Chapter 2 Roles of the Board and Management – Best of Boards, 2nd Edition

Chapter 2
Roles of the Board and Management

Karen Lee, board chair of a small social service nonprofit, sat in a roundtable meeting sponsored by the North Carolina Center for Nonprofits. The participants were there to discuss the role boards should play in nonprofit organizations. Karen was eager to hear how other boards were run but worried that she would be asked to step into a board role for which she was unprepared. Around the table were the board and audit committee chairs from organizations of varying size and complexity: a state community college, several charities, and a United Way affiliate.

The first participant to speak was Howard, the board chair from a large charitable organization with $191 million dollars in support and revenue. "Our board has 30 members. We have several active committees including an audit committee. We have made some improvements in governance as a result of all of the press around transparency and accountability. We want to be the organization that is above scandal. The board takes its fiduciary responsibility very seriously. We see our role as one of strategy and oversight. We approve the operating budget and listen to recommendations of management for new programs and changes or significant modifications to programs. We review and approve the compensation of the executive director and perform an evaluation of her each year. We also help the organization raise funds. We understand that we have a fiduciary responsibility to the organization and this is discharged through our oversight, vested particularly in the audit committee. We have a code of ethics that includes a conflict of interest policy."

The board chair from the private community college spoke next. "We have a much smaller board. There are seven board members. Each of our board members represents a different area of the state. Because of our membership constraints, we do not have a financial expert on the board. There are business people on the board but none has the experience to prepare not-for-profit or governmental financial statements. The board cares passionately about higher education, and we have doubled our enrollment over the last five years. We take a more hands-on approach than Howard was describing, and the President of the College accuses us from time to time of usurping her role. Our board has an investment committee to oversee the endowment. We also approve the compensation for the President and each year review her progress. I am very interested in learning more about governance and that’s why I volunteered to participate in this group."

Other participants described what they saw as the function of the board at their organizations. It seemed to Karen that all of the organizations were much larger than hers. She finally spoke up. "I feel a little embarrassed about being here. My organization is very small. We have a little over $300,000 in revenue. Our board is made up primarily of people in the community interested in mental illness. We have 12 board members, and none of us would qualify as a financial expert. The thing that makes our board different is that we actually participate in some of the operations because there is not enough paid staff. One board member serves as the treasurer and signs checks to segregate duties a little more than would be possible using only the executive director and the employees. The board raises money, sometimes opens the mail, provides legal services, and even cuts the grass. We have a financial statement audit because we get allocations from the United Way, and our auditors have made us aware of our control deficiencies. That’s one reason why I’m here. We really do want to "do the right thing."

The group was quiet for a few minutes. Then the moderator spoke up. "Nonprofits come in all sizes and have varying degrees of complexity. A smaller organization will not be able to do some of the things that larger ones can. But that doesn’t mean that it can’t follow the principles of good governance. It just needs to adapt the principles to its circumstances."

Governance in the 21st Century

State law requires corporations to have a governing body or board whether they are commercial entities or nonprofits. There are very few rules as to how the governance function should be carried out, providing the organization with flexibility. However, Form 1023, which is used to apply for tax-exempt status from the IRS, requires the nonprofit to list its governing board so that the IRS can evaluate whether the governance function is sufficient. But these are legal and compliance reasons; they do not get at the heart of why governing bodies are important.

Part of the reason for the focus on governance over the last decade comes from high profile corporate failures that gained national attention. The majority of these were related to public companies such as Enron and WorldCom. In 2002, an enterprise governance study was performed by the Chartered Institute of Management Accountants and the International Federation of Accountants in response to these failures, which examined the concept of governance.1 The study covered 27 international organizations in a variety of industries and looked for the reasons for the corporate failures of some and for best practices in others. This report identified lack of attention and oversight by the board of directors as a key element in the corporate failures. These are important tenets of governance.

The term governance is widely used and, depending on the context, can have different meanings. Enterprise Governance: Getting the Balance Right uses the definition of governance set forth by the Information Systems Audit and Control Foundation (ISACF). Governance is defined as "the set of responsibilities and practices exercised by the board and executive management with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that the organization’s resources are used responsibly."2 This definition applies to corporate governance whether it relates to a large multinational public company or a small nonprofit.

In October 2007, the Panel on the Nonprofit Sector published a report titled "Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations." The paper identifies 33 principles of good governance recommended by the panel (the Good Governance Model). It has significance because it was published in an ongoing effort to help nonprofits retain the ability to self-govern. The public and legislators, most notably Charles Grassley of the Senate Finance Committee, already had a heightened awareness of fraud in public companies. The spirit of the principles codified in the requirements of the Sarbanes Oxley Act of 2002 was assumed to apply to nonprofits even though most of the provisions of the law did not. As discussed in chapter 1, several nonprofit frauds came to light in the early 2000s, and the Panel on the Nonprofit Sector was created in 2004 to find ways to strengthen governance, transparency, and ethical standards.

The Panel on the Nonprofit Sector defines the term governance through 13 of its principles that outline the requirements of boards.3 The principles are meant to be adapted to the type, size, and complexity of the organization. As will be discussed later in this chapter, the principles operationalize the ISACF definition by suggesting the activities that should be conducted by the governing board.

Because governance is a shared responsibility between executive management and the governing board in most organizations, it is important to define the role of the board for two primary reasons. First, the board plays an important role in being a check and balance on management who are involved in the day-to-day activities of the nonprofit. The second, more practical reason for defined roles is that duplication of effort is neither efficient nor effective.

Purpose of the Governing Board

Governing boards can have several names depending on the type of nonprofit organization, such as a board of directors, board of trustees, or board of regents. No matter what it is called or whether its members are elected or appointed, the objectives of the governing board are to

  • assume responsibility for the organization’s compliance with laws and regulations and provisions of funding source agreements.
  • set strategic objectives to be accomplished.
  • create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives.
  • serve as content matter experts and a sounding board for the chief executive.
  • hire the chief executive and monitor his or her progress toward meeting strategic objectives.
  • set its own governance processes and assess its performance in meeting its objectives.

A nonprofit may also create other types of boards when the number of board members becomes excessive. One very prevalent category of board is the advisory board. These board members may have specific content expertise that is helpful to the nonprofit organization. Another is a fund-raising board. These board members are called on not only to provide financial resources, as all board members should, but also to use their contacts and community position to raise money or in-kind donations for the nonprofit organization. These functions are not the primary responsibility of the governing board. From this point forward in this text, all references to "the board" refer to the governing board.

Board Committees

Boards may also have committees to do the work that may be too detailed for the entire board to manage. Committee members are generally selected for their content expertise. Committees are particularly helpful when the organization does not have certain expertise in house.

A description of the function of the most frequently used board committees including the percent of organizations that used those committees from the 2017 Boardsource Governance Survey, Leading with Intent,4 follows in table 2.1.

