Managing nonprofit organizations with effective governance means running a nonprofit well. It also means watching out for risks, especially risks related to compliance. Good governance is a huge asset in ensuring that the board is performing at its optimal level, which will lead to good performance by the organization. Some of the areas in which the IRS may be scrutinizing nonprofits a bit more than in the past relates to fundraising expenses, compensation competence, showing losses to offset gains, taxable income due to parent and subsidiary transactions, and unallowable political activity. Nonprofit board directors must be as vigilant with respect to their board duties as directors of for-profit companies.
The Five Keys to Governing and Managing Nonprofit Organizations Effectively
Boards should ensure that they have established all the basic policies for good governance. Also, they need to establish new policies to address other issues that may arise. As a matter of good governance, boards should also make it a practice to review their policies and update them as necessary.
One of the basic governance policies is a Code of Conduct and Professional Ethics policy, which outlines the ethical principles that govern decisions and behavior for an organization. Another basic policy for nonprofits to have is a Conflict of Interest policy, which prohibits anyone from personally benefiting from the nonprofit. The policy should state that the person should announce the conflict and avoid voting on issues related to it. Every nonprofit should also have a Whistleblower policy, which outlines the procedures whereby employees can blow the whistle on financial management and accounting practices without being subject to retaliation. Nonprofits can’t possibly keep every document, so a document retention and destruction policy outlines the rules for which documents the organization must keep, how long they must keep them and when they should be destroyed. IRS Form 990 asks if the nonprofit has a written record retention policy. For instance, nonprofits aren’t allowed to destroy documents that pertain to a criminal investigation. A compensation policy outlines salary ranges and benefits for all paid employee positions including executives.
Ensure transparency and accountability.
The public’s trust is one of many important assets that nonprofits can possess. The best way to attain and maintain the public’s trust is to be transparent and accountable. It only takes one donor to lose confidence in a nonprofit to spread the word to others to have a major negative impact on the organization’s finances and reputation. As noted above, it’s important to have written policies for ethical behavior and for the organization to follow them implicitly. Boards should be willing to disclose copies of the nonprofit’s three most recent annual tax returns and its application for tax-exempt status and the related correspondence and attachments.
Nonprofits should also have a policy that requires the board to review a copy of IRS Form 990 before it gets filed. Form 990 asks additional questions of nonprofit organizations on Part VI, which includes several questions that are optional. Answering questions about the conflict of interest, executive compensation, whistleblower protection and document retention policies will help to demonstrate that a nonprofit is doing its best to be transparent and managing the nonprofit organization well.
In addition to IRS requirements, state governments may also have requirements of nonprofits, and organizations should be transparent about those as well.
Diversity on a board of directors is just as important for nonprofits as it is for for-profit corporations. Startup nonprofits may follow a simple rule of thumb in board composition. Choose one-third of board directors from those who have access to financial resources or who can solicit donations. Another third should be selected for their expertise in management, finance, marketing, legal and other professions. The final third of the board should be composed of individuals from the community who have some level of expertise in the nonprofit’s service field. As cybersecurity is a rising area of risk, boards should consider having someone on the board or on a committee who can help advise them in the area of technology.
With respect to diversity, boards should be as diverse as possible, including diversity of gender, race, ethnicity, age, religion and culture, in order to bring as many perspectives into the boardroom as possible. It’s also important for the board to keep refreshing itself. Term limits are a good way to ensure that the board is continually recruiting and bringing in fresh perspectives. It’s common for board members to serve two consecutive terms and then be required to take a break of a year or so before continuing their board service.
Financial oversight and responsible fundraising.
In managing nonprofit organizations well, it’s helpful for nonprofit boards to establish a finance committee that works on the budget, financial policies and regular oversight. Having a committee doesn’t relieve all board members from their responsibility for overseeing the organization’s finances. As needed, nonprofit boards should enlist help from financial experts. Finance committees usually develop financial policies for the board to approve.
Take a modern approach to nonprofit governance with board management software.
Nonprofits can take a strong step toward good governance by implementing a board management software system by BoardEffect. Using this system, board directors can communicate and share files securely, which helps to reduce cyber risks. Board business is cyclical in nature. BoardEffect provides a platform that supports modern governance practices within and across the meeting cycle, annual cycle and development cycle. Nonprofit boards are required to keep meeting minutes, and BoardEffect has a program that streamlines the creation of board agendas and meeting minutes. Boards will find that it’s fast and easy to create board books online, schedule meetings and tasks, get rounds of approvals and store important documents electronically.
Managing nonprofit organizations well requires the board’s strict attention to good governance in a world that is complex, demanding and high stakes. Board governance requires a modern approach to enable boards to make effective decisions and drive successful outcomes based on getting the right information at the right time.