On Aug 22, 2009, Carter McNamara wrote:
In the past year, I've encountered two nonprofits in which a Board member or two personally co-signed a loan for the nonprofit. For 30 years before that, I'd never encountered that before.
I asked a colleague if this practice has any legal or ethical issues and while she believes it's "terrible financial planning and management" she believes there's ultimately nothing wrong with it.
[Note: A person who "co-signs" a loan is promising the bank that he or she will repay the loan personally if the borrower fails to do so. — Ed.]
Henry D. Lewis, MA, CFRM, President of Development Consultant Associates, answered on August 23, 2009:
Usually, it's a clean and simple deal, and the NPO pays back the loan within the required timeframe.
There are, however, those occasions where a board member co-signs a note or lends cash to the organization, and where that board member is "nervous" about being left on the hook or not getting his/her money back.
Such circumstances can lead a board member to "push" the board/organization to do what might be more likely to relieve his/her "nervousness" than to act in the best interests of the NPO.
The problem can often be more in the realm of perception, than in actual self-interest. As long as (people think) it looks like the board member is more concerned with his/her own risk, it becomes a question of ethics.
Ethical questions very often are a matter of perception !!
When a board member lends money to or signs a note on behalf of their NPO, some circumstances may require that board member to recuse him-/herself from some board actions that relate to financial matters ... just to avoid the appearance of a conflict of interest.
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