State governments were wise in developing corporate and tax structures to benefit nonprofit organizations. Tax breaks afford nonprofit organizations the ability to serve the public by providing opportunities to assist those who aren’t able to help themselves through civic engagement, volunteering and developing new approaches to solving problems. Nonprofit organizations operate for the public good, so the public rightly expects nonprofit board directors to uphold fundamental values, including honesty, integrity, fairness and trust.
Nonprofit board directors have fiduciary responsibilities just like any other board. They must comply with the law and maintain financial accountability and transparency. Best practices require them to also observe and respect ethical boundaries, including providing their services regardless of race, religion, ethnicity, gender, age, socioeconomic status, ability or sexual orientation.
Nonprofit boards do their best work when following best practices for nonprofit boards.
One of the first things that nonprofit boards do is to establish their mission, vision and values statements. These statements impact virtually everything that nonprofit organizations do, so founding boards should develop these statements with great care and thought. These statements should clearly demonstrate how the nonprofit supports the community with charitable or educational goals.
Role of the Nonprofit Board of Directors
A nonprofit organization’s bylaws should outline written criteria for selecting a competent board of directors. Best practices require boards to state each board director’s term, the number of terms they may serve and whether the terms can be consecutive. Nonprofit start-ups should consider the number of board directors and the types of committees they need to appropriately oversee the organization and be willing to adapt as the organization grows.
The bylaws should also detail the duties and responsibilities for board directors and committees. Board directors should be aware of what their duties are and be willing and able to fulfill them. Boards should meet at least annually, and more often as needed to conduct the organization’s business.
Best practices require nonprofit boards to give an official accounting of the board’s work through recording official meeting minutes. Nonprofit boards are responsible for oversight, so it’s important for them to participate in strategic planning every year, but no less frequently than every five years.
Nonprofits that employ staff should set reasonable and appropriate compensation for directors and employees and measure their performance against goals and objectives.
Quality of the Nonprofit Board
Much like for-profit corporations, nonprofit boards must compose their boards of directors thoughtfully. Boards should select members on the basis of their knowledge, competency, skills and experience. Boards should seek members who provide diverse perspectives in order to provide credible, effective oversight, informed decision-making and due diligence. Board members should also take these issues into consideration when they fill vacancies on the board to ensure that the board is continually well composed. Best practices for nonprofit boards encourage them to provide solid opportunities for training and development, starting with an informative orientation and continued opportunities for board development.
Nonprofit boards often face critical decisions. Best practices suggest that nonprofit boards should be willing to consult subject matter experts or other business experts as needed. Many nonprofit groups find it helpful to involve area experts in committee or advisory group work.
All boards should periodically participate in board self-evaluations to assess their effectiveness in achieving the organization’s mission. This requires boards to conduct periodic self-evaluations through questionnaires, interviews or both. Among other things, boards should evaluate their progress toward their objectives and how well they follow the organization’s mission. Evaluations should cover the board’s relationship with executives and staff, as well as the effectiveness of programs. Volunteers and constituents can also offer valuable feedback about the organization’s operations and value to the community.
Code of Ethics
Board directors set the culture at the top. It’s vital for board directors to act in an ethical manner, placing the organization’s best interests above their own at all times. Best practices require nonprofit boards to have a written code of ethics, conflict of interest and whistleblower policies and to follow through with ensuring all board directors are informed of these policies and act accordingly.
Board directors must respect the confidentiality and privacy rights of their clients, donor, volunteers and others.
In addition, nonprofit boards need to establish a document retention policy that preserves key organization documents.
Fiduciary Duties and Legal Compliance
Nonprofit boards should be knowledgeable about all federal, state and local laws, regulations and fiduciary responsibilities and make an effort to abide by them. This includes having an understanding of basic legal, accounting, audit and tax issues. All board members should be familiar with Form 990 and be willing to seek professional legal and accounting advice as needed for compliance. Boards should also develop risk management plans and assess insurance coverage needs, including directors and officers insurance.
Best practices entail strong financial oversight. Boards should approve an annual budget and maintain sufficient financial resources, including cash reserves. This responsibility includes maintaining accurate financial records, preparing at least quarterly financial reports, and justifying expenses as reasonable and necessary.
Most states require an annual audit of a nonprofit’s financial and accounting practices. Best practices require the same in all states.
Nonprofit organizations are accountable to the government and to the public they serve. Best practices for nonprofits suggest that nonprofits should make certain information public and transparent. Such information includes:
- Form 990 of 990-PF
- Financial statements
- Program reports
- Board directors and officers
- Contact information
Best practices for nonprofits also mean that board directors should respond promptly for requests for information and respond quickly to complaints.
Fundraising is one of nonprofits’ main activities and it’s one that shows a true reflection of whether the organization abides by its mission. Nonprofits should be willing to disclose relevant information to potential donors. Board directors should respect the rights of donors and ensure that donated funds get used for the purpose stipulated by the donor’s intent. Best practices also speak to fundraising in ways that aren’t coercive, intimidating or intended to harass potential donors.
Best practices infiltrate every area of board service. How well nonprofit boards employ best practices demonstrates to the public that the board takes critical issues such as good governance, integrity and the public trust to heart.