HOW TO KEEP YOU AND YOUR BOARD OUT OF TROUBLE Insights from the King Foundation Experience

1. HOW TO KEEP YOU AND YOUR BOARD OUT OF TROUBLEInsights from the King Foundation Experience 16th Annual CASA Statewide Conference October 7, 2005

2. JAN SOIFER Delgado, Acosta, Braden & Jones, P.C. jsoi@delgadoacosta.com (512) 583-0451

3. Board Members of Nonprofit Organizations Have Legal Duties and Responsibilities • What are they? • What happens if you don’t know? • What do you need to do to do it right?

4. Board members must perform duties: • In good faith • With ordinary care • In a manner they reasonably believe are in the best interest of the nonprofit Board members manage the affairs of the organization and formulate policies. Staff members handle the day-to-day operations.

5. Question? • What happens when the Board doesn’t shoulder its responsibilities?

6. Once upon a time…

7. 2002 (Yeckel – cash only) $81,000+ per month or $975,000 per year

8. 2002 (Vett – cash only) $37,500+ per month or $450,000+ per year

9. 2002 (Yeckel and Vett – cash only) Yeckel: $975,000 Vett: $450,000+

10. Yeckel’s compensation increase 1993- 2002 1993: $225,000+ 1998: $500,000+ 2002: $975, 000 In 9 years, Carl Yeckel’s cash compensation QUADRUPLED

11. King Foundation Assets • 1993: $31.5 Million • 1998: $48.1 Million • 2002: $37.6 Million

12. Expert’s Comparables for Yeckel • 1993: $93,000 median • (Yeckel: $225,000+ >double) • 1998: $117,000 median • (Yeckel: $500,000+ >quadruple) • 2002: $136,500 median • (Yeckel: $975,000 >seven times more)

13. $1,200,000 $1,000,000 $800,000 Actual Salary(not including credit card charges) Reasonable Salary $600,000 $400,000 $272,887 $244,207 $226,805 $200,000 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Excessive Compensation To Carl Yeckel $974,978 $935,120 $805,710 $670,245 In Thousands $536,384 $430,595 $345,369 $136,598 $129,010 $116,868 $126,480 $116,868 $104,978 $98,952 $101,921 $96,071 $93,271 YEARS

14. Vett’s compensation increase 1993- 2002 1993: $122,000+ 1998: $250,000 2002: $451,000 In 9 years, Vett’s cash compensation almost QUADRUPLED

15. Expert’s Comparables for Vett • 1993: $74,000 median • (Vett: $122,000+ >1.6 times more) • 1998: $92,000 median • (Vett: $250,000 >2.6 times more) • 2002: $108,000 median • (Vett: $451,000 >four times more)

16. $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Excessive Compensation To Thomas Vett $451,937 $394,665 Actual Salary(not including credit card charges) Reasonable Salary $367,361 In Thousands $303,432 $248,461 $208,772 $175,205 $146,141 $133,628 $122,120 $107,913 $101,918 $99,919 $78,172 $92,326 $92,326 $80,517 $82,933 $75,896 $73,684 YEARS

17. Reasonable Compensation: Yeckel: $ 136,598 Vett:: $ 107,913 Mott: $ 60,000 Actual Compensation, Three Employees $1,568,537 Reasonable Benefits Obligations @ 20% of Reasonable Compensation Benefits Obligations of Foundation (medical and retirement) King FoundationYear - 2002Actual Compensation and Benefits vs. Reasonable Compensation and Benefits(not including credit card charges) $3,000,000 Total: $ 2,545,168 $2,500,000 + $976,631 $2,000,000 In Thousands $1,568,537 $1,500,000 $1,000,000 Total: $ 365,413 $500,000 + $ 60,902 $304,511 Actual Reasonable

18. Credit Cards • $750,000 charged to Foundation credit cards 1997 – 2002: • $400,000 -- Vett (3700 charges) • $350,000 -- Yeckel (2000 charges) • Reimbursements in 2002: • $75,000 -- Vett • $124,000 – Yeckel

19. Charges for Foreign Travel • Vett: $25,000 traveling to Mexico, Canada, Italy, France, England and Australia • Yeckel: $69,000 traveling to England, Greece, Turkey, Italy, Hong Kong, and China

20. Charges for Out of State Travel • Vett: $88,000 traveling to New York, Colorado, Utah, Virginia, Rhode Island, Wyoming, California, . . . • Yeckel: $112,000 traveling to Montana, Indiana, Arizona, North Carolina, . . .

21. Charges for Meals and Entertainment in Dallas • Vett: $56,000+ • Over 620 charges in 6 years • Yeckel: $10,000+ • Over 160 charges in 6 years

22. Charges for Gas, Tolls and Auto Repairs in Dallas • Vett: $26,000+ (not including the cost of the Oldsmobile Aurora) • Yeckel: $15,000+ (not including the cost of the Chevrolet Suburban)

23. Charges for Books, Magazines, Music, Movies, Videos, etc. • Vett: $20,000+ (Plus an additional $10,000+ for On Line services --AOL, MSN, Juno) • Yeckel: $23,500+

24. Retail Store and Other Charges • Vett: $31,000+ (florists, pet supplies and veterinary clinics, shoe repair, camera shops, clothing, etc.) • Yeckel: $40,000+ (pen shops, camera shops, sporting goods, pet supplies and veterinary clinics, hardware stores, gun and military stores, clothing, etc.)

