Best Practices for Non-Profit Boards of Directors

By W. Parish Lentz

In recent weeks, we have seen headlines in Massachusetts and Rhode Island related to major criminal investigations in the non-profit community. These scandals range from the misappropriation of grant funding to excessive compensation or private benefit at the expense of the organization. In 2013, the Washington Post cited a report by Marquet International concluding that non-profits and religious organizations accounted for one-sixth of major embezzlements, placing second only to the financial services industry. “I come across these cases all the time,” said Christopher T. Marquet who heads the firm. He said oversight at nonprofits is often thinner and supervisors are more trusting. “The control structures in these organizations are much weaker.” Over two years later, little has changed.

The best practices below will help your organization utilize the appropriate preventive measures to ensure legal compliance and to avoid criminal activity within your organization.

  • Understand Your Fiduciary Duties. Serving as a director or officer of a non-profit, requires that you accept the responsibility to act with the duties of good faith, due care and loyalty; and the potential liability for failing to fulfill those duties. With increased scrutiny from the I.R.S., Congress, state attorneys general, the Department of Justice, donors and the media, board service comes with real responsibilities and real consequences for those that fail to live up to them.
  • Provide Effective Oversight. Boards can delegate tasks to committees, officers, staff, or in certain cases, professionals, but only with sufficient oversight, which is commonly exercised through policies and procedures as long as the board ensures that the policies and procedures are actually followed. Common oversight mechanisms include review of financial statements and the annual Form 990 as well as the implementation of various governance policies, which can include conflict of interest policies, executive compensation policies, travel and expense reimbursement policies, whistleblower policies, etc. Committees can also be formed for tasks that require more time and attention, such as finances, investments, audits, and compensation.
  • Financial Transparency. Every organization must maintain up to date and transparent financial reports and processes that do not allow for employees to utilize funds without supervision and accountability. Additionally, bookkeepers and controllers’ work should be open format and not in an isolated silo. Frequent review of credit card statements and actual cancelled checks are essential, and checking accounts should be reconciled frequently and discrepancies addressed immediately. There should be many sets of eyes on all phases of the intake and payment processes.
  • Awareness of Laws Governing Tax-Exempts. It is essential that directors of tax-exempt entities be aware of the various federal, state, and local laws that apply to the organization. Congress and local governments have imposed legal requirements that tax-exempt organizations, which enjoy an array of tax and other benefits, must follow to ensure those benefits are not exploited. Different limitations apply if you are a private foundation, a public charity, a supporting organization, or another form of tax-exempt entity. At a minimum, board members should understand the penalties for overpaying employees, engaging in excessive lobbying or political activities, accommodating tax shelter transactions, making egregious bad bargains on behalf of the organization, the impact of failing to pass the public support test, etc. Ongoing board training and orientation for new board members offers the best prevention.
  • Keep Governing Documents Up-to-date. Organizations may, over time, change or update their mission, purpose, and governance practices without updating their governing documents. Greater compliance can be encouraged by conducting regular reviews of governing documents and checking bylaws before the election of additional officers or directors, creating additional committees, adopting amendments, etc.
  • Ask the Hard Questions. Though it can be difficult and uncomfortable to ask tough questions or disagree with fellow board members, often the most valuable board members are those who, calmly and respectfully, speak their mind. Boards that pass every resolution “unanimously” should evaluate whether it is encouraging open, productive discussions about key issues.
  • Conflict Management. If a conflict of interest between a board member and an insider, family member or business arises, disinterested members of the board should consider alternate arrangements that would not create a conflict of interest. If after considering alternatives, the board finds the transaction with the insider is in the best interest of the organization, then the board should carefully document the basis for the decision and note that the interested director did not participate in the deliberations or vote.