Governance In Non-Profits: The Best Practices

| November 14, 2014

Business people discussing in officeGood governance practices by a Board of Directors are vital to every nonprofit organization.  It starts with meeting Legal Standards.

Nonprofit organizations must follow all federal, state and local laws and its board of directors is responsible for ensuring that this happens. The IRS gives the responsibility of organizational oversight to the board of directors.

Organizations formed within the last five years or so had to have a Conflict of Interest policy when they filed their corporate documents with the IRS. However, many organizations never look at the policy again. It is a good idea to review the policy on an annual basis and to have all board members sign it. When new board members come in, the policy should also be shared with them during the orientation process. It is also important to remember that the conflict of interest policy is not just for the board of directors; all senior staff members should also sign the policy on an annual basis.

Over the past several years, there have been many situations where staff or volunteers turned their heads the other way when they saw wrongdoing within the organization. As a result of these situations (which really are the minority), it is recommended that all organizations have a “Whistleblower Policy.” A Whistleblower Policy outlines policies and procedures for board members, staff, volunteers or clients to report suspected wrongdoing without fear of retaliation. Along with this policy, the organization should also have procedures in place to investigate any reports of wrongdoing.

Another policy that organizations need to have in place is one that outlines the organization’s policies to retain important documents. Some documents that need to be included in such a policy are those relating to board governance, financial records and historical policy information. Additionally, if the organization receives grant funding, it is important to verify how long documents associated with the grant must be kept.

It is the role of the board of directors to ensure that the assets of the organization are protected. Assets include financial resources, human resources, buildings and equipment. In addition, assets are also non-tangible items such as the reputation and integrity of an organization. An annual review of insurance policies and other operating policies is a best practice to ensure that the organization is prepared in the event of a loss.

The Board of Directors is not charged only with legal compliance but with Effective Governance — ensuring that the organization is fulfilling its mission and following the legal requirements established by the IRS.

The governing board is responsible for setting the strategic direction of the organization, approving the annual budget, setting compensation packages, and developing policies. To fulfill these responsibilities, the board of directors must meet on a regular, consistent basis. For some organizations, this may mean meeting on a monthly basis while for others it may mean meeting on some other basis that is agreed upon.

Regular meetings provide the board with an opportunity to stay connected to the mission of the organization and to ensure that the organization is staying true to its mission. Since the IRS gives the responsibility of oversight of the organization to the board of directors, it makes sense then that the board meets regularly to provide governance and oversight.

It is tempting to recruit board members who are just like you, who think like you and understand you. However, best practice models indicate that strong organizations have a diverse board in terms of ethnicity, race, gender, and in other ways. Having a diverse board increases the likelihood that you will receive a variety of thoughts and opinions in board meetings.

While the board of directors has the responsibility of evaluating the Chief Executive Officer, it is also important to recognize that the board should also evaluate itself. Such an evaluation should occur every one to two years and identify both strengths and areas of weakness within the operations of the board. Once identified, a plan can be developed to improve areas of weakness in priority order. It should be noted that it is usually very helpful to have a consultant or unbiased outsider guide this process.

A third aspect of good governance is Financial Oversight. While many nonprofit leaders do not relish the idea of developing financial statements, they are a must! Complete financial statements are necessary, both for legal compliance and for the board of directors to provide oversight of the finances and make strategic decisions based on the information contained within. It is recommended by accountants that all organizations use Generally Accepted Accounting Principles (GAAP) in the management of their finances.

Nonprofits should also plan to have an external auditor (i.e., accountant) audit the finances of the organization on an annual basis. Smaller organizations may not need a full audit, but instead should have a financial review. The purpose of both an audit and financial review is to ensure that the financial resources of the organization are being used appropriately.

Another function of the board of directors is to develop policies and procedures related to finances. Such policies may include who has permission to make spending decisions and at what threshold as well as how funds will be invested. Written policies should dictate the day-to-day management of receiving money and spending it.

Occasionally, a board member may come to the organization seeking a loan for personal reasons. This is never a good practice and should be avoided. While not illegal in all states, many states do have laws against this practice.

Every organization should have a board-approved annual budget. It is important to have the Executive Director be included in the development of the budget as he/she will be responsible for implementation of programs and services; however, it is ultimately the responsibility of the board to ensure the organization has the resources it needs to fulfill its mission and to approve the budget.

Category: Non-Profits

About the Author ()

Email | Website | Deborah DiVirgilio is a Certified Governance Trainer through BoardSource and has more than 20 years of experience in providing nonprofit consulting, grant writing and management services for nonprofits, government agencies and faith-based organizations. She is the owner and principal consultant of The Faith-Based Nonprofit Resource Center (formally known as DiVirgilio & Associates). She holds a Bachelor’s Degree in Behavioral Sciences from Wilmington College and a Masters Degree in Non-Profit Management from Regis University, and is Grant Professional certified by the Grant Professional Institute. She has served on the Board of Directors and as an officer of the Grant Professionals Association.