Welcome to the February 2010 edition of The Director's Dilemma newsletter. I hope you find it interesting, informative and inspiring.

I advise Boards and Directors on complex and challenging issues which can be resolved in a variety of ways. Each way has different pros and cons for the individuals and companies concerned. Every month this newsletter considers several responses to a real issue. Which response would you choose?

Hans is a director on the Board of a small not-for-profit. The company had tendered for some government contracts but these are now drawing to a close and were unprofitable. The Board and other donors have provided funds to keep the company going until the contracts expire. They are not able to continue to offer that support and are not confident of their ability to raise funds from external donors once the Board's financial support ends.

The company has failed in its mission and, although the directors and staff are very passionate about the aims of the company, it has become obvious that other companies are better placed to tackle those problems successfully. In particular one competitor has been doing similar work and making a small surplus which provides a buffer. That competitor has tendered for, and won, the contracts that will continue the work Hans' company has been doing.

The Board has discussed the issue and has decided that they should close the company down. The CEO agrees with the decision but is naturally very concerned about the staff. None of the directors or staff have been through a liquidation and they have no idea about the process. The company has sufficient funds to complete its contracts but after three months will have no income in the future.

What should Hans do?

John’s Answer

On paper, it is relatively straightforward ... all resources are disposed of, and then the company closed in accordance with the legal and statutory requirements of the jurisdiction(s) where the company operates.

In practice, it is quite hard. My response will deal with the disposal of resources; equipment and infrastructure, consumables, intellectual property, and people.

Some equipment and infrastructure will have been procured under a contract, and these contracts will have to be terminated, perhaps with a payout. Other equipment, infrastructure and consumables can be sold, either by private treaty or by public auction. As these items will typically be sold below book value, they should first be offered to staff (especially ICT equipment that was used in their day-to-day work) or third-party organisations with charitable or socially responsible agendas, before being offered to the wider public. Intellectual property that is unequivocally owned by the company may have a resale value to a competitor. Alternatively, there may be staff members who want to start-up a similar enterprise (individually or in a small group). This new entity should be given the opportunity to acquire the intellectual property at no cost: a write-off for the business and a gesture of goodwill to former employees.

People are the biggest casualty in all of this. If there are funds available to place staff in an outplacement program for at least one month, preferably three months, then that must be arranged. In this case, a competitor exists who will continue the work of Hans' company. If a dialogue can be opened to negotiate the transfer of staff then that must be pursued.

Next, board members should use their connections to find work opportunities for staff. If this is unsuccessful then the board members should be urged to keep in touch with staff, effectively as mentors, until they find work. All this pastoral care will greatly help staff to transition out of the 'old & known' and into the 'new & unknown' ... but it is going to be quite painful for everyone concerned.

Good luck, Hans.

John Groarke is a Principal at JEGMC Strategy Consulting.

Julie’s Answer

First Hans should thank the board members who have been putting in funds to allow the company to fulfil its obligations. He should document who is giving support and why the Board believes this support is sufficient to keep the company solvent (able to meet all its debts as and when they fall due) until closure.

Careful cashflow planning is required. Many expenses may arise as the company closes down and, as funding is limited, it is important to identify and plan for all of these.

Next, Hans should identify the options for getting value from the assets. As it is a not-for-profit, under most legal jurisdictions, any surplus on winding up must be given to another not-for-profit. The Board should plan to utilise proceeds from saleable assets to mitigate the need for additional funding. It would be unconscionable to take money from some board members to fund the ongoing operations and then have a cash lump sum when operations finish.

Hans should check the constitution and any other documents that may limit the destination of any surplus on winding up. There may be a liquidation clause in the contract. The directors should decide, when they have all the facts for a good decision, where best to direct whatever small surplus they finish up with.

Hans should also check the Directors and Officers Liability insurance policy. Members, staff, beneficiaries, donors and the client organisation(s) may all feel aggrieved at the failure and wish to hold the Board accountable. A meeting should be organised with the broker to talk through the heightened risks of this period.

It is natural for staff to feel resentful of a competitor that has damaged their job security and sense of professional pride. It may be possible to place key staff with the competitor but Hans should not rely on that. Giving staff as much notice as possible will help them to plan and take responsibility for their career progression. Transition support may be expensive but Hans should investigate the options. Providing written testimonials and two contacts for references will also assist. Many companies restrict references and testimonials but, in these circumstances, the company should attempt to provide staff with all possible support, practical and moral.

Finally, the Board should learn what went wrong and how it could be avoided in future. While they clearly had the best intentions for the company, it is important that they learn and develop through this sad experience so they can confidently add value to other not-for-profits in the future. They have only failed this time; they can go on to succeed again.

Julie Garland McLellan is a specialist Board consultant and practising non executive Director based in Sydney.

