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The Basics of Nonprofit Board Governance

Posted In: Nonprofit Management News

Diverse group of business people in a boardroom.

Compared to for-profit boards, nonprofit board governance can be complex. Nonprofit organizations serve a public purpose and can have different groups of stakeholders. The organization’s management and workforce may be paid less than for-profit peers, and economic models can be more complicated as well. Some nonprofit organizations blend earned revenue, contributed income, investments, real estate and other sources of revenue to diversify revenue streams and overcome harsh economic climates.

A nonprofit board assumes an integral role in overseeing the organization’s activities. “Board members are the fiduciaries who steer the organization towards a sustainable future by adopting sound, ethical, and legal governance and financial management policies, as well as by making sure the nonprofit has adequate resources to advance its mission,” according to the National Council of Nonprofits.

Nonprofit Board Responsibilities

Members of a nonprofit board of directors have three primary legal duties.

  • Duty of Due Care: Take care of the nonprofit by ensuring sensible use of assets — including facility, people and goodwill — and providing oversight for all activities that advance the nonprofit’s effectiveness and sustainability.
  • Duty of Loyalty: Make decisions in the best interest of the organization; not in their own self-interest.
  • Duty of Obedience: Ensure that the organization obeys applicable laws and acts in accordance with ethical practice.

The basic expectations of a nonprofit board include the following.

  • Determining the mission and functions of the organization
  • Selecting and evaluating the performance of the chief executive
  • Strategic and organizational planning
  • Ensuring strong fiduciary oversight and financial management
  • Fundraising and resource development
  • Approving and monitoring the nonprofit’s programs and services
  • Enhancing the organization’s public image
  • Assessing the nonprofit’s performance as the governing body of the organization

Nonprofit Board Governance Best Practices

A nonprofit board may receive a list of principles, practices and standards from the state association of nonprofits. States also often offer educational programs on good governance practices that can help nonprofit boards.

The National Council on Nonprofits highlights five basic best practices for good nonprofit board governance. They are based on what the IRS highlights on Form 990, but smaller nonprofits that file the 990-N should also be aware of and adopt these best practices.

  1. Maintain minutes of all board meetings. Minutes must also be kept for committees that are authorized to act on behalf of the board, such as an executive committee.
  2. Annually review a written policy and complete a questionnaire about conflicts of interest. Document in minutes of board meetings when the policy is invoked.
  3. Approve the compensation and benefits of the executive director or CEO, and document how the board determined that the compensation is appropriate and not excessive.
  4. Require the board to review a copy of the IRS Form 990. Smaller nonprofits that only file Form 990-N should make sure the board knows about the annual filing requirement.
  5. Disclose to the public the nonprofit’s three most recently filed annual returns with the IRS, along with its application for tax exemption and related correspondence and attachments.

Form 990 also asks whether a charitable nonprofit has adopted the following.

  • Written whistleblower protection policy
  • Written document retention/destruction policy
  • Written gift acceptance policy to govern the receipt of “non-cash” gifts, such as in-kind gifts and unusual gifts like land, vehicles and artwork
  • Joint ventures: If the organization has participated in a joint venture, the IRS Form 990 asks whether the nonprofit took steps to avoid prohibited private benefit

The IRS uses a governance check sheet when examining charitable nonprofits during an audit. This tool can help nonprofit boards benchmark their organization’s governance practices.

Pursuing a Career in Nonprofit Management

Grace College’s online nonprofit management degree prepares graduates for management roles and other opportunities for advancement. This faith-based program applies biblical values to content. Graduates are equipped with the knowledge and skills to succeed in marketing communication, applying technology, creating and training staff, raising funds and improving efficiency within an organization.

 

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