As needs within communities have grown, the number of nonprofit organizations has grown along with them. Nonprofits have grown about 20% in recent decades. The growth of nonprofits, along with concern over how they’re being governed has prompted greater scrutiny over charitable organizations in general.
Nonprofit boards face plenty of risks when they don’t have a full grasp on what’s required of them in the areas of governance and compliance. To protect themselves and their organizations, nonprofit boards are serving at a time where it’s appropriate not just to understand their responsibilities in governance and compliance, but to master them. The best places to start are with board education and the right nonprofit governance and compliance tools.
Defining Governance and Compliance for Nonprofit Boards
The duties and responsibilities of nonprofit boards form the foundation for its governance framework. Governance is the act of overseeing the organization’s activities, programs, and finances. The board is also responsible for overseeing all the people that work with or for the organization including the executive leaders, employees, and volunteers. Governance refers to the need for boards to be aware of what’s going, as opposed to being directly involved. Strategic planning and risk management also fall under the umbrella of nonprofit governance.
Nonprofit compliance refers to all the duties and responsibilities that go along with ensuring that the nonprofit is acting responsibly and regularly follows all laws and regulations. Nonprofit boards need to be familiar with compliance regulations at the local, state, and federal levels.
Problems Your Nonprofit Board Can Face Due to Poor Governance and Compliance Practices
Being a leader in a nonprofit organization brings enough problems of its own. The lack of good governance can bring about big problems with big liabilities. Nonprofit board members have just as much responsibility for their actions and decisions as corporate boards.
One of the more important areas of training that many nonprofits overlook is ensuring that all board members are aware of what their fiduciary duties are. As members of a nonprofit board, board members accept specific duties to always act with good faith, due care, loyalty to the nonprofit’s mission. Liabilities that can arise from the board’s failure to carry out their duties responsibly can be very damaging to the nonprofit and its reputation.
For example, in situations where nonprofit boards have a single dominant board member and other board members follow that individual blindly, it presents liabilities for the whole board in the event of a bad decision. All board members are responsible for every decision the board makes whether they voice their opinion or not. Each board member has a responsibility to vet issues carefully, ask probing questions, and consider all sides of an issue. Not knowing or understanding fiduciary duties such as these doesn’t relieve board members of the consequences.
It’s common for boards to delegate some of their duties and responsibilities to various committees, and that’s perfectly acceptable. When boards make this choice, they’re still responsible for oversight of those committees. For example, boards should expect to receive reports from the committees at intervals that are specified by board policies. It’s also common for boards to assign members to a finance committee that’s responsible for reporting to the board on financial statements, the annual audit, and the annual Form 990.
Other committees may be formed to establish governance policies for conflict of interest, executive compensation, travel and expense reimbursements, and whistleblower policies. Other governance and compliance issues that board members need to be aware of are the penalties for overpaying executives, the limitations on political lobbying, and the impact of failing to pass the public support test.
12 Tips for Mastering Nonprofit Governance and Compliance
If you’re considering serving on a nonprofit board, it’s not necessary to know everything about governance and compliance right away. It’s common for some board members to have more experience than others in this area. What’s important is for all board members to continually get educated about nonprofit board responsibilities and do their best to act ethically and in good faith.
With that in mind, here are 12 tips for mastering nonprofit governance and compliance:
- Delegate difficult tasks such as overseeing finances and investments, handling audits, and setting executive compensation to committees so boards can focus on other agenda items.
- The executive committee should function as a steering committee rather than a mini version of the full board.
- The board chair should preside over board meetings and serve as a liaison between the board and the executive director.
- The board chair should not have the power to override the decisions of the board.
- The board or a board committee should review the executive director’s performance annually and ensure his or her compensation is appropriate for the position.
- The board should oversee staff without micromanaging it.
- All board members should be willing to ask hard questions and disagree with fellow board members in a collegial manner to allow for a free exchange of ideas.
- The board or a committee should establish clear policies for conflict-of-interest policy and whistleblower and document any incidents concerning these policies.
- Anytime the board changes the nonprofit’s mission or purpose, they should do a thorough review of the governing documents to ensure they’re in keeping with the changes.
- Boards should conduct an annual review of the governing documents and bylaws.
- All board members should refrain from having disagreements outside of board meetings as part of their duty of loyalty.
- The board should work to cultivate board diversity and view minority members as equals, accepting their input and avoiding tokenism.
Your board can start moving in the direction of good governance and compliance practices by ensuring you have a good board orientation that includes the topics of governance and compliance. Ongoing board training will help to enhance your board’s knowledge and expertise in this area.
A BoardEffect board portal is a total board management system where you can document your board member’s training in governance and compliance to protect the nonprofit and the board. BoardEffect is a secure platform that’s uniquely designed for every board activity. It’s the best bet for ensuring good nonprofit governance and compliance.