The Nonprofit Board Answer Book

A Practical Guide for Board Members and Chief Executives

• Publisher: Jossey-Bass
• Year: 2011
• ISBN:
  9781118127025
• Edition: 3
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

An essential guide to good governance for board leaders at all levels of experience and expertise

This third edition of the bestselling book for nonprofit board members and professionals offers a thoroughly revised and updated resource that answers the most-commonly asked question on board governance. The book covers such topics as board structure and process, board member recruitment and orientation, board-staff relations, and financial management. This new edition includes updated information on topics that have recently increased in importance including new Form 990; dealing with the financial crisis, risk management, and mergers.

• Shows executives and board members how to be more effective, meet difficult situations head-on, and deal with commonplace challenges with confidence
• Topics include information on the viability of for-profit ventures, board retreats, board diversity, fundraising, financial oversight, strategic thinking, and the use of technology
• From Boardsource the premier resource for practical information, tools, best practices, training, and leadership development for board members of nonprofit organizations worldwide

Offers insight gained from the BoardSource Governance Index Survey, hundreds of board self-assessments, and questions and challenges heard by BoardSource from thousands of nonprofit leaders.

PART ONE: Basic Board Functions

Nonprofit organizations come in endless variations. They range from small, local homeless shelters to large, international trade associations; from community foundations operating within a geographic region to educational institutions that attract students from around the country. Their funding may come from just a handful of sources or from a wide array of charitable contributions, membership dues, government grants, fees from programs and services, and more.

Whatever its size, scope, or funding, every nonprofit organization has a governing board composed of people who believe in and support its particular mission. As a member of a governing board, you have the pleasure—and the responsibility—of monitoring, overseeing, and providing direction for the organization’s pursuit of that mission. Those responsibilities, which have legal ramifications, will call on you to develop or hone your skills in numerous areas, from financial management to organizational communication and from fundraising to strategic planning.

1.

What are the basic responsibilities of a nonprofit board?

If you could observe the board meetings of hundreds of nonprofit groups, you would be struck by how different they are in terms of structure, strength of leadership, working style, and relationship with the staff. But despite their diversity, most boards share the same basic duties:

1. Determine the organization’s mission and purposes. It is the board’s responsibility to create and review a statement of mission and purposes that articulates the organization’s goals, means, and primary constituents (see Question 3).

2. Select the chief executive. When the time has come to hire the first or the next chief executives, boards must reach consensus on the position responsibilities and undertake a careful search to find the most qualified person for the job (see Question 74).

3. Support and evaluate the chief executive. The board should ensure that the chief executive has the moral and professional support he or she needs to further the goals of the organization (see Questions 67 and 68).

4. Ensure effective planning. Boards must participate actively in an overall planning process and assist in implementing and monitoring the plan’s goals (see Question 5).

5. Monitor and strengthen programs and services. The board must ensure that current and proposed programs and services are consistent with the organization’s mission and monitor their effectiveness (see Question 8).

6. Ensure adequate financial resources. One of the board’s main responsibilities is to ensure that the organization has adequate financial resources to fulfill its mission (see Questions 4 and 48).

7. Protect assets and provide financial oversight. The board must approve the annual budget and ensure that proper financial controls are in place (see Questions 50 and 51).

8. Build a competent board. All boards have a responsibility to articulate prerequisites for candidates, orient new members, and periodically and comprehensively evaluate their own performance (see Questions 23, 29, 36, and 37).

9. Ensure legal and ethical integrity. The board is ultimately responsible for seeing that legal standards and ethical norms are respected (see Questions 2 and 54).

10. Enhance the organization’s public standing. The board should clearly articulate to the public the organization’s mission, accomplishments, and goals and garner support from the community (see Question 10).

SUGGESTED ACTION STEPS

1. Board members, write down what you believe are the board’s responsibilities. Consolidate the responses in a summary report for discussion at the next meeting. Try to reach consensus on the distinction between board and staff roles.

2. Board chair, invite a knowledgeable and objective volunteer to read the board’s minutes from the past year and then observe two board meetings. Ask this person to summarize, based on his or her observations, the board’s actual role (not what someone says it should be). You’ll find out quickly whether or not the board is fulfilling its responsibilities.

2.

What are the legal duties of a board member?

