Board governance of nonprofit organizations has increasingly become more akin to board governance of for-profit corporations after Enron’s debacle produced the Sarbanes-Oxley Act of 2002 (SOX). While no federal nonprofit laws similar to SOX have been passed, the IRS forms and instructions for the non-profit Forms 1023 and 990 are playing a major role in reshaping nonprofit governance.
Essentially a nonprofit organization’s board must actively manage the nonprofit organization and do more than meet infrequently and just receive reports from the organizations officers and staff. Board members must involve themselves and become knowledgeable about the organization’s programs, operations, and finances and understand the climate in which the organization operates in order to avoid conflicts of interest, place the objectives of the organization above board members’ and others’ personal desires, and, in essence, GOVERN the nonprofit instead of merely watching what happens as it happens or, much worse, hearing what happened after it happened.
These emerging principles require boards to design structural control of their nonprofits going far beyond their articles of organization and bylaws. Now, nonprofit boards must adopt and nonprofits must operate using adopted:
- Organizational and management policies, procedures, and work instructions;
- Conflicts-of-interest policies;
- Codes of ethics for senior officers;
- Investment policies; and
- Written program objectives and performance measures.
In addition, nonprofit boards should:
- Have independent audit committees that use independent accounting services;
- Hire lawyers, accountants, and other consultants directly as a board instead of letting their nonprofit’s top-level executive/operations staff do so;
- Specifically approve compensation arrangements for the top-level and second-level staff; and
- Certify their board members have reviewed and understand the nonprofits financial statements and information returns.
Nonprofit boards should take guidance from Congress’ 2007 amendments of the congressional charter of the American National Red Cross, which require that board to:
- Review and approve the organization’s mission statement
- Provide oversight of the protection of the organization’s brand
- Provide oversight of the protection of organization’s financial and operational stability
- Approve and oversee the organization’s strategic plan and maintain strategic oversight of operations
- Approve and oversee the design and implementation of the organization’s organic policies, procedures, and work instructions, including management and financial reporting, audit processes, internal controls, and legal compliance
- Select, evaluate, and determine the level of compensation of the organization’s chief executive officer
- Evaluate the performance and establish the compensation of the senior leadership team and provide for management succession
- Hold management accountable for performance
- Ensure the inclusiveness and diversity of the organization
- Assist with fundraising on behalf of the organization.
Any nonprofit desiring to run as best as it can should require as part of its board member onboarding process that all of its board members (both existing and new) read (not just glance through, but really, really read) and discuss with each other their understanding of the Independent Sector’s Principles for Good Governance – A Guide for Charities and Foundations. In 2015, Independent Sector—reputedly the only national membership organization that brings together a diverse set of nonprofits, foundations, and corporations to advance the common good—published the Second Edition of its Principles for Good Governance – A Guide for Charities and Foundations.
IS organizes its 33 Principles in four categories:
- Legal Compliance and Public Disclosure
- Effective Governance
- Strong Financial Oversight
- Responsible Fundrasing
The text of the principles is clearly stated and then supplemented with additional discussion of each one in a very readable 50-page book, a copy of which any can download for free at https://independentsector.org/wp-content/uploads/2016/11/Principles2018-Final-Web.pdf. This book also contains a very nice, easily readable, comprehensive, educational glossary.
The full text of IS’s 33 Principles of Good Governance are:
Legal Compliance and Public Disclosure
PRINCIPLE 01 A charitable organization must comply with all applicable federal laws and regulations, as well as applicable laws and regulations of the states and the local jurisdictions in which it is formed or operates. If the organization conducts programs outside the United States, it must also abide by applicable international laws, regulations, and conventions.
PRINCIPLE 02 A charitable organization should formally adopt a written code of ethics with which all of its directors or trustees, staff, and volunteers are familiar and to which they adhere.
PRINCIPLE 03 A charitable organization should adopt and implement policies and procedures to ensure that all conflicts of interest (real and potential), or the appearance thereof, within the organization and the governing board are appropriately managed through disclosure, recusal, or other means.
PRINCIPLE 04 A charitable organization should establish and implement policies and procedures that enable individuals to come forward with information on illegal practices or violations of organizational policies. This “whistleblower” policy should specify that the organization will not retaliate against, and will seek to protect the confidentiality of, individuals who make good-faith reports.
PRINCIPLE 05 A charitable organization should establish and implement policies and procedures to protect and preserve the organization’s important data, documents, and business records.
PRINCIPLE 06 A charitable organization’s board should ensure that the organization has adequate plans to protect its assets — its property, documents and data, financial and human resources, programmatic content and material, and its integrity and reputation — against damage or loss. The board should review regularly the organization’s need for general liability and directors’ and officers’ liability insurance, as well as take other actions necessary to mitigate risks.
PRINCIPLE 07 A charitable organization should make information about its operations, including its governance, finances, programs, and activities, widely available to the public. Charitable organizations also should consider making information available on the methods they use to evaluate the outcomes of their work and sharing the results of those evaluations.
Effective Governance
PRINCIPLE 08 A charitable organization must have a governing body that is responsible for reviewing and approving the organization’s mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies.
