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Nonprofit Board Governance

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Have you heard these statements?

  • “Nonprofit Boards of Directors must practice good governance.”
  • “The nonprofit is governed by its Board of Directors.”

The topic of nonprofit Board governance can be confusing, mostly because this important concept may not be fully understood. In general, governance brings together policies, systems and structures that provide support to Board members in making good decisions for the nonprofit according to expectations of the public trust.

Right there, you see that the topic can get confusing. It might help to know that governing a nonprofit is different from governing a for-profit organization. Nonprofits serve a public purpose without benefiting any particular individual. Therefore, the basic goal in governance for nonprofits focuses on protecting and furthering the mission of the nonprofit. However, the goal of a for-profit company is to generate income for the company, employee and shareholders.

Nonprofit boards are considered “Stewards of the Public Trust”, which signifies the general public trusts that a nonprofit is fulfilling its mission as stated to the IRS when it was granted exemption status as a nonprofit organization. The Board has three primary responsibilities: Duty of Care, Duty of Loyalty, and Duty of Obedience.

Duty of Care means the Board will make decisions with the same level of care as each member would for their own personal assets (even though board members have no personal assets in the nonprofit).

Duty of Loyalty means the Board puts the needs of the organization and the population that it serves above all other needs, especially the individual’s or group’s personal agenda.

Duty of Obedience means the Board will maintain compliance with all legal standards and regulations required for the exempt organization, including annual filings with state and federal agencies.  

A 2017 study on Boards of Directors showed that 56 percent of nonprofit Boards struggle with weak Board governance. As a result, approximately 52 percent of nonprofits are unable to expand their impact because of a weakness in strategic thinking such as developing a mission, strategy, impact evaluation, or insight by their Board.

What should be noted, however, is that these limitations are most likely not the fault of the Board members. Instead it’s more a matter of “you don’t know what you don’t know!” Without a doubt, those serving on a nonprofit Board have every intention of doing the right thing, making the right decisions, and being a good steward of the organization. But like coming into anything for the first time, Board members need to learn how to effectively govern a nonprofit and serve as a productive Board member. That takes information, training and dedication.

Spokes is always here to assist nonprofit Boards with the development of policies and procedures as well as providing an understanding of the legal and ethical responsibilities of the Board. Visit our website at https://www.spokesfornonprofits.org/services/just-for-board-members/ to learn more about the resources we have available to provide local nonprofit Boards with the management training, consulting and resources they need to better serve our community.

Resources about Nonprofit Board Governance:

Good Governance Policies for Nonprofits: https://www.councilofnonprofits.org/tools-resources/good-governance-policies-nonprofits

Study: Most Nonprofits Lacking in Leadership, Management http://www.thenonprofittimes.com/news-articles/study-nonprofits-lacking-leadership-management/

How to be an Excellent Board Member

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Register Now!

Local nonprofits need and want trained Board members who understand their responsibilities in nonprofit governance and how to support their nonprofit Executive Director. Our annual survey of nonprofit member organizations shows how paramount the desire for effective and well-informed board members truly is. Every nonprofit organization needs a Board of Directors and with the large amount of nonprofits in San Luis Obispo County, that means many community volunteers are needed to serve on nonprofit boards.

A 2018 Nonprofit Board Leaderships Study by Korngold Consulting, LLC and IMPACT 2040 found that business professionals that serve on a nonprofit board of directors “listen more carefully to different viewpoints, create more inclusive teams, and make more inclusive hiring and promotion decisions.” Comments from participants in the research noted that working with people from diverse backgrounds helped participants learn to solve problems by working together through healthy debate. Additional benefits are the board participants become more confident, better leaders, who are able to accept more responsibility and feel better qualified for promotion (McClimon, 2019). 
 
Serving on a board is important, but being a board member that brings excellence to the position is another step. In 2018, Spokes created a new signature program to respond to the need of San Luis Obispo County nonprofits for more trained Board members. The Board Academy is the first intensive board training for nonprofits on in San Luis Obispo County. The first academy was held in October, 2018 with 17 participants representing 12 different nonprofits.