From a legal standpoint, trustees, officers, or board members of a nonprofit board are held to these three standards:

1. Duty of care. This refers to board members’ responsibility to participate actively in making decisions on behalf of the organization and to exercise their best judgment while doing so.

2. Duty of loyalty. When acting on behalf of the organization in a decision-making capacity, board members must set aside their own personal and professional interests. The organization’s needs come first.

3. Duty of obedience. Board members bear the legal responsibility of ensuring that the organization remains true to its mission and purpose by its compliance with all applicable federal and state laws.

As an example of a legal issue, organizations designated as tax exempt under Section 501(c)(3) of the Internal Revenue Code may not engage in excessive lobbying and may not make contributions to certain types of organizations, such as political campaigns. If the organization does not operate in accordance with these restrictions, it may have to pay a stiff fine or may even lose its tax-exempt status (see Question 81).

The Internal Revenue Service (IRS) can also penalize individuals who take advantage of their positions inside nonprofits. Known as intermediate sanctions, these penalties apply to “excess benefit” transactions between a nonprofit organization and disqualified persons. “Excess benefit” simply refers to any transaction that exceeds fair market value for the benefit received by the nonprofit or that is not comparable to what similar organizations or companies pay for a similar product or service. Any financial transaction is subject to scrutiny, from severance payments to transfers of property to officers’ liability premiums.

According to the IRS, the term disqualified person refers to anyone in a position to exercise substantial influence over the affairs of the nonprofit organization within the preceding five years. This category would include officers, directors, high-level employees (including department managers), major donors to the organization, and even the families of all these types of people.

Should the IRS determine that a disqualified person has received an excess benefit, the person has a tax liability of 25 percent of the excess amount. (If the tax is not paid or the excess amount not returned to the organization within a specified amount of time, the penalty may increase to 200 percent.) In addition, any board member or manager who knew of or approved the transaction is subject to a 10 percent tax on the excess amount (up to a maximum of $10,000 per excess-benefit transaction). The IRS may waive the taxes and penalties should the nonprofit organization uncover the excess-benefit transaction and correct it before an IRS audit takes place.

Intermediate sanctions are applicable to 501(c)(3) organizations (excluding private foundations) and 501(c)(4) organizations. To protect itself from intermediate sanctions, a board should be sure to fulfill the three requirements of the safe harbor provision. This provision applies when nonprofit boards are determining the chief executive’s compensation or engaging in a financial transaction with a disqualified person. The safe harbor requires the board to

• Approve the transaction, with the interested person not present during the debate and not casting a vote;
• Obtain and review comparability data related to the transaction; and
• Document the basis for its decision.

SUGGESTED ACTION STEPS

1. Board members, make sure the board has a written policy that either prohibits board members from engaging in business or financial transactions with anyone directly connected to the organization or clearly states conditions under which such transactions are acceptable.

2. Board chair, set aside time during a board meeting to review the restrictions that accompany the organization’s tax-exempt status.

3. Board chair, use the three legal duties of a board member as a discussion topic during a board development session or leadership retreat.

3.

What is the board’s role and involvement in mission, vision, and values?

Mission, vision, and values are the defining elements of an organization’s identity, the templates from which all actions and programs evolve. The board is responsible for expressing, understanding, endorsing, and advancing these summaries of purpose, direction, and principles.

Mission is an organization’s reason for being. A well-articulated mission focuses board members’ thinking and actions on what distinguishes their organization from others. It should not so much describe the organization as define the results the organization seeks to achieve. The board should review the mission periodically—for example, at the beginning of every strategic planning process—to make sure it remains useful and valid.

Successful nonprofit organizations use their mission statements as guides and benchmarks for everything board and staff members do. They ask, “Do the strategic plan and its supporting objectives build upon the whole reason we exist? Does the budget accurately reflect what’s really important to us? Do our policies and procedures advance our purposes? What programs and services are most consistent with our mission?”

Ideally, a mission statement is clear, memorable, and relatively brief, suited for printing on organizational documents and easily committed to memory. It should not simply summarize strategies or programs. These examples illustrate the difference:

• Yes: We stimulate young people’s love of learning and reading.
• No: Our mission is to provide free books to local schools.
• Yes: We strengthen our community by helping those who are in need to gain self-sufficiency.
• No: Our mission is to operate neighborhood-based food banks and offer job training.

Vision paints a picture of what is possible in the future—for constituents, for the community, or for society as a whole—if the organization accomp...