PRINCIPLE 09 The board of a charitable organization should meet regularly enough to conduct its business and fulfill its duties.
PRINCIPLE 10 The board of a charitable organization should establish its own size and structure and review these periodically. The board should have enough members to allow for full deliberation and diversity of thinking on governance and other organizational matters. Except for very small organizations, this generally means that the board should have at least five members.
PRINCIPLE 11 The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnicity, race, and gender perspectives), experience, and organizational and financial skills necessary to advance the organization’s mission.
PRINCIPLE 12 A substantial majority of the board of a public charity, usually meaning at least two-thirds of its members, should be independent. Independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to anyone described above (as a spouse, sibling, parent or child), or reside with any person so described
PRINCIPLE 13 The board should hire, oversee, and annually evaluate the performance of the chief executive officer of the organization. It should conduct such an evaluation prior to any change in that officer’s compensation, unless there is a multi-year contract in force or the change consists solely of routine adjustments for inflation or cost of living.
PRINCIPLE 14 The board of a charitable organization that has paid staff should ensure that the positions of chief staff officer, board chair, and board treasurer are held by separate individuals. Organizations without paid staff should ensure that the positions of board chair and treasurer are held by separate individuals.
PRINCIPLE 15 The board should establish an effective, systematic process for educating and communicating with board members to ensure they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities of the organization, and can carry out their oversight functions effectively.
PRINCIPLE 16 Board members should evaluate their performance as a group and as individuals no less frequently than every three years, and should have clear procedures for removing board members who are unable to fulfill their responsibilities.
PRINCIPLE 17 Governing boards should establish clear policies and procedures setting the length of terms and the number of consecutive terms a board member may serve.
PRINCIPLE 18 The board should review organizational and governing instruments no less frequently than every five years.
PRINCIPLE 19 The board should establish and review regularly the organization’s mission and goals and should evaluate, no less frequently than every five years, the organization’s programs, goals, and activities to be sure they advance its mission and make prudent use of its resources.
PRINCIPLE 20 Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their boardrelated duties. A charitable organization that provides compensation to its board members should use appropriate comparability data to determine the amount to be paid, document the decision, and provide full disclosure to anyone, upon request, of the amount and rationale for the compensation.
Strong Financial Oversight
PRINCIPLE 21 A charitable organization must keep complete, current, and accurate financial records and ensure strong financial controls are in place. Its board should receive and review timely reports of the organization’s financial activities and should have a qualified, independent financial expert audit or review these statements annually in a manner appropriate to the organization’s size and scale of operations.
PRINCIPLE 22 The board of a charitable organization must institute policies and procedures to ensure that the organization (and, if applicable, its subsidiaries) manages and invests its funds responsibly, in accordance with all legal requirements. The full board should review and approve the organization’s annual budget and should monitor actual performance against the budget.
PRINCIPLE 23 A charitable organization should not provide loans (or the equivalent, such as loan guarantees, purchasing or transferring ownership of a residence or office, or relieving a debt or lease obligation) to directors, officers, or trustees.
PRINCIPLE 24 A charitable organization should spend a significant amount of its annual budget on programs that pursue its mission while ensuring that the organization has sufficient administrative and fundraising capacity to deliver those programs responsibly and effectively.
PRINCIPLE 25 A charitable organization should establish clear, written policies for paying or reimbursing expenses incurred by anyone conducting business or traveling on behalf of the organization, including the types of expenses that can be paid for or reimbursed and the documentation required. Such policies should require that travel on behalf of the organization is to be undertaken cost-effectively.
PRINCIPLE 26 A charitable organization should neither pay for nor reimburse travel expenditures for spouses, dependents or others who are accompanying someone conducting business for the organization unless they, too, are conducting such business.
Responsible Fundraising
PRINCIPLE 27 Solicitation materials and other communications addressed to donors and the public must clearly identify the organization and be accurate and truthful.
PRINCIPLE 28 Contributions must be used for purposes consistent with the donor’s intent, whether as described in the relevant solicitation materials or as specifically directed by the donor.
PRINCIPLE 29 A charitable organization must provide donors with specific acknowledgments of charitable contributions, in accordance with IRS requirements, as well as information to facilitate the donors’ compliance with tax law requirements.
PRINCIPLE 30 A charitable organization should adopt clear policies, based on its specific exempt purpose, to determine whether accepting a gift would compromise its ethics, financial circumstances, program focus, or other interests.
PRINCIPLE 31 A charitable organization should provide appropriate training and supervision of the people soliciting funds on its behalf to ensure that they understand their responsibilities and applicable federal, state, and local laws, and do not employ techniques that are coercive, intimidating, or intended to harass potential donors.
PRINCIPLE 32 A charitable organization should not compensate internal or external fundraisers based on a commission or a percentage of the amount raised.
PRINCIPLE 33 A charitable organization should respect the privacy of individual donors and, except where disclosure is required by law, should not sell or otherwise make available the names and contact information of its donors without providing them an opportunity at least once a year to opt out of the use of their names.