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Business & Charities Law Blog

Monday, May 8, 2017

Building an Effective Nonprofit Board

 

Are your board members willing to invest their time, talent and financial resources for the long term?

Does your board understand its role and responsibilities?

Are your board members engaged? Do they attend meetings and serve on a committee?  Are they united for a sustained effort in cultivating donors?  

Has your board adopted legally compliant organizational documents and appropriate board policies? 

 A strong, engaged and active board is critical to the long-term success of any nonprofit organization. Often, the most challenging obstacles are in implementing a viable governing body that will be best suited to lead the organization, fulfill its mission and sustain financial viability.

WHERE DO YOU START?

The easiest place to start is by identifying skill sets among current board members. Each board member should bring a skill set or skill sets that will have an impact on the success of the nonprofit organization. This requires that each board member understand both his or her individual and collective roles in serving on the board and guiding the charitable organization in meeting its mission.

BOARD EXPERTISE

To help fulfill the board’s important role in monitoring the foundation’s financial health and enabling it to meet its mission, it is essential to appoint board members with a broad range of expertise. It is helpful to include professionals that have an understanding of how to operate legally and with transparency, such as lawyers, accountants and compliance officers. In addition, it helps to include board members that have experience in public relations and marketing to help raise awareness.  It is critical that the board understand how to cultivate donors and raise funds through development and grant writing. It is also hugely beneficial to include members of the local business community as well as representatives of the nonprofit’s stakeholders.

BOARD COMMITTEES

While most functions can be handled by the full board, it is both convenient and efficient to authorize various board committees that will be responsible for specific functions. Often the nuts and bolts of a board’s responsibilities are handled at the committee level. In order to act with the authority of the board, each board committee must consist of at least three directors and must be specifically authorized in the bylaws or by a board resolution. It is recommended that every board member participate on a committee, preferably one that is synergistic with a board member’s areas of expertise and specific passion.

BOARD PROCEDURES

An effective nonprofit board prizes both transparency and accountability. These goals are achieved by ensuring that the nonprofit’s board and officers follow the rules, policies and procedures that are set out in its bylaws and board governance policies.

Bylaws

Does your nonprofit actively consult its bylaws or do the bylaws collect dust in a drawer?

The bylaws set out the rules and guidelines for how the foundation is to be operated at its highest levels. The rules mirror New York not-for-profit law requirements, where applicable, and help the board comply with the law and state regulations. Failure to follow the bylaws can be harmful to the nonprofit and its constituents, allowing the validity of past decisions to be questioned by various interested factions or regulatory agencies such as the IRS or attorney general.

Governance Policies

Governance policies help nonprofits comply with state and IRS legal requirements. To help illuminate a lack of transparency or accountability, the IRS asks about some of these policies in the application for tax-exemption and the annual IRS 990 informational return.

Governance policies can be categorized into either general policies that are applicable to most every charity, and special policies that address specific compliance requirements that arise because of the organization’s structure or mission. Both types of governance policies help promote transparency, accountability and compliance with applicable laws and ethical guidelines. They can be extremely helpful in guiding the actions of the charity’s board and officers in monitoring the affairs of the organization.

Conflict of Interest Policy

The Conflict of Interest Policy is highly valued in promoting transparency and prevention of private inurement. The policy should clearly define a conflict of interest and provide rules for how a conflicted transaction should be approved. An interested person is one with substantial influence over the organization who can financially benefit from a transaction. A nonprofit best practice is to require annual disclosure by all directors, officers and key employees of any conflicts of interest or an affirmative declaration that there are no conflicts.

While conflicts can exist, they must be managed appropriately. Disclosure is the key to properly and ethically managing conflicts. The first step is disclosure to the board, the second is recusal from decisions that could personally benefit an individual, whether directly or indirectly, and third, documentation in the board minutes of how the conflict of interest was appropriately addressed.

Whistleblower Policy

The Whistleblower Policy is required under New York law for nonprofits with more than 20 employees and annual revenue in excess of $1,000,000. This policy enables employees to report financial and other abuses by establishing procedures to keep whistleblowers’ identities confidential and to protect them from retaliation. It’s a helpful approach because it encourages nonprofits to address complaints before they are taken outside of an organization.

990 Review Policy

Having a policy with a review process for the IRS 990 information return that is filed by tax-exempt organizations annually helps the board to act proactively in ensuring that each member has an opportunity to review the 990 before it is filed. Failure to follow a 990 review process can indicate a lack of board oversight and financial weakness to the IRS (which asks about this process in two places on the form 990).

Executive Compensation Policy

An executive compensation policy establishes rules for the approval of compensation and benefits provided to individuals with substantial influence over the nonprofit. Following the process helps avoid IRS penalties, and evidences to the public a deep commitment to the concepts of transparency and accountability. Following the procedures allows favorable responses on the IRS form 990 regarding the foundation’s executive compensation procedures. The policy should require that the board review comparability data to ensure compensation paid by the nonprofit to “disqualified persons” is “reasonable”. In addition, the policy should require that disqualified persons recuse themselves during a discussion and vote on the compensation, and that the board’s decision be documented in the board minutes within 60 days of the decision or by the next board meeting if sooner.

BOARD REVENUE DEVELOPMENT

While nonprofit organizations have founders, donors and other stakeholders, they do not have owners. As a result, they may not have the cash needed to operate and further the mission. The board must work with the organization’s staff in securing revenue needed to operate, whether through programming or through development and fundraising. 

Board’s Fundraising Role

Board members should be available to the executive director as a resource – to give advice and guidance. To help the organization raise funds, board members should attend and support fundraising events, make a financial gift to the organization outside of special event participation and identify and develop a minimum of two potential funding sources each year.

Development Builds Relationships

Relationships are an investment in building support from the community. Development of these relationships is a core function that is long-term, strategic and must be responsive to community needs. Board members typically understand that development and fundraising are critical to organizational health. However, fundraising can be one of the biggest challenges for board members. Here are some ideas for how board members can get involved: Ask the board, as a whole, to set a goal for how much the group will raise for their charitable organization. Challenge each board member to donate or raise a specific amount of money – give or get! Also evaluate prospective board members to determine who has access to funds and who can be engaged to open doors for the organization.

Appointing board members with the right skill sets, ensuring they follow written policies, procedures and guidelines, and training them on their roles and responsibilities, goes a long way to achieving transparency and accountability.

These attributes are important to the public, as well as to regulatory agencies such as the IRS and state attorney generals that monitor the activities of charitable organizations. The public expects nothing less from nonprofit foundations and registered tax-exempt organizations.

 





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