Governance: Basics

Roles and Responsibilities of the Nonprofit Board

990 Board Approval

Board Composition and Structure

Conduct of the Board

Meeting Documentation

Nonprofit Board Conflict of Interest

Relationship between the Board of Directors and Executive Director

Board, Officer, Key Employee Relationships

Recruiting and Retaining good Board Members

Featured Articles

GOVERN YOUR NONPROFIT AND MANAGE LESS

Elected or appointed, volunteer boards of directors who are committed to the organization's mission and leadership govern nonprofits. A nonprofit board determines the mission, strategic direction, and future programming of the organization. A nonprofit board ensures and nurtures adequate human and financial resources and actively monitors and evaluates the organization's executive director/CEO, as well as service and financial results. Nonprofit board members approve and systematically implement policies to ensure achievement of the mission of the organization and to prevent perceived, potential, or actual conflict of interest.

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ROLES AND RESPONSIBILITIES of the NONPROFIT BOARD

Board of directors are trustees who act on behalf of an organization's constituents, including service recipients, funders, members, the government, and taxpayers. The board of directors has the principal responsibility for fulfillment of the organization's mission and the legal accountability for its operations. This means that as a group they are in charge of establishing a clear organizational mission, forming the strategic plan to accomplish the mission, overseeing and evaluating the plan's success, hiring a competent executive director and providing adequate supervision and support to that individual, ensuring financial solvency of the organization, interpreting and representing the community to the organization, and instituting a fair system of policies and procedures for human resource management.

Board members have a duty of loyalty to the organization, its staff and other board members. While differences of opinion are sure to arise, board members should seek to keep disagreements impersonal. By practicing discretion and accepting decisions made on a majority basis, board unity and confidence will be promoted.

Board members accomplish their functions through regular meetings and by establishing a committee structure that is appropriate to the size of the organization and the board. Ideally, board members arrive at meetings prepared and ready to engage in thoughtful dialogue, and there is a group process which generates and uses the best thinking of its members.

Boards should be open to self-evaluation and regularly review their own composition to ensure constituent representation, and board expertise and commitment. Boards also are responsible for evaluating and determining compensation for the executive director.

Under Minnesota law, nonprofit directors are responsible for management of the business and affairs of the corporation. In carrying out their responsibilities, the law imposes on these directors specific fiduciary duties of care, loyalty, and obedience to the law. While Minnesota state law requirements for the specific functions description of board president and treasurer.  Please refer to Statute 317A and the document entitled “Fiduciary Duties of Directors of Charitable Organizations.

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990 BOARD APPROVAL

Steve Miller, Commissioner of Tax Exempt and Government Entities at the IRS stated that the “Service is going to be involved with governance.” The IRS encourages an active and engaged board and believes that it is “important to the success of a charity and to its compliance with applicable tax law requirements.”

Part VI of the Form 990, Section A, question 10 asks, “Was a copy of the Form 990 provided to the organization’s governing body before it was filed? All organizations must describe in Schedule O the process, if any, the organization uses to review the Form 990.” There is no existing legal requirement to provide board members with the 990. This question really relates to how an organization’s governing body reviews the 990.

As organizational practices differ regarding internal review by Board and management officials, the 990 Instructions indicate that an organization should describe Schedule O the process by which any organization's

• Officers, directors, trustees, Board committee member or management reviewed the prepared Form 990
• Indicate whether the review occurred before or after it was filed with the IRS
• Include specifics regarding who conducted the review, when it was conducted, and the extent of such a review

Boards will need to consider adopting a Form 990 review policy that provides adequate time for meaningful review by at least a subcommittee of the Board and a method for allowing feedback and revisions based on Board input.

Process Tips

• Copy of the 990 should be provided to the board prior to filing (hard copy or electronic)
• Actual review and discussion should be made by the committee/full board, facilitated perhaos by the Finance Director, Audit Committee Chair, 990 preparer
• Documentation of the "review" in meeting minutes

Additional Insights

• Tate & Tyron "Your Board and Form 990 - an important new question!"
• Nonprofit GPS "Board Review of Form 990"

Many organizations prepare a written document which sets forth procedures by which the Board of Directors will review the Form 990 before it is filed. See sample policies below, but tailor policies to fit an organization’s particular facts, circumstances, structure, capacity and culture.

