13 Tips for a Resilient Not-for-Profit Board
In that light, however, one cannot overlook the fiduciary responsibility and due care required by every governing body member to exercise that governance role. A governing body member is responsible for overseeing compliance and transparency of the financial information to the public, providing effective governance, financial oversight, and fundraising among other things. One needs to understand how to achieve these goals in order to be effective.
POOR BOARD GOVERNANCE
As an example of what can go wrong if a governing body does not exercise appropriate responsibility, one can look to the headlines and news. In a recent investigative report issued by the Office of the State Comptroller of NJ, several issues were identified at a not-for-profit including: The executive director continually engaged in wasteful and abusive spending practices; wrote unauthorized payroll checks; maintained a brokerage account with unauthorized trades; did not follow formal bidding procedures for contracts; gave no-interest loans to a not-for-profit which was operated by a trustee of the entity issuing the loan; provided for improper bonuses and advances; distributed large sums of money to community organizations without approval; did not follow procedure concerning petty cash; and did not provide for proper sub-recipient monitoring.
As a result of the investigation, individuals on the governing body are under fire and could face legal consequences. What went wrong here? At a high level, inadequate governing body oversight and poor exercise of fiduciary responsibility.
NOT-FOR-PROFIT BOARD MEMBER RESPONSIBILITY TIPS
In order to safeguard the organization, the governing body member, or sub-committees of the governing body, should consider the following:
| 1 | A strong system of written internal controls is required. Review and approval annually by the oversight group is also a strong practice. |
| 2 | A sub-committee structure whereby individuals with different expertise on the board oversee different areas is a strong mechanism for oversight. |
| 3 | Significant transactions and contracts carry additional risk and should have an ancillary layer of review outside of the Executive Director, namely, by a governing body member, and contractual obligations may require full board approval. |
| 4 | The 501(c)(3) exemption is conditioned on the organization being one “of which no part of the net income inures to the benefit of any private shareholder or individual.” A strong conflict of interest policy should be in place and enforced to identify related party transactions and instances where private inurement arises. A written statement from members on conflicts or lack thereof from management and the governing body can accomplish this task with annual attestations required to ensure compliance with this policy for a board member and key employees. |
| 5 | NFP accounting nuisances exist, including additional layers of disclosure as well as differences in the treatment of revenue as compared to for-profit accounting. Be careful when reviewing not-for-profit financial statements to consider the unique operating metrics of not-for-profits. |
| 6 | Revenue generated from activities that are outside of the organization’s charitable mission may be subject to income tax. Performing too many unrelated tasks could lead to loss of tax exemption. The governing body should verify that management or a third-party consultant is evaluating each revenue stream for potential UBI issues. |
| 7 | Non-filing of the 990 tax return for three consecutive years will lead to loss of tax-exempt status. The governing body is required to be a part of the review and filing process as well as for overall compliance with the filing requirement. The 990 is also a great marketing tool, therefore, governing body involvement is key. |
| 8 | Annual discussion of agency-wide risk and threats to the organization, including evaluating internal controls, legal and compliance risk, reputation risk, operational risk and other significant risks to the organization, is strongly suggested. The governing body should maintain written notation of the risk assessment performed. |
| 9 | Compliance with all federal, state and local laws, including tax liability (payroll, income, etc), is required and governing body members can be held liable personally for lack of compliance. The governing body should verify management is handling these matters. |
| 10 | Grant contracts and donor contributions are complex and the organization needs to monitor these agreements closely and carefully to ensure compliance. In today’s environment, states and local governments are trying to cut, not increase, their budgets – the first place they look are organizations with habitual non-compliance. |
| 11 | Executive Compensation must meet the IRS criteria of “rebuttable presumption of reasonableness,” which means there must exist a formal process to determine and evaluate officer compensation – the process must be written and based on an analysis of comparable data. This documentation generally occurs at the governing body level and should be done annually. |
| 12 | Meeting minutes must be written and contain information concerning significant actions of the board as well as the sub-committees of the board. The minutes should be approved by the governing body members by vote. |
| 13 | If the organization has an endowment fund, each state generally has laws over the prudent management over the endowment and the investments. For example, in New Jersey, not-for-profits must follow the “UPMIFA” laws as well as specific contract laws associated to the agreements establishing the funds, unless the donor instructions include details on how the funds are to be maintained. An investment committee of the governing body generally oversees the management of endowment funds and establishes an investment policy. |
Although the governing bodyposition is generally in a volunteer capacity, it is important to remember that being a member of the governing body of a not-for-profit requires due care, strong oversight and exercising of fiduciary responsibility.
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
