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Nonprofit Board Fiduciary Responsibility & Risk Management
One of the main responsibilities of nonprofit board members is to maintain financial accountability. Board members act as trustees of assets and, therefore, must exercise due diligence to make sure the organization is well-managed and its financials are sound.
Fiduciary duty requires board members to stay objective, responsible, honest, trustworthy and efficient. They are stewards of the public trust and must act for the good of the organization. They need to exercise care in all decision-making, without placing the nonprofit under unnecessary risk.
Board members need to be financial inquisitors, understand basic terminology, be able to read financial statements and judge their soundness, and have the capacity to recognize warning signs that might indicate a change in the overall health of the organization. If they don't understand something, they need to be willing to find the answer.
Here is a sampling of questions to ask:
- Is the financial plan consistent with the strategic plan?
- Is cash flow projected to be adequate?
- Are there sufficient reserves?
- Are any specific expense areas rising faster than their sources of income?
- Do board members regularly compare financial activity with budgets?
- Are expenses appropriate?
- Are there checks and balances to prevent errors, fraud and abuse?
- Are the board meeting guidelines and requirements set by funders?
Boards hire and set the compensation for an executive director to run the day-to-day affairs. With paid staff in place, board members provide foresight, oversight and insight looking for indications that may present challenges and opportunities. Board members' roles as stewards of nonprofits means they advocate for their nonprofit's mission.
The board of directors has three primary legal obligations: duty of care, duty of loyalty and duty of obedience. Nonprofit board members take care of the organization by ensuring prudent use of assets, including the facility and its people, while maintaining goodwill. In addition, they provide oversight for all activities that advance effectiveness and sustainability. That is the duty of care responsibility.
Board members make decisions in the best interest of the nonprofit as part of the duty of loyalty. By ensuring that the organization obeys applicable laws and employs ethical practices, and that it adheres to its own stated purposes and activities to advance its mission, it fosters its duty of obedience.
How can a board of directors be sure it is governing well at present and is ready to handle the challenges ahead?
There are five basic good governance practices:
- Maintain minutes of all board meetings and committee meetings.
- Annually review a written policy about conflicts of interest and complete a questionnaire, documenting in the minutes of board meetings when the policy is invoked.
- Approve the executive director's compensation, making sure it's appropriate and not excessive.
- Review a copy of the IRS Form 990 before it's filed — this ensures that the board is aware of the annual filing requirement.
- Disclose to the public the nonprofit's three most recent annual returns filed with the IRS, as well as its application for tax-exempt status and related correspondence and attachments.
There are several other governance policies that IRS Form 990 asks:
- Do you have written whistleblower protection policies?
- Do you have written document retention and destruction policies?
- Do you have written gift acceptance policies — including for receipt of noncash gifts such as land, vehicles and artwork? Go to this link for policy guidelines.
- How about joint ventures? Has the organization participated in a joint venture and taken steps to avoid any private benefit?
Governance oversight, management accountability, financial integrity and internal controls —these are the pillars of your risk management function. By overseeing the day-to-day activities of your nonprofit, you ensure that appropriate information regarding organizational compliance with applicable laws comes to the board's attention in the ordinary course of work. The board should recognize its oversight obligation, including monitoring of business risks that could have a material effect on operations and the pursuit of the organization’s mission.