Governance: Basics

Featured Articles:  Managing the Risk of Board Discontent

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

                                                                                              More of this featured articles

                                                                                                                                                                                            Roles and Responsibilities of the Nonprofit Board

Board Composition and Structure

Conduct of the Board

Nonprofit Board Conflict of Interest

Relationship between the Board of Directors and Executive Director

Recruiting and Retaining good Board Members

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.

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.                                                                                       

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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NONPROFIT BOARDS: conflict of interest

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

Under Minnesota state law, a contract between a nonprofit corporation and a board member or members may be avoidable 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.

Conflict of Interest Policies

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.

Conflict of Interest

The Board shall not enter into any contract or transaction with (a) one or more of its directors, (b) a director of a related organization, or (c) an organization in or of which a director of Organization is a director, officer, or legal representative, or in some other way has a material financial interest unless:

1. That interest is disclosed or known to the Board of Directors,
2. The Board approves, authorizes or ratifies the action in good faith,
3. The approval is by a majority of directors (not counting the interested director),
4. At a meeting where a quorum is present (not counting the interested director).

The interested director may not be present for discussion to answer questions, but may not advocate for the action to be taken and must leave the room while a vote is taken. The minutes of all actions taken on such matters shall clearly reflect that these requirements have been met.

The Charities Review Council of Minnesota recommends that nonprofit boards have directors sign an annual statement regarding conflicts. One potential statement is as follows:

The undersigned person acknowledges receipt of a copy of the corporate “Resolution Concerning Conflict of Interest” dated ___/___/___. By my signature affixed below I acknowledge my agreement with the spirit and intent of this resolution and , I agree to report to the President of the Board of Directors any possible conflicts (other than those stated below) that may develop before completion of the next annual statement.

_______ I am not aware of any conflict of Interest

_______ I have a conflict of interest in the following area(s)

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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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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.

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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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