The Nonprofit Board Answer Book: A Practical Guide for Board Members and Chief Executives

By BoardSource

An essential guide to good governance for board leaders at all levels of experience and expertise

This third edition of the bestselling book for nonprofit board members and professionals offers a thoroughly revised and updated resource that answers the most-commonly asked question on board governance. The book covers such topics as board structure and process, board member recruitment and orientation, board-staff relations, and financial management. This new edition includes updated information on topics that have recently increased in importance including new Form 990; dealing with the financial crisis, risk management, and mergers.

• Shows executives and board members how to be more effective, meet difficult situations head-on, and deal with commonplace challenges with confidence
• Topics include information on the viability of for-profit ventures, board retreats, board diversity, fundraising, financial oversight, strategic thinking, and the use of technology
• From Boardsource the premier resource for practical information, tools, best practices, training, and leadership development for board members of nonprofit organizations worldwide

Offers insight gained from the BoardSource Governance Index Survey, hundreds of board self-assessments, and questions and challenges heard by BoardSource from thousands of nonprofit leaders.

• Language: English
• Publisher: Wiley
• Release date: Nov 8, 2011
• ISBN: 9781118127025

Book preview

PART ONE: Basic Board Functions

Nonprofit organizations come in endless variations. They range from small, local homeless shelters to large, international trade associations; from community foundations operating within a geographic region to educational institutions that attract students from around the country. Their funding may come from just a handful of sources or from a wide array of charitable contributions, membership dues, government grants, fees from programs and services, and more.

Whatever its size, scope, or funding, every nonprofit organization has a governing board composed of people who believe in and support its particular mission. As a member of a governing board, you have the pleasure—and the responsibility—of monitoring, overseeing, and providing direction for the organization’s pursuit of that mission. Those responsibilities, which have legal ramifications, will call on you to develop or hone your skills in numerous areas, from financial management to organizational communication and from fundraising to strategic planning.

1.

What are the basic responsibilities of a nonprofit board?

If you could observe the board meetings of hundreds of nonprofit groups, you would be struck by how different they are in terms of structure, strength of leadership, working style, and relationship with the staff. But despite their diversity, most boards share the same basic duties:

1. Determine the organization’s mission and purposes. It is the board’s responsibility to create and review a statement of mission and purposes that articulates the organization’s goals, means, and primary constituents (see Question 3).

2. Select the chief executive. When the time has come to hire the first or the next chief executives, boards must reach consensus on the position responsibilities and undertake a careful search to find the most qualified person for the job (see Question 74).

3. Support and evaluate the chief executive. The board should ensure that the chief executive has the moral and professional support he or she needs to further the goals of the organization (see Questions 67 and 68).

4. Ensure effective planning. Boards must participate actively in an overall planning process and assist in implementing and monitoring the plan’s goals (see Question 5).

5. Monitor and strengthen programs and services. The board must ensure that current and proposed programs and services are consistent with the organization’s mission and monitor their effectiveness (see Question 8).

6. Ensure adequate financial resources. One of the board’s main responsibilities is to ensure that the organization has adequate financial resources to fulfill its mission (see Questions 4 and 48).

7. Protect assets and provide financial oversight. The board must approve the annual budget and ensure that proper financial controls are in place (see Questions 50 and 51).

8. Build a competent board. All boards have a responsibility to articulate prerequisites for candidates, orient new members, and periodically and comprehensively evaluate their own performance (see Questions 23, 29, 36, and 37).

9. Ensure legal and ethical integrity. The board is ultimately responsible for seeing that legal standards and ethical norms are respected (see Questions 2 and 54).

10. Enhance the organization’s public standing. The board should clearly articulate to the public the organization’s mission, accomplishments, and goals and garner support from the community (see Question 10).

SUGGESTED ACTION STEPS

1. Board members, write down what you believe are the board’s responsibilities. Consolidate the responses in a summary report for discussion at the next meeting. Try to reach consensus on the distinction between board and staff roles.

