Nonprofit directors play a vital role in making sure a nonprofit’s governance structure is functioning and healthy. Here are five tips for contributing to a healthy governance structure.
1. Follow and Pay Attention to Your Bylaws
Bylaws are your governance road map. They set out the rules on how directors are elected or selected, how the board takes action, how meetings are called and noticed, how meetings are conducted, officer positions and their duties, and what committees advise or have certain authority of the board. State statutory requirements also should be included in the bylaws.
Nonprofits should keep bylaws simple so that they deal only with the highest level of governance, such as organizational purpose, board structure, officer position descriptions, terms of board service, board member removal and succession, official meeting requirements, and other non-negotiable terms. A nonprofit should review its bylaws every two to three years to ensure that they are legally compliant and relevant. Directors have an obligation to understand and follow their nonprofit’s bylaws and, accordingly, should be reviewing bylaws at least annually.
2. Include Provisions for a Staggered Board in Your Bylaws
A staggered board means that, in any given year, only a portion of the board is up for reelection. Nonprofits with a staggered board ensure that the institutional memory of the nonprofit remains when new directors are elected. This avoids the disruption of having an entirely new board get up to speed on the nonprofit’s dealings, while also ensuring that people with new ideas and perspectives are regularly joining the board. For these reasons, a board may want to include in its bylaws a provision for staggered election, provided doing so is permitted by state law.
3. Know Your Fiduciary Duties
Directors are subject to well-established fiduciary duties, meaning they have a duty to act primarily for the benefit of corporation. Directors owe fiduciary duties of care, inquiry, loyalty and a duty to comply with investment standards.
The duty of care describes the level of competence that is expected of a board member and is commonly expressed as the duty of care that an ordinarily prudent person would exercise in a like position and under similar circumstances. This means that a board member owes the duty to exercise reasonable care when a director makes a decision as a steward of the organization.
Directors are generally entitled to rely on information, opinions, and financial data from employees who they deem to be reliable and competent, legal counsel, independent accountants, and other professionals. In relying on this information, the director must act in good faith and conduct reasonable inquiries as the situation warrants.
The duty of loyalty means that a director must disclose and cannot vote on matters where they have a material financial interest. Nonprofits should have a conflict of interest policy tailored to the nonprofit’s activities to help interested parties, including directors, identify and avoid conflicts.
Directors also owe a duty of obedience to stay faithful to the organization’s mission and purpose. Donors rely on a nonprofit’s faithfulness to its purpose when making donations. The Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted in 49 states, governs the management of funds donated to charitable institutions. Directors must follow the applicable standards for investment of donated funds.
4. Maintain a Clear Delineation of Duties Between Operations and Governance
There should be appropriate separation between those individuals governing the nonprofit and those individuals administering the day-to-day operations of the nonprofit. The administration should be in charge of day-to-day operations and decisions, while the board should be involved with major risk issues and corporate dealings. Establishing and maintaining this separation can be done by adopting job descriptions, board policies, administrative procedures, and similar documents that clearly delineate the duties and responsibilities of each and set clear expectations for communications between administration and the board. Training for board members and executive employees on board governance can help reinforce this delineation of duties.
5. Maintain and Follow Board Policies
Boards should adopt board policies to help implement best practices around governance at the nonprofit. Below is a list of the type of governance policies directors may want to consider adopting. The IRS also asks nonprofits who file a Form 990 whether they have adopted the first four policies.
- Conflict of interest policy. This helps directors uphold their fiduciary duties by identifying when a potential conflict exists.
- Whistleblower policy. This handles concerns regarding unethical behavior.
- Document retention and destruction policy. This creates a timeline for the retention of certain documents to protect the nonprofit.
- Joint venture policy. This ensures the nonprofit does not engage in activities that would jeopardize the nonprofit’s tax exemption.
- Gift acceptance policy. This establishes naming rights, types of donations, gift acceptance protocols, and other donation-related issues.
- Compensation policy. This allows highly compensated employees to have compensation reviewed and assessed to ensure the nonprofit is not engaging in an excess benefit transaction.