The concept of quality governance practices within nonprofit organizations is not revolutionary. Historically, however, the role of those charged with the governance of nonprofit organizations - the board of directors - has not always been clearly defined.
Many have viewed the board member role as self-promotion, a résumé-builder. A hands-off approach taken by these board members can lead to a lack of focus when it comes to the mission of the organization, and create a breeding ground for abuse.
Due to the nature of nonprofit organizations and their existence for serving the greater public good, when abuse does arise there is almost a disbelief that such activity could occur. There is a public expectation that boards will be responsible for upholding the integrity of their organization, and by extension the nonprofit sector as a whole.
Economic downturns drastically highlight that there truly is a limited number of "donation dollars" available for charitable contribution. Donors and grantors have become more selective about their contributions. Boards have recognized this. They understand that exhibiting strong governance practices, a strong focus on their mission, and transparency can result in gaining an edge in the competition to receive much-needed funds.
Probably the most influential stimulus for stronger governance in recent years was the overhaul of Form 990 by the IRS, effective in 2008. This significant modification created waves among nonprofit boards. Concepts such as whistleblowers, conflicts of interest, and record retention demanded the institution of previously nonexistent policies. An extensive questionnaire on governance, management, and compensation methods caused boards to review their organizations as a whole and revamp their structure and operations. The requirement that Form 990 be presented to the board for its review prior to filing created deeper analysis, and thus a better understanding of the organization by all board members. This review requirement also created an inability for individual members to claim ignorance of information reported in the 990. The IRS emphasizes that compliance with the revised Form 990 represents minimum requirements, and that exemplary governance practices would go above and beyond Form 990.
ROLE OF THE BOARD
Understanding the role of the board within an organization may seem to be a basic concept. Too often, however, there has been only an informal recognition of its purpose. Strategic planning, oversight of mission-driven programs, fundraising and risk assessment should be the key focus. Management and operational functions sometimes consume the precious time needed for these goals. The details of these management and operational functions should be the responsibility of an executive director. Board involvement should be called on only when necessary.
Board members should also serve the role of "cheerleaders" for the organization, promoting its mission wherever possible. This requires responsibility on each member's behalf, as their actions can be construed as being representative of the organization. A code of ethics for each member to follow will help promote exemplary behavior.
MAKEUP OF THE BOARD
Most nonprofits are started by an individual or group with a vision. In the early years, the governance group tends to consist of like-minded individuals. This may be sufficient during the genesis period, but sustaining viability will require expansion beyond that core group.
There are several factors to consider regarding the structure of the board. First is the experience of the individual. Knowledge of the mission of the organization is an important factor, but business acumen, strong social skills, or a well-connected network can rate even higher. Second is the age of the members. A mix of experience and youth will instill time-tested ideals combined with fresh concepts. For new and younger members, an effective training system and a manual outlining responsibilities will help them become active and contributory participants. Diversity among the members could mean innovative approaches due to differing backgrounds.
Lastly, and perhaps the most important from a governance aspect, is to reduce or eliminate interrelationships among board members. Having employees serve as board members creates a conflict of interest. The executive director serves the board: This person should not be on the board. In this case, governance and operational lines would become clouded. Ensuring independence between individual board members, employees of the organization, and related vendors used by the organization eliminates the potential for decisions and transactions that do not have the organization's concerns first and foremost.
SIZE OF THE BOARD
The number of board members should be in direct proportion to the size of the organization. An oversized board can breed inefficiency, as decision-making will become cumbersome. Conversely, a de minimus board can lack the depth necessary for effective oversight. Using external partners (accountants, lawyers and insurance agents) can reduce board size and provide expertise for smaller organizations. Such usage, however, must remain in compliance with the organization's conflict-of-interest policy.
COMMITTEES
With larger organizations, the use of committees by the board can effectively provide focus and expertise in key areas. Common committees include executive, finance, audit, fundraising and technology. Each committee can provide specific attention to its task and report its recommendations to the board as a whole, thus streamlining board meetings, reducing unneeded deliberation, and keeping the board engaged.