2. Board chair, invite a knowledgeable and objective volunteer to read the board’s minutes from the past year and then observe two board meetings. Ask this person to summarize, based on his or her observations, the board’s actual role (not what someone says it should be). You’ll find out quickly whether or not the board is fulfilling its responsibilities.

2.

What are the legal duties of a board member?

From a legal standpoint, trustees, officers, or board members of a nonprofit board are held to these three standards:

1. Duty of care. This refers to board members’ responsibility to participate actively in making decisions on behalf of the organization and to exercise their best judgment while doing so.

2. Duty of loyalty. When acting on behalf of the organization in a decision-making capacity, board members must set aside their own personal and professional interests. The organization’s needs come first.

3. Duty of obedience. Board members bear the legal responsibility of ensuring that the organization remains true to its mission and purpose by its compliance with all applicable federal and state laws.

As an example of a legal issue, organizations designated as tax exempt under Section 501(c)(3) of the Internal Revenue Code may not engage in excessive lobbying and may not make contributions to certain types of organizations, such as political campaigns. If the organization does not operate in accordance with these restrictions, it may have to pay a stiff fine or may even lose its tax-exempt status (see Question 81).

The Internal Revenue Service (IRS) can also penalize individuals who take advantage of their positions inside nonprofits. Known as intermediate sanctions, these penalties apply to excess benefit transactions between a nonprofit organization and disqualified persons. Excess benefit simply refers to any transaction that exceeds fair market value for the benefit received by the nonprofit or that is not comparable to what similar organizations or companies pay for a similar product or service. Any financial transaction is subject to scrutiny, from severance payments to transfers of property to officers’ liability premiums.

According to the IRS, the term disqualified person refers to anyone in a position to exercise substantial influence over the affairs of the nonprofit organization within the preceding five years. This category would include officers, directors, high-level employees (including department managers), major donors to the organization, and even the families of all these types of people.

Should the IRS determine that a disqualified person has received an excess benefit, the person has a tax liability of 25 percent of the excess amount. (If the tax is not paid or the excess amount not returned to the organization within a specified amount of time, the penalty may increase to 200 percent.) In addition, any board member or manager who knew of or approved the transaction is subject to a 10 percent tax on the excess amount (up to a maximum of $10,000 per excess-benefit transaction). The IRS may waive the taxes and penalties should the nonprofit organization uncover the excess-benefit transaction and correct it before an IRS audit takes place.

Intermediate sanctions are applicable to 501(c)(3) organizations (excluding private foundations) and 501(c)(4) organizations. To protect itself from intermediate sanctions, a board should be sure to fulfill the three requirements of the safe harbor provision. This provision applies when nonprofit boards are determining the chief executive’s compensation or engaging in a financial transaction with a disqualified person. The safe harbor requires the board to

Approve the transaction, with the interested person not present during the debate and not casting a vote;

Obtain and review comparability data related to the transaction; and

Document the basis for its decision.

SUGGESTED ACTION STEPS

1. Board members, make sure the board has a written policy that either prohibits board members from engaging in business or financial transactions with anyone directly connected to the organization or clearly states conditions under which such transactions are acceptable.

2. Board chair, set aside time during a board meeting to review the restrictions that accompany the organization’s tax-exempt status.

3. Board chair, use the three legal duties of a board member as a discussion topic during a board development session or leadership retreat.

3.

What is the board’s role and involvement in mission, vision, and values?

Mission, vision, and values are the defining elements of an organization’s identity, the templates from which all actions and programs evolve. The board is responsible for expressing, understanding, endorsing, and advancing these summaries of purpose, direction, and principles.

Mission is an organization’s reason for being. A well-articulated mission focuses board members’ thinking and actions on what distinguishes their organization from others. It should not so much describe the organization as define the results the organization seeks to achieve. The board should review the mission periodically—for example, at the beginning of every strategic planning process—to make sure it remains useful and valid.

