Board Basics For Non-Profits Copyright 2006, 2007, 2008 by Roger M. Ingbretsen NOTE: Information and guidance presented in this document are provided with the understanding that Ingbretsen Consulting LLC is providing only information and not engaged in rendering legal professional opinions. The services of an attorney or certified public accountant should be sought if such services are required. Nothing presented in this white paper establishes or should be construed as establishing a confidential relationship between you and Ingbretsen Consulting LLC.
INTRODUCTION In the years leading up to 2002, boards – especially in the “for-profit” sector – were blindsided by unprofessional, unethical or illegal actions by some inside management. This caused significant liability, affected shareholder value, influenced customer confidence and significantly affected employee confidence. In some cases these actions destroyed organizations and greatly impacted the personal lives of especially employees and investors.
As a result of the inappropriate actions of a few, the U.S. government passed the American Competitiveness and Corporate Accountability Act of 2002, commonly known as the Sarbanes-Oxley Act. With two exceptions relating to “document destruction” and “whistle-blower protection” the Sarbanes-Oxley Act only applies to American publicly traded companies and regulates what boards must do to ensure auditors independence. Although the act contains many pages of legalese, it supports one simple premise; good corporate governance and ethical business practices are no longer optional niceties.
Boards and organizational leadership are now held accountable for establishing and maintaining an adequate internal control structure and assessing it’s effectiveness on an annual basis. Boards in the for-profit sector now have a key responsibility to assure legal and ethical standards are established and maintained. They also need to model these standards in their own behavior and decisions.
So how does this affect the boards for non-profit organizations? Already several state attorneys general are calling for applying much of the Sarbanes-Oxley rules to non-profit organizations. However, boards of non-profits need to develop an understanding not only of Sarbanes-Oxley rules, but also gain a solid understanding of their role in today’s world rather than operating based on old paradigms of board responsibilities.
For most non-profit boards, governance remains simply a series of routines such as overseeing budgets, receiving audits, hearing reports, approving strategic plans, and so on. This is the traditional thinking that guides most non-profit boards. If boards are to be successful this approach must change. The board is where corporate policy is made, where project priorities and goals are set, where capital (yes, nonprofits have capital) is allocated and where the values of the organization and the community it serves are exemplified.
The non-profit board of 2006 should function as a clear value-added asset to the organization and community it serves. The board should contain the true intellectual capital and leadership required to work through effective processes; and contribute to, or assist in raising the money required for the success of the organization. Bottom line… a board needs each member to add value.
Boards as a whole and as individuals need to hold themselves accountable for effective execution of their own role and responsibilities. Just as the board expects executive management to hire good talent, make effective decisions, develop and implement strategy, deploy resources and properly execute and attain objectives and evaluate progress, so too the board must function in this way to be effective. The most effective boards are fully engaged in the organizations success lending their leadership, expertise and passion and… hold themselves accountable for their actions and effectiveness.
Finally, nonprofit leaders and board members should review the following information and assess their individual role and the collective role of the board of which they are a member. They should do this to determine whether their organizations are developing in a manner which best serves the greater good of the community and the people the organization was designed to serve.
Basic Responsibilities of a Nonprofit Board:
Determine the organization's mission and purposes Select the executive staff through an appropriate process Provide ongoing support and guidance for the executive; review his/her performance Ensure effective succession and organizational planning Ensure adequate resources Manage resources effectively (the buck ultimately stops with the board)
Determine and monitor the organization's programs and services Enhance the organization's public image Serve as a court of appeal Assess the boards own performance Basic Responsibilities of a Nonprofit Board Member:
Be truly engaged Think beyond your experience and expertise Plan beyond your tenure IMPACT AREAS FOR BOARD REVIEW Board Membership Roles The strength of the board is only as strong as its members. Can boards or board members really be governing if they do not actively participate? Can boards deal with a changing world if they continue to clone themselves and what they accomplish from one board meeting to the next? Board membership should be made up of individuals with broad and diverse backgrounds and who display leadership strengths in a variety of disciplines. Additionally, they must be driven and engaged to make an impact on the organizations they are charged to govern.
