Nonprofit governance - is your board an accident waiting to happen?

Nonprofit Governance

Is Your Board an Accident Waiting to Happen?

Nonprofits have an incredible resource in their board of directors. These are the talented, energetic folks who believe in your mission — and have a passion for seeing you succeed.

That’s the good part. The bad part is that passion and enthusiasm only go so far. Nonprofits are different — their finances, funding and compliance requirements are radically different than those of a for-profit business.

Four Ways Boards Get in Trouble

Even the best-intentioned board members can get your nonprofit in trouble if they don’t receive at least some basic training in their roles and responsibilities. For example:

1. They don’t play by the rules. Not understanding all the rules and regulations of the nonprofit world can trigger harsh penalties — possibly even revocation of the nonprofit’s tax-exempt status. For example, if your fundraising committee launches a high-impact direct mail campaign but fails to follow registration requirements for charitable solicitation in your state, trouble can ensue. Ditto for a gung-ho board chair who sends out a personal letter on your organization’s letterhead campaigning for a candidate in a local election in clear violation of lobbying limitations.

Likewise, without the requisite knowledge, your board may not follow proper procedures and best practices, such as maintaining accurate minutes, following the bylaws and properly documenting all board decisions.

Reality: The final responsibility for all legal and compliance matters rests with your board.

2. They don’t understand the financials. Board members don’t need to know everything the CFO does … but they do need to know something about the financials. In particular, they need to understand whether the organization is making (or losing) money and if its programs are sustainable. Yet, nonprofit financial statements can be a hard read even for otherwise financially savvy members.

Board member-disconnect can occur around donor-imposed restrictions – which do not exist in a for-profit setting. For example, board members need to know that a nonprofit’s Statement of Activities reflects the activities in both donor restricted funds and unrestricted or board designated funds. They should understand that donor restricted funds may be released from restriction by actions taken by the nonprofit or by the passage of time.

Reality: Nonprofit financial statements are unique in terminology and their underlying concepts, both of which should be reinforced whenever financial statement information is presented to the board.

3. They create conflicts of interest. Without proper training, a board member might urge the organization to purchase janitorial services through a firm owned by a family member. Or, maybe a major donor promises much-needed funds only if the organization conducts business with a particular company.

Reality: IRS Form 990 asks very specifically whether the nonprofit has a written conflict of interest policy, as well as a description of the process used to manage such conflicts.

4. They overstep their authority. Problems occur when a board starts getting into the business of “doing” rather than “directing.” A well-meaning board may start meddling in the organization’s day-to day operations and micromanage staff.

Reality: A board’s primary duty is to set policy and provide high-level leadership. Likewise, nonprofit board members are ultimately tasked with being the “vision keepers” of the organization. More than anyone, they need to have a clear understanding of the organization’s mission and purpose — and a vision for where it is headed next.

There’s No Replacement for Training

The knowledge that board members need to do their job doesn’t come by accident. Nonprofit leadership must take the lead in providing ongoing training. This includes providing solid orientation that sets expectations and prepares new board members for their role. It also includes ongoing training, refreshers and updates as needed throughout the year.

Not sure where to start? Just ask. A good way to determine ongoing training needs is to conduct a board self-evaluation. For example, if your board is telling you that they really don’t understand the budget and financial statements they are asked to review, you can create specific training that meets those needs. This training could be as simple as asking someone from your independent audit team to spend 15 minutes during a regular board meeting to bring everyone up to speed on an accounting change or new auditing requirement.

As the nonprofit world becomes increasingly more complex, it’s imperative that board members know their duties and provide the high-level leadership needed for success. In the end, they may only be as good as their training.

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