Board Governance Series – Part 1

A Not-for-Profit board is charged with the responsibility to set and oversee the strategic objectives of the Organization, in order for the Organization to accomplish its mission. Governance is the shared responsibility between the board and management of the Not-for-Profit Organization. While the responsibility is shared, the board has liability for the Not-for-Profit Organization, and ultimately is the final authority.

Governance is a set of responsibilities and practices applied by the board and management that provides strategic direction, makes sure objectives are achieved, appropriately manages risks, and ensures the Organization’s resources are used responsibly.

In October 2007 (updated in 2015), the Panel on the Nonprofit Sector published a report titled “Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations” (The Good Governance Model). The report identifies 33 principles, which are organized under 4 main categories. These principles should be considered by all charitable organizations as a guide for strengthening its effectiveness and accountability.

This Board Governance Series provides a high-level summary of each of these principles, as broken down into 4 main categories: 1) Legal Compliance, 2) Effective Governance, 3) Strong Financial Oversight, and 4) Responsible Fundraising.

In Part I, we summarize Legal Compliance:

• Laws & Regulations
  • Duty of Care – Requires the board to conduct the business of the Not-for-Profit in a way that a prudent person would. Board members are expected to make reasonable and sound judgements when acting on behalf of the Not-for-Profit. Active preparation for and participation in board meetings where important decisions are being made is an integral part of the duty of care.
  • Duty of Loyalty – Requires the board to be loyal in its dealings with the Not-for-Profit and to put the Organization’s needs above its own. A board member may never use information obtained in their capacity as a board member for personal gain. A conflict of interest policy covering both financial and nonfinancial conflicts is key to fulfilling the duty of loyalty.
  • Duty of Obedience – Requires the board to be faithful to the Organization’s mission. Board members must not take action that is inconsistent with the Not-for-Profit’s mission. The board’s responsibilities to ensure compliance with laws and regulations falls under the duty of obedience.
• Code of Ethics
  • This is one of the most important policies a Not-for-Profit organization can have. A code of ethics (or code of conduct) should outline the conduct that is expected by the board, management, staff and volunteers.
• Conflict of Interest
  • Every board member and all employees should be required to sign a statement that states any conflicts of interest that they may have. Conflicts of interest may be in fact or appearance. When an issue arises where a conflict exists, the board member or employee should recuse themselves from any discussion or votes on the issue.
• Whistleblower Policy
  • If an employee or volunteer becomes aware of a violation of policy or law, the Not-for-Profit should have a whistleblower’s policy in place so they can report the situation without fear for retaliation. Having a whistleblower’s policy is not a requirement to receive tax-exempt status, the IRS Form 990 requires each organization to report whether or not they have such a policy in place.
• Document and Data Retention and Destruction
  • Not-for-Profit organizations are generally held to a higher moral standard than most private businesses, as they exist to provide a public benefit or charitable mission, they are still susceptible to possible litigation. If legal action is brought against a Not-for-Profit, a formal document retention policy can limit potential damages.
• Protection of Assets
  • Members of Not-for-Profit boards are responsible the Organization’s assets. The board should safeguard the Organization’s assets such as property, documents and data, etc. against damages. There should be oversight and review of the Organization’s need for general liability and D & O liability insurance, and take action to mitigate other risks.
• Availability of Information to the Public
  • Not-for-Profit organizations (other than churches) recognized by the IRS are required to file a Form 990 (an information return), which must also be made available for public inspection. Making other information, such as information about the Organization’s mission and results of operations can have a profound impact on the public trust of the Organization.

Our goal is to provide you with information that provides insight and impact to your Not-for-Profit organization. Board Governance is crucial to the success of an Organization – we hope you have found Part I of this series useful. Be sure to stop back for Part II – Effective Governance.

If you would like additional information or need assistance with board governance, reach out to the DBC NPO Niche today.