One of the most important assets for a nonprofit organization is an engaged board of directors. However, boards that do not have a clear understanding of their legal duties when it comes to their role in the governance of a nonprofit mitigate their effectiveness in furthering the organization’s mission while opening up its directors to personal liability. Here are 10 common governance mistakes made by nonprofit boards:
1. Failure to Understand Fiduciary Duties
When you volunteer to function as a director or officer of a nonprofit, your responsibility is to act with the duties of due care, good faith, and loyalty. Additionally, you assume possible liability for failing to satisfy those duties. Increased scrutiny by the IRS, state and federal governments, donors, and also the media call for vigilance. It’s no longer adequate to simply sanction committee or staff recommendations or even to abstain from risky decisions. Today, serving on a nonprofit board comes with real consequences for those who fall short in meeting their fiduciary duties.
2. Failure to Provide Effective Oversight
Although boards are permitted to assign duties to committees, officers, staff members, or even professionals, they should do so only with sufficient oversight. Oversight is often exercised through procedures and policies as long as the board guarantees that these policies and procedures are followed. Common oversight mechanisms include assessment of financial statements as well as the yearly Form 990 and the implementation of a variety of governance policies. Challenging tasks that call for more time and attention could be delegated to committees — for example, those created to oversee compensation, finances, audits, and investments.
3. Deferring to a Founder
While an individual may have founded a nonprofit, no one truly “owns” a tax-exempt organization nor should one person be in total control. Although a nonprofit’s founder may serve on the board or have other managerial roles, he or she should not be treated any differently than others who serve in the same capacity. The board has a duty to provide oversight to all the nonprofit’s activities as well as the performance of the chief executive and staff, and should not defer to a founder — or any one person for that matter — in executing their duties.
4. Failure to Stay in Your Lane
Board members that attempt to micromanage a nonprofit’s staff are crossing the line into daily management tasks that belong to the chief executive. The board’s chief duties are to provide strategic direction and oversight, not to meddle in the nonprofit’s day-to-day operations. Sometimes the size of the organization and its budget necessitate some blurring of the lines, but directors need to be cognizant of their roles and adhere to them.
5. Failure to Adopt and Follow Procedures
Having a clear set of rules for how decisions will be made and who will be responsible for various tasks can avoid tensions and lead to a better decision-making process. Some rules are spelled out in the nonprofit’s governing documents—its bylaws, board charter, and so forth. Among other things, this means that board members need to have a good understanding of how these documents govern their work. Other procedures may need to be crafted to suit a particular circumstance. For example, a board might form a special committee to examine an important transaction. For a committee to be effective, its roles and responsibilities need to be agreed upon in advance.
6. Failure to Keep Good Records
California law requires nonprofit corporations to appoint a secretary who is responsible for keeping the governance records of the organization. Among other things, the secretary takes the required minutes at every board meeting. Meeting minutes need not record every small detail of what takes place at the meeting, but it’s important that minutes record what was discussed and what decisions were made. Minutes are essential for showing that the board is doing its job in a thorough and responsible way. They can also be important in transactions and litigation.
7. Lack of Awareness of Laws Governing Nonprofits
There are a number of tax and other benefits that tax-exempt organizations enjoy, and to ensure that these benefits are not exploited, there are a number of federal and state laws that nonprofits must follow to maintain their tax exempt status. Directors accustomed to operating in a for-profit world may assume that nonprofits operate in a less regulated environment, but the opposite is really true. Directors must be aware of the rules and regulations governing nonprofits or they may fail to act in the best interest of the nonprofit.
8. Failure to Exercise Due Care in Recruiting New Directors
It is always tempting for boards to choose people they know or work with already to serve on a nonprofit board. Likewise, nonprofit boards may seek out wealthy or influential individuals to serve in hopes of having the organization benefit from those beneficial connections. However, boards should ensure that any candidates for board positions are interested and qualified to exercise independent judgment and provide meaningful oversight.
9. Failure to Encourage Diversity
Many nonprofit boards start out as a mix of the founder’s friends and trusted advisors but it is important for a nonprofit board to recruit “outsiders” with skills and experiences that will benefit the organization, such as having a legal, accounting, or marketing background. It is also important for new board members to share the nonprofit’s mission.
10. Failure to Seek Help When Necessary
Some decisions involve complex or specialized information that board members may not know how to interpret. A board may best serve its constituents by seeking the help of outsiders. This can be true even if one board member has relevant expertise. For example, if the nonprofit is contemplating a complex financial transaction and happens to have a director with extensive accounting experience, that director’s opinion, though valuable, may not be sufficient to ensure the board has done its job. Asking for outside advice is a good way to avoid this problem.
The Church Law Center of California assists nonprofits with organization, governance, and risk management. We can help your nonprofit craft policies so it is in a better position to address problems as they arise. To find out how we can help your nonprofit, call us today at (949) 689-0437 or reach out to us through our contact page.