Sample Policies

• Evangelical Council for Financial Accountability, "Board Review of IRS form 990"
• Major Hospital Foundation, "Review of annual 990 return by board prior to filing"
• Rea & Associates, Inc., "Sample Form 990 Review Process Policy for Not-for-Profit Organizations"

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BOARD RESPONSIBILITIES

1. The board should engage in ongoing planning activities as necessary to determine the mission of the organization and its strategic direction, to define specific goals and objectives related to the mission, and to evaluate the success of the organization's services toward achieving the mission.
2. The board should approve the policies for the effective, efficient, and cost-effective operation of the organization.
3. The board should annually approve the organization's budget and assess the organization's financial performance in relation to the budget at least four times per year.
4. The board is responsible for the financial health of the organization and should actively participate in the fundraising process through members' financial support and active seeking of the support of others. As part of the annual budget process, the board should review the percentage of the organization's resources spent on program, administration, and fundraising, with a goal of at least 70% of revenue used for programs.
5. The board should hire, set the compensation for, and annually evaluate the performance of the executive director/CEO.
6. If the organization employs staff, the board should annually review its overall compensation structure, using industry-based surveys of salaries and benefits. The board should ensure that a livable hourly compensation is paid to all employees, whether full- or part-time. The board should ensure that sufficient funds are allocated to contribute to full-time, permanent employees' medical insurance and retirement plans. The board should establish policies, when appropriate, on employee benefits, vacation, and sick leave.
7. The board should approve written policies and procedures governing the work and actions of its employees and volunteers. These polices and procedures should address the following: working conditions; evaluation and grievance procedures; confidentiality of employee, volunteer, client, and organization records and information; and employee and volunteer growth and development.
8. The board should ensure that an internal review of the organization's compliance with known existing legal, regulatory, and financial reporting requirements is conducted annually and that a summary of the results of the review is provided to the entire board.
9. The board should periodically assess the need for insurance coverage in light of the nature and extent of the organization's activities and its financial capacity. A decision to forego general liability insurance coverage or Directors and Officers liability insurance coverage should be made only by the board of directors.

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BOARD COMPOSITION AND STRUCTURE 

1. The board members should be personally committed to the mission of the organization, willing to volunteer sufficient time and resources to help achieve the mission of the organization, and understand and fulfill their fiduciary responsibilities.
2. No more than one employee of the organization should serve as a voting member of the board of directors and staff should not serve as chair or treasurer of the Board.
3. To allow for significant deliberation and diversity, the majority of the board should be made up of at least seven persons unrelated to each other or staff.
4. The organization's bylaws should determine term limits that establish individual terms of no more than three years, allow individuals to serve no more than three consecutive terms, and require at least one year intervening before eligibility for re-election after serving the maximum number of consecutive terms.
5. Board membership should reflect the diversity of the organization's constituencies.
6. Board members (who are not employees) should not receive compensation for their board service, other than reimbursement for expenses directly related to board duties.
7. The board nomination process should be announced to the organization's public, so that interested persons or community members can nominate themselves or others.

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CONDUCT OF THE BOARD BOARD 

1. The board should be responsible for its own operations, including the education, training, and development of board members; annual evaluation of its own performance; and, when appropriate, the selection of new board members. There should be written job descriptions for board members, officers, committees, and committee members.
2. The board should have written expectations for board members, including expectations for full board participation in fundraising activities, committee service, and service activities.
3. The board should meet as frequently as needed to adequately conduct the business of the organization. At a minimum, the board should meet four times a year with a quorum present.
4. The board should have written policies that address attendance and participation of board members at board meetings including a process to address noncompliance.
5. Written meeting minutes should reflect the actions of the board, including reports of authorized board committees. The board should permanently retain the minutes, distribute them to board and committee members, and make them available when needed.

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MEETING DOCUMENTATION

Part VI, Section A of the new Form 990 inquires about the governing body and management. Question 8 requires disclosure of documenting meetings of the governing body and committees with authority.

8. Did theorganization contemporaneously document the meetings held or written actions undertaken during the year by the following:

• The governing body?
• Each committee with authority to act on behalf of the governing body?

