Importance of Good Board Governance in Today’s Not-for-Profit World

Not-for-profit organizations today face tough times, just like many other businesses in this economy. Not only is there is fierce competition for donors, there is also increased regulation and scrutiny from many directions. An organization’s Form 990 is required to be made publicly available to those who request it, and funding sources likely are also reviewing the form. Just as importantly, the Internal Revenue Service has made the form much longer than previous versions and added many questions that are trying to determine if nonprofits have good board governance practices in place.

There are three main duties of a board member: the duty of care, the duty of loyalty, and the duty of obedience. The duty of care is providing the same level of care as an “ordinary prudent person” in a like position in similar circumstances. Examples of this would be participation in board meetings and decisions, reading reports, financials, and minutes, and knowing the organization’s mission and ensuring compliance with that mission and all regulations. The duty of loyalty is exercised by acting in the best interests of the organization. Personal, family, business, and other nonprofit interests should not be put above the interests of the organization. The duty of obedience is exercised by ensuring the organization remains true to its central purpose and acting with consistency to the organization’s goals.

Other important responsibilities of a board member and a board of directors as a whole include effective planning (fiduciary and strategic), building reserves, monitoring programs, ensuring good internal controls to prevent fraud or misstatements, recruiting other good board members, hiring the CEO and reviewing their performance, and reviewing the interim and annual financial statements, IRS Form 990, and the management letter.

Because the IRS feels so strongly about good board governance, it has developed a Governance Check Sheet that is available on its website at the following address http://www.irs.gov/charities. This check sheet is to be used by Exempt Organization Revenue Agents in the examination of public charities.

The following sections relating to good governance practices are included on the check sheet:

Governing Body and Management

Specific questions relate to having a written mission statement that articulates the organization’s current exempt purpose, bylaws that provide information about composition, duties, qualifications, and voting rights. It also asks about the amount of board members there were during the year and how often there was a quorum, and how many times the board met during the year under examination.

Compensation and Conflict of Interest

Questions asked include whether or not compensation agreements were approved by the board, documented contemporaneously, and comparable data relied upon for compensation determinations. They also relate to board members having a family or business relationship with other members, officers, or key employees, and if there is a conflict of interest policy.

Financial Oversight and Document Retention

Questions asked relate to board review of finances, including the Form 990 and/or an independent accountant’s report, and whether or not a management letter is issued, discussed, and suggestions implemented. Finally, the checklist asks if there is a written policy for document retention and destruction.

Because of the increased emphasis on board governance matters, nonprofit boards should focus on making sure that they have the proper policies and procedures in place. If your nonprofit board needs any help in developing procedures, or you would like our assistance with any board trainings related to good governance, including fiduciary responsibility, please don’t hesitate to contact us.