Answer Guide: Board And Governance - Center For Nonprofit Management

Board & Governance

Here, we address the legal and ethical responsibilities that come with being a board member. We also look at best practices related to board operations, recruitment, fundraising and internal communications. This is the business side of any nonprofit, and it all leads to greater effectiveness of one of your most powerful assets: your nonprofit board.

What are the basic responsibilities of a board and the legal duties of board members?

The board is legally responsible for the operation of the nonprofit organization for which it serves. In fact, individual members can even be held personally liable for improper conduct if they breach their duties. So, pay careful attention to the law and board duties. Doing so will help you minimize risk and ensure your organization is the best it can be.

Standards of Conduct

Under the law, each board member must meet certain standards of conduct. These standards are typically described as duty of care, duty of loyalty and duty of obedience.

Duty of Care. Board member must exercise “reasonable care” when he or she makes a decision for the organization. In this case, “reasonable” is what a prudent person in a similar situation might do.
Duty of Loyalty. Board member must never use information gained through his or her position for personal gain. This means each member must always act in the best interests of the organization.
Duty of Obedience. A board member must be faithful to the organization’s mission. This means he or she cannot act in a way that is inconsistent with the organization’s goals.

Board Responsibilities

In addition to standards of conduct, as a governing body, the board has a responsibility to support management and staff, and ensure operations run smoothly and in accordance with the law.

Following, are 10 responsibilities of nonprofit boards:

Establish mission and purpose.
Select the executive director.
Support and evaluate the executive director.
Set policies and ensure effective planning.
Monitor and strengthen programs and services.
Ensure adequate financial resources.
Protect assets and provide proper financial oversight.
Build a competent board.
Ensure legal and ethical integrity.
Enhance the organization’s public standing.

Source: Ten Basic Responsibilities of Nonprofit Boards, Second Edition, by Richard T. Ingram (BoardSource 2009).

Laws and Guidelines Governing Boards

In 2002, the U.S. government passed the American Competitiveness and Corporate Accountability Act (a.k.a. the Sarbanes-Oxley Act), which regulates the financial controls of corporate boards.

The Act itself doesn’t apply to nonprofits, but there are a number of provisions you might want to adopt voluntarily, particularly as they relate to board oversight and committees, disclosure, document retention, whistleblower policies and audits. We’re not alone in this recommendation. In its publication, Compliance Guide for 501©(3) Public Charities, the Internal Revenue Service recommends that nonprofits consider whether such governance practices are necessary to ensure sound operations and compliance with tax law.

It’s also important to note that Sarbanes-Oxley may be relevant to your nonprofit in that it inspired a number of state laws that govern nonprofits, such as the California Nonprofit Integrity Act of 2004, which addresses registration of a charity, financial reporting, auditing and other areas relevant to a nonprofit’s finances and management. And remember, state laws vary, so it’s important that you become familiar with relevant legislation in your area of operations.

What are bylaws and why do we need them?

How can they protect the board?

Bylaws are the written rules by which an organization is governed. They set forth the structure of the board and the organization. They determine the rights of participants and they determine the procedures by which rights can be exercised. In other words, bylaws guide the board in conducting business. Carefully crafted bylaws and adherence to them can help ensure the fairness of board decisions and provide protection against legal challenges.

It’s important to note that bylaws are in fact legal documents. This means there are legal requirements for what should be included. These requirements vary depending on the state in which you operate. For example, some state laws require membership, board selection and other issues to be stated in the articles of incorporation. To be sure your bylaws are on side with state laws, consult a lawyer before you begin.

Bylaws can help protect your directors and officers from personal liability. For example, your nonprofit can protect its directors and officers from costs arising from wrongful lawsuits by including provisions regarding indemnification in your bylaws.

In some cases, nonprofits are required to indemnify directors and officers, that is, protect and defend them from loss or harm resulting from risk. In other cases, they are prohibited from doing so. (In California, see California codes 5238 and 9246 for more details).

Here’s an example: A nonprofit is required to indemnify a director or officer for all costs the director incurred in successfully defending himself against a lawsuit. In such a case, issues could arise regarding the nonprofit’s ability to advance funds to the director to pay for defense, or its ability to reimburse the director for losses as required by law. For this reason, insurance is necessary. This topic is discussed in more detail in Legal.

