Nonprofit Board Oversight

A nonprofit’s board of directors is legally responsible for exercising the care an ordinarily prudent person in a like position would exercise in overseeing the organization’s operations. This includes the organization’s finances and legal compliance.

Even so, it’s not practical for a board to oversee every single payroll tax payment, approve every expenditure, or understand the complex laws and accounting rules that apply to nonprofits. Accordingly, many of these tasks must be delegated to others.

State laws permit boards to delegate tasks to qualified staff, officers, consultants, committees and task forces; however, it does not permit boards to delegate oversight. All boards must oversee the staff, officers, committees, task forces, and consultants that are operating on the organization’s behalf. Common board oversight mechanisms include:

Adopt Comprehensive Bylaws. Even if an organization has no bylaws, or its bylaws include very little detail, there are laws in place that control a nonprofit’s activities and serve as default rules to govern the organization. Adopting comprehensive bylaws permits the board to choose, to some extent, the rules that will govern the organization rather than simply relying on the default rules set forth in state law.

Develop and Implement Policies and Procedures. Boards are responsible for developing and implementing policies that help the organization reduce risk, comply with the law, and adhere to high standards. Examples of policies and procedures include those dealing with conflicts of interest, signature authority, gift acceptance, fundraising, compensation, human resources, financial management, travel and expense reimbursement, whistleblowers, etc. However, policies and procedures are only successful as an oversight tool if the board takes steps to ensure the policies and procedures are actually followed.

Develop and Approve an Annual Budget.  The development of an annual budget helps the board and chief executive articulate financial goals and agree on spending priorities and limits. Once the board has approved an annual budget, the chief executive can manage the organization’s funds within the approved budget without the need to go back to the board for further approvals.

Delegate to Committees and Review Reports. Difficult tasks that require more time and focused attention can be delegated to committees. Common governance committees include those designed to oversee finances, investments, audits, and compensation. The board should carefully define each committee’s authority and require committees to make regular reports to the board about their work.

Review Financial Data. Financial oversight is a key duty of any nonprofit board. All boards should review up to date financial statements on a regular basis. Another approach is to form a finance committee of qualified directors to meet and discuss the organization’s financial performance, reporting, and budgeting on a regular basis. If the organization has audited financial statements, careful review of the financial statements and management letter will alert the board to weaknesses in its financial management. Finally, a review of the organization’s publicly available informational tax return will provide insight into the organization’s finances. It will also help the Board understand how the organization is presenting itself to the IRS, state regulators, charity watchdogs and others who may review the organization’s publicly available tax filings.

Implement a Board Action Calendar. A board action calendar can help to ensure that a corporation’s key governance obligations and filing requirements are being met. A board action calendar also helps to keep the board focused on its key oversight duties. Items that are tracked typically include Form 990 and annual report filing dates, annual and regular meetings, when to circulate conflict disclosures, and when to conduct CEO and board evaluations. It can also include a reminder to periodically review where the organization is filing fundraising registrations, consider updates to the governing documents, and review the strategic plan.

Set Measurable Goals and Monitor Progress. Once all of the approved budget, policies, procedures, and strategic plan are in place, the board should review the chief executive’s performance annually and hold them accountable for budget adherence, compliance deadlines, and making sufficient progress toward attaining the goals in the organization’s strategic plan. One mechanism is to implement a dashboard. A dashboard can chart the progress made towards achieving specific goals, note who is accountable, and track deadlines making them terrific tools for performance measurement.

Once the board has adopted comprehensive bylaws, policies, procedures, and implemented tools for monitoring progress, a competent chief executive can manage the nonprofit’s day-to-day affairs within the perimeters set by the board without needing its daily input. Further, the board can conduct its affairs with confidence that its properly overseeing the organization and meeting its fiduciary duties.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at info@caritaslawgroup.com.

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