Table 2.1  

Committee Function Percent Boards Reporting Such a Committee*
Executive committee Acts on behalf of the board when it is not necessary or possible to have a meeting of the full board. The full board should always validate the executive committee’s decisions at the next meeting.
Finance committee Supports the development of the annual budget, monitors the spending against the budget, monitors the level of cash and determines the level of necessary reserves. Provides commentary on the "financial health" of the organization to the board. This committee provides input to the strategic plan. 76%
Audit committee Monitors the effectiveness of internal controls over financial reporting and compliance with laws, regulations and contracts and grant agreements, if any. Discusses the quality of significant accounting and reporting principles, practices, and procedures with the external auditors and obtain their feedback. Reviews the scope of the external auditors’ annual audit including inquiry as to any limitations placed on the external auditors by management. Reviews the audit fee annually. Inquires about the independence of the external auditors and ask them to disclose any outside relationships between the auditors and management. At the conclusion of the audit, reviews the financial statements and the letters prepared related to internal control deficiencies. Monitors the implementation of any corrective action needed to remediate internal control deficiencies. Reviews Form 990. Recommends the selection, retention, or termination of the external auditors to the board. 76%
Development (fund raising committee) Monitors the funds raised against the development plan. Oversees all relationships with professional fundraisers. This committee can also encourage board involvement in fund raising. The actual fundraising is management’s responsibility. 53%
Governance/nominating committee Determines the skills necessary for board members. Recruits and orients new board members. Responsible for the annual self-assessment. Monitors attendance at meetings. Evaluates board member participation and contribution. 70%

*2017 National Board Governance Survey, Boardsource.

Legal Responsibilities of the Board

Nonprofits serve the public and, as a result of their tax-exempt status, derive a benefit by relief from taxes or the ability to issue tax-exempt debt. In addition, many nonprofits receive support in the form of grants from federal, state, and local governments and foundations. Other support comes from corporate and individual donors. So regardless of the type of activities conducted by the nonprofit, the public benefit is there. Those exercising the governance function, by law, are designated to protect the organization by assuming overall responsibility and liability for it. The legal responsibilities of the members of the governing board are often referred to as the duty of care, duty of loyalty, and the duty of obedience.5 These will be explained with examples below.

The duty of care instructs the board to conduct the affairs of the nonprofit in the way that a prudent person would.

Lesson Learned

It is likely that the board violated its duty of care by not acting in a prudent manner. The governing board should have evaluated whether this was the right move for the organization given the external conditions. The board should think independently and not be swayed by a chief executive’s hopes. More due diligence should have been conducted and the funds raised prior to making any commitments.

The duty of loyalty instructs the board to be loyal in its dealings with the nonprofit and to put the organization’s needs above its own. The board should not have any conflicts of interest, and the members should keep all the information they learn about the organization or its stakeholders and constituents confidential and not use it for private gain.

In 2008, the United States was in a recession. Many nonprofits were badly hurt through a decrease in funding from state sources, foundations, and donors. These trends were evident throughout the country and particularly evident in the city served by Healthy Start, a nonprofit agency serving mothers with children birth through age five. The board of Healthy Start approved a budget that contained provisions to expand the organization’s reach. It also gave approval to the executive director’s proposal to lease additional space and hire new employees. The board believed the executive director who assured them that a fund-raising effort would be successful. Six months later, the nonprofit had depleted its reserves, and the board was not sure that it would survive because the additional contributions did not materialize.

Lesson Learned

The board member has violated his or her duty of loyalty by using the organization for the purpose of self-enrichment by churning the account. Although related party transactions are not always improper, they need to be approved by the board and would also need to be disclosed in the Form 990 and in the financial statements. The board should consider how its constituents would view dealings with related parties prior to allowing them to occur.

The duty of obedience instructs the board that it should be faithful to the mission of the organization. This means that the actions taken by the board should support the mission; this extends to the purposes identified by donors for which their restricted contributions are to be used.

A board member of a charity with a large endowment fund wanted to provide investment management services for the organization. The board approved the contract with the board member and documented that it believed the commission that would be charged by the board member for trades would be competitive. At the end of the year when the independent auditor was reviewing the investment transaction fees for the endowment, the amount appeared higher than expected. When the auditor reviewed the investment statements, it was apparent that the board member was making excessive purchases and sales.

Lesson Learned

The duty of obedience has been violated because using restricted contributions for unrestricted purposes violates the trust between the donor and the organization. The organization should have gone back to the donor to seek release from restriction. The temptation may be tempting to justify this by saying it is for the good of the organization and will be paid back, but is not sufficient.

Of the 33 principles set forth in the Panel on the Nonprofit Sector’s Good Governance Model, only six are legal requirements:

1.  Have a governing body responsible for reviewing and approving the organization’s mission, strategic direction, annual budget, key financial transactions, compensation practices, policies, and fiscal and governance policies.

2.  Abide by federal, state, and, if applicable, international laws and regulations.

3.  Maintain complete, current, and accurate financial records.

4.  Institute policies and procedures to ensure the appropriate investment and management of institutional funds.

5.  Use contributions for purposes consistent with donor intent.

6.  Provide donors with acknowledgements of donations consistent with IRS requirements.

Sheltering Arms is a nonprofit whose mission is to serve the homeless. It owned 2 buildings, which were used to provide program services to homeless women and their children. The organization received $25,000 in restricted contributions to remodel the kitchen of one of the facilities in January 2009. In May 2009, the organization was experiencing cash flow problems, and the board voted to sell one of the facilities and to use $15,000 of the restricted contributions to meet operating expenses. The profit from the sale of the building was used to start a thrift store in hopes of generating additional income for the organization. The board did not seek permission from the donor to use the restricted money for unrestricted purposes.

IRS Form 990 and Governance

Most tax-exempt organizations are required to file an informational tax return, Form 990, each year. Beginning with the 2008 tax year, tax-exempt organizations were asked not only to provide information on their financial position and activities for the year but also to answer a series of questions about governance, policies and procedures, and events that took place during the year, such as whether there was a material diversion of assets. This is due to the emphasis that federal and state governments, funding sources, and the IRS are now placing on transparency and greater accountability. The IRS is using the questions on the new Form 990 not only to obtain additional qualitative information from nonprofits but also to correlate sound governance practices with compliance with tax laws and effective utilization of charitable assets. Because Forms 990 are provided to and published on Guidestar.org, the increased disclosure should also serve to shine a bright light on those organizations that have good governance policies and procedures and alert donors to the ones that do not. Although more robust discussion of the tax issues for nonprofits can be found in chapter 8, the governance policies and procedures highlighted in the new Form 990 should be considered when implementing any of the frameworks for good governance discussed in the following section.

A comparison of key objectives of the board of directors with the good governance model and questions from IRS Form 990 can be found in appendix A at the end of this chapter.

Frameworks for Good Governance

Governance models provide a framework or guided process for accomplishing the objectives of governance. Perhaps the most widely respected governance model in the literature today is the Carver Policy Governance® Model (the Carver model), which was described in John Carver’s book Boards that Make a Difference.6 The model applies to commercial organizations, governments, and nonprofits. The model requires that boards of directors step up to the plate and govern as the voice of the organization. Nonprofits do not have owners. They have constituents or stakeholders that include the beneficiaries of the mission, donors, funding sources, and members of the community in which the organization is situated.

