By Ron Mattocks, author of Zone of Insolvency: What Nonprofits Need to Know to Avoid Hidden Liabilities and Build Financial Strength
Approximately 20,000,000 of us volunteer as board members to govern nonprofit organizations. On an average day, there are 20,000 nonprofit board meetings spread across this country convening in restaurants, hotels, schools, missions, and other establishments where a few chairs can be gathered around a big table.
Each nonprofit board is legally mandated by corporate charter to honor the mission and protect the assets of the corporation. Each board meeting is an opportunity to further the achievement of the organization’s mission, enhance fiscal viability, and enhance the value of the combined nonprofit community.
It is perplexing that approximately one third of these nonprofits, more than 450,000 organizations, operate perpetually in financial distress, i.e., the "Zone of Insolvency," and approximately 7% are totally insolvent.
The Zone of Insolvency is a period of corporate financial distress, sandwiched between solvency and total insolvency.
The courts have expanded the legal responsibilities and liabilities of boards governing nonprofit organizations in the Zone of Insolvency. Board members and managers have individual and corporate liabilities for decisions made in the Zone of Insolvency.
Since 1992, an increasing number of suits and settlements against boards and managers of for-profit and nonprofit organizations have stemmed from decisions made while operating in the Zone of Insolvency
Until now, most nonprofit board members have never heard of the Zone of Insolvency, do not know if their organization is in the Zone, and therefore do not understand their related legal responsibilities and liabilities.
Here are a few of the tough questions that board members need to answer in order to avoid or escape the pitfalls of the Zone of Insolvency:
- Does your organization continue because it can or because it should?
- Is your debt ratio too high and creating an unsustainable budget burden?
- Are you underpaying staff but over-spending due to inadequate staff skills?
- If you were to close the organization today, do you have the assets to pay for all wind down expenses?
The answers to those questions will help board members determine whether they are operating in the Zone of Insolvency. If your organization is fiscally strong, be diligent, continue to strengthen it, and avoid the Zone of Insolvency.
If your organization has been operating in the Zone of Insolvency, you have three options: fix it, negotiate a merger, or file for dissolution.
Nobody joins a nonprofit organization to bury it. The notion of closing down an organization that has served many people over the years is fraught with emotions of guilt and questions of loyalty. However, perpetually operating in the Zone of Insolvency, by default or by design, is a tricky proposition in today’s age of board accountability.