Purchasing Directors and Officers Liability Insurance (D&O Insurance) will enable your nonprofit to indemnify your directors and officers. And, in the case of nonprofits that have enough assets to indemnify directors and officers out of the nonprofit’s funds, insurance will reimburse your nonprofit for funds advanced for legal defense. D&O Insurance can also pay for losses incurred against which the nonprofit is not permitted by statute to indemnify.

In fact, if your nonprofit is not able to offer this protection you may run the risk of being unable to recruit qualified directors.

D&O Insurance does two things:

It directly reimburses directors for legal costs they incur which the nonprofit cannot or will not pay.
It reimburses the nonprofit for the costs it incurs in indemnifying directors.

Before you sign on the dotted line, consider having your attorney or nonprofit insurance specialist explain your policy in detail.

Be sure to ask:

Does the policy automatically cover directors and officers who come on after the policy has taken effect?
Does the policy provide for the advancement of funds to pay defense costs as they come due?
Is there coverage for claims arising from events occurring before the beginning of the policy period?
Does the policy provide coverage for employment practices liability?
What are the limits and deductibles?

Adapted in part from The Nonprofit Board’s Guide to Bylaws, by D. Benson Tesdahl (BoardSource, 2003).

How does the board ensure the organization is mission driven?

A mission-driven organization is one that is constituent-focused at every touchpoint. Your mission may be defined in terms of providing exemplary service, or developing products that meet and exceed the needs of your target audiences, or both.

A mission-driven strategy can be a framework to help your board align your programs and services with the values and priorities of your organization. But how do you ensure your board is using this framework effectively?

First, the executive director and the board should establish a guiding mission and vision that reflect the organization’s constituency. This will require careful research and strategic planning. It’s important that the executive director and staff support the board with the research they need in order to develop an informed mission that positions your organization appropriately and sets you up for success.

Once established, board commitment to driving your mission forward at every opportunity is essential. Such a commitment helps everyone in the organization create a solid operational structure, a strong organizational identity and effective communications and fundraising strategies.

Here are three tips to ensure your board keeps your organization’s mission top priority:

Develop opportunities to keep board members communicating. Members should be engaged in moving your mission forward. Keep the line of communication open between board members and the executive director to ensure buy-in at all levels and a shared understanding of your common purpose.
Ask the board to regularly review communications and fundraising plans to ensure they tie in with mission and strategic goals. This keeps them tied into critical organizational activities and ensures the mission is top of mind for everyone. Be sure to follow up on their suggestions for improvement.
Don’t let your mission “drift.” Potential support from large donors or corporate sponsors can sometimes result in taking on programming that is not in line with your mission. If growth means a potential shift, do your research and plan your strategies before you make the leap.

To guard against an unclear or misguided mission, ask yourself:

What is the social benefit gained by our organization’s existence and how important is it?
Does our mission have meaning for stakeholders, or is it just boilerplate for grant applications?
Do we know our organization’s competitive advantage, and who our constituents are?

Source: Mission-Driven Governance, by Raymond Fisman, Rakesh Khurana and Edward Martenson

What are some best practices for board operations?

Implementing “best practices” for building and running a board effectively can help you further your cause with confidence. Here are some top issues to consider.

Board size

Federal law doesn’t dictate board size, but state laws often establish a minimum (typically one to three members).

Beyond legal requirements, the number of board members will depend largely on your organization’s needs. Before you decide on size, it’s best to think about your needs. Do you want to create a diverse board with varied skills, knowledge and experience to support your organization and match the needs of a diverse constituency? To determine the right number for your organization, think about the dynamics between members and their ability to accomplish tasks. Consider whether adding more will help or hinder in this regard.

Quorum

A quorum is the minimum number of members that must be present at a meeting to make the proceedings of that meeting valid. This is typically established in an organization’s bylaws, although in some cases state law will determine the quorum. Often the quorum for a meeting of the board is one-third of its total members, or two directors (whichever is higher).

