Board governance: Best practices for not-for-profit boards

A high-functioning board can provide a not-for-profit organization with invaluable leadership and support — but boards aren’t automatically effective. Boards can increase their odds of success when an organization’s management and their board members truly understand the boards’ roles and responsibilities on a group and individual level. Moreover, to avoid legal issues, an organization wide understanding of the board’s powers and required independence is also essential.

Below are our recommended top five areas not-for-profit boards should ensure they have addressed:

#1 Whistle blower policy

Whistleblowers (in any form) remain the number one avenue that fraud or other inappropriate behaviors or activities are discovered. All not-for-profit organizations, large or small need a whistleblower policy; however, the policy should be tailored to the not-for-profit’s size, structure and capacity. Small organizations should designate an outside advisor to respond to whistleblower reports. All organizations should have a formal policy that specifies individuals in the organization or the board members to whom such information can be reported.

#2 Compensation

In our opinion, the most important responsibility of a not-for-profit organization’s board is the selection, supervision and determination of a compensation package for the executive director or CEO. The board should be formally evaluating its top leader’s performance at least annually and should be approving any compensation changes before they occur. There may be a multi-year agreement in place that establishes costs of living increases or increases in compensation based on other established metrics; however, it is still important that the board institute some regular basis for reviewing whether the terms of the contract have been met. The board must also conclude that the compensation is reasonable by examining compensation paid to executives at similar organizations or, more formally, by hiring a compensation consultant. A formal study is not necessary annually, but should be considered. It is important that the study and the performance evaluation and compensation process be documented. It is also important to note that the board should ensure that the individuals involved in the determination of the compensation do not have a conflict of interest.

#3 Travel and expense policies

Solid policies in this area are needed to prevent your organization from landing on the front page of the newspaper for an officer’s or employee’s inappropriate spending. The board of directors and management should ensure their expense reimbursement policy defines “reasonable” expenditures. In addition, we recommend that the policy give various examples to assist individuals when making judgments in this area. Travel policies should ensure that the business of the organization is carried out in a cost-effective manner and be based on how to best further the organization’s charitable business purposes, rather than on the title or position of the person traveling. All expense reimbursements should require documentation of the business purpose of the expense (who, what, why) and should be reviewed by a supervisor. It is best practice that the president’s expenses be reviewed by the board. 

#4 Risk management

The board’s responsibilities include establishing the level of risk tolerance for the organization. An organization cannot likely manage all of their risks through insurance, but insurance programs are typically an important part of a risk management strategy. Board members should be aware of the organization’s insurance programs and should be involved in discussing other risk mitigation programs and strategies. Although it is rare, board members may be personally liable as a result of certain legal violations of the organization so they should make sure they are personally protected.

As second piece of risk management includes information, and more specifically, donor confidentiality. The board of directors should assist the organization in developing policies and procedures to ensure that donor information is handled with respect and confidentiality. Donors should receive information from the organization that informs them how their information may be used. Donors should be given an opportunity to “opt out” of future solicitations or communications.

Many not-for-profits are beginning to embark on a broader risk management program – Enterprise Risk Management.

#5 Board diversity

Many organizations lack a formal board diversity policy, but it has been studied and concluded that a group of leaders are better when there is diversity. Some organizational documents may want to address board diversity (gender, race, age and expertise). Boards should seek members with experience in budgeting/financial management, investments, personnel, fundraising, public relations/marketing, governance, advocacy and leadership as well as knowledge in the organization’s area of expertise and its programs. It may be hard for some boards to have experience in all of those areas; however, it is completely appropriate to supplement gaps with hired advisors when necessary.

Why governance matters

Ultimately, board members are more than advisors — they are fiduciaries who steer the organization towards a sustainable future by adopting sound, ethical and legal operating and financial management policies and ensuring the not-for-profit has adequate resources to advance its mission.1 Without effective policies and procedures in place to address these issues, a board function cannot realize its full potential.

In 2012, 26.5 percent of adult Americans – about 64.5 million of them – gave 7.9 billion hours of volunteer time worth $175 billion. In 2013, individual donations totaled more than $240.6 billion. The public has high expectations for the not-for-profit sector and preserving the public’s trust is key to keeping the sector strong. Unethical or inappropriate conduct can have significant repercussions, not just for your not-for-profit, but for all of the country’s 1.4 million charitable organizations.2

Solid governance doesn’t guarantee the elimination of fraud, waste or abuse. Poor governance; however, almost always plays a role in these incidents and prevents boards from detecting and responding to them in a timely fashion. If the safety, efficacy and prosperity of your not-for-profit matters to you, it’s time to start thinking about governance.

**For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.**

1: National Council of Nonprofits, www.councilofnonprofits.org
2: “Principles for Good Governance and Ethical Practice” Independent Sector