Successful nonprofit organizations use their mission statements as guides and benchmarks for everything board and staff members do. They ask, Do the strategic plan and its supporting objectives build upon the whole reason we exist? Does the budget accurately reflect what’s really important to us? Do our policies and procedures advance our purposes? What programs and services are most consistent with our mission?

Ideally, a mission statement is clear, memorable, and relatively brief, suited for printing on organizational documents and easily committed to memory. It should not simply summarize strategies or programs. These examples illustrate the difference:

Yes: We stimulate young people’s love of learning and reading.

No: Our mission is to provide free books to local schools.

Yes: We strengthen our community by helping those who are in need to gain self-sufficiency.

No: Our mission is to operate neighborhood-based food banks and offer job training.

Vision paints a picture of what is possible in the future—for constituents, for the community, or for society as a whole—if the organization accomplishes its mission. Think of vision as a long-term achievement that guides, inspires, and motivates the board and staff.

A vision statement differs from a mission statement yet also requires board approval. Typically longer than a mission statement, a good vision statement is both idealistic and realistic: it challenges people to accomplish something while making the accomplishment attainable. For example:

We aspire to be the premier youth sports organization in the state, the first choice for boys and girls who want to develop their athletic talents to the best of their abilities in an atmosphere of caring and support.

Our vision is to be the most effective voice and most vocal advocate for the preservation and restoration of wetlands throughout the world. We will operate in partnership with other like-minded organizations to shape the future of our world through research, science, and education.

It’s not uncommon for nonprofit organizations to revise their vision statements every five years or so, to reflect changes and developments in the world around them.

Values are the deeply held beliefs that guide programs and operations and provide the litmus test for all decisions. People identify with organizations whose values they share, so the expression of values will attract interest in a way that a simple description of an organization does not. A statement of values should be inspiring and capture the distinctive essence of the organization. Unlike mission and vision statements, values statements are often written as straightforward lists, like this one from Goodwill Industries of America:

Respect. We treat all people with dignity and respect.

Stewardship. We honor our heritage by being socially, financially, and environmentally responsible.

Ethics. We strive to meet the highest ethical standards.

Learning. We challenge each other to strive for excellence and to continually learn.

Innovation. We embrace continuous improvement, bold creativity, and change.

SUGGESTED ACTION STEPS

1. Chief executive, post the mission, vision, and values statements in a well-trafficked area where board members, staff members, and visitors will be sure to see them.

2. Board members, to reinforce the organization’s mission, consider reprinting the full mission statement (or highlighting three or four key words) on its letterhead.

3. Board chair, ask the chief executive to do reports tied to the mission statement, to make it measurable to some extent.

4.

What is the board’s role in financial management?

Every board member must take finances seriously. A board member has a fiduciary duty for the organization—a responsibility to see that the organization is well managed and that all the finances are safely guarded. In general, these three areas require your attention and participation:

Policies. Every board should have organized financial policies, written in language everyone understands. These policies spell out the board’s desires regarding such matters as controls on cash receipts and disbursements, budget practices, investments, operating reserves, capital budgets, risk management, financial reports, and audits. In short, these policies ensure that the finances of the organization are handled professionally.

Budget. Even with strong financial policies in place, all nonprofit boards must see and approve the annual budget. Budget discussions often bring out critical assumptions and policy matters that might be overlooked. Because revenues and expenditures can shift frequently throughout the year, budget policies should define the staff’s flexibility to move funds within or between budget categories. It is common to have a midyear budgetary review and make some adjustments, even if the original budget was as realistic as possible (see Question 50).

Financial reports. The board should understand the various financial statements nonprofits use, then clarify what reports it wants and when. The typical reports are statements of financial position, statements of financial activities, and statements of cash flow. Staff members often supplement these reports with graphics, trend data, comparison data with similar organizations, and adequate commentary to highlight significant budget variances. Many boards use dashboard reporting for clarity and ease of comparison (see Question 8).