Carver presents a model based on the concept of servant leadership, which was developed by Robert Greenleaf in 1977.7 The board can only lead after it is servant. This means that the board must understand the judgments and values of its stakeholders as defined by the organization’s mission. Although the board is made up of individuals, the board speaks with one voice to those inside the organization and to the outside world. Therefore, the board has total authority and also accountability.

The board does not run the day-to-day operations of the organization. However, it is accountable for the organization’s actions. This means that it must effectively supervise the chief executive, who will then delegate a part of his or her assigned responsibilities to others within the organization. If the delegation of responsibility to the chief executive is not clear then the results will be less effective, and it will not be possible to properly evaluate the performance of that person.

Carver presents the concept of ends and means to describe the definition of the success. The ends are the eventual goal to be accomplished (not the methods by which the goals or the impact on the constituents are accomplished). And the ends are not necessarily spelled out in the mission.

Mission Statement: Wheeling Aging Center is committed to providing quality home care to the elderly residents of Wheeling, WV, at the lowest possible cost, enabling them to live in their homes longer.

The ends are the outcomes by which the organization’s success is measured. How it gets there are the means. Because the board is accountable for the organization, it is accountable for the ends and the means. The board, after obtaining input from constituents, staff, and outside professionals, demonstrates its accountability by developing policies about the

  • ends or outcomes.
  • limitations or parameters for the chief executive (the chief executive can decide how to accomplish the ends within the parameters or limitations).
  • delegation and measurement (how authority is passed from the board to the chief executive and how it is measured).
  • governance processes (the manner in which the board conducts its activities and carries out its leadership role).

In the Carver model, the board lets the chief executive do his or her job within the parameters established.

Area Board Sets Parameters Staff Functio Board Monitoring
Increase donations by 20% Development Quarterly
Spend amounts as prescribed by funding source Establish effective internal controls Quarterly
Increase number of constituents served by 15% Expand program reach within budget Quarterly
Financial accountability Monitor spending so as not to overspend budgeted expenses in total Focus on variance analysis and determining the most cost-effective delivery of service Monthly
Investments should be diversified according to the investment policy Evaluate investment professionals against the policy Quarterly
Timely filings of all government and funding source reports Establish effective internal controls to establish accurate, timely reporting Quarterly

The board should set the work plan and agenda for the year and for its meetings; determine what it needs for development and succession planning; establish limits for the chief executive in the areas of budgeting, compensation, programs, and other issues; establish the results that are expected; and monitor the achievement of the results.

The Carver model is most difficult to implement when it comes to smaller organizations because in those organizations, the board is often expected to function as staff.

Panel on the Nonprofit Sector Framework—Good Governance Model8

The Panel on the Nonprofit Sector’s principles also serves as a framework for governance. In addition to the 6 legal requirements noted, there are 27 other principles that nonprofit boards should consider when forming policies for the organization. The principles are divided into four important categories:

  • Legal compliance and public disclosure. These principles deal with polices that should be developed to comply with legal and regulatory requirements and to enhance transparency and accountability to the public.
  • Effective governance. These principles deal with policies and procedures related to effective oversight of the organization.
  • Strong financial oversight. These principles deal with discharging the fiduciary responsibilities of the organization, evidencing good stewardship of the organization’s resources.
  • Responsible fund-raising. These principles deal with policies and procedures that the organization should have in place to deal with soliciting funds for its support from the public.

Where the Carver model is more concerned with the division of responsibility, this model is concerned with meeting legal and regulatory requirements. The Good Governance Model spells out the specific elements the board should address and assumes that the board will cause these outcomes to occur. The model does not concern itself with whether the actions are taken directly by the board or, where possible, delegated to the chief executive. Therefore, it is easier to adapt this model to smaller, less complex organizations.

In the following pages, the Good Governance Model’s principles are summarized followed by a discussion of the principle or principles and suggestions for practical application.

Legal Compliance and Public Disclosure

Summary of Principle: Laws and Regulations Discussion
The board is responsible for ensuring compliance with provisions of laws and regulations. Although this may sound like there is an expectation that every board should have an attorney, it really means that the board should be aware of the applicable laws and regulations and identify any red flags in dealings or potential dealings so that legal counsel or other specialists can be consulted. The IRS website (www.irs.gov) contains many helpful resources related to tax law for exempt organizations, and the website www.stayexempt.org has a several interactive tutorials on tax issues. Many of the laws with which nonprofits need to comply are state specific. State associations for nonprofits will have helpful resources. For example, the North Carolina Center for Nonprofits publishes a resource that contains a list of websites where board members could go to obtain synopses of state and federal employment law, charitable solicitation laws, and laws relating to lobbying and advocacy (http://www.ncnonprofits.org/sites/default/files/public_resources/ResourcesNCLawsForNonprofits.pdf). The National Council of Nonprofits’ website contains a list of state associations for nonprofits (www.councilofnonprofits.org/salocator).
Summary of Principle: Code of Conduct Discussion
Nonprofits should have a formal code of conduct or code of ethics including a conflict of interest policy.

This is one of the most important policies that an organization can have. In fact, the Form 990 specifically asks if the organization has a written conflict of interest policy, asks whether it is consistently monitored and enforced, and asks for a description of how this is done. A code of ethics should outline the conduct that is expected of the organization’s governing board, executives, staff, and volunteers. In some organizations, this even extends to key contributors.When the governing board embraces the code of ethics and conflict of interest policy, it sets an important tone from the top and demonstrates that the organization is serious about conducting business in a forthright and ethical manner. The code of ethics, though, is not enough in and of itself. The way that the policy is implemented is even more important. Staff, volunteers, and new board members should receive training on the code of ethics. Some organizations require an annual certification that the code has been and will continue to be followed and that all incidents of noncompliance of which the individual is aware on the part of him- or herself or others have been reported.

The conflict of interest policy ties into the duty of loyalty discussed in this chapter. Every board member and executive, as well as employees in financial and procurement positions, should be required to sign a statement that declares any conflicts of interest or asserts that they have none. Conflicts of interest may be present in fact or in appearance. Both are important because board members, especially, should be seen to be without blemish. If an issue arises in which a board member has a conflict of interest, he or she should recuse him- or herself from any discussions about that issue and not participate in any vote.

Summary of Principle: Whistleblower Policy Discussion
Nonprofits should have a whistleblower policy that states that the organization will not retaliate against any person coming forward with information about fraud, illegal acts, or violation of the organization’s policies.

Although it is important to try to protect the confidentiality of whistleblowers, this is not always possible when conducting an investigation. Title 11, Section 1107 of the Sarbanes Oxley Act of 2002 prohibits retaliation against whistleblowers. It states that anyone who intends to retaliate and takes action against a whistleblower including interfering with his or her employment will be fined or imprisoned for up to 10 years, or both. This portion of the act is applicable to all organizations. Form 990 asks whether the organization has a whistleblower policy.

Joseph T.Wells, founder and chairperson of the Association of Certified Fraud Examiners (ACFE), discussed some of the findings in the ACFE "2010 Report to the Nations on Occupational Fraud and Abuse" in an article published in the Journal of Accountancy in June 2010. He stated that tips and complaints are the number one method of fraud detection. An effective whistleblower policy, training for employees on when and how to use the organization’s reporting mechanism, and effective follow-up are all key features to fraud prevention and detection. The board should consider the most appropriate mechanism for the size, complexity, and budget of the organization. Hotline companies are effective but so are less expensive mechanisms such as using a law firm to receive and investigate complaints or reporting directly to a designated board member. More important than the mechanism is the support and credibility that the board lends to the policy.

