E&F Advice & Administration
March 24, 2021
Nonprofit Board Governance Essentials
An effective board is one of the best predictors of a successful nonprofit, and good governance is the foundation of an effective board. As an investment and advisory services provider to nonprofit organizations, we frequently guide boards in adopting good governance practices. In our experience, good governance practices not only help members be responsible stewards of the assets they oversee, but help establish a strategic decision-making and administrative framework that keeps the organization moving forward in service of its mission.
Stewardship: The guiding principle
The concept of stewardship is central to everything the nonprofit board does. Board members are fiduciaries who guide the organization and ensure it has the necessary financial and human resources to advance its mission. They are the guardians of extremely important assets —finances, reputation, employees — which enable the pursuit of the mission of the organization. Their responsibilities are wide-ranging: hiring executive staff and management; overseeing fiscal and investment matters; fundraising; and establishing governance policies and procedures as required by law and necessary to ensure a sustainable operating environment. In addition, board members play a crucial role as advocates for the organization’s vision and values in the communities it serves. Overlaying all these responsibilities is the board’s fiduciary duty to the organization and compliance with the regulatory environment in which it operates.
As fiduciaries, board members have a duty to act solely in the interest of the nonprofit organization. Fiduciary duties are governed by state law, and although laws vary by state, they generally impose standards of conduct on board members. These standards typically are referred to as the Duty of Care, Duty of Loyalty and Duty of Obedience. The very first requirement of good governance is to make sure current and prospective board members fully understand all three.
Duty of Care
A board member must exercise “reasonable care” when making decisions for the organization. “Reasonable” is generally held to be what any prudent person would do under similar circumstances. As a practical matter, the duty of care requires that board members be familiar with all laws, facts and information necessary to make an informed decision.
Duty of Loyalty
Each member must act in the best interests of the organization with undivided allegiance and never use information or exert influence gained through their position for personal gain. Confidentiality and avoiding conflicts of interest fall under this duty. Nonprofits also have specific regulatory requirements regarding conflicts of interest, as noted below in the section titled Regulatory compliance.
Duty of Obedience
A board member must be faithful to the organization’s mission and conduct themselves in a manner consistent with that mission. Decisions should be grounded in the organization’s founding documents, bylaws and governance policies and procedures. Going hand in hand with responsible stewardship, the duty of obedience includes advancing the organization’s public mission through fundraising and relationship-building across the community it serves.
Ensuring that all acting and potential board members understand these three fiduciary duties can be key to the success of the board and the organization it represents.
Today’s nonprofit organizations are subject to a variety of statutory requirements, some of which carry civil or criminal penalties for noncompliance. Failure to comply can pose financial, operational and reputational risks to the organization and jeopardize its ability to advance its mission. It is the board’s responsibility to help ensure compliance with all applicable federal and state laws and regulations, as well as filing, reporting, distribution and other requirements that relate to the organization’s activities.
The regulatory landscape is complex, and compliance requires constant vigilance. Over the years, we have found that developing policies and procedures in the following areas helps nonprofit organizations operate optimally:
- Fundraising solicitations, particularly the truthfulness of solicitation materials.
- Executive compensation, especially how, and by whom, executive compensation is determined.
- Governing body minutes and record maintenance for the board, board committees and any other decision-making body.
- Organizational code of ethics, including behavior the organization wants to encourage and discourage, that communicates and fosters a culture of legal compliance and ethical integrity to everyone associated with the organization.
- Document retention and destruction, including guidelines for handling electronic files, backup procedures, archiving of documents and regular checkups of the reliability of the system.
- Whistleblower complaints, including confidential procedures for employees to report suspected financial impropriety or misuse of the organization’s resources.
- Conflict of interest policy involving directors, trustees, board members, officers and employees, including specific steps for identifying, disclosing and avoiding potential conflicts of interest.
- Preparation and certification of financial statements, including (if applicable) the selection of an independent auditor and oversight by an independent audit committee.
Best practices of effective boards
Based on our time spent working with a wide variety of boards that are considering the elements of good governance, we recommend the following path of action:
From the outset, the board should identify, recruit and select members who will bring needed skills, varying backgrounds and diverse and inclusive perspectives that align with the organization’s mission and needs. It is critical that new board members be passionate about the nonprofit’s mission, willing and able to attend all meetings and participate in fundraising, donor relations activities and public events. It is the responsibility of the board to ensure new members are given all the tools and materials they need to be engaged participants, including clear expectations about the time commitments and level of involvement required.
The board should take an active role in guiding the nonprofit organization toward mission fulfillment. That starts with written documents describing the organization’s mission, strategic
vision, long‐term and short‐term goals, specific actions to be taken, implementation responsibilities and metrics to measure success. The board should regularly review the plan’s progress against goals and make any adjustments necessary to stay on track. An annual board retreat is a good opportunity for the board and executive leadership to step back and consider the organization’s mission and strategic direction.
The board periodically should review all programs, including the strategic plan, giving, fundraising, events, marketing and community outreach, to evaluate their effectiveness. The board should determine specific methods and relevant metrics to measure the impact each program has on the mission. In addition, board decisions should be data-driven and evaluated against established standards and procedures.
Succession and transition planning
Boards have a responsibility to ensure continuity of oversight and the sustainable operation of the organization. They need formal policies and procedures in place that anticipate turnover — planned and unplanned — at the board and executive leadership levels. The plan should include recruitment and evaluation criteria, as well as provide guidance for a smooth transition that keeps the operation of the organization on track.
As mentioned earlier, the board must be responsible stewards of the organization’s assets. It must ensure there are adequate financial resources to advance the mission; oversee and monitor investment assets; maintain a current investment policy statement; provide budgeting, accounting and financial oversight; engage in grant-making and spending decisions, including written policies and procedures for grant-making; and oversee fundraising and donor relations efforts to support the ongoing work of the organization. Board members may be personally involved in fundraising, grant-making and community outreach activities, acting as ambassadors for the organization’s mission and advancing its reputation among key constituencies.
Governance resources for nonprofits and board members
As we stated in the beginning of this piece, effective board governance is a determining factor of a nonprofit’s success. Good governance policies and procedures strengthen the organization and allow the board to focus on mission fulfillment. It is a foundational topic that Glenmede prioritizes in our advisory work with nonprofit organizations.
The following are additional resources for those seeking to establish or refresh their governance procedures:
- BoardSource (boardsource.org)
- Center for Nonprofit Advancement (nonprofitadvancement.org)
- IRS.gov (https://www.irs.gov/pub/irs-tege/governance_practices.pdf)
- National Council of Nonprofits (councilofnonprofits.org)
- Individual state attorney general websites
- State and regional nonprofit associations
This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.