Navigating a Crisis: Key Strategies for Nonprofit Boards in Crisis Management – Charity Lawyer Blog

Nonprofit organizations are vital to communities but are not immune to crises. From financial scandals to leadership misconduct, a crisis can quickly derail an organization’s mission and threaten its existence. During the 2024 NAAG/NASCO Charities Conference panel discussion, which featured charity regulators and nonprofit law experts, attendees gained valuable insights into how boards can effectively manage crises by fulfilling their fiduciary duties, preparing in advance, and working closely with regulators.

Here’s a detailed breakdown of the critical strategies for nonprofit boards to manage crises:

1. Defining and Recognizing a Crisis

A crisis can manifest in various ways, from financial mismanagement, fraud, and executive misconduct to operational disruptions such as data breaches or harmful media exposure. A common thread in these crises is their potential to distract from the organization’s mission and require an extraordinary allocation of time and resources. The panelists emphasized that recognizing a crisis early is crucial. Nonprofit boards must be vigilant, identifying when an issue is beyond normal operational challenges and requires immediate, strategic intervention.

One of the panelists, Kate Carl, noted that it’s important not to give the crisis too much power by focusing on panic. Instead, board members should see these events as opportunities to address underlying issues and improve the organization’s governance and operational strength.

2. Fulfilling Fiduciary Duties in a Crisis

The fiduciary duties of care and loyalty are at the heart of crisis management. These duties bind board members to act in the nonprofit’s best interests and exercise sound judgment during crises. Panelists explained that the duty of care requires board members to stay informed, attend meetings, and actively oversee the organization’s affairs, particularly during a crisis. The duty of loyalty compels board members to put the nonprofit’s interests above their own, avoid conflicts of interest, and maintain confidentiality.

During a crisis, the board must remain engaged and ensure that management is handling the situation effectively. One of the experts shared a cautionary tale of a board that failed to ask tough questions about their executive director, only to discover financial mismanagement later. By the time the crisis came to light, much damage had already been done, illustrating how critical it is for boards to maintain a “nose-in, hands-off” approach until leadership failures necessitate direct intervention.

3. The Importance of Crisis Preparedness

Preparation is the foundation of effective crisis management. The panel stressed the importance of conducting tabletop exercises and “what if” scenarios that simulate potential crises. These exercises help boards identify weaknesses in their response plans and improve communication channels among board members and leadership.

Tim Phillips, a panelist with extensive experience in crisis management, explained that organizations should not wait for a crisis to strike before preparing. Boards should regularly assess potential risks, review insurance policies (e.g., D&O insurance, cyber liability), and ensure that management teams have comprehensive crisis response plans. It was also recommended that nonprofits maintain a list of key stakeholders—such as donors, regulators, and the public—who may need to be informed during a crisis.

4. Internal Investigations: When and How to Conduct Them

When a crisis occurs, boards often decide whether to conduct an internal investigation. While investigations can be expensive and disruptive, they are sometimes the only way to fully uncover the facts and mitigate future risks. 

The panelists emphasized that the scope of an investigation should depend on the nature and seriousness of the crisis. For instance, if a crisis stems from a senior leader’s actions, external counsel is often necessary to ensure an impartial and thorough investigation. In less severe cases, an internal review might suffice. The goal is to determine the root cause of the problem, prevent recurrence, and restore trust with stakeholders, including donors, employees, and regulators.

Kate Carl emphasized that not every investigation needs to involve expensive law firms. Depending on the circumstances, organizations may be able to conduct a solid investigation using internal resources. However, the panel cautioned against relying solely on internal auditors or legal counsel who may have existing relationships with the leadership involved in the crisis, as this can create a conflict of interest.

5. Working with Regulators: Transparency and Cooperation

When a crisis involves potential violations of charity law or misuse of charitable funds, regulators, such as state attorneys general, often get involved. Both the New York and Ohio Attorneys General have charity oversight responsibilities, and panelists explained how important it is for nonprofits to cooperate fully with regulatory authorities during a crisis.

Sharon Lincoln, a nonprofit attorney and former regulator, noted that cooperation with regulators can significantly affect resolving a crisis. Transparency, self-reporting, and voluntary disclosure of relevant information signal to regulators that the organization is taking the issue seriously and is committed to fixing it. Regulators, like the New York Attorney General’s Office, often look for signs that the board is engaged in addressing the crisis and willing to cooperate to protect the organization’s charitable mission.

Emily Stern, Chief of the Enforcement Section of the New York Attorney General’s Charity Bureau, highlighted how regulators initially investigate by pulling annual reports, reviewing organizational filings, and cross-referencing public information. Nonprofits not compliant with basic filing requirements will face increased scrutiny, making cooperation even more critical in such cases.

6. Protecting Privilege During a Crisis

Legal privilege plays a vital role in protecting an organization during a crisis. The panel advised that communications with legal counsel, especially regarding investigations, should be carefully managed to maintain attorney-client privilege. Nonprofit boards must understand that while the communication with lawyers is privileged, the case’s underlying facts are not.

The panelists explained that privilege should be viewed as a shield to protect sensitive communications rather than as a weapon to avoid transparency. In fact, when working with regulators, balancing privilege with the need for transparency is essential to building trust and resolving the crisis efficiently. One panelist noted a case where a nonprofit tried to cloak their auditor in attorney-client privilege by having the attorney hire the auditor and that the privilege was not upheld because the auditor’s role is inherently adversarial to the nonprofit being audited and their paperwork was discoverable.

7. Key Takeaways for Nonprofit Boards

a. Be Prepared – Develop crisis response plans and regularly conduct crisis simulations to prepare the board and management for potential issues.

b. Stay Engaged – Boards must ask tough questions, especially in times of crisis, and monitor management’s response.

c. Investigate Thoroughly: When needed, conduct internal investigations to uncover the full scope of the crisis and take corrective action.

d. Work with Regulators – Cooperate transparently with regulators to ensure a smoother resolution and to demonstrate accountability.

e. Protect Privilege – Maintain attorney-client privilege where necessary, but balance it with transparency when communicating with regulators.

By focusing on preparation, communication, and legal compliance, nonprofit boards can navigate crises more effectively and safeguard their organizations’ mission and integrity. Crises may be inevitable, but with the right approach, they can be managed and resolved to strengthen the nonprofit for the future.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nationwide nonprofit and socially responsible businesses on federal tax and fundraising regulations. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.