Summary of Principle: Document Retention and Destruction Policy Discussion
The nonprofit organization should have a document retention and destruction policy to protect the records of its governance, finance, and administration.

Protection of the records will also help to prevent allegations of wrongdoing on the part of the board and employees. The document retention policy should address the length of time that records are to be kept, appropriate methods of destruction, and prohibition against concealment or destruction of records when an official investigation is underway. Document retention policies should also address electronic files and voicemail. Many nonprofits are unaware that electronic documents and voicemail are given the same status as hard copy files in litigation cases. Because electronic files are backed up on a regular basis, the document retention policy should also cover archiving documents and back-up procedures. It is important that if a nonprofit is involved in any official investigation that no documents be destroyed. Otherwise, the organization could face criminal obstruction charges. Form 990 asks if the organization has a document retention and destruction policy.

The National Council on Nonprofits has a guide for document retention on its website www.ncna.org.

One only has to look back to March 2002 when the Justice Department indicted Arthur Andersen, formerly one of the Big 5 accounting firms, to appreciate the gravity of document retention. The main reason for the demise of the firm was the claim that employees on the Enron account shredded records once the company revealed the extent of the misstatement of the company’s financial statements. All large firms have been involved with clients who committed accounting fraud, yet this action was the beginning of the end for Arthur Andersen. Its other clients and its employees began leaving the firm in large numbers. Even though the firm was exonerated in 2005, the damage was done.9

Summary of Principle: Protection Procedures Discussion
Nonprofits should have procedures in place to protect property, financial assets and information, human resources, and program content, as well as their reputations.

The board is responsible for having an understanding of the risks facing the nonprofit and addressing and monitoring those risks on a periodic basis. Risk management is an important part of the board’s responsibilities. The level of risk assessment will vary based on the size and complexity of the organization.

Board members can be held personally liable for certain violations of law such as the failure of the nonprofit to remit payroll taxes to the IRS, approval of excess benefit transactions (discussed in chapter 8), or any kind of self-dealing. Board members do have some protection, though, in the Volunteer Protection Act of 1997. Under the act, if a volunteer’s actions result in any harm while operating in the capacity of a volunteer, he or she is not personally liable unless there was willful or reckless misconduct or gross negligence. The nonprofit could be held liable though. The interpretation of this law varies state by state, and board members can always be sued. Therefore, the board should ensure that the governing documents include indemnification protections for them as well as reimbursement for any expenses they incur in litigation related to their governance roles

Summary of Principle: Protection Procedures Discussion
The board should also assess the organization’s need for insurance on assets, liability coverage for incidents that might occur on its properties or during events, and directors’ and officers’ liability insurance. Risk management also extends to good internal controls to protect against damage to the organization’s reputation. This topic will be discussed in chapter 7.
Summary of Principle: Public Disclosure Discussion
Disclosure of information related to the organization’s governance, finances, and program activities should be available to the public.

Because transparency is presently such a big focus for the IRS, Senate Finance Committee, state charity officials, and other organizations that scrutinize nonprofits, the board should ensure that all interested parties have access to important documents. The Form 990 asks for a description of how the organization makes its governing documents, conflict of interest policy, and financial statements available to the public. Disclosure of the work that the nonprofit does in the community is also good public relations and is attractive to donors. This information could be posted on the organization’s website. The organization should consider making the following available:

  • List of board and staff members
  • Financial information, financial statements, and Forms 990
  • for the past 3 years
  • Program services and accomplishments
  • Mission, vision, and values statements
  • Code of ethics and conflict of interest policy
  • Whistleblower policy

Effective Governance

Summary of Principle: Mission Discussion
The governing body is responsible for setting the nonprofit’s mission and its strategic direction

Among the things the board should oversee are the annual budget, compensation policies and practices, and fiscal and governance policies. Management should draft the policies. Management and the staff of the organization are informed about the limitations of the organization’s resources and may be in a better position to make recommendations and to inform the board if its budget and staffing constraints prohibit certain activities from taking place as the board may wish.

In addition, the board should select the chief executive and evaluate his or her contributions to the organization. This may include termination if the stated objectives are not met.

Some smaller nonprofits may not have staff, so board members may be expected to occupy more hands-on roles. Although this is not ideal because it is difficult for the board to monitor and challenge its own activities, it is a reality for some smaller organizations.Where paid staff is available, the board should function as policy setter and advisor and monitor the work of the chief executive and staff.

Summary of Principle: Functions Discussion
The board should meet regularly to perform its assigned functions.

Boards can identify certain individuals with content expertise to meet more frequently in committees and report back to the board, which meets less frequently. Board meetings do not have to be face to face. More often with organizations whose board members are not in one city, conference calls or web calls are held.With today’s technology, board members can meet face to face with the aid of a webcam on their computers.

The Better Business Bureau (BBB) has a program that evaluates and provides accreditation to charities without charge. Organizations are judged on how well they meet the BBB’s 20 standards for charity accountability. In the Governance and Oversight category, the minimum requirement is for the board of directors to have at least 3 evenly spaced meetings per year of the full governing board. The majority of members should be present in person for at least 2 of the meetings.10 The Panel on the Nonprofit Sector also agrees that, generally, at least 3 meetings should be held. However, in the case of foundations that only make grants once a year or other types of organizations with widely dispersed board membership, 1 or 2 meetings a year may be sufficient.11 In June 2007, BoardSource conducted a survey of over 2,100 board members and executives of nonprofit organizations. Among those organizations surveyed, boards met an average of 6.9 times a year.12

The advantage of face-to-face meetings is that they promote team building, which is very important to boards.When board members live in locations that are not conducive to face-to-face meetings (such as those representing a national organization), supplementing face-to-face meetings can be one way to encourage participation and prevent board burnout. It is important, however, to ensure that virtual meetings do not violate state laws. Addressing these issues up front may go a long way toward ensuring compliance:13

  • The legal status of the organization (trust, corporation, or unincorporated association) may make a difference
  • Generally, the location in which the nonprofit is incorporated, not where it is located, determines the state law that applies to the organization. However, this is not always true. For example, the California Integrity Act of 2004 requires foreign corporations that do business or hold property in the state of California to comply with this state law.
  • Determine if the law has any kind of prohibition to virtual meetings. Many states require that board members be able to hear one another simultaneously
  • Some states, for example California and Illinois, permit boards to meet in any way they choose as long as they can communicate with one another. The term communicate is different than hear.

In addition, boards should ensure that their by-laws permit virtual meetings. It is also important to have written policies that guide the frequency and conduct of virtual meetings.