Effective meeting planning

To ensure full participation and thoughtful decision making in the best interest of the organization, board meetings should always be carefully planned, facilitated and documented for implementation and follow-up.

Here’s how you can keep meetings on track:

Begin with a clear, focused agenda. Agendas should address meeting topics and outline goals for discussion. Deliver the agenda to board members at least a week in advance. You may also want to compile an organizational update, key background needed for decision-making points and highlights of the latest “good news.”
During the meeting, stick closely to the agenda to make good use of everyone’s time. Focus on getting results and critical decision-making at every meeting.
Make attendance mandatory. Develop policies around meetings and hold members accountable. If a meeting is scheduled but agenda items have changed, don’t waste members’ time. Reschedule for another, more appropriate day.
Ask for board input on the agenda. This allows members to include topics of interest, increasing the likelihood of attendance and helping to keep them engaged while there. This can also help the executive director better understand where members stand on important issues.
Schedule time for discussion and networking among members. Give members the opportunity to get to know each other and build their own professional networks.

Executive directors and founders as members

While an executive director is often a member of the board, involved in board discussions and information sharing, he or she is rarely granted a vote. After all, the board is technically the executive director’s employer and conflicts of interest could arise. To guard against this, both the board and the executive director should act independently from each other – the executive director as leader of the organization and the board in a governance role. Because of their passion and commitment, founders may want to directly exert their influence over the organization as a member of the board. Ultimately, the answer to this question rests in the founder’s ability to use his or her skills and experience to move the organization’s mission forward at the governance level. As a board member, a founder can be granted a vote. This means he or she should be able to effectively address the organization’s needs and provide guidance and support.

Term limits

Term limits give both the board member and the organization an opportunity to determine if continued service is in the best interest of both parties. To ensure the organization’s ability to bring in fresh perspectives and expertise and foster its ability to be flexible and responsive to changing needs, many nonprofits set defined terms for their board members. These typically range from one to four years. However, some nonprofits choose not to adopt a limit – typically when an organization will benefit from the continued involvement of strong, active members. When developing policy in this area, think carefully about the needs of your organization and your funders.

Board committees

Board committees help optimize individual expertise and diversity by allowing the board to use resources more effectively. By operating in smaller groups, members can often accomplish more than if the board acted as a whole, particularly where issues are complex or numerous.

Certain types of committees may be required by law. In California, for example, charities with gross revenues exceeding $2 million must establish an audit committee.

Board orientation

Board orientation is critical to getting organization-wide buy-in to your mission, values, organizational identity and strategic plans. It helps improve communication and participation, and it empowers new members with the tools they need to steward your nonprofit in the community. Orientation prepares your board members to provide informed guidance and support in governance issues, allowing your organization to make better use of their expertise.

Remember, board orientation is key:

Develop an orientation manual outlining what each member needs to know about service and your organization.
Give your board the tools they need to excel. Regularly update members on key organizational issues and good works.
Use mentoring and ongoing education to help members feel prepared.

Learn more! Get Getting On Board with Effective Orientation. This BoardSource Toolkit can help you design your board orientation materials and training sessions.

Executive director evaluations

Executive director evaluations are a significant component of a board’s responsibilities. They are critical to ensuring the executive director is in sync with a board, and driving the organization forward, toward its mission. Evaluations also help to clarify expectations and set goals for the future.

For more information about executive director evaluations, read Managing People.

Where do we find board members?

Finding the right candidates for your board is not an easy task. Ideally, you’ll recruit individuals with a range of complementary skills who are as passionate about your mission as you are. So, where do you start?

First, think about the skills that will benefit your organization. There are often three key areas represented on the board:

One-third would be individuals who have access to financial resources or soliciting donations.
One-third would be individuals with management expertise in areas of financial, marketing, legal and the like.
One-third would be individuals connected at the community level, with expertise in your service field.

Then, think about other characteristics such as age, gender, diversity, geographic representation and familiarity with your cause.

Consider current volunteers and significant donors as candidates. Ask for board and staff suggestions, and look at business leaders and high net-worth individuals in the community.

