negligently causes harm to someone. Anything that draws attention to your organization can trigger scrutiny of your minutes, and not keeping adequate, consistent minutes on file as required by law can put your organization in serious peril.
In addition to the Attorney General’s office, the Franchise Tax Board oversees the state tax-exempt statuses of California charities. In the event of an FTB audit, minutes are essential to establish that the organization has been acting in a compliant manner for state tax law purposes.
Although adequate meeting minutes are not explicitly required by federal law, it is important to note that meeting minutes are some of the first documents requested by the IRS in an audit. The IRS will use those minutes to help determine if an organization is organized and operated in keeping with its tax-exempt purpose, to determine what returns have been or need to be filed, and whether any tax reported is correct. Part VI, Section A, Question 8 on IRS Form 990 (a required filing for all nonprofit organizations) specifically asks whether the organization documented the meetings held or actions undertaken during the year, clearly indicating this is an area of concern for the IRS, and the agency itself has been up front about its intent to use that information to “assess noncompliance and the risk of noncompliance with federal tax law of individual organizations.” Again, the IRS most likely will not come after an organization for failure to keep minutes, but if an organization does come under scrutiny at any time, the lack of minutes, and even the lack of adequate minutes, could weigh heavily against the organization’s interest. Noncompliance could conceivably result in the loss of the nonprofit’s 501(c)(3) status, which could then result in possible fines, penalties, back taxes, and subsequent loss of donations or grants. And, because it’s conceivable that a state regulatory agency may rely on IRS determinations when reviewing a corporation for compliance, your nonprofit could face a domino effect of penalties and fines and ultimately a loss of nonprofit status at the state level because of IRS scrutiny.
Meeting minutes are legally binding documents that provide protection to your organization. In the everyday practice of running any business, there are decisions made regarding the hiring and firing of employees, policies are proposed, developed, and implemented, employment agreements are negotiated and adopted, and internal disputes are investigated and resolved. Minutes are the only means the board has of providing proof of decisions made in the board room, and that those decision comply with the corporation’s bylaws, as well as state and federal law. They are a record of accepted business practices which can help prove or disprove the validity of a course of action. Minutes can and will be admitted as evidence in any ensuing litigation, and as Disney demonstrated, are often the first thing submitted and the most highly scrutinized.
Another case to involving Netsmart Technologies, Inc. (2007) hammers this point home. Netsmart’s stockholders sued the board of directors to prevent a merger, citing a flawed sales process. The board of directors didn’t keep meeting minutes at “informal” meetings where they claimed to have discussed sales options, and when minutes were kept they didn’t reflect much deliberation. To make matters worse, after litigation had commenced, to board decided to approve over five months of meeting minutes, casting doubt on the veracity of any of the minutes. The directors lost the suit, were found to have likely breached their fiduciary duties, and the merger was enjoined.
The takeaway here is clear: if it is not recorded in the minutes, it is very difficult to prove it happened.
Minutes, if taken and kept consistently and accurately at every meeting, serve a functional purpose in that they can help keep meetings on topic and on point, serve as a progress report for policies implemented, help maintain ownership of ideas, and help guide the goals and discourse in subsequent meetings.
Human beings, and their memories, are fallible. A written record serves as a reminder as to who proposed what, how a member voted, what tasks have been assigned, which tasks have been completed, and what steps are agreed to be taken next. It can prevent disputes from arising because board members may disagree on how a certain action is supposed to be implemented. It can insulate a board member who disagrees with and votes against a course of action, if that action ends up causing liability issues down the road.
Minutes promote efficiency by saving time that would otherwise be wasted trying to remember where the last meeting ended and what was ultimately decided. This is especially true if your board meets quarterly or biannually. Without proper minutes, much time could be wasted just trying to make sure everyone is on the same page. If a member is absent, minutes provide notice for what they missed in the previous meeting and can catch them up on what transpired. New employees or management can review past minutes to follow the progression of an idea or plan to gain a better understanding of the intent behind it, and to understand how decisions came to be made. They can provide valuable insight into how a board functions and what motivates or drives individual board members.
Finally, minutes can keep meetings on point and on task. If members know they are being recorded, they will be less likely to deviate from the agenda. They are more likely to stay on topic and forego unnecessary arguing or indulge in excessive tangents. Meetings will be more productive. If they know their absences are being recorded, members may be more inclined to show up and participate.
Keeping consistent and adequate minutes at every board meeting is a task nobody wants to undertake, but it is vital for the success of your organization. Not only is it required by law, it is necessary to protect your organization from litigation and scrutiny from regulatory bodies. Minutes serve a functional purpose as well, helping members stay on task and on point, serving as a historical record regarding ownership of ideas and voting, and providing a means of measuring progress. Minutes should be kept in the same way at every single board meeting and should be kept on file and easily accessible in the event an issue arises. Minutes are often the first items of inspection and the last line of defense when regulatory or legal issues arise. Given this they should be taken seriously and should be a standard component of your organizations’ ongoing corporate compliance.