Boards will govern most effectively by taking a “leadership” approach to their work. Just as today's complex organizations demand leaders who work in multiple roles, boards should govern in multiple roles. Three main roles for boards to assume are as follows:
Fiduciary role: This role constitutes the bedrock of governance – the transactional fiduciary work is intended to ensure that nonprofit organizations are faithful to the mission, accountable for performance, and compliant with relevant laws and regulations. If a board fails in the fiduciary role, the organization, its donors, clients, or the community it serves could be harmed.
To properly exercise this role, boards should at a minimum insist that a current statement of income and expenses in comparison with the board-approved budget be presented at each meeting. This must not be a “rubber stamp” process. High functioning boards must orient new board members and re-orient/train all board members periodically in the reading and interpretation of the financials.
Strategic role: This is where boards develop strategy with management to set the organization's priorities and course, and deploy resources accordingly. With involvement in strategic governance, the board can exert “constructive power and influence” and help set the course and future of the organization.
Transformational role: When operating in this role, boards, along with executives, frame problems and make sense of ambiguous situations, which in turn shapes the organization's strategies, plans, and decisions. This is where board expertise can play an important role and become central to the governance process. However, this is often the least used and most difficult role to have board members become comfortable operating in, because it requires board members to explore multiple and sometimes conflicting views. It requires board members to truly understand the organization they govern.
While fiduciary and strategic work can place a premium on consensus, transformational governing requires board members to think outside the box. This requires a different type of discourse, and adopting a norm that values frank discussion and disagreement in the boardroom rather than holding fast to Robert's Rules of Order. For the health of the organization it is much better to have a “good” board meeting that generates action oriented ideas, rather than a nice and tidy meeting that moves quickly and quietly through the agenda.
Boards exercise their greatest power by truly framing the issues at hand and recommending options for a solution. More broadly, board members acting in a leadership role can influence their organizations by deciding what the organization should pay attention to and then providing ways of looking at it. A high impact board has high impact players who work on high impact deliverables. If a board is to truly govern, it needs to be both transformational and transactional.
Selection of Board Members Rather than trying to sell those we identify as potential board members on the idea of joining our board we should test their skills and levels of interest and commitment, selecting only the best for the team. Putting people on committees and seeing how they produce is one of the most effective tests available because the proof is in the outcomes.
Well crafted interview questions will provide good insights as well, as long as one really listens to the responses he or she gets. Some questions that are effective at ascertaining skills, interest and commitment include:
• What can you bring to this board that will make you a valuable board member?
• What do you think is the most important job of a board member and why?
• What information do you like to have before making go/no-go decisions?
• How much time can you give the board?
• What do you expect from the board/board members?
Clearly stating the organization's expectations of its board members and determining to what degree the individual is comfortable with committing to meeting those expectations will also tell you whether this is the right person or not.
Always be on the lookout for new prospective board members who can play active fiduciary, strategic or transformational roles. Continually do some preplanning, and talk to an individual ahead of time to make sure what your organization does is of interest or a driving passion of the prospective board member. If a person is too busy, (most good people are) but you really need them to help your organization, don’t pressure them to join the board; rather, ask if they could serve on a short term project to help as an advisor to the board.
Once someone agrees to be on the board the job is not complete until that person is fully versed and understands all aspects of what the organization does. A new board member orientation kit should at minimum include; Board and organization management structure, Mission/vision/purpose statement, History of the organization in a concise, interesting way, Programs, Services, Board and organization staff roles and responsibilities, and a description on how the organization does its work.
Board Committee Structure There are as many board committee structures as there are nonprofit boards; however, the following can be useful when determining the committee structure for your board.
Financial accountability must always be considered when forming committees. The main concern here is to have in place a committee which ensures the fiduciary responsibilities of the board are carried out in an ethical manner using approved and acceptable financial policies and procedures. This is accomplished by making sure financial planning and financial statements truly reflect the mission of the organization.
Governance is also an area which should be covered by a committee. The governance committee is normally set up for the purpose of recommending to the board things such as corrections/changes to the by-laws, board size, and term length for directors, standards for director qualifications, number and structure of committees, and other governance policies and procedures.
