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Best Practices for Nonprofit Board Governance

Best Practices for Nonprofit Board Governance Columbus, OH

​Running a nonprofit organization can be quite different from running a for profit business. Instead of a single owner(s) who can largely do whatever they like, you have a board of directors to answer to, extensive oversight from the IRS and Ohio Attorney General, not to mention keeping both donors and grant funders happy. And this wide array of stakeholders means your nonprofit needs good governance policies in place to prevent problems before the organization’s tax-exempt status is threatened.

What is Nonprofit Board Governance?
Nonprofit board governance encompasses the entire umbrella of policies and procedures that govern how a nonprofit organization is run and how key decisions are made. Of course, some of this is determined by the nonprofit’s Articles of Incorporation and bylaws. But those are both fairly high-level documents that can’t possibly address all of the details that come with running a nonprofit organization on a day-to-day basis.

For example, most nonprofit bylaws state that the board of directors will make decisions based on a majority vote of those directors at a duly called meeting. But the bylaws typically don’t address the details that can arise: What happens if one of the board members has a conflict of interest related to a matter the board is discussing and potentially taking a vote on? What happens if a board member has doubts about the treasurer’s suggestion to apply for a Paycheck Protection Program (PPP) loan? How will the board make decisions about the executive director’s salary?

Why is Nonprofit Board Governance so Important?
At this point, you may be wondering why details like these matter. Why can’t the board just make a decision “on the fly” whenever a sticky situation comes up?
The directors who serve on a nonprofit’s board have certain fiduciary duties when it to comes to the nonprofit. See O.R.C. § 1702.30(B). A director must act:

  • in good faith,
  • in a manner the director reasonably believes is in (or at least not opposed) to the best interests of the nonprofit, and
  • with the care that an ordinarily prudent person in a similar position would use under similar circumstances.

When a director breaches their fiduciary duties, it can lead to investigations and litigation brought by the Attorney General’s office or other interested parties (i.e. members of the organization, major donors, and even other directors) and even loss of tax-exempt status.
In short, the directors of a nonprofit can’t just operate on the fly; the organization needs to have good governance policies in place in order for the directors to properly do their jobs and make decisions that are in the best interests of the nonprofit.

Best Practices for Nonprofit Board Governance

  1. Keep Good Meeting Minutes – Taking minutes at all board meetings may seem obvious if you have experience with nonprofits, but with volunteer board members coming and going all the time, nonprofits should also have plans for storing and saving these meeting minutes. The fact that minutes were taken at a board meeting where a critical decision was made won’t really matter if no one can find those minutes to refer back to later. Nonprofit organizations should also be taking and keeping meeting minutes at committee meetings, especially if those committees are authorized to act on behalf of the board (which is often true of governance or executive committees).
  2. Develop a Document Retention and Destruction Policy – Related to keeping good minutes is figuring out how long to hang on to those minutes (and all of the other documents an organization will generate over its lifetime). A written document retention and destruction policy helps both board members and employees understand what documents to keep, where and how they should be stored, and when documents can be safely deleted. As more and more of our work becomes digital, a good document retention policy should also address plans for backing up documents that are stored electronically. Finally, don’t forget that emails are documents too, and they often contain information that can be critical later, especially when trying to figure out how and why certain decisions were made.
  3. Have (and Regularly Certify Compliance With) a Conflict-of-Interest Policy – Most people understand that a nonprofit’s directors shouldn’t use their position on the board for their own personal gain, but the Ohio Attorney General’s quarterly nonprofit newsletter is full of examples of nonprofit directors who did exactly that. Directors who use their positions with nonprofits for their own financial gain are often ordered to pay restitution and are sometimes banned from being involved with nonprofit organizations in the future. The same is true of directors who knew or should have known about the malfeasance of others, but who failed to take action. A well-drafted conflict of interest policy not only explains the types of situations that can lead to such enforcement actions, but it also reminds directors to disclose any potential conflicts of interest and to refrain from voting on matters related to a potential conflict.
  4. Decide How to Handle Allegations of Wrongdoing Before an Issue is Presented – Every business and nonprofit would like to believe that a dispute among their key stakeholders will never happen. Unfortunately, the belief that it will never happen to me is simply naïve, especially in our litigious society. Every nonprofit should have a plan in place for how it will handle allegations of wrongdoing. And a key part of this plan is making it clear that retaliation against whistleblowers is strictly prohibited and will not be tolerated. In fact, retaliation is illegal under a number of regulations, most notably Sarbanes-Oxley (which also prohibits the destruction of evidence once allegations are raised…yet another reason to have a document retention policy).   
  5. Document Compensation Decisions for Officers and Key Employees – Compensation decisions can be a sticky subject in any organization. But as a nonprofit, the IRS expects you to make compensation decisions that are “reasonable.” In other words, what would a similarly-sized nonprofit pay a similarly qualified employee to provide similar services to the organization? When answering this question, you have to do your own homework and collect the data and have that information reviewed and approved by individuals who don’t have a conflict of interest. Additionally, both the data and deliberations around compensation decisions should be documented “contemporaneously,” i.e., in the board’s meeting minutes when the discussion around what to pay an officer or key employee takes place.
  6. Consider Other Risk Areas Unique to Your Nonprofit – We’ve pointed out best practices for nonprofit board governance that are generally applicable to most nonprofits. But every organization is unique and may have its own particular risk factors. For example, does your nonprofit:
    1. Have a joint venture relationship with a for-profit entity?
    2. Receive unusual gifts of items that are difficult to value?
    3. Have loans or lines of credit?
    4. Make grants to (or serve as a fiscal sponsor for) other organizations?
    5. Have affiliate organizations (subsidiaries, chapters, branches, etc.)?
    6. Provide international aid?
    7. Offer scholarships or similar benefits to individual recipients?

Not only will these questions point out potential areas of concern for your nonprofit, but you should also consider any governance problems your organization has dealt with in the past. All too often, nonprofits deal with these issues by simply replacing the person that was believed to be the cause of the problem without making any real policy changes. But past experience is the first place to start when deciding whether your nonprofit board governance policies are sufficient.

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