Often times what attracts a person to a nonprofit board is a shared interest or passion for the mission of an organization. Of course this is important, as a board position requires an ample amount of volunteer time. However, it is important for board members to not lose sight that they are ultimately tasked with the governance of the organization. A point that should not be taken lightly. The importance of this responsibility is demonstrated by the IRS annual Return of Organization Exempt from Income Tax (Form 990) which dedicates an entire section to governance, management and disclosure, and includes a list of all board members.
We have pulled together a top ten list to help better understand the notation of good board governance.
1. Understand fiduciary duties
A board position is a responsibility to serve and act with good faith, due care and loyalty towards achieving an organization’s mission, ultimately supporting the best interest of the general public.
2. Provide oversight
Although oversight of an organization can come primarily from the staff, it is ultimately and legally the responsibility of the board. To help a board with oversight, they should have a strong executive director, effective policies and procedures, and committees to help with oversight of specific areas. Committees do not need to be comprised entirely of board members and ideally should include industry experts, for example it is great to have a CPA on the finance committee or an HR professional on a hiring committee.
3. Understand roles and lines of authority
Nonprofits are not owned, no one person – director, founder or even committee, can control the organization. The organization should be set up so that there are no controlling parties. The Form 990 emphasizes this through required disclosure of independent board members, as well as disclosure of related parties. Should it be determined that there is not sufficient independence among board members, the door is then open for the IRS to re-classify the organization as a private foundation. Additionally, neither the board chair nor the organization’s executive director should be considered the ultimate line of authority. The chair’s role is to preside over the board and sometimes to act as the liaison between the executive director and the board. And although the executive director is tasked with leadership of the organization, it is the board’s responsibility to hire the executive director, review their performance and approve their compensation. Critical decisions should be brought to the board’s attention and then supported by a board majority vote.
4. Let staff do their job
Boards should not be engaged in micro managing staff, their engagement with staff should be limited to occasional oversight. More importantly the board is responsible for hiring and evaluating the executive director, who is in turn responsible for managing staff. On the flip side, staff should not ask board members to be involved in the day to day operations as this can easily blur the lines of responsibility.
5. Understand the laws governing tax exempt organizations
Nonprofits are granted tax exempt status by the IRS, and this is where regulation typically occurs. There are several rules an organization must follow to ensure it keeps its tax exempt status. Visit www.uhy-us.com/News-Events/Article/829/Maintain-Your-Tax-Exempt-Status to learn how to maintain your tax-exempt status. In addition, a nonprofit must be in good standing with any local or state regulations in order to maintain their tax exempt status with the IRS.
6. Keep governing documents up to date
Over time organizations can change; and although they should strive to operate in support of their original purpose, it is not uncommon for the mission and vision to change. Take time to periodically review the mission and vision and if things are different, update accordingly. Also, make sure bylaws are reviewed on a periodic basis and that the organization remains in compliance with the bylaws. If the organization’s structure requires change, then update the bylaws accordingly. For example, board terms, term limits or the number of board members allowed per the bylaws may no longer be the most effective operating structure. Change is okay, and often change can be good – just make sure to keep the organizational documents aligned.
7. Ensure programing is effective
It is easy for organizations to undergo mission drift, especially if there is a constant need to pursue funding through creating that next program that will pull in the money. Make sure programs support the purpose and mission of the organization, and make sure there is a way to access outcomes and effectiveness. The board should receive periodic reports on the programs that includes a review of outcomes and effectiveness. Don’t settle for a verbal – “everything is going great” from the executive director.
8. Strive to cultivate board diversity
As with any good management team, diversity is key. Often, board vacancies are filled by a board member reaching out to a trusted friend or advisor – people that often have similar backgrounds and viewpoints. Strive to fill open board positions by those with different skills sets and backgrounds and also ensure that your board represents the community that they are serving. Assess skill sets of current board members and determine if any skills are missing. An accountant, lawyer, social media guru or someone with fundraising or event planning experience are good additions to any board. Also, make sure that the board has someone with a knowledge base and expertise regarding the organization’s program objectives.
9. Performance evaluations for executive directors
In the for profit world, CEOs and executives are judged by the financial success of the organizations. Just because a nonprofit does not have this type of easily identifiable indicator does not mean it is okay to pass on measuring performance. Make sure to establish performance measures that align with the goals, visions and mission of the organization and then hold the leader accountable for pushing the organization in that direction.
10. Document all actions appropriately
Board minutes should be a building block for institutional knowledge as well as a record of important decisions or directives. Board minutes should not be an exact transcript of the meeting, nor should the minutes be only a record of motions for votes. They need to be somewhere in the middle. The minutes should provide enough information for a new board member to step in, read the minutes from the prior year and feel they are up to speed on the priorities, concerns and vision for the organization. In addition, the minutes should always note regarding review of the finances to demonstrate fiscal responsibility.
You're Invited! Annual Not-For-Profit Accounting Update
Thursday, September 26, 2019
Hosted at Detroit Historical Museum
Middle Market Manufacturing Outlook
Wednesday, October 23
Hosted at the Detriot Athletic Club
7:30 AM - 11:30 AM