Audit committees are often combined with the financial committee. If this is the case, extraordinary steps should be taken to ensure that the independence of any audit action is absolutely separate from the financial operations of the nonprofit organization. It is highly suggested that either a separate audit committee be formed or an independent outside audit be con ducted annually.
Development committees can serve a very useful purpose mainly in the areas of current board member development and the search for new board members as well as the succession planning process for both the board and the nonprofit organizational leadership.
Nominating committees have been a mainstay of boards. There job has been to assure a continuous flow of replacement or additional board members. Often the nominating committee is quickly formed to address an immediate need. The development board can be seen as an updated and more effective approach to the health of board membership.
Executive committees are normally put in place if only to deal with crisis matters which cannot be address in a timely manner by the full board. The caution offered here is to not develop an executive committee, which becomes a board within a board.
As you can see many committees can be formed and or combined to fit the size and complexity of a board. We did not go into event committees, fund-raising or other special committees which are formed to serve the specific goals or deliverables of a nonprofit organization. The important point to remember is to tailor and staff your committees in a manner which will best serve the public sector for which your organization was formed.
Financial Review (Using Sarbanes-Oxley Act Criteria)
Financial accountability is the main focus of the Sarbanes-Oxley Act. The main provisions of the act which can be applied and followed by a nonprofit organization fall into the following areas; Independent and competent audit, Responsibilities of auditors, Certified financial statements, Insider transactions and conflicts of interest, Disclosure, Whistle-blower protection, and Document destruction.
Independent and competent audit: While most nonprofit board members are volunteers not receiving compensation, the board should have a strong, independent and competent audit committee. The board should ensure the independence of their audit committee and ensure that board members of the audit committee have the financial competency to understand, evaluate, audit and make sound financial decisions as part of their fiduciary responsibilities. In fact, the board should have at least one “financial expert” serving on the audit committee.
Caution: The financial and audit committee members normally should not be the same individuals. Additionally no member of the nonprofit staff including the CEO/Executive Director should serve on the audit committee. At least one formal “independent” audit should be accomplished every twelve months.
Responsibilities of auditors: Auditors and audit firms should be change at least every five years to ensure that all financial practices are closely examined with “fresh eyes.” Also, great caution should be exercised using auditors or firms to provide non-auditing services such as tax preparation or legal services.
Certified financial statements: Although not required by law, CEOs and Executive Directors of nonprofit organizations should certify and sign off on “all” financial statements. The Form 990 or 990-PF requires a signature from an officer of the organization. More than the ceremonial signature, the accuracy of these forms should be verified for accuracy and completeness. Because the board has the ultimate fiduciary responsibility, the financial, audit and 990 or 990-PF Form, should be reviewed, understood and approved by the board. This certification process offers the greatest protection for the organization.
Insider transactions and conflicts of interest: Insider transactions such as loans and conflicts of interest should be highly discouraged and better yet eliminated. A conflict of interest policy with disclosure should be in place and enforced. Mixing any kind of personal gain with the business of the organization can be a recipe for disaster.
Disclosure: Nonprofit organizations should disclose changes in operations or financial situations in a timely and current basis. Audited financial statements and accurate and complete 990 or 990-PF Forms should be made available in a timely manner.
Although not enforced by any government agency at this time, these last two provisions of the Sarbanes-Oxley Act are not optional for the nonprofit sector.
Whistle-blower protection: The nonprofit organization must develop, adopt, and disclose a formal confidential and anonymous process to deal with employee complaints regarding any inappropriateness within the organizations financial management. Even if the claims are unfounded, the nonprofit may not reprimand the employee. A reasonable belief or suspicion that fraud exists is enough to create the protected status for the employee.
Document destruction: The nonprofit organization may not alter, cover up, destroy or falsify any document to prevent its use in an official proceeding. This does not say the organization can not shred or otherwise dispose of unnecessary and outdated documents. As a nonprofit you must have a written “document retention and periodic destruction policy.” The policy should include guidelines for handling electronic files and voice mails as they have the same status as paper in litigation related cases. The procedure should also outline archiving and back-up procedures.