This question basically seeks information on whether it is organizational practice to document meetings and record actions taken. The 990 Instructions provide helpful guidance on exactly what “contemporaneous documentation” entails. In addition to any means permitted by state law, contemporaneous documentation may also be accomplished through “approved minutes, strings of emails, or similar writings that explain the action taken, when it was taken, and who made the decision.”
Minnesota statutes do not specifically address contemporaneous documentation; however there is a provision that requires minutes to be available to committee members. M.S.A. 317A.241 Subd. 4 (2009).

The 990 Instructions also define “contemporaneous” as the “later of (1) the next meeting of the governing body or committee (such as approving the minutes of the prior meeting), or (2) 60 days after the date of the meeting or written action.” Accordingly an organization has this timeline to actually document the meeting. Many organizations accomplish this through the taking of minutes that are later distributed and approved by meeting participants as an accurate representation of dialogue and action taken. Minutes document governance practices and organizational decisions, and once approved become legal documents. As important as it is to take minutes, it is also important to store them in a safe and accessible place.

Although question 8 does not direct the filer to go to Schedule O for a “No” answer, the filer should consider explaining why it does not document meetings or the alternative procedure it uses to record or track governing body actions and decisions.

Resources

• "Nonprofit Corporation Minutes"
• "Nonprofit Legal Guide to Meeting Minutes"

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NONPROFIT BOARDS: conflict of interest

For many nonprofits, at times, conflicting organizational and personal interest may arise naturally and in some cases may be beneficial to an organization. Nonetheless a written conflict of interest policy helps determine which situations may be harmless and which situations warrant further attention. The policy can also provide guidance to Directors on approaching potential conflicts. The substance or subject of the conflict is as important as the process by which it is addressed by directors.

1. The board should establish conflict of interest policies regarding board, staff, volunteers, contractors, and organizational partners or allies and adhere to these policies in all dealings. The policies should include an obligation of each board member to disclose all material facts and relationships and refrain from voting on any matter when there is a conflict of interest.

Conflicts of Interest under Minnesota state law

Legal Authorities

Federal tax law does not provide guidance on what should be included in a conflict of interest policy, but it is commonly addressed in state statutes.

In Minnesota, the state nonprofit corporation act requires elements of both procedural and substantive inquiries. Minnesota considers potential for conflict in a transaction or contract between:

• an organization and its directors,
• a common director with a related organization,
• or a common director with another organization,
• and any family members therein involved.

Chapter 317A requires that any potential conflict transaction or contract be “fair and reasonable” to the organization when approved, that the “material facts” of the matter be fully disclosed and known to all parties to a transaction or contract and to the board or appropriate committee for good faith approval. It also requires that the vote of the potentially interested director not count in a Board’s authorization or ratification process. M.S.A. § 317A.255 (2009).

Under Minnesota state law, a contract between a nonprofit corporation and a board member or members may be voidable unless the interested board member or members can establish that:

1. The contract is fair and reasonable;
2. Full disclosure by the interested board member or members was made to the full board or voting members;
3. A two-thirds majority of the entire board or appropriate committees, or a full majority of the voting membership, in all cases not including the interested board member or members, voted in favor of the contract.

For further information, see the Minnesota statute section 317A.255. Also, the Minnesota Attorney General's Office, Charities Division (1200 NCL Tower, 445 Minnesota Street, Saint Paul, 612/297-4613), publishes a booklet, Fiduciary Duties of Directors of Charitable Organizations, which explains the law in narrative text.

Explaining Conflicts of Interest

For Board members of nonprofit organizations, conflicts of interest occur whenever a director acts in a position of authority on an issue in which they have financial or other interests. In other words, when there is a dual interest or the appearance of a dual interest for any board member, the potential for a conflict of interest exists. For example, directors of agencies could be in conflict of interest if they offer services to the organization on whose board they serve even if the charge for these services is at or below the market value. Similarly, if a board member contemplates purchasing or leasing property that the organization may wish to purchase, the board member may be placed in a conflict of interest situation.

In cases of potential conflict of interest, directors must act to preserve and enhance public trust in the organization by putting the interests of the organization ahead of all other business and personal interests. In addition to the public's sensitivity to self-dealing, activities which appear to have a conflict of interest can be the basis for lawsuits against the directors and officers.