Sites like boardnetUSA, VolunteerMatch and BoardSource also help nonprofit boards and new leaders find each other. The latter also offers “Recruiting a Stronger Board: A BoardSource Toolkit,” which, among other tools, provides a sample board matrix to help you outline the desired expertise, sectors and demographics that comprise your board.

You might consider designating a board nominations committee to identify potential candidates. Ask the board to seek out candidates who can contribute in a unique way. And be sure to review each candidate in light of your mission and goals.

What role does the board chair play?

Successful, mission-driven nonprofits have two things in common: 1. a strong executive director and 2. an engaged, collaborative board chair. Without exception, the role of board chair is paramount to ensuring an active, focused and supportive board. This in turn ensures a healthy, happy nonprofit.

The board chair’s commitment to stakeholders is to operate under the guiding principle of what is best for the organization. He or she should facilitate board leadership and good governance. In this way, the chair molds the board’s culture, work and impact.

A board chair is responsible for leading the board and setting the tone for all members. He or she oversees governance and policy setting, with a focus on mission, direction, priorities and evaluation. The chair has a significant influence on how the board uses its time (and in particular is often instrumental in helping the board address fundraising goals).

In addition to overseeing board and committee meetings, supporting recruitment, and assessing the performance of board members and the executive director, the board chair works closely with the executive director. The two should meet regularly to collaboratively drive the organization’s mission forward.

The relationship between the executive director and board chair is key. Trust, respect and a willingness to rely on each other’s strengths are critical, along with a common understanding of the organization’s goals and the strategies needed to get there. Both the executive director and the chair should also have clearly defined roles and responsibilities so that everyone understands where one individual’s authority ends and the other person’s begins. This helps to determine what issues are matters for the board, and what issues lie in the domain of the organization itself.

Important ways the board chair and the executive director work together:

Partnering to make sure board resolutions are carried out.
Appointing committee chairs and recommending who will serve on committees.
Preparing strategic agendas for board meetings that are geared to decision-making.
Conducting new board member orientation.
Each acting as spokespersons when necessary.

Adapted in part from BoardSource and the Board Chair Handbook, Second Edition (www.boardsource.org).

How do we get board members engaged for our cause?

How do we get them to raise funds?

Board members play a vital role in helping an organization drive its mission forward. And in most instances, board members want to fulfill their responsibilities and contribute positively to the work of the nonprofit they serve. When a member is not actively participating, it’s often due to a lack of understanding of what is expected or not having access to the tools necessary to participate effectively.

Actively involve your board in the development of strategic plans, including fundraising plans. A board can be a significant resource in terms of making introductions. In fact, they often have the business expertise that can be useful in developing a sound plan.

The board is responsible for ensuring the financial health of your organization. Getting them involved at the planning stage helps boards understand their fundraising responsibilities, builds excitement toward implementation and increases the likelihood that members will want to engage in actionable activities.

If you sense resistance, you may want to conduct a session with the board to discuss any reluctance to being involved in fundraising. Such a session may reveal the source of hesitation so you can address it.

Providing the board with outside training in fundraising strategies and techniques will help mitigate such fears, as will setting up a structure for successful fundraising that may include partnering board members with other board members, volunteers or staff members.

Tips to get members moving.

Gail Perry, the author of Fired Up Fundraising: Turn Board Passion into Action, suggests the following four steps:

Work with the board chair to get your board members involved in developing an annual fundraising plan. Put numbers on your program objectives, such as how many kids you’ll send to camp or how many meals you want to serve to a needy public.
Communicate the community impact of the results of your efforts. Talk to your board about benefits in real terms, such as “We’ll help kids who go to camp be healthier, have better self-esteem, and do better in school.” Or “We will help hungry people get nutritious meals right here in our community.”
Create an action plan and give each board member a job. Ensure all individuals understand their role and how it relates to results. How is each board member going to help make the plan a reality? For example, some may seek out sponsors, some may enlist volunteers and some may serve on committees to strengthen community and government relationships. Be sure to tie all responsibilities back to your cause and your fundraising goal.
Communicate regularly with your board members to keep excitement up and momentum going. Keep in touch weekly or monthly and keep them informed of your success. Board engagement is strongest when members’ interests match those of the organization.