Governance refers to the strategic direction of an organization and encompasses a variety of functions, including financial viability and how successfully the organization is fulfilling its mission. For nonprofits, governance entails setting direction, making policy and strategy decisions, overseeing and monitoring organizational performance and ensuring overall accountability.
Effective governance requires leadership and accountability from all involved parties. The CEO, directors, officers, committees, members, advisory board, staff, and volunteers should all be informed of the governance practices and policies of the nonprofit. This will help to advance the organization’s principles and mission, as well as reduce liabilities.
This article discusses the importance of nonprofit governance, best practices and the risks of poor governance.
Why Nonprofit Governance Is Important
Nonprofit governance works to advance the organization’s principles and mission and provides oversight to ensure companies follow all legal and compliance rules. The benefits of strong governance include:
- Avoiding scandals—Strong internal controls help to protect the company from fraud or embezzlement within the organization. Nonprofits need to avoid scandals because negative press can make individuals and foundations less likely to donate.
- Encouraging growth—Focusing on rules and procedures can ensure that the nonprofit meets legal and ethical standards, improving the organization’s overall strength.
- Improving reputation and increasing donations—Potential donors have the opportunity to examine all available public documents before donating. Some public tax documents, such as Form 990, include descriptions and summaries of how nonprofits use their money. With appropriate governance, these documents can reflect positively on the nonprofit’s efforts, improving the organization’s reputation.
Quality processes and policies help nonprofits achieve their goals and serve stakeholders’ best interests. The following nonprofit governance best practices can help organizations function successfully and address legal requirements for compliance:
Develop and implement helpful policies. To mitigate legal risks and liabilities, nonprofits should have policies in place for the following topics:
- Whistleblower protection—Federal law prohibits all corporations and nonprofits from retaliating against employees who report illegal or dishonest activity. Adopting a whistleblower policy to protect employees signals to stakeholders and the public that the nonprofit values transparency and accountability.
- Document retention and destruction—This policy addresses maintaining and discarding documents and records. It should specify which documents the nonprofit must retain and for how long, and outline the process and schedule by which documents will be destroyed.
- Gift acceptance—A gift acceptance policy can help board and staff members understand which donations and gifts are appropriate to accept while maintaining positive relationships with donors and mitigating risk.
- Conflict of interest—Governing conflicts of interests is one of the most critical policies a nonprofit board can implement. This policy should require those with a conflict of interest to disclose it and prohibit them from voting on any matter in which there is a conflict.
- Train board members on reviewing Form 990. Tax-exempt organizations must file Form 990 annually with the Internal Revenue Service (IRS) to ensure that the organization fulfills its tax-exempt purpose. Form 990 Part VI, Line 11a, inquires whether the organization provided a copy of the form to all governing members before filing. Due to its public disclosure requirements, Form 990 is available for public inspection for three years following its filing, so having the policy to train board members can ensure that all involved have had the opportunity to contribute.
- Document and retain meeting minutes. The minutes of board and committee meetings provide an official record of any action. Having a standard process for the documentation and preservation of meeting minutes ensures that a consistent record is available for those who need it.
- Implement an attendance policy. For board members to exercise their governance authority, they must attend meetings. Having a meeting attendance policy ensures that board members can participate in informed and independent decision-making. Send out the agenda and meeting invite in advance so members have time to plan.
- Adopt term limits for board members. Board member turnover can help avoid stagnation by removing unproductive members. Set term limits to continuously expand the board’s available contacts and influence.
- Analyze and improve board recruitment. Member recruitment must be strategic for it to be effective. Determine what qualities, characteristics, and perspectives are missing and direct recruitment efforts toward filling those gaps.
- Develop an organizational strategy. Nonprofits need direction, and it is the responsibility of the board to develop, approve and support organizational strategy.
- Approve the annual budget. The annual budget should be developed by staff in conjunction with the financial committee before being submitted to the board for approval. The budget should reflect the organizational strategy and work to advance the long-term fiscal health of the nonprofit.
- Undertake an audit. Nonprofits should determine if they are required by law to conduct audits. Nonprofits that are not required by law to perform audits should still assess the potential benefits and costs and decide when it is appropriate to conduct an audit.
Risks of Poor Nonprofit Governance
Failure to adhere to good governance practices can cause stakeholders to lose their confidence in the organization and result in devastating consequences, such as:
- Loss of funding—When strong governance policies aren’t in place and followed, mistakes and liabilities are more likely to occur. If donors stop believing in the work of the nonprofit, the organization may be forced to close its doors.
- Poor reputation—Governance failures can cause the nonprofit’s reputation to suffer. A damaged reputation can detract volunteers, funding, and staff.
- Increased fees—Bad governance practices can increase legal liabilities, and regulatory issues can become costly for nonprofits.
Implementing governance best practices can ensure that the above risks don’t derail the efforts of a nonprofit, as well as help achieve organizational goals. For more risk management guidance, contact us today.