Summary of Principle: Size and Structure Discussion
The board should review its size and structure so that there are sufficient members to allow for good deliberation and diversity in point of view. Unless the organization is small, the Panel on the Nonprofit Sector recommends at least five members.14 Grant Thornton, a national accounting firm, conducts board governance surveys on the practices of nonprofit organizations every year. The last published survey in 2009 showed that 39 percent of the respondents surveyed had between 16 and 30 board members, 37 percent had between 6 and 15 members, and 15 percent had larger boards with 31 to 50 members. Only a few (6 percent) of organizations had more than 50 board members.15 It should be noted that the majority of the 465 respondents to the survey had annual revenues less than $50 million.
Summary of Principle: Construction Discussion
Diversity of expertise, background, skills, genders, race, and ethnicities are very important in the construction of a board Some boards serve a narrow band of constituents, and this may guide how the board is constructed. For example, if the nonprofit is a trade group for pediatricians, then the members of the board are most likely to be pediatricians. However, if a nonprofit is related to a cause such as a heart association, then the members of the board should represent various ages, genders, ethnic groups, races, and occupations, such as physicians, that are affected by the disease.

A nonprofit dealing with issues on aging served the state of Oregon. To ensure that all areas of the state were represented, the board by-laws required that 4 of the board members be selected from prescribed areas of the state. In addition, to ensure that varying points of view were considered when developing and funding programs, members were to be drawn from different age, gender, race, and ethnicity groups. This resulted in 10 of the 15 board slots being filled with the best qualified members available that represented those categories. The other 5 slots were available for content experts, including a person with financial expertise.

It is important that at least one and preferably more board members have financial expertise. This is critical in that the board has a fiduciary responsibility to the organization and its constituents. Financial literacy begins with the ability to read and understand nonprofit financial statements and the IRS Form 990. Some smaller organizations may have a difficult time finding a board member with financial expertise. The state associations of nonprofits mentioned earlier can frequently assist the nonprofit in its search, and organizations such as Atlanta Women’s Foundation provide training for women to serve on nonprofit boards.* If the organization is still unable to find a qualified member with financial expertise, another strategy could be to solicit pro bono help from an accounting firm that is not the organization’s external auditor.

* Atlanta Women’s Foundation, www.atlantawomen.org/

 

Summary of Principle: Characteristics Discussion
The majority of members that are on a nonprofit board should be independent. The Panel on the Nonprofit Sector believes that 2/3 of the members should not only be independent but should also not be compensated as employees or independent contractors or receive material financial benefits from the organization except as a member of the charitable class that is served.16 They should also not be related to management of the organization. This principle would not apply to private foundations or organizations such as churches that may be required to have related parties or paid representatives of the organization on its board. If board members are paid, then appropriate comparability data should be used to determine the amount paid along with the rationale for the compensation. This information should be disclosed to any party that requests it.

Independence may seem to be a straightforward concept, but the IRS requires that a board member only be considered independent if he or she meets three tests. These tests will be more fully discussed in chapter 8. The IRS does not require that board members be independent. It asks the preparer of Form 990 to enter the number of voting members of the governing board that are independent. In addition, there is a requirement to disclose compensation information related to payments made to board members on the core Form 990 and its Schedule J.

Most people tend to think of board members as volunteers who are willing to give of their time to serve the cause. In addition, many professional service firms and larger companies expect their employees to serve on nonprofit boards. The firm or company then benefits by being seen as a responsible corporate citizen. In addition, donors and other funding sources want their contributions to be spent on program rather than on administration; for that reason, compensating board members might adversely affect the organization. Form 990 requires identification of amounts paid to board members, so this information is publicly available.

There are others who believe that board members will not serve to the best of their ability unless they are compensated. For example, compensating board members might assist those who would otherwise not be able to contribute the time to serve, which could promote diversity. Paying board members might stimulate better attendance at meetings. It might attract more qualified members and promote professionalism.17

Paying board members is not illegal. However, the Federal Volunteer Protection Act of 1997 defines a volunteer as “an individual performing services for a nonprofit organization or governmental entity who does not receive compensation other than reasonable reimbursement or any other thing of value in lieu of compensation, in excess of $500 per year.”18 Therefore, paying board members may affect protections under the act. The organization’s by-laws should be specific as to any compensation to be paid.

According to the BoardSource Governance Index Survey, only about 3 percent of nonprofit organizations compensate board members, and 11 percent of those organizations had budgets greater than $25 million.

Summary of Principle: Responsibilities Discussion
The board has a responsibility to hire the chief executive, determine compensation, and conduct an evaluation of that individual and any changes to compensation other than for cost of living. As discussed in this chapter, the board is responsible for the conduct of the organization. The board will put policies in place that include specific parameters and then delegate the responsibility of the day-to-day operations to the chief executive. Therefore, it is critically important that a qualified person be recruited to join the organization. Compensation is a very important issue and is a significant focus of the IRS and other watchdog agencies. One of the questions on Form 990 asks if the process for determining compensation for the chief executive (as well as other officers and key employees of the nonprofit) included a review and approval by independent individuals using comparability data and whether there was contemporaneous documentation of the discussions and decision. Excessive compensation could result in an excess benefit transaction. The instructions to Schedule L of Form 990 state that an excess benefit transaction is one in which a tax-exempt organization (501 c3 or c4) directly or indirectly provides a benefit to a disqualified person that exceeds the value of the consideration, or in this case services of the employee, given by the person. The chief executive is in a position to exercise substantial influence over the organization, and, therefore, is a disqualified person. This concept will be more fully explored in chapter 8.
Summary of Principle: Positions Discussion
The positions of board chair, board treasurer, and chief executive should be separate. If the nonprofit does not have paid staff, then the board chair and treasurer should be separate. This is an important segregation of duties and should help to prevent conflicts of interest in fact and appearance.
Summary of Principle: Training Discussion
Board training is very important. The board should establish a process for providing education and communication to its members about the programs and activities of the organization as well as about their legal and ethical responsibilities. The board should receive and review information related to financial activities on a timely basis.

This will ensure that the members have the tools to carry out their duties. Board orientation and training should include discussion of the by-laws, conflict of interest policy, code of ethics, roles and responsibilities, financial information (including the most recent financial statements, audited financial statements, and Form 990), and information about directors’ liability and insurance. Periodically, the board should receive updates on issues relating to nonprofits. There are several good sources that can be tapped for this sort of information. One very good one is The Nonprofit Times, a periodical that is available monthly in print or online. The periodical can be accessed online at www.nptimes.com. The AICPA produces a good yearly risk alert for nonprofit organizations. It can be purchased at www.aicpastore.com/. Larger accounting firms, such as Grant Thornton, also publish a number of nonprofit surveys and white papers dealing with governance, accounting, and tax issues.

Management should provide the board with monthly financial information so that the members can monitor the financial position and results of operations of the organization. This monitoring may be delegated to an audit committee. In these cases, the board should still receive financial information but perhaps not as much. This is a decision that should be made by the board and not by management. The board or audit committee should monitor.

  • metrics related to programs so that performance can be assessed against the mission and strategic plan.
  • financial information related to the organization’s liquidity, financial position (assets and liabilities), reserves, activity (revenues and expenses), compliance with donor restrictions, endowment, and other investment information especially concerning investments that are not publicly traded (alternative investments).
  • hot line calls and disposition and significant issues affecting internal controls.
  • fundraising efforts.

A dashboard could be created to provide the information in sufficient detail to monitor but not so much detail that board members become overwhelmed. A sample dashboard for monitoring nonprofit activity can be found in appendix B at the end of this chapter.