More specifically, in its role as the organization’s financial monitor, the board must ensure that the organization has the following practices in place:

Keeps accurate and up-to-date financial records

Prepares and follows an annual budget

Prepares accurate and timely financial statements

Manages assets effectively

Follows established investment policies

Complies with federal, state, and local regulations and applicable reporting requirements

Conducts an annual external financial audit

Conducts audits or prepares reports required by the government or other funders

Has internal controls in place for staff and board members who deal with finances to ensure segregation of duties

Manages risk effectively through the purchase of insurance policies and the establishment of conflict-of-interest policies

The level of financial detail board members receive can be confusing to the layperson. For this reason, many boards recruit a few members who specifically understand the intricacies of budgets, investments, audits, and financial reporting. These board members typically are assigned to financial committees.

Even if you are not a financial expert, you can ask good questions about all the figures, columns, and statistics you see. For example:

Do we have adequate reserves should we unexpectedly lose major funding?

Do we put money in the budget for the required depreciation expenses in case we need a new roof?

What percentage of our total expenditures goes for staff compensation and benefits, and how does that compare with similar organizations?

How might moving a major revenue-producing event or fundraising initiative to a different time of year have an effect on the organization’s cash flow?

Would the revenue from our potential business partnership require us to pay unrelated business income taxes?

Questions about the financial reports often prompt discussions that lead to revised policies, better ways to present the budget, or new reports that allow the board to draw a more complete picture of the prevailing financial situation.

SUGGESTED ACTION STEPS

1. Board members, answer this question on a blank index card and give the card to the chair to use in evaluating the need for further training: On a scale of 1 to 10, how satisfied are you that you understand our finances?

2. Board chair, ask a CPA or an auditor who works with nonprofit organizations to make a board presentation on the organization’s finances.

3. Board members, if you do not have written board policies to guide the staff in all areas of finance, discuss who should work with the chief executive and the chief financial officer to draft them.

5.

What is the board’s role in strategic planning?

As a board member, you must continually ask, What is our purpose? Who are we serving? How are we doing? Where are we going? Strategic planning is one way to sort out these questions. Conducted in partnership with the staff, strategic planning helps the board assess the organization’s strengths and weaknesses, look at environmental trends affecting the organization, articulate priorities, and monitor progress against financial and programmatic goals.

Many people view strategic planning as the complicated, laborious task of producing a long document that often gets put on a shelf and ultimately has little influence on the organization. But planning is not just a product. It is a process that requires time, resources, patience, conflict resolution, persistence, and controversial choices. And it demands the full attention and involvement of the board, working in partnership with the staff.

The board sets the direction for the organization; on the basis of that direction, the staff fleshes out the plan, defines the strategies to achieve the plan, and determines the operational objectives. Undertaking the process of strategic planning offers numerous benefits to a nonprofit organization.

It Maintains a Mission-Based Focus.

Organizations tend to wander from their stated missions over time, taking on new programs and serving new constituencies because money is available or new leaders want to do different things. Sometimes the mission statement is indistinguishable from that of other organizations, or it may seldom be referred to in decision making.

It Offers a Reality Check.

Old methods may not meet the needs of today’s environment. Assuming that certain problems—such as decreased fundraising, participation, or program quality—will correct themselves is a sure road to disaster. Strategic planning can identify emerging trends and new developments that the organization must address sooner rather than later.

It Provides a Performance Review.

Some nonprofits are good at doing things that no longer apply to their mission (or never did). A periodic review of actions will reveal which ones produce the best results, which are no longer significant, and where the majority of resources should be directed.

It Builds Consensus and Ownership.

It is not enough for the chief executive to have a clear picture of where the organization is going. All board members, staff, and constituents should agree on the organization’s strategic direction. Consensus requires excellent communication and periodic consultation with a variety of people about how well the organization is doing and what its next steps should be.

It Helps Define Leadership Characteristics.

Organizations go through cycles, each handled best by a leader who fits the times. Board members often hesitate to address the sensitive issue of whether and when a leadership change is needed for the challenges ahead (see Question 72). Strategic planning can help a board determine what the times require.