Strategic Guidance Both for-profit and nonprofit boards are putting more emphasis on strategic thinking as a capability in board members and a priority of the board. Your organization can only do better by being different. Being good is not enough. Strategy is a key to being different. Ignore strategy and your organization could be in peril.
Simply stated, strategic thinking is thinking through one or more decisions impacting your whole organization, taking into consideration the critical external factors (economy, markets, perceptions and competition) and then thinking through how you will shape and focus your resources (knowledge, financial, and facilities) so that the organization delivers a distinctly competitive value in the public's eyes.
Building a strategic thinking board is not difficult, and there is no “one way” to run an effective board, but there are factors that can have a dramatic impact on a board's ability to think strategically. These are the size of the board, the use of executive committees, the frequency of board meetings and the regular attendance of board members.
With size “less is more.” Seven to fourteen members is considered optimum. Typically people in larger boards abdicate their responsibilities to a few. Keep your board small enough to sit around a table where each member can sit eye-ball to eye-ball and stay truly engaged in the process. If you are concerned about losing your reach, use committees made up of people who do not sit on the board.
Few constructs do more to limit strategic thinking than executive committees. Executive committees are great to make quick decisions in times of crisis; but, having a small group make all decisions behind closed doors does little to encourage committed thoughtful participation by the entire board. Board members are not going to waste time or effort in thinking strategically if the executive board/committee makes all the strategic decisions. If your board is small enough, great strategic thinking and dialogue can be accomplished.
Board members have a duty to make informed strategic decisions. Board members can only be expected to make informed, strategic decisions if the meetings are strategic in scope and… if the board is meeting at least six times a year, preferably nine.
Board members are needed at each meeting if the board is going to engage in meaningful strategic thinking. Consider using today's technology to increase participation. Clearly, your bylaws must be in compliance with laws regulating the use of technology as a means of conducting board business; However, many states merely require that people be able to participate simultaneously. This would allow the use of conference calls, or online conferencing.
Succession Planning Sooner or later, almost every organization is likely to face the need to compete for executive talent, either at the board level, CEO level or among senior executives who report to the CEO. Turnover at every level of any type of organization is a natural part of life. By planning ahead to manage turnover at the top, organizations ensure they have the leadership they need to meet the challenges ahead.
A change in executive leadership is inevitable for all organizations and can be a very challenging time. A succession plan policy is a tool to help an organization ensure it is prepared for planned or unplanned absences of key executives, clarifying authority and decision-making and thereby maintaining accountability and ensuring stability.
To attain the most success in succession planning it can not be a process that exists in isolation, but rather it must be interwoven within the culture and the strategic and business objectives of the organization. Attaining strategic goals and improving the existing cultural values of an organization will require leadership development that not only keeps pace with, but also leads the organization to its desired future. Therefore, the succession planning process should be tailored to specifically meet both the present and future needs of the organization…at all levels of leadership.
To protect operations when vacancies occur, it is highly suggested to combine executive succession plans with leadership development, thus creating management depth to maintain efficient operations when key positions are vacant.
Smart succession planning takes a split route: the normal, gradual development process and a backup emergency plan.: A well thoughtout succession planing process should spell out who is actually in charge when an emergency strikes. A long-term succession planning process involves "protecting the company's culture, mission, and long-term strategy," by internally developing the next succession of leadership.
Boards should conduct regular sessions with the CEO on succession planning and executive development. A board committee should have succession oversight among its formal duties. The board should stay informed on and evaluate potential succession candidates from both inside and outside the organization. If the board does not have the talent to develop a succession planning process they should seek outside input.
A practical approach to viewing a succession planning process is to see it as a necessary and required continual search for, and the grooming of the best talent. Whether they like it or not, everyone in key positions must understand that training their successor is part of their job! Leaders are the stewards of their talent pool. The organization must seek to have the best talent, with a backup, in positions that are critical to attaining its plans and priorities and capable of dealing with its biggest challenges.
Board “best practice indicators” for fulfilling its responsibilities in succession planning:
• Strong/Developed/Prepared internal candidates available for promotion.
• Retention of promising top management candidates.
