Church governing board and their management teams should determine to what degree their operations continue to be disrupted by the coronavirus outbreak. In this special feature of Legal Counsel for Churches, we explore some legal issues churches should consider as they address the threat of COVID-19 on their congregations, ministries and operations.
Like many discussions about corporate governance, we begin with a reminder about the fiduciary duties leaders have to the church and congregation. Essentially, leaders have a duty of care to act in a reasonable manner as any other corporate director under the circumstances. Secondly, church leaders have a duty of loyalty to put the needs of the church first. Framed like bookends, these two duties are imposed on church leaders to ensure they focus on making the best decisions for the church.
In the face of a health epidemic like such as we have with this Pandemic, it is important for church leaders to make prudent decisions that will help the church rebound from the social and economic disruptions.
Take an Assessment
One of the first responses leadership should consider in these circumstances is making a clear assessment of where things stand with the church. In North Carolina, Governor Cooper has issued a series of Executive Orders for churches to refrain from assemblies of certain sizes. For many churches, this has meant closing the church facilities to services, meetings and activities.
Churches often rely on gatherings to serve the needs of their members. The inability to have the congregation come together is an unprecedented disruption. This interruption may have impacted financial stewardship, social connectivity among members and ministry work. Church leaders may wonder what should be done until they can return to normal. To answer this question, leaders should ask themselves what a reasonable leadership team would do.
I inquired from some of my clients what they are doing during times like this. I polled several companies for responses to this question as well. Most return with the answer they are taking an assessment of where things stand. They are monitoring news reports on the latest developments. They are checking in with stakeholders and constituents on their conditions. They are reviewing the impact business stoppage is having on their congregations.
It seems reasonable that church leadership should start and continue an assessment of evolving conditions. The church board should pay heightened attention to the impact on employment with companies that employ church members in your community. Layoffs and hiring freezes could signal an impending demand for future philanthropic support from the church. Economic stress could lead to pressure on the wellbeing of families as well.
Some authorities opine that the recession will continue for months. From anecdotal observations, church leaders may expect their members’ households will experience financial stress. Churches often rely on the wherewithal and willingness of members for charitable gifts. A downward trend in the economy can have an impact on giving.
Vendor Management
Churches do business with vendors for many types of services. Churches rely on suppliers for equipment maintenance and office operations. An interruption in a critical vendor’s operation could have an unfortunate impact on the church. For this reason, church leaderships should survey the health of its vendors.
Organizations often scrutinize a vendor before doing business for the first time. Vendor due diligence usually calls for checking a company’s financial strength, management’s experience and service reliability. After the contract is signed, churches may not be so diligent about checking back with the vendor on its health.
Church leaders should know if critical vendors have the strength to weather tough economic times. The way to get to this assurance is through asking questions.
If the vendor is a publicly-traded company, its financial statements may be online for the church’s review. A search of public records may reveal if a company is having a spate of lawsuits, liens or government actions taken against it. Frequent changes in management may also signal trouble times could be ahead for the company.
Financial Management
When it comes to finance, leaders should consider all stakeholders who have an interest in the financial performance of the church. These parties may be concerned about the church’s abilities to fulfill its obligations under the agreements.
Stakeholder contracts may include promissory notes, lines of credit and letters of credit. These instruments may include covenants and terms that restrict the church to certain conditions. Usual covenants include debt service coverage ratios, minimum liquidity levels and reserve requirements. If the church has accepted grants from foundations or other funders, there could be buried in the agreement performance requirements.
Church leaders should play close attention to the church’s finances to watch for conditions that trigger negative treatment by stakeholders. If the church believes it will breach contract terms, it should consider having a dialog with the other party. This negotiation may prove preferable to having a creditor invoke a default provision.
Contract Review
This may be a good time for churches to review its outstanding contracts. A typical church has dozens of contracts at any given time. These agreements specify what a company is expected to deliver for the church and what responsibilities the church have towards the company.
After an event like a pandemic, the church’s normal may have changed. With a new set of circumstances, some deals with other organizations may need to be modified.
This could include leases, labor agreements and vendor services.
There are a few issues to pay close attention to when reviewing contracts. First, determine the length of the agreement. If the contract is due to expire soon, look for automatic renewal terms that could lock the church into a new period without any negotiations. If the church needs to rework the deal, a scheduled term extension is a good opening for having that conversation.
Next, church leaders should review the termination clauses in agreements for unneeded services. Termination sections often invoke penalties and notice provisions. Churches should weigh the cost of forcing a modification to a contract with the benefits of a revised deal.