Having an audit committee that is separate from the finance committee is a practice arising from Sarbanes-Oxley. While not always feasible based on the size of an organization, those groups that use an audit committee benefit from improved financial reporting and increased risk assessment ability.
MISSION-DRIVEN FOCUS
Each board member must understand and be focused on the organization's mission. The mission should be reiterated at every board meeting to remind participants of why they are donating their valuable time and efforts. Planning regular board retreats can be an instrumental tool in maintaining that crucial focus. Such events enable members to reflect upon the mission, generate new ideas, and renew their drive in serving the organization. Board members set the tone for those working and volunteering for the organization, and their commitment will set an example.
PARTICIPATION AND ENGAGEMENT
An effective board of directors requires engaged participation in meetings and functions, and involvement in events that promote the mission of the organization. Innovative technological advances - such as smartphones, Skype and Web portals - enable attendance at meetings even when physical attendance is not possible.
Board members should participate periodically in the operations of the organization. This enables board members to understand how the organization serves its mission. It also "humanizes" board members to employees, adding to the renewal of their drive toward the organization's success. Fully engaged and committed board members also reduce turnover and create stability.
Boards must meet on a regular basis, usually monthly, to remain engaged. The timing of meetings would depend on the nature of the organization and its goals, but infrequent meetings or an irregular schedule can lead to a lack of attention to the organization's needs and an overall lack of focus on the mission. Conversely, meeting too often can cause micromanagement and member dissension.
SAFEGUARDS
Understanding and implementing best practices is instrumental in providing quality governance for a nonprofit organization. Best practices will both further the nonprofit's mission and help with what could be a paramount factor for future existence - assessment of risk. Identifying factors that could jeopardize the organization will enable the board to address needs before negative effects are felt. The risk factors can be broken down into four areas: organizational, investment, fraud, and inherent risk.
With the implementation of Statements of Auditing Standards Nos. 103 through 112 on risk assessment, auditor strategy was changed to require a more in-depth understanding of the organizations they audit and to identify areas that create the greatest risk of material misstatement.
Through documenting financial systems, understanding internal controls, and transactional walk-throughs, auditors have subsequently shifted the auditee's focus toward overall organization risk. Boards have become acutely aware of factors not previously considered at length, such as internal control deficiencies, economic and industry factors, and effects of related-party transactions.
A volatile stock market creates significant risk for organizations with endowments or invested reserve funds. Consideration of investment risk is fundamental to ensure that accumulated assets of the organization are protected, and the board serves as the steward for those assets and maintains responsibility. The board should have an investment policy that can endure volatile periods. Having a "market-reactive" approach is irresponsible, as significant losses might be sustained that cannot be recovered. The constant monitoring of the investment portfolio is vital to ensuring the appropriate diversity of holdings, for both principal maintenance and growth.
The risk of fraud is omnipresent, and it often occurs from the most unexpected source. Boards must understand the opportunities, incentives and mindset from which fraudulent activity arises. A solid system of internal controls can mitigate the risk and potential of its occurrence. In addition, the establishment of a whistleblower policy can assist in uncovering fraud rooted within the organization.
There are factors outside the control of the organization that can create significant risk to its wellbeing. Understanding inherent risk will help insulate the organization from these risks by directing the board to make adjustments to help manage it.
The struggling economy has caused a decrease in available donations and support, thus opening the need for new and innovative funding methods. Competition from organizations with similar missions creates the need for differentiation; otherwise, both support and availability of beneficiaries will be redirected elsewhere.
There is no one way to instill proper governance practices in a nonprofit. There are, however, many over-arching principles that apply to all types and sizes of organizations. Understanding and implementing those principles is the first step toward IRS compliance, public confidence and, most important, furthering the nonprofit in its mission.
Douglas W. Ofcharsky, CPA, is a senior manager of WeiserMazars LLP in Horsham, Pa. Reach him at douglas.ofcharsky@weisermazars. com. Reprinted with permission from The Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPAs.