When directors are confronted with an actual or apparent conflict of interest, there are reasonable steps that the organization can take to preserve its integrity. Directors need not be disqualified from boards simply due to conflicts of interest. Perhaps the most important step is for Board members to disclose information related to the possibility of dual interests to others on the board. Minimally, the director needs to inform the board of the important facts and details and must abstain from voting on the transaction. These actions should be recorded in the minutes to document the disclosure.

990 Disclosure on Conflict of Interest

The 990 ask in Part VI, Section B,

12a Does the organization have a written conflict of interest policy?
12b Are officers, directors or trustees, and key employees required to disclose annually interests that could give rise to conflicts?
12c Does the organization regularly and consistently monitor and enforce compliance with the policy?

The 990 more broadly requires organizations to disclose potential conflict situations with not only directors or trustees, but also key employees. Key employees are defined as the executive director, the primary financial executive, and any employees who are compensated at $150,000 and above. Questions 12b and 12c suggest that conflict of interest policies should include provisions that require an organization to provide an opportunity for interested persons to disclose conflicts and that an organization monitors and enforces the policy. In February, 2008, the IRS Exempt Organizations Office wrote, “[t]he Internal Revenue Service encourages a charity’s board of directors to adopt and regularly evaluate a written conflict of interest policy that requires directors and staff to act solely in the interests of the charity without regard for personal interests; includes written procedures for determining whether a relationship, financial interest, or business affiliation results in a conflict of interest; and prescribes a course of action in the event a conflict of interest is identified.”

Thinking through tailoring policies for your Organization

Each organizational situation and needs are different, so conflict of interest policies should be tailored according to each organization’s mission, structure, culture, and organizational facts. There are several considerations organizations should explore in drafting their conflict of interest policy and in its implementation.

The following outline addresses the most common elements of a basic conflict of interest policy.

• Section 1: Purpose
  • Generally, this section includes a brief statement of the policy’s intent to avoid conflicts and potential conflicts of interest between the organization and those connected to the organization and that the interest of the organization supersedes all other interests.
  • The purpose section may also cover:
    • People the policy intends to cover (although this may also be found in a separate section)
      • Examples
        • Statutory requirement to cover board members and officers
        • 990 suggestion to cover board, officers and key employees
        • Some policies cover all employees, volunteers and vendors
    • The type of conflict addressed by the policy
      • Examples
        • Statutory requirement to address situations where there may be a “material financial interest”
        • The 990 does not specify which types of conflict to address
        • Other common types of conflicts addressed include:
          • “personal benefit”
          • “private interest”
          • “personal financial, professional or political gain

Some purpose statments include a statment that indicates that the policy is supplementary to the current statute which controls.

• Section 2: Definitions
  • Generally this section defines technical terms used in the document, gives parameters for the scope of the policy's reach
  • Commonly defined terms in accordance with statutory language and organization choice:
    • Interested Person
    • Financial Interest
  • This section may conclude with a statement that indicates that a financial interest or potential financial interest is not necessarily a conflict of interest until determined as such by the board of directors

• Section 3: Procedures
  • This section generally covers the way in which an organization will address a conflict or potential conflict of interest situations. Some policies require that an interested person present the potential conflict situation to an executive committee, some require presentation to the full board. This section is generally broken up in sub-sections to cover different stages of the procedure.
    • A. The first sub-section is generally one that outlines a duty to disclose a potential conflict by the interested person. Some policies require disclose of “material facts” of a financial interest, some policies do not specify the level of disclosure required.
    • B. The second sub-section generally outlines the process for determining whether a conflict exists. This process may require a presentation by the interested party or the board chair to either the executive committee or full board of the facts and potential conflict situation. The interested person then is required to leave the conversation, while the deciding body continues to discuss the situation and votes.
    • C. The third sub-section deals with due diligence and the procedures for addressing the conflict of interest. Particular questions and specific actions may be necessary to determine whether an actual conflict, harmful to the organization exists. These questions or actions may include:
      • an investigation into alternatives to the proposed transaction by a disinterested person and whether it might be more advantageous.
      • decide whether the organization can obtain a more advantageous transaction with reasonable effort from someone without a conflict of interest.
      • discuss and decide whether the transaction is in the best interest of the organization and whether the transaction is fair and reasonable to the organization.
    • After this discussion and due diligence by the board or committee, disinterested members usually vote on whether a conflict exists and the best interests of the organization.
    • D. This sub-section generally deals with situations where the general procedure outlined above is not followed and violations of the conflict of interest policy. Some policies indicate that if a board finds out and has a reasonable belief that someone may have a conflict of interest, the board chair will generally inform that person of their belief and give them the opportunity to present the situation and failure to bring the potential conflict forward earlier. If the board is not satisfied with the person’s explanation, it can then take appropriate disciplinary action.
• Section 4: Records of Proceedings
  • Most policies include provisions that require written records of the above outlined procedues, persons involved, and votes taken.