An extensive formal planning process—complete with task forces, committees, and reports—may only be required every few years. Once the rationale for strategic planning is clear, the chief executive typically looks at different models and proposes a specific process to follow. The proposal, which should be presented to the full board for approval, should address the following questions:

Who will lead the strategic planning process? The chief executive usually fulfills this role, sometimes assisted by an outside consultant. Or the consultant or a particularly gifted board member might be best suited to take the lead.

What is the time frame? Between six and nine months should be sufficient. If the process goes longer than that, the participants will grow weary of it. The board should receive interim reports.

Who will be involved? The process should include board, staff, major donors, and other key stakeholders, such as community leaders.

What is the budget? The process need not be expensive, but some direct expenses will be incurred.

What are the expected outcomes? Be specific about reports, how relative priorities are to be identified, and whatever else the leadership expects from the process. For example, the board may require staff members to provide certain data that track actual results versus desired outcomes. This monitoring requirement forces critical analysis and creative reflection about new ways to achieve outcomes or prompts a reconsideration of the stated outcomes.

Strategic planning should flow from a clear mission—the reason the organization exists. What would the world lack if that mission were not pursued? Using the mission statement as a touchstone—and revising it if you need to—helps you decide whether to add or eliminate a particular goal or objective or a specific program. It helps you focus on what’s really important when deciding what to do as an organization.

SUGGESTED ACTION STEPS

1. Chief executive, if your organization has a strategic plan, familiarize the board with its contents.

2. Chief executive, if your organization doesn’t have a plan, develop a proposal for undertaking a formal strategic planning effort.

3. Board members, have a short discussion about other experiences board members have had with strategic planning and what approach might be best for your organization.

4. Board members, brainstorm for an hour about the trends, opportunities, and threats in the organization’s external environment. Discuss who your competition is and how well you perform in comparison.

5. Board chair, ask board members to dream about what they would like the organization to do, without regard for cost, energy, or time. These dream sheets can serve as the basis of a formal plan.

6.

How does strategic thinking contribute to board and organizational effectiveness?

Strategic thinking—an attribute of every high-performing board—involves consideration of today’s issues and developments that may have an implication on tomorrow’s activities. It is not a one-time activity but a state of mind for the board—continually looking ahead and posing relevant questions. The goal of strategic thinking is not to predict the future but to anticipate it—by answering What if … ? questions, exploring future scenarios, and identifying emerging trends. As a continuous exercise, strategic thinking helps the board focus on what matters most. Ultimately, it helps provide high-quality content for a strategic plan (see Question 5).

A board that thinks strategically creates a culture that focuses on critical issues, encourages the thorough exploration of ideas, and continuously aligns agenda items with organizational priorities. Service on such a board is productive and satisfying for board members. Instead of focusing on routine process questions and operational matters, meetings feature lively debate about big-picture issues, such as public perception of the organization, options for future funding, or improving service to constituents.

Making strategic thinking a part of board culture requires some intentional actions:

Take a different approach to meeting agendas. To allow time for dialogue and discussion, use a consent agenda, which groups items such as committee reports and meeting minutes so that board members can vote on them without discussion. Then be sure that every item on the regular agenda is related to the strategic initiatives.

Promote robust debate. Test board members’ thoughts and behavior. Challenge traditional thinking by posing questions that promote critical reasoning. Make sure board members know that the boardroom is a safe place for dissent and argument, even if an issue is contentious.

Strengthen board composition. Create a mix of personality types and perspectives so that all board members don’t necessarily think alike. New board members can bring energy and creativity to stale discussions.

SUGGESTED ACTION STEPS

1. Chief executive, brainstorm with your board chair about reshaping board meeting agendas for livelier and more challenging discussion.

2. Board chair, try asking different board members to present challenging counterpoints to conventional thinking about staff recommendations or agenda items.

3. Board chair and chief executive, choose a big-picture question for discussion at every board meeting: What should look different about our organization five years from now? What would we do if a donor unexpectedly offered us a large gift?

4. Board members, help the board move away from static, perfunctory discussion—or no discussion at all—by coming to meetings prepared with questions and opinions about agenda items.