One of the first decisions a founder of a nonprofit corporation must make is who selects the board members. Initially, that’s usually the founder or the founding group. But what happens after the initial board has been selected?
Most nonprofit boards are known as self-perpetuating boards. In such structure, the board elects new board members or re-elects incumbent board members. State laws generally do not prohibit board members from voting for themselves but do allow nonprofits to provide limitations, including term limits and qualification criteria.
Some nonprofit boards have voting memberships that elect the board members (directors). The group of voting members is different from the board, although it’s typical for all board members to also be voting members. This structure provides voting members with several other rights, similar to the rights of shareholders of a for-profit corporation except for the right to distribution of net earnings. For example, voting members may have rights to approve changes to the articles of incorporation and certain provisions of the bylaws, mergers, and dissolutions, and to sue the board members for breach of their fiduciary duties. Sometimes, there may be only a single member with the power to elect (and remove at will) all of the board members, which is a common way to create a nonprofit parent-subsidiary relationship. See Starting a Nonprofit: Voting Membership Structure.
Where founders desire some control over who will be on the corporation’s board in the future, but do not want to set up a membership structure, they may choose a governance structure that allows for one or more designators to each designate (appoint) one or more board members. Unlike members, who have an array of other rights and powers, designators have no other rights or powers with respect to the corporation other than what may be provided in the corporation’s governing documents.
A variety of structures are possible with designators, including the following:
- One designator with the right to designate and remove all of the board members at any time at the designator’s sole discretion.
- One or more designators, each with the right to designate and remove one board member, who may be the designator themselves. All board members are designated directors.
- One or more designators, each with the right to designate and remove multiple board members (the designator may be one of these designated board members). All board members are designated directors.
- One or more designators, each with the right to designate and remove one board member, who may be the designator themselves. Additional board members are elected by the Board.
- One or more designators, each with the right to designate and remove multiple board members (the designator may be one of these designated board members). Additional board members are elected by the Board.
The designator structure may allow for a founder to retain some control over the board’s composition or to keep themselves on the board absent egregious circumstances but without creating some of the concerns of a voting membership structure. It may also allow another legal entity (whether nonprofit or for-profit) to have some level of governance affiliation with the nonprofit corporation. In any case, the designator may not want to be involved with or in some part responsible for decisions or actions of the nonprofit corporation. This may be important to the designator for asset protection purposes (i.e., avoiding ascending liability from the nonprofit corporation to the designator) or to protect the tax-exempt status of the nonprofit corporation.
An organization interested in maintaining some affiliation with a nonprofit corporation may also be able to use the status of a designator to help ensure it has an understanding of, and influence over, the affiliated nonprofit’s governance and operations. While a designated board member would, in their individual capacity, owe a duty of loyalty to the nonprofit to act in its best interests, they may also be able to keep the designator informed. This type of relationship may be attractive to some venture funders and prospective merger partners.
Designators can also be used for a nonprofit corporation established by multiple other nonprofits as an entity in which their collaborate efforts could be housed. Each collaborating nonprofit could designate a board member to the nonprofit corporation, allowing each to feel it was in position to exercise equal influence with respect to the collaborative goals. While the position of designator comes only with the authority to select and remove (or approve the removal) of the designator’s chosen director, the bylaws of the nonprofit corporation could provide for additional powers of the designator. Accordingly, such relationships can be made with varying degrees of control and complexity. But the adage popularized by the Spider-Man comic books and movies applies: “With great power comes great responsibility.”