• Section 5: Review of Policy
  • This section generally requires periodic (usually annual) review of the policy by those subject to the policy. Some policies may also include a supplementary disclosure form that those subject to the policy are required to acknowledge and sign annually

Sample Conflict of Interest Policies

• Form 1023 Instruction
• Minnesota Attoney General's Conflict of Interest Policy Sample
• Minnesota State Bar, Organization Policy Regarding Conflicts of Interest and Discharge of Duties for Directors and Officers
• Charities Review Council
• National Council of Nonprofits sample conflict of interest policy

Additional Resources.

• Charities Review Council
• Not-For-Profit Accounting, "Getting ready for the updated form 990"
• Minnesota Statutes Annotated § 317A.255
• IRS documents
  • “Governance and Related Topics – 501(c)(3) Organizations”
  • “Remarks of Steven T. Miller, Commissioner, Tax Exempt and Government Entities, Internal Revenue Service, Western Conference on Tax Exempt Organizations, Los Angeles, California, Nonprofit Governance, November 20, 2008"

Conflict of Interest

Many organizations adopt a Conflict of Interest policy. Carver Governance Design, Inc. (2060 Kingdom Drive, Columbus, IN, 47201) suggests the following Directors' Code of Conduct which includes information regarding conflict of interest.

Directors' Code of Conduct

The board expects of itself and its members ethical and businesslike conduct. This commitment includes proper use of authority and appropriate decorum in group and individual behavior when acting as directors.

1. Directors must represent unconflicted loyalty to the interests of the ownership.

This accountability supersedes any conflicting loyalty such as that to advocacy or interest groups and membership on other boards or staffs.

This accountability supersedes the personal interest of any director acting as an individual consumer of this agency's services.

2. Directors must avoid any conflict of interest with respect to their fiduciary responsibility.

There must be no self-dealing or any conduct of private business or personal services between any director and the agency except as procedurally controlled to assure openness, competitive opportunity and equal access to otherwise “inside” information.

Directors must not use their positions to obtain for themselves or for their family members employment within the agency.

Should a director be considered for employment, s/he must temporarily withdraw from board deliberation, voting and access to applicable board information.

3. Directors may not attempt to exercise individual authority over the agency except as explicitly set forth in board policies.

Directors' interaction with the executive director or with staff must recognize the lack of authority in any individual director or group of directors except as noted above.

Directors' interaction with the public, press or other entities must recognize the same limitation and the similar inability of any director or directors to speak for the board.

Directors will make no judgments of the executive director or staff performance except as that performance is assessed against explicit board policies by the official process.

4. Directors will deal with outside entities or individuals, with clients and staff and with each other in a manner reflecting fair play, ethics and straightforward communication.

Management Assistance Program for Nonprofits (2233 University Avenue West, #360, Saint Paul, MN, 612/647-1216) provides the following sample conflict of interest policy.

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RELATIONSHIP BETWEEN THE board OF DIRECTORS AND THE EXECUTIVE DIRECTOR

No single relationship in the organization is as important as that between the board and its chief executive officer. Probably no single relationship is as easily misconstrued or has such dire potential consequences. That relationship, well conceived, can set the stage for effective governance and management.
---John Carver, Boards that Make a Difference, 1990

The relationship between the Board of Directors and the Executive Director is one of the most written about topics in nonprofit literature. This document summarizes some of the thoughtful material that has been written on this subject, including the book cited above and information from the Board Source and Independent Sector. 