Summary of Principle: Performance Assessment Discussion
Boards should assess their own performance at least once every three years and should have policies in place to remove board members who are no longer carrying out their responsibilities. The board should establish clear policies on the length of terms, review the governing documents at least once every five years, and regularly review the organization’s mission and goals and its progress toward those goals.

The board should create a set of documents that outlines the roles and responsibilities of board members, including their responsibility for attendance at meetings, requirements for advance preparation, and norms for contributions to the discussion. The documents should also set out expectations for raising money and board members’ monetary contributions to the organization. The documents should also address the committees of the board and the responsibilities of committee members.

These items are important for periodic self-assessment, but perhaps even more important is how the board believes it is doing with the more subjective items such as

  • understanding of the mission and vision of the organization and how this understanding is used in evaluating the strategic plan and in making decisions.
  • agreement on management responsibilities versus board responsibilities as well as the shared roles.
  • financial needs assessment and progress toward meeting those goals.
  • understanding of needs of the community and progress toward meeting those needs.
  • quality and contribution of expertise supplied by the board members.
  • its ability to enhance the reputation and visibility of the organization.
  • its role in assessing the risks related to the organization and how they can be mitigated (through insurance).
  • quality of its monitoring, review of financial information, resource allocation, and review of the chief executive.
  • its process for evaluating the strategic plan and making modifications.
  • evaluation of committee structure and committee performance.
  • quality of board diversity.
  • quality of skills present on the board that are necessary to meet the organization’s goals and objectives.
  • effectiveness of board leadership.
  • quality of relationship with chief executive.
  • quality of meetings (written agenda, board package sent out in sufficient time to review, time productively used, healthy debate on issues, and the like).

There are a variety of self-assessment tools that can be purchased from vendors such as BoardSource and various state associations of nonprofits. Many of them are in electronic form and are very comprehensive. Given the size and complexity of the organization and the board’s willingness to self-assess, the board may not wish to assess all of the aspects that are included in the various tools. The board should determine which are the most relevant and important factors for self-assessment and select those. Additional factors can be added over time. A sample tool is included in appendix C at the end of this chapter.

Survey Monkey provides an excellent mechanism for anonymous board self-evaluation that can be constructed at no or very low cost to the organization (www.surveymonkey.com/). Giving board members the ability to perform the self-assessment anonymously encourages honesty. The aggregate results can be used for discussion. Survey Monkey can also be used to provide feedback on an individual board meeting or committee activities.

Summary of Principle: Loans and Transactions Discussion
The organization should not provide loans or loan guarantees or other related transactions such as relieving debt or lease obligations to directors, officers, or trustees. This is a very important principle and should not be ignored. Many states prohibit this type of activity. From time to time, the organization may find it necessary to provide a loan to an employee, but this should not extend to substantial contributors, board members, executives, or related parties. Any of these types of loans are required to be disclosed on Form 990.
Summary of Principle: Resources Discussion
The organization should spend a significant amount of its budget on the mission. However, it is important to provide resources for administration and, if applicable, fundraising. The amount spent on administration is necessary to ensure that the organization’s objectives are carried out in the appropriate fashion. It is important to recruit and retain talented people to run the organization; design, implement, and monitor effective internal controls; manage volunteers; raise money; promote the reputation and programs of the organization to the public; and ensure legal compliance. These activities have a price. Some watchdog agencies recommend that nonprofit charitable organizations spend at least 65 percent of their funds on programs. In 2004, the Center on Nonprofits and Philanthropy at the Urban Institute reported on the Nonprofit Overhead Cost Project. It reported that nonprofits in various sectors of the industry had average administrative and fundraising cost ratios as follows:19
Type of Organization Percent Fundraising and Administrative Expenses Percent Program Expenses Percent Spending Less Than 65% on Programs
Human services 20 80 14
Arts, culture, humanities 28 72 28
Education 20 82 15
Health 21 79 15
Environment and animals 22 78 18

Charity Navigator is a well-known organization that rates charities based on their organizational efficiency and organizational capacity using financial ratios. The intent is to show donors or potential donors how efficient the charity is in using dollars currently and how likely the charity is to grow its programs and services over time. Charity Navigator’s statistics20 show that approximately 90 percent of the charities rated spent at least 65 percent of their budget on programs and services. And 20 percent of those spent at least 75 percent of their budget on programs and services.

One way that the program expense ratio is decreased is when the organization uses fund-raising organizations. Accounting principles require nonprofits to report the gross amount of funds raised as a contribution and the amount paid to the professional fund-raiser as fund-raising expense. In addition, when donors designate a beneficiary in their contributions to United Way, United Way takes a percentage for an administrative fee. The percentage varies by location. This is also considered fund-raising expense to the nonprofit. When United Way allocates funds to a nonprofit, no administrative fee is charged to the nonprofit. Therefore, the entire amount is considered a donation. Nonprofit boards need to be aware of such issues and evaluate the contracts before the nonprofit enters into agreements with professional fund-raisers. At issue are the terms, minimums, and percentages that the fund-raising organizations require. The board should question whether the arrangements are really worth it.

Summary of Principle: Reimbursement Discussion
Nonprofits should have written policies describing the types of reimbursements that can be made to employees and board members for travel expenses.

Travel and entertainment expenses are some of the most abused areas in nonprofits. EduCap and its Loans for Learning Program is a high-profile example of egregious abuse. In 2006, allegations of impropriety and abuse were raised against the chief executive of Educap, Catherine Reynolds, by Higher Ed Watch, the United States Senate’s tax committee, the IRS, and the Government Accountability Office.21 In 2007, the organization significantly reduced its operations. A CBS News report focused on the usage of Educap’s $31 million jet, which the chief executive allegedly used for personal travel for herself, family, and friends. The investigation of the organization identified other abuses as well.22

The IRS focuses on travel and entertainment as a possible source of abuse, and nonrpofit organizations are now required to disclose information related to companion travel and first-class or charter travel (among other reimbursed items) on Schedule J for officers, directors, trustees, and certain key and highly compensated employees. This disclosure will help the IRS to identify possible abuses for investigation.

Nonprofits should not provide reimbursement for individuals, such as spouses or dependents who accompany the organization’s employees or board members, unless they are also conducting the business of the nonprofit. There could be an exception for dinners to which the nonprofit representative is invited to bring a guest.

Summary of Principle: Solicitation Discussion

Nonprofit solicitation materials should be truthful and clearly identify the organization. Contributions should be used consistent with the donor’s intent. The organization must provide donors with specific acknowledgments of contributions in accordance with IRS requirements. The organization should adopt policies to determine whether accepting certain types of gifts could compromise ethics, financial circumstances, program focus, or other interests. Employees and volunteers that solicit gifts should be trained and supervised so that they understand the laws and regulations governing solicitation.

