I am president of a 501(c)(3) nonprofit corporation and serve as an ex-officio member of the board of directors. I have one employee who serves on the board as well. We both receive compensation for the work we do as employees. We recently added a new board member who stated that neither I nor the other employee could serve on the board. Is she correct?
Probably not. Unless there is something unique in your own governing documents (which is unlikely since you have been doing it for a while), there is no general state law prohibition or tax law prohibition against having employees serve on the board. There are a few state nonprofit corporation laws that provide that no more than 49% of a charity board may be comprised of “interested” (i.e. compensated) persons and New Hampshire provides that no employee may chair the board. But those laws don’t prohibit such service and there is no federal tax law limit. You will have to disclose the number of directors who are not “independent” if you file a full Form 990 tax information return.
It is not unusual for a paid CEO, particularly at a hospital, university, grant-making foundation or other large charitable organization, to serve on the board. It is a lot less usual for other employees to serve on charity boards, and a lot of commentators think it is a bad idea. The Standards for Excellence developed by Maryland Nonprofits and promulgated by several other state associations, provide in the version promulgated by the Pennsylvania Association of Nonprofit Organizations (“PANO”) that “where an employee of the organization is a voting member of the board, the circumstances must insure that the employee will not be in a position to exercise undue influence.”
While we don’t normally look to the for-profit business world for guidance on charitable activity (See Ready Reference Page, “A Corporate Mentality in Charity Boardrooms? Hey, Bring It On.”), for-profits regularly have paid executives on the board. Trying to overcome their excessive influence was one of the reasons for the Sarbanes-Oxley requirements that certain functions be fulfilled by independent directors.
The practice obviously raises issues, but it is not illegal. A well run organization ought to be able to deal with any problems if they are recognized and confronted openly.