Failures of governance can have potentially far-reaching consequences for a church so it is incumbent on church leadership to adopt policies that help prevent abuses and encourage good governance throughout the organization.
However, church leadership needs to be discerning when choosing its governance policies since having a policy in place and then failing to comply with it can create more liability risk. As the IRS has noted on its Form 990, “Whether a particular policy, procedure, or practice should be adopted by an organization may depend on the organization’s size, type, and culture. Accordingly, it is important that each organization consider the governance policies and practices that are most appropriate for that organization in assuring sound operations and compliance.”
Here are seven governance policies every church should probably have:
1. Budget policy.
The first line of a church’s financial defense is made up of the people with authority to spend money and, perhaps more importantly, create obligations for the organization. By adopting a clear policy about who has authority to spend money or bind the organization to an obligation, and setting limits on how high those obligations can go without board approval, the organization can ensure that assets are protected. This goes beyond just spending money; a good budget policy should also address the process for dealing with budget overages.
2. Conflict-of-interest policy.
Avoiding problems of self-dealing and other ethical dilemmas should be a central concern of a church’s leadership. Having a clear procedure for identifying and addressing conflicts of interest ensures that when they arise they can be handled in a way that is fair and predictable. It also helps to ensure that the church’s nonexempt status is protected.
3. Executive compensation policy.
Church leaders should never be a part of the decision-making process for determining their own compensation. The IRS has parameters for what is permissible for tax-exempt churches in setting executive compensation levels. An executive compensation policy for the church should set the process for determining and documenting executive compensation.
4. Whistleblower protection policy.
Employees who report illegal activities by an employer that could cause public harm are protected by state and federal laws that shield whistleblowers from being retaliated against for those activities. Churches need to make it clear that not only is it a responsibility of directors, officers, and employees to report any breaches in ethical or legal conduct but that those reporting such incidents will not suffer any adverse consequences.
5. Document and records retention policy.
Central to any strategy for managing risk is a clear set of rules governing how long an organization will keep its records, and how it will go about destroying them when the time comes. A document retention policy is an important backstop in the event of regulatory review, tax audit, or litigation.
6. Fundraising policy.
The methods an organization will use to raise money and how it manages donor relationships should be spelled out by management. In particular, a policy describing how the organization will handle offers of large or complicated gifts (like real estate or stock) should be adopted before such things become issues.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 892-1221 or reach out to us through our contact page.