Dru’s Answer

In the United States, there are a series of steps involved in dissolving a non-profit organization. The Board must notify two different government agencies, one State and one Federal, as follows:

1. Board Resolution.
   The Board of Directors or Trustees for the organization needs to meet, discuss, and adopt a written resolution to dissolve the organization and distribute the remaining assets to other tax-exempt charities (preferably a registered 501(c)3 exempt organization). The resolution should specifically address the distribution of final assets and authorize one person (usually the President or other officer or director) to dissolve the corporation. Follow the requirements of your organization's articles and by-laws for the meeting, the vote, and for dissolution. Retain a copy of this Resolution for your records.
2. Distribute the remaining assets.
   After paying all outstanding obligations, checking your insurance coverage, terminating leases, selling tangible or real property, etc., the organization must distribute the remaining assets to other tax-exempt charities, preferably a 501(c)3. You can give the assets to one charity or to several - it does not matter, but keep careful records. Close the organization's bank account(s), and have the bank issue a cashier's check for any remaining funds payable to the designated charity.
3. File a Certificate of Termination
   The relevant state government website will have a standardized form (usually 1-3 pages) with instructions about completing the form and where to file it. The state may require you to attach a copy of the Board's Resolution for Dissolution. File the completed form with any required attachments and fees, and wait for the Secretary of State to send a Certificate of Filing (usually a cover letter with your termination form and a stamp or seal from the state government on it).
4. File a dissolution packet with the IRS.
   This must include:
   • A cover letter that explains the reason for dissolution, and includes the organization's EIN (Employment Identification Number) and DLN (Determination Letter Number);
   • The Certificate of Termination filed with the Secretary of State, along with the Certificate of Filing received from their office;
   • The list of the last set of Directors/Officers with their daytime phone numbers; and
   • A statement signed by the President regarding the final distribution of the assets.
   • Send the packet to: Internal Revenue Service, TEGE Correspondence Unit, Room 4024, PO Box 2508, Cincinnati, OH 45201.

Keep copies of every one of these documents for your records.

Dru Stevenson is a professor at South Texas College of Law in Houston, USA.

John’s Answer

Hans' non-profit is tax-exempt because of a charitable mission that the legal authorities have concluded will benefit the community at-large. In essence, the Board is responsible to the community, not any shareholders or members. As the entity has failed the mission and has no reasonable means to continue operations, the governing board has correctly decided to complete their contracts and terminate operations.

The legal charter of most organizations include a section on disposition of assets in the event the entity ceases to exist. The Board and CEO should review the corporate charter to determine if there is any overriding guidance or restrictions. Often, the charter directs the Board to disperse assets to any non-profit with a similar charitable mission.

As a board member, Hans should encourage the Board and CEO to adopt a proactive approach to promote an orderly transition of the non-profit's assets to the community, that is, to other providers who might be able to deploy the assets that are intended for community benefit, including personnel, business records, technology, intellectual property, office furniture and so forth.

In periods of retrenchment or repositioning of services, mission-based organizations typically treat personnel (and all stakeholders) in a compassionate and forthright manner. The Board would be well advised to take whatever reasonable and practical steps are available to support their staff as well as assure the dissolution of assets benefits the community. For example, it may be possible to solicit the donation of outplacement counselling or similar support from community resources.

The closing of a non-profit can be sad, but keeping a struggling one afloat, especially when there is little hope of longer term survival, is horrific for staff and worse for the communities being served. Many non-profits would benefit from strategic combinations, such as mergers, joint ventures, or other kinds of strategic alliances that might sustain the service. Boards having the courage and foresight to think in this manner are a rare breed.

John Shulansky is a Principal at Shulansky Consulting and Managing Member, President & CEO at AtlanticJet LLC.

DISCLAIMER:
The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling. Names and some circumstances have been changed to ensure anonymity.

What’s New

Two new courses – I have been busy over the past month developing two great new courses.

Dealing with Director's Dilemmas is designed to improve your decision making in the boardroom. Using case studies and decision analysis tools it is guaranteed to give you a valuable edge.

Secrets of Successful Boardroom Presentations is a one day course to enhance your skills at delivering information to your board.

Book reviews – Directors do a lot of reading. I keep a note of my thoughts on each book I read. Here is my review of Write to Govern by Mary Morel.

A book full of dilemmas – Dilemmas, Dilemmas; practical case studies for company directors is a compilation of dilemmas and solutions for not-for-profit, government-owned and commercial boards. You can get a copy at Amazon.com . Email me if you need to comply with corporate purchasing guidelines.

Where’s Julie? – A few readers manage to catch up with me on my travels and it is such a pleasure to meet them. Below are my current work travel plans for February and March.

Please call or email me if you would like to schedule a meeting or find out more about attending one of the public events.

This newsletter – If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription. It is (still) free. As an existing subscriber you will continue to receive a free subscription when a charge is introduced later this year.

Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Be an expert – I will post the next dilemma on LinkedIn. If you would like to feature next month just log on to my Q&A and type in your advice. I will pick the best answers to be published in the next newsletter. 

Farewell until next issue (due 1 March 2010). Enjoy governing your corporations; we are privileged to do what we do!

Best wishes
Julie

www.mclellan.com.au | PO Box 97 Killara NSW 2071
email julie@mclellan.com.au | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711

unsubscribe