‘Good governance’ is an easy term to toss around, but so broad as to leave nonprofit leaders and board members mystified: Exactly what should they be doing (or not doing) to ensure good governance for the organization they serve? If pressed, most people would probably suggest that the term refers to compliance… and communication… and a lot of other positive, but equally vague, concepts.
Wanting the best for your nonprofit doesn’t automatically lead to the best outcomes, unfortunately. Getting granular about board behavior and best practices, on the other hand, enables leaders to minimize risk and effectively manage human and financial resources. Following these best practices lets you supercharge your nonprofit board of directors to achieve the results you want.
Top 10 good governance practices for nonprofit boards
- Monitor financial activity and tax reporting during board meetings. Line-by-line scrutiny of expenditures and financial statements each month isn’t necessary—that would quickly become unfeasible for most organizations. However, the board should carefully review annual Form 990 reporting before submitting to the IRS and have an accurate idea of the organization’s current financial picture at all times.
- Maintain official minutes of meetings. Besides documenting full board meetings, draft and retain minutes of any meetings where official board business is discussed in committees that can act for the board on certain (or all) matters. These minutes serve as an official record of discussions and decisions that can be referenced later as needed. They can also serve as an important risk reduction tool to document the contemporaneous reasoning underlying past decisions.
- Review compensation for the organization’s CEO, executive director, and other leaders. The board should discuss and approve executive compensation each year, including benefits and bonus payments, and establish that the amount is reasonable. The discussion should include analysis and methodology used to determine that the amount of compensation falls within an appropriate range given the needs, resources and size of the organization as well as the responsibilities associated with the position.
- Communicate public-facing financial data to ensure adequate transparency and build trust. Generally speaking, nonprofits should make tax returns publicly available for at least three years. Well-crafted tax reporting can be an effective vehicle to communicate value and showcase the organization’s impact.
- Evolve with the times. Rules change, as do the trends and social context that shape public perceptions of nonprofit organizations and the boards that govern them. Encourage individual board members to learn about shifting standards and best practices by signing up for (and reading!) nonprofit-focused newsletters published by the National Council of Nonprofits and others. It is a good idea to also assign this as an official responsibility to one or more board members who can share relevant information with the group and initiate discussions when necessary.
- Establish clear expectations for board members related to performance, fundraising, attendance at meetings, conflict of interest, nondisclosure and other potential concerns. Potential board members should know what is expected so they can make an informed decision before accepting the position.
- Clarify policies and rules. It is critical for your nonprofit to create written governance policies spelling out what is expected and allowed. Having formal, detailed policies makes it easier for board members to avoid inadvertent violations that create organizational risk. With no gray areas, you’ll also eliminate potential awkwardness if someone does cross the line; a clear policy with defined consequences means there is no question of unfairness or personal bias. Consider drafting a policy for each applicable area the IRS asks about on Form 990:
- Conflict of interest
- Whistleblower protection
- Document retention and destruction
- Gift acceptance
- Joint venture
- Disclose conflicts of interest immediately, following the organization’s established policies. Be sure to document conflicts and retain documentation in the minutes of board meetings, along with an explanation of related actions and decisions.
- Educate board members about their responsibilities as well as all rules related to ethics, transparency, conflict of interest and more. Having clearly defined policies doesn’t help if they live in a big book nobody looks at. Providing thorough onboarding and training for new board members can dramatically improve their effectiveness and compliance, while strengthening the personal relationships that increase overall board performance. Your training should include specific situations that illustrate conflict of interest and how the rules apply to real-world scenarios.
- Understand the IRS and state-specific rules that apply to your organization. What type of tax reporting is required? What are its responsibilities regarding unrelated business income? Does your state require registration? You can’t comply if you don’t know, so be sure the board recognizes all applicable rules and requirements to keep the organization in compliance with state and federal regulations.
Give your board the tools they need to succeed by adopting these best practices and you’ll be amazed at what your organization can achieve. For more ways to support and empower your nonprofit board of directors, contact the nonprofit experts at Mauldin & Jenkins.