• “Leadership quality” individuals in the wings who can step into key positions in case the CEO or other key individuals have to leave unexpectedly.
• Time-based succession planning scheduled around planned retirements.
• Strong and growing performance by the organization.
Executive Review Evaluating the Chief Executive is a primary responsibility of the board. Executive review and evaluation ensures the board is meeting its duty to document, guide and enhance the performance of the organizations CEO/Executive Director. It also leaves a written record of the Board's impression of the Chief Executive's performance in case this record is needed for future verification, e.g., for salary increases, probationary/firing activities, etc.
Additionally, the best CEO s and executive talent want to know more fully where they stand, particularly with their boards. These executives want to be seen as doing well and also learn how they can be even more effective. The best executive talent wants to learn and grow, since they are achievers. Through the use of a sound review process the board can accomplish this.
Review Areas to Consider:
Financial:
Receives a clean financial audit Develops a sound budget and stays within the budget Maintains the needed cash flow Raises enough revenue to accomplish programs, meet goals and build financial capital for future growth/programs.
Strategic Thinking:
Develops strategies which carry out the goals of the organization Administers/accomplishes the desired/documented strategies Transformational Thinking:
Demonstrates entrepreneurial/creative abilities to enhance organizational sustainability, performance and growth Maintains an active and creative role with the board to ensure good governance of the organization Human Resources:
Maintains or increases the productivity of the staff Maintains low staff turnover Deals quickly and effectively with personnel complaints/issues Maintains a sufficient and effective volunteer pool Maintains a safe and professional work environment Ensures the growth and development of the staff Personal Development/Growth:
Actively seeks information/advice from board/outside experts Documents/accomplishes an ongoing personal/career development plan Board Review Checklist The following checklist is provided as a tool to enhance the operation of the board. It is not totally inclusive of all boards in the nonprofit sector because of their variety and complexity. The checklist is best used as a starting place. You are encouraged to add to the list and use it on a continuing basis (at least annually) to conduct a board self-evaluation. Consider having new board members (fresh eyes) run through the list.
• Are the roles of the Board and the Executive Director defined and respected, with the CEO/Executive Director delegated as the manager of the organization's operations and the board focused on policy and planning?
• Are new board members oriented to the organization, including the organization's mission, bylaws, policies, and programs, as well as their roles and responsibilities as board members?
• Does the Board of Directors act as governing trustees of the organization on behalf of the community at large and contributors while carrying out the organization's mission and goals?
• Do the board members receive regular training and information about their responsibilities?
• Does the organization have at least the minimum number of members on the Board of Directors as required by their bylaws or state statute?
• Does the board have a viable organizational succession planning and board selection process in place?
• Is the CEO/Executive Director recruited, selected, and employed by the Board of Directors.
• Does the board provide clearly written expectations and qualifications for the CEO/Executive Director position, as well as reasonable compensation?
• Does the board's nominating process ensure that the board remains appropriately diverse with respect to gender, ethnicity, culture, economic status, disabilities, but especially skills and/or expertise?
• Does the board have a documented description of the board and board committee responsibilities?
• Do the bylaws include as a minimum: a) how and when notices for board meetings are made; b) how members are elected/appointed by the board; c) what the terms of office are for officers/members; d) how board members are rotated; e) how ineffective board members are removed from the board; f) a stated number of board members to make up a quorum which is required for all policy decisions?
• Do the organizations adopted bylaws conform to state statute and have they been reviewed by legal counsel?
• Does the organization maintain a conflict-of-interest policy and all board members and executive staff review and/or sign to acknowledge and comply with the policy?
• Does the board have a process for handling urgent matters between meetings?
• Does the board have an annual calendar of meetings, and does the board also have an attendance policy such that a quorum of the organization's board meets at least quarterly?
• Do board meetings have written agendas and are materials relating to significant decisions given to the board in advance of the meeting?
• Are board meetings characterized by open communication, diligent questions and on point discussions in a collegial manner?
• Does your board periodically review your mission statement and implement strategy?
• Does the board communicate effectively on a regular basis with its stakeholders, contributors and beneficiaries?
• Does the board rotate committee members and chairs at appropriate intervals?