25. Health and Fitness • Vett: $108,000+ (pharmacies, optical shops, dentists, doctors, fitness centers, nutrition stores, etc.) • Yeckel: $22,000+ (pharmacies, fitness centers, doctors, hospital and medical insurance, optical shops, etc.)

26. 2002 • King Foundation assets:$37.6 Million • Charitable gifts:$1.79 Million • Other expenses: $3.28 Million • Total expenses: $5.07 Million

27. Retirement or Deferred Compensation “Deals” • ¾ of last year’s income for life • ½ of that for surviving spouse • No contributions paid by employee • Not approved by the Board • When applied to unreasonable salary, results in more excessive compensation

28. What did the jury decide? • Yeckel and Vett breached their fiduciary duties, committed fraud and received excessive compensation • Other members of the Board of Directors also breached their fiduciary duties

29. The jury divided responsibility: • Yeckel 55% • Vett 25% • Jordan (Lawyer/Director ) 14% • Grover + Phipps 3% each

30. How much do they have to pay? • Yeckel – over $5.2 million in excessive compensation and benefits, plus interest, plus $10.5 million in exemplary damages, or more than $16 million (and counting) • Vett – over $2.3 million in excessive compensation and benefits, plus interest, plus $3.5 million in exemplary damages, or more than $6 million (and counting)

31. What happened to the volunteer Board members? • Based on the jury’s verdict, Grover and Phipps would have been responsible for 3% of $7 million or over $200,000 • Grover settled by paying $200,000, and Phipps forfeited retirement pay valued at $180,000 • Junkin filed bankruptcy in Oklahoma, and ultimately agreed to the entry of a $300,000 judgment against him

32. What about Will Jordan, lawyer/director? • Based on the jury’s verdict, he would have been responsible for 14% of $7 million or almost $1 million • He settled before trial for $250,000 – but he’s still fighting his insurance company for reimbursement

33. Happily Ever After?The Good News • The judge found that Yeckel and Vett’s “retirement contracts” were void, so even if the Foundation doesn’t collect on the judgment, it eliminated $12 million in future liabilities for retirement benefits

34. Or Not?The Bad News • Yeckel has paid over $2 million in attorneys’ fees, and is appealing the judgment • Vett fired his lawyer and claims to be broke • The King Foundation had no insurance to pay for the litigation, and will have paid over $1 million on the litigation and the appeal • The Foundation was examined by the IRS and has been assessed additional taxes (based on exclusion of what the jury found to be unreasonable compensation)

35. Duties of Board Members • In good faith • With ordinary care • In a manner reasonably believed to be in the best interest of the nonprofit

36. Question? • What does it mean to act in good faith as a director of a nonprofit?

37. Good Faith • Acting with honesty and faithfulness to the Director’s duties • Acting without an intent to take advantage of the nonprofit • Acting only after she believes she has sufficient information

38. Question? • What types of actions should a director take to demonstrate ordinary care in the performance of her duties on behalf of a nonprofit?

39. Ordinary Care • The care that an ordinarily prudent person in a similar position would exercise under similar circumstances • Attend meetings • Devote a reasonable amount of time to duties • Review and understand materials • Make informed decisions • Ask questions

40. Ordinary Care, continued • Ordinary care: • Follow the bylaws and other corporate policies • Document corporate decisions • Take, review, approve and keep minutes • Review and approve annual financial statement • Monitor corporate finances • Expenditures for charitable purposes • Expenditures of restricted funds • Compensation of executives

41. In the Best Interest of the Nonprofit • Personal, business, or family interest must not prevail over the interest of the nonprofit • Belief that action is in best interest must be reasonable

42. Absolutely Prohibited! • No loans or dividends paid to directors • No distribution of assets that will make the organization insolvent

43. Protections for Board Members • Reliance on information supplied by others • Officers and employees • Accountants • Attorneys • Board committees of which the director is not a member • BUT-cannot rely on this information if the director has knowledge that the information is incorrect

44. Protections for Board Members • Delegation of investment authority No liability for an investment decision as long as the Board selected the investment advisor in good faith and with ordinary care

45. Mandatory Indemnification A nonprofit must pay the director for reasonable expenses incurred by the director after a court order and the exhaustion of all appeals, if the director is successful in defending the lawsuit.

46. PermissiveIndemnification • A nonprofit may pay reasonable expenses in the following situations if the bylaws, articles, a resolution, or agreement permit: • In a civil case if the director acted in good faith and reasonably believed the actions were in the best interest of the nonprofit • In a criminal case if the director had no reason to believe the conduct was unlawful • Before the completion of the case if the director affirms in writing that he met the appropriate standard of conduct

47. Prohibited Indemnification • A nonprofit may not indemnify a director if: • The director engaged in willful or intentional misconduct • The director received an improper personal benefit

48. Books and Records • Keep accurate and complete minutes of board and committee meetings having board authority

49. Conflicts of Interest • Have a policy • Disclose material facts • Compare prices • Interested director should abstain • Majority of disinterested directors approve in good faith and with ordinary care

50. Best Practices Tip • Every nonprofit should have a written conflicts of interest policy that is followed consistently. • The policy should be reviewed by each board and staff member annually.