The Federal Trade Commission (FTC) estimates that approximately 1 percent of charitable gifts is collected using fraudulent techniques or is used inappropriately. It estimates that for 2005 and 2006, misrepresented or misused donations were between $2.6 to $3 billion. The FTC shines a bright light on the issue, but the regulations governing charitable solicitation are enacted by the states. There are only 9 states that do not have statutory requirements. A standardized form, which is accepted by the majority of states, has been created by the National Association of State Charity Officials (the Uniform State Registration Statement) for reporting under the state solicitation laws. But most states require that this annual form be supplemented with additional information. The state requirements apply to solicitations over e-mail and the internet as well as by mail or telephone. It is important for boards to be aware of the requirements and also to know other related state requirements. A helpful summary for state contacts, requirements, and fees can be found at the Center for Public Policy and Administration, University of Utah.23

In response to issues surrounding abuse of donor relationships, the Association of Fundraising Professionals, the Association for Healthcare Philanthropy, and the Council for Advancement and Support of Education developed a donor’s bill of rights.24 The principles, which are listed below, have been endorsed by numerous nonprofit organizations and appear on the websites of many nonprofit trade groups and charities:

1.  To be informed of the organization’s mission, of the way the organization intends to use donated resources, and of its capacity to use donations effectively for their intended purposes

2.  To be informed of the identity of those serving on the organization’s governing board and to expect the board to exercise prudent judgment in its stewardship responsibilities

3.  To have access to the organization’s most recent financial statements

4.  To be assured their gifts will be used for the purposes for which they were given.

5.  To receive appropriate acknowledgement and recognition

6.  To be assured that information about their donation is handled with respect and with confidentiality to the extent provided by law

7.  To expect that all relationships with individuals representing organizations of interest to the donor will be professional in nature

8.  To be informed whether those seeking donations are volunteers, employees of the organization, or hired solicitors

9.  To have the opportunity for their names to be deleted from mailing lists that an organization may intend to share

10.  To feel free to ask questions when making a donation and to receive prompt, truthful, and forthright answers

One of the risk areas in nonprofits is that in times when cash is tight, restricted contributions may be used for unrestricted purposes. Although the nonprofit may consider this to be borrowing, in reality, without the donor’s agreement (preferably in writing), it is misuse of funds. The board should set a clear tone in this regard and monitor the use of restricted donations. This is true for endowment funds that are permanently restricted, the use of income and appreciation from endowment funds that may carry donor restrictions, and also gifts, whether solicited or unsolicited, that are restricted as to timing of use or purpose.

Schedule M of Form 990, which relates to noncash contributions, asks "Does the organization have a gift acceptance policy that requires the review of any non-standard contributions?" Nonprofits may, from time to time, receive gifts that could put them at risk for environmental remediation obligations, gifts of partnership interests, or interests in assets that might give rise to unrelated business income or other noncash gifts. The donor’s expectations for those gifts might be that the organization will use (not sell) the assets, which would result in a larger tax deduction. A gift acceptance policy with clear guidelines will enable the organization to be prepared to evaluate whether a noncash gift should be accepted. Generally, it is not a good idea to accept gifts unrelated to the mission unless the donor is willing for it to be sold. The board has responsibility for creating this policy and should be notified if the organization receives an offer of such gifts so that it can determine whether to accept them.

Summary of Principle: Privacy Discussion
The organization should always respect the privacy of donors. At least once a year, donors should be provided with an opportunity to refuse to have the organization sell their names or make use information about them or their donations. This is not only an important practice from a legal standpoint, it is also important to preserve donor trust and loyalty. Donors, especially large donors, may wish to give more to organizations with missions that dovetail with their interests to the exclusion of other organizations. This is especially true in economic hard times. Preferring to concentrate on organizations that have greater meaning to them, these donors likely do not want to be solicited by other organizations that may assume that a donor has the resources to make additional contributions. Some donors may not wish to be acknowledged on the organization’s website, programs, or collateral materials or even in conversation. It is important to note that although donors may not wish to be publicly acknowledged, the information required for Schedule B of Form 990 (name, address, and aggregate contributions per donor) must be provided to the IRS. This information should not appear in any public place such as Guidestar.org because the information is removed prior to publishing the Form 990s on the Guidestar website.

Conclusion

Governance is a shared responsibility between executive management and the governing board, and it is important to define the role of the board for two primary reasons. First, the board plays an important role in being a check and balance on management who are involved in the day-to-day activities of the nonprofit. The second and more practical reason for defined roles is that duplication of effort is neither efficient nor effective.

The board and its members are responsible for the overall protection of the organization through the exercise of their legal duties of care, loyalty, and obedience. Their responsibility is to ensure legal, regulatory, and funding-source compliance; set strategic objectives; create policies to guide the implementation of those objectives; monitor the implementation thereof; serve as content matter experts and as a sounding board for the chief executive; hire the chief executive and monitor performance; set its own governance processes; and assesses its performance in meeting its objectives.

The chief executive’s job is to run the day-to-day operations of the organization, implementing the policies and strategies set by the board. The distinction is that although that the board does not run day-to-day operations, it is accountable for the organization’s actions; it must think independently and not be unduly influenced by the chief executive. The organization’s ability to carry out its mission is effectively reduced when management and the board do not work hand in hand in their respective roles.

Appendix A—Comparison of Key Objectives of the Board of Directors With the Good Governance Framework and Questions From IRS Form 990

This chart illustrates how the 33 principles of the Good Governance Framework support the key objectives of the board of directors and how the questions on IRS Form 990 reinforce the importance of the 33 principles.

Key Board Objective—Thomas and Strom-Gottfried 33 Principles of the Panel on the Nonprofit Sector Form 990 Question
Assume responsibility for the organization’s compliance with laws and regulations and provisions of funding source agreements

1.  Compliance With Laws and Regulations

N/A
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

2.  Code of Ethics

Question on Form 990 relates to conflicts of interest
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

3.  Conflicts of Interest

Part VI, lines 12a and 15
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

4.  Whistleblower Policy

Part VI, line 13
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

5.  Document Retention and Destruction Policy

Part VI, line 14
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

6.  Protection of Assets

N/A
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

7.  Availability of Information to the Public

Part VI, lines 19 and 20
Set strategic objectives to be accomplished

8.  Review and Approve Mission, Strategic Direction, Budget, Key Financial Transactions and Policies, and Fiscal and Governance Policies

N/A
Set its own governance processes and assess its performance in meeting its objectives

9.  Board Meetings

Part VI, lines 1b and 8
Set its own governance processes and assess its performance in meeting its objectives

10.  Sufficient Meetings

N/A
Set its own governance processes and assess its performance in meeting its objectives

11.  Board Diversity

N/A. Questions on diversity relate to faculty, administrative staff, and students.