• Has the board reviewed your operation's significant legal exposures and assessed your organization's legal compliance processes and record?
• Does the board governance and nominating committee regularly assess board practices and structures for effectiveness, evaluate current directors and counsel those whose performance is less than ideal, and continually look for talented potential new directors?
• Does the board get enough information of the right kinds, at the right time, from the right members of management?
Board Directors and Management must work together The board and management comprise a team which should work cooperatively towards fulfilling the organization's nonprofit purposes. This is the primary goal of the organization and every reasonable effort should be expended to achieve it. The relationship between the board and management should be objective, but not adversarial. It should be independent, yet supportive, open and honest and without any deception. For the sake of the organization, power should be shared between the board and its chief officer to promote harmony and accountability.
Practical Tips Every organization needs to bring about a constructive sharing of power between its board and chief officer to set the standard of accountability. An organization might consider implementing as many of the following accountability steps as are applicable:
1. After careful selection of a CEO or Executive Director for the organization, permit that chief officer to have broad executive authority within the scope of the organization's nonprofit purposes.
2. Adopt a comprehensive ethics and conflict of interest policy applicable to all officers, directors and employees.
3. Approve a detailed annual operating budget, an annual independent financial audit and an annual mission compliance review.
4. Adopt a succession planning process for both board membership and key organizational leadership positions.
5. Authorize and monitor general and specific fund solicitation programs in compliance with the Council of Better Business Bureaus' Standards for Charitable Solicitations or equivalent standards.
6. Annually prepare a two year business plan including cash flow and income projections with specific deliverables at specific times especially for the first year.
7. Authorize and empower appropriate working management committees including and in this order: 1. Finance, 2. Governance, 3. Audit, 3.Development/succession, and 4. Nominating committees of the board. If the board is kept small an Executive committee becomes optional.
8. Approve procedures for the selection and performance evaluation of executive and operating officers and hold them accountable for appropriate execution of board policies.
9. Make informed policy decisions consistent with and supportive of the organization's exempt nonprofit purpose and tax-exemption laws free of conflicts of interest and self-dealing.
10. Stay focused on issues that are related to the organization's mission and vision.
11. Agree to put forth no goals without action plans and no problems without proposed solutions.
12. Educate members of your board and provide them with the tools they need to do their job.
13. Continually brainstorm on ways to improve both board and organizational operations.
14. Be unconditionally constructive toward the greater good of the organization and the purpose it serves.
Conclusion In today's climate of increasing liability exposure, nonprofit organizations must demonstrate their willingness to be accountable. The way to reach this goal is to have a strong board. A board of directors has extensive responsibilities. As the board does its job it creates an environment which will influence every director, employee, donor and member.
The board of directors is the governing body of a nonprofit organization. The responsibilities of the board include but are not limited to discussing and voting on the highest priority issues, setting policy, approving operating budgets, establishing strategies, hiring key staff and most importantly exercising fiduciary responsibility. Board members rarely know everything about a nonprofit organization; however, they are expected to act prudently and in the absolute best interest of the organization.
Finding desirable board members can be a difficult task. A good board member is someone who is interested in the organization's purpose, willing to work within a group, and be in a position to make financial contributions to the organization, or to find others who will, and act in professional, constructive and confidential manner.
Hopefully this white paper has served its intended purpose – Provide knowledge and awareness to help better shape the future of your nonprofit board and organization.
Copyright Information:
You MAY reprint the information contained in this article as long as no portion of the contents are modified and it used “exclusively” within your organization. You must also give credit to information by including the tag line...
Roger M. Ingbretsen, Author, Speaker, Leadership Coach and Organizational developer For more information, visit www.ingbretsen.com or call 509 999 7008.
Ingbretsen Consulting LLC, specializes in leadership coaching and organizational development and is the creator of the “Leadership Development Coaching Experience©” a train the trainer, internal leadership coaching process. Roger Ingbretsen is also the author of the personal growth, self development reference book, “Personal Knowledge to Shape Your Future” and will soon release “Your Future Career: A Survival Guide for the American Workplace.”
Board Basics for Non-Profits - To learn more about this author, visit Roger Ingbretsen's Website.
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