The next Board Academy will be held on Saturday, March 23 from 9:00 am to 5:00 pm at Spokes. Lunch and snacks will be served and each participant will receive a binder of materials to take back and share with their board. You can expand your knowledge and be a board member of excellence by participating in the Board Academy. Register here.

Seven topics pertinent to the education of all nonprofit board members will be covered including an overview of the nonprofit sector nationally to locally, financial management and fiduciary responsibilities, insurance and risk management, legal and ethical responsibility of the Board, governance issues, board and executive Director interactions and fundamentals of fundraising. 
 
Resources: 

Beacon Economics (2013) Central Coast Economic Forecast. McClimon, T.J. (2019) Nonprofit Board Service Builds More Effective Business Leaders https://www.forbes.com/sites/timothyjmcclimon/2019/01/14/nonprofit-board-service-builds-more-effective-business-leaders/#22b7384c31a9

 
Takagi, G. (2009) Number of Directors – What’s the Best Practice? Nonprofit Law Blog.  http://www.nonprofitlawblog.com/number-of-directors-whats-the-best-practice/

Could Your Website Get Hacked? A Reality Check!

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You might think it could never happen to you but one morning you find out your website no longer exists or it’s connected to a site you’re ashamed to show. Don’t think your small nonprofit would be of interest to a hacker? Well, according to a recent FBI report, there’s been a 270% increase in online fraud and cyber scams in the past two years and smaller organizations and nonprofits tend to be the latest targets. Hackers find these organizations to be less technically savvy and lacking in security measures that protect their websites and other technology, making them an easy target. Not only is it terribly inconvenient to have your business operations taken over by a hacker, it raises multiple ethical and legal issues to consider.

Here are a few reasons to be concerned:

  1. Conducting nonprofit business often requires collecting information protected by law as confidential. A breach in this confidentiality poses a risk for individuals whose data has been disclosed and puts the nonprofit in a position of being subject to liability for the breach.
  2. Many nonprofits use a website URL’s that ends in .org. which can help them rank higher and have better visibility in donor searches. However, this also results in making them easier to find for hackers.
  3. If you do any e-commerce on your website, such as processing donations or event registrations, personal payment information could be compromised or stolen.
  4. Information handled by nonprofits are of interest to hackers including donor information, client records, confidential emails, habits and preferences of donors, patrons,  and other data.

Donor and client trust are imperative for nonprofit operations, having to notify your donors or clients that their personal information (such as medical information, employee records, social security numbers, driver’s license number, etc.) have been compromised could result in serious consequences for the nonprofit.

So what’s a nonprofit to do?

  • Start by attending the upcoming Spokes workshop: “Don’t Get Hacked!” Thursday, March 7, 9-11 a.m. facilitated by Rony Krell. You’ll learn is to better understand the cybersecurity landscape, the costs of data breaches, and proactive strategies you can take to protect your nonprofit. Each participant will receive an actionable cybersecurity checklist to take back and use at your nonprofit. The information will be presented in a way that won’t require any technical expertise to understand the information.
  • Take an assessment of your data to determine what data you store on individuals, where the data is stored, how much you actually need, and data what you could do without. This simple one-page inventory tool will help you think through this process.
  • Determine whether the data you collect and maintain is considered “personally identifiable information” by federal or California regulations. If so, there are several steps you would have to take to inform those affected of a security breach. Look in the resources section below to prepare for this possibility.  
  • Learn how to secure your data and take the necessary steps to make that happen such as making sure you have proper firewalls, virus protection, and regular file backups.
  • Be sure you has an HTTPS certificate that encrypts data transmitted between your website the user’s browsers. If you use laptops, consider encrypting the hard drives to scramble data until an encryption key is used. This won’t protect again hackers but it will protect against anyone who might have physical access to your computer.

All of this might sound complicated but you can easily learn the basic steps to enhance your cyber-security in our upcoming workshop “Don’t Get Hacked!”. Be sure to visit the additional resources for more information and several downloadable tools and resources. 

Additional Resources