Set its own governance processes and assess its performance in meeting its objectives

12.  Board Independence

Part I, line 4, and Part VI, line 1b
Monitor the progress of the chief executive towards those objectives

13.  CEO Evaluation and Compensation

Part VI, line 15, and Part VII
Set its own governance processes and assess its performance in meeting its objectives

14.  Separation of CEO, Board Chair, and Treasurer Roles

Part I, line 4, and Part VI, lines 1b, 2, and 3
Set its own governance processes and assess its performance in meeting its objectives

15.  Board Education and Communication

N/A
Set its own governance processes and assess its performance in meeting its objectives

16.  Evaluation of Board Performance

N/A
Set its own governance processes and assess its performance in meeting its objectives

17.  Board Member Term Limits

N/A
Set its own governance processes and assess its performance in meeting its objectives

18.  Review of Governing Documents

NA
Set strategic objectives to be accomplished

19.  Review of Mission and Goals

Part I, line 1, and Part 3, line 1
Set its own governance processes and assess its performance in meeting its objectives

20.  Board Compensation

Part VI, line 15, and Schedule J
Set strategic objectives to be accomplished

21.  Financial Records

N/A
Set strategic objectives to be accomplished

22.  Annual Budget, Financial Performance and Investments

Part VII-XII
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

23.  Loans to Directors, Officers, and Trustees

Part IV, line 26, and Schedule L
Set strategic objectives to be accomplished

24.  Resource Allocation for Programs and Administration

Part I and Part III
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

25.  Travel and Other Expense Policies

Schedule J
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

26.  Expense Reimbursement for Nonbusiness Travel Companions

Schedule J
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

27.  Accuracy and Truthfulness of Fundraising Materials

N/A
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

28.  Compliance With Donor Intent

Part VIII
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

29.  Acknowledgement of Tax Deductible Contributions

Part V
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

30.  Gift Acceptance Policy

Schedule M, line 31
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

31.  Training and Oversight of Fundraisers

N/A
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

32.  Fundraiser Compensation

Part 1, line 16a, Part IV, line 17, and Schedule G
Create policies to guide the implementation of activities designed to assist the organization in meeting its strategic objectives

33.  Privacy of Donors

N/A

Appendix B—Example Dashboard for Board Evaluation

Following is an example dashboard that could be provided to the board by management to use as a tool for monitoring. The board would choose the metrics that were most important to their monitoring responsibilities and determine the frequency with which the metric should be reported.

Purpose: To assist the board in evaluation of the organization, including its programs and their impact on the community, financial position and results of operations, compliance and risk management, fundraising, human resources, and governance.

Category 1: Program Service Efforts and Accomplishments
Metric Target Current Status Prior Quarter
Number of clients served in adult daycare programs (quarterly)
Attendance at awareness classes (quarterly)
Videos on working with the elderly sold (quarterly)
Signatures for petitions to congressional representative (quarterly)
Number of volunteers serving meals to the elderly (quarterly)
Results of client satisfaction survey (yearly)
Category 2: Financial Position and Results of Operations
Metric Target Current Status Prior Quarter
Number of days cash on hand (quarterly)
Number of days contribution receivables in current receivables (quarterly)
Contribution receivables written off as uncollectible (quarterly)
Days in accounts payable
Grants funding received vs. budgeted
Operating margin
New individual donors by type (individual, corporate, foundation)
Donations against budget—unrestricted (quarterly)
Donor restricted donations spent (quarterly)
Investment return on endowment funds (quarterly)
Net proceeds on special events (as events are held)
Donations received online and from social media sources
Commitments received under planned giving (if applicable)
Category 3: Compliance and Risk Management
Metric Target Current Status Prior Quarter
Met deadline on payroll withholding and benefit plan remittances (report monthly)
Numbers of workers compensation claims (quarterly)
Percentage of calls to hotline investigated and resolved (quarterly)
Financial statements delivered to bank, covenants met (quarterly)
Met charitable registration requirements
Quarterly evaluation on information security (internal and external)
Form 990 filed on timely basis (yearly)
Category 4: Human Resources
Metric Target Current Status Prior Quarter
Number of training classes attended by management and staff (quarterly)
Number of accidents (quarterly)
Numbers of days employees were absent from work (quarterly)
Results of employee satisfaction survey (yearly)
Percentage of performance evaluations written and delivered to employees (yearly)
Attendance at board meetings (monthly)
Time spent evaluating financial position, operations, risk to the organization from external environment and internal controls, including the risk of fraud (quarterly)
Time spent evaluating strategic direction (yearly)
Time spent with external auditors (yearly)
Time spent evaluating the executive director (yearly)
Audited financial statements reviewed and approved
Form 990 reviewed and approved

Appendix C—Sample Board Self-Assessment Document

This is an example of a form that could be used by the board to assess its effectiveness. The form could be given to board members and the results compiled by the organization’s staff. It could also be automated using a tool, such as Survey Monkey, for anonymous results. The results could be used to facilitate discussion among the members and create action plans for improvement.

Purpose: To assist the board in evaluating its performance during the year. Evaluate your perception of the board’s performance by selecting 1–5 as follows:

1.  Poor

2.  Average

3.  Good

4.  Very good

5.  Exceptional

Category 1: Size, Structure, Independence, Diversity, Orientation, Training, Meetings
1 2 3 4 5
Board has an appropriate number of members for the size and complexity of the organization. Membership is sufficiently diverse in order to include different points of view and stimulate discussion.
Board has sufficient committees with technical expertise to facilitate good governance.
Board has sufficient independent members (recommendation 2 and 3).
Board has the appropriate policies and procedures to answer affirmatively to Form 990 questions.
Board has members with sufficient training to facilitate monitoring (financial, program, regulatory compliance).
Board holds sufficient meetings where a quorum is present and meeting time is used productively.
Board agenda and package is sent sufficiently in advance so members can prepare.
Board package contains the right amount of information at the right level of detail.
Board challenges the information presented by management and brings new ideas to the table before making strategic decisions
Board undergoes training on external risks, new regulatory and accounting developments, and other issues as needed to ensure its oversight is performed with sufficient knowledge and skill.
An atmosphere of trust and cohesiveness exists among the board members.
Category 2: Board Responsibilities
1 2 3 4 5
Board members set the tone for the organization for integrity, ethical values, and moral courage.
Board members proactively reach out to the community to build awareness for the mission of the organization and solicit the community’s needs.
Board understands the potential areas of risk and considers plans to mitigate them.
Board assesses the risk of cyber fraud (internal and external) and causes the organization to evaluate information system access periodically.
Board should identify and assess the risk of fraud in the organization.
Board understands its obligations as it relates to the duties of care, loyalty, and obedience.
Board views itself as accountable to the community and regulatory bodies for the actions of the organization.
Board annually reviews the adequacy of the organization’s internal control structure. The board takes the auditor’s recommendations seriously and where implementation is not feasible, documents how the risk identified can be mitigated.
Board annually reviews the performance and compensation of chief executive.
Monitoring of compliance with laws and regulations is performed quarterly.
Board annually approves the budget for the year and sets effective parameters for the chief executive to follow relating to revenue, expenditures, investments, and other important financial aspects of the organization.
Board assesses the liquidity level of the organization quarterly and ensures that the organization has at least 60 days’ worth of operating expenses on hand.
Board ensures there is a fundraising plan with a diversity of private and public funding. Board assesses the risk that one or more funding sources will not remain viable and plans for unexpected reductions in financing.
Board evaluates the attention paid to major donors or other funding sources to help ensure continued participation by those sources.
Board annually reviews Form 990.
Board annually reviews its financial statements.
Board meets at least annually with the independent auditors.
Board annually reviews the strategic plan.
Board chair ensures that individual directors are evaluated either by each other or by the board chair.
Board chair ensures that conflict of interest statements are signed.
Board monitors its own performance by completing and discussing the results of the self-assessment.
Board members all contribute to the organization.

Notes