As a general rule of thumb, it is said that in a nonprofit organization, boards primarily govern and staff primarily manages. This means that a board provides counsel to management and should not get involved in the day-to-day affairs of the organization. Confusion and tension can arise when this rule is put to use practically, because the distinction between management and governance is not absolute. In order for this rule to work effectively, each party in this relationship needs to understand its own responsibilities and those that fall in the other's purview, and the way in which the board and staff conduct their business needs to reflect this understanding. Clear expectations for the board and the director need to be established and maintained, because a board that is overly active in management can inhibit the organization's effectiveness.

A nonprofit's Board of Directors has very specific duties that are distinct from those of the Executive Director. Directors have fiduciary responsibilities and they are required to act within their authority primarily for the organization's benefit. Directors do not have power or authority individually. A board's decision-making ability lies in its group structure. While at times an individual board member may become extensively involved with one particular program area and be working with staff, this is usually temporary, and information regarding the need for increased attention by that board member should be relayed regularly to the full board.

Nonprofit boards generally have the duties of selecting and working with the executive director, amending bylaws, approving the annual budget and long-term strategic plans, and ensuring its own succession. The board often establishes committees to accomplish its activities, including financial, personnel, fundraising and planning functions. Through such committees, the board assists management in policy formation and strategic planning. While nonprofit staff may conceive, develop and implement the organization's plan, the board will often monitor the process and provide counsel. However, it is often true that in smaller, younger nonprofits with limited staff positions or experience, or in more grass-roots type organizations, board duties may include more tasks typically associated with management.

Ultimately, the ideas and actions of the Executive Director, perhaps more than the will of the board, will influence the nature of the dynamic that characterizes this important relationship. Because it falls to the Executive Director to help determine which issues the board will address and to assemble the information that shapes the discussion, this individual can guide the board towards a true governance role. The following are three specific methods that the Executive Director can take to help the board govern more and manage less:

Use a comprehensive strategic plan that has been developed in conjunction with the board, and supplement it with regular progress reports. This can be a useful tool for the board as it develops its own annual work plans, and will keep the board's sights focused on the long term goals and mission of the organization. Regular reports based on this plan will keep board members appraised of progress toward organizational goals, and provide part of the basis for evaluation of the executive director.

Provide the board with relevant materials before board meetings, and explain why the materials are coming to the attention of the board. Let board members know how specific agenda items relate to the organization's larger mission, and what kind of action or discussion is desired of the board on each item.

Facilitate board and board committee discussions so that the board stays focused on the larger issues. Refer to set policies that define the limits of the board's decision-making power, and strive to engage the board in a dialogue among themselves that leads to consensus-building.

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BOARD, OFFICER, KEY EMPLOYEE RELATIONSHIPS

990 Disclosure

Part VI, Section A requires disclosures of governance composition. One question inquires into the nature of relationships between people involved with an organization in difference capacities.

2 Did any officer, director, trustee, or key employee have a family relationship or a business relationship with any other officer, director, trustee, or key employee?

Through this question, the IRS hopes to identify the potential for insider transactions that could result in conflict of interest situations or the misuse or charitable assets. Question two is simple enough, but breaking down terms and knowledge of IRS definitions makes it easier for organizations to solicit the appropriate information from officers, directors, trustees and key employees.

Who is included in "Trustees, Directors, Officers and Key Employees?"

Question two regards the relationship between trustees, directors, officers and key employees.

Trustees generally have powers that are exercisable solely in the fiduciary capacity consistent with and in furtherance of the charitable purposes of the trust. IRS Pub 557.

Directors comprise the governing body of an organization, through a Board of Directors. A Board has the ultimate authority for the management or direction of the business and affairs of the organization. Directors owe a fiduciary duty to the organization.

Officers are often elected or appointed to additional duties beyond other directors. Minnesota law requires all nonprofit Boards elect or appoint a “president” and “treasurer.” M.S.A. § 317A.301 (2009).

Key Employees are defined by the IRS.

(1) Compensation Test:

Employee is compensated (according to W2) in excess of $150,000 annually,

(2)Responsibility Test:

The employee has responsibilities, power or influence over the organizations as a whole similar to the authority of trustees, directors or officers, or

Manages a program or activity that represents 10% or more of the organization’s income or expenses, in comparison to the organization as a whole, or

Has or shares authority to control 10% of organizational capital expenditures, operating budget, or compensation for employees.

(3) Top 20 Test:

Employee is one of the 20 employees (in addition to satisfying (1) and (2)), with the highest reportable compensation from the organization and related organizations for the calendar year.

Family or business relationship?

Only two relationships are relevant in question two, a family or a business relationship. Similar to the definitions above, the IRS definition is not necessarily the same as commonly understood.

Family Relationship includes certain hierarchical and lateral relationships. The family of a trustee, director, officer, or key employee includes:

Spouse

Ancestors – parents, grand parents

Brothers and sisters (whole or half blood siblings)

Children (natural and adopted)

Grandchildren, great-grandchildren

Spouses of siblings, children, grandchildren, and great-grandchildren

Business Relationship includes an employment relationship, a business transaction outside of the ordinary course of business above $10,000 in the aggregate during the tax year, or common ownership greater than 10% in the same business or investment entity. See IRS Form 990 Instructions, page 16 for a full iteration of each indication of a business relationship.

Privilege Exception: The Form 990 Instructions also indicate that privileged relationships do not need to be reported. These relationships include attorney/client, medical professional/patient, and priest/clergy/penitent/communicant.

Reasonable Effort

The Form 990 Instructions provide that an “organization is not required to provide information about a family or business relationship between two officers, directors, trustees, or key employees if it is unable to secure the information after making a reasonable effort to obtain it.” An example of a reasonable effort would be a questionnaire distributed to each trustee, director, officer and key employee related to their family or business connections with others involved with the organization.

Questionnaire

Some organizations may be small enough that the preparer may have actual knowledge of reportable relationships, other organizations would be well served by developing and distributing an annual relationship questionnaire. Most questionnaires cite the 990 changes as the purpose for distribution of the questionnaire and define the relationships therein concerned and ask trustees, directors, officers and key employees to disclose such relationships.

Sample Questionnaires

Cherry, Bekaert & Holland, "Family and Business Relationship Questionnaire"

Nonprofit Management Center, "Form 990 Questionnaire"

Wegner LLC CPAs and Consultants, "Highest Paid Employee Questionnaire"

Additonal Resources

Maryland Association of Nonprofit Organizations, "Form 990-We are Family"

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RECRUITING GOOD BOARD MEMBERS

An effective board should include active members of the community the organization serves, and accurately reflect the diversity of that community. 

Clear bylaws — Include clear information about the board of directors election process in the organization’s bylaws.

Create job descriptions — Develop board member job description, including meeting and time commitments.

Clarify duties — Make sure potential board members understand their legal and fiduciary duties.

Develop officer positions — Officer positions can and should be designed to meet the needs of specific organizations, Minnesota law requires that a nonprofit fill the offices of president and treasurer.

Establish a board governance or nominating committee — A special committee can be established to analyze the needs of the board (professional skills, community connections, representation) and oversee the election process.

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RETAINING GOOD BOARD MEMBERS

Once an organization has effective members on its board of directors, it becomes essential to retain those directors. Here are some tips on how to ensure effective board members continue their vested interest in the organization.

Prepare new board members — Staff and existing board members should provide an orientation. New board membership should be given collateral materials about the organization’s current and recent activities, as well as any information that will be useful in their position.

Thank and recognize board members — An appreciative environment can help sustain job satisfaction for volunteer board members.

Lead by example — Ensure staff and board officers maintain good attendance and an active role. It is important to deal effectively with inactive board members.

Conduct exit interviews — When a board member leaves, either mid-term or after his or her term has ended, conduct an interview to learn more about their board experience, positive or negative.

Maintain relationships — As a general rule of thumb, it is said that in a nonprofit organization, boards primarily govern and staff primarily manages. Keeping this relationship intact, between board and staff and board and executive director, is key.

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FEATURED ARTICLES

Managing the risk of board discontent boils down to keeping the board from being bored or overworked. This feature article helps keeping your board member interested and active.

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Principles and Practices

Click on the links below to jump to the different sections of The Principles and Practices for Nonprofit Excellence.

• Introduction
• The Principles
• Role in Society

• Governance

• Planning

• Transparency and Accountability

• Fundraising

• Financial Management

• Human Resources

• Civic Engagement and Public Policy

• Strategic Alliances
• Evaluation
• Advice for Users
• The Origins of the Principles and Practices

Download a PDF 
of the

Principles and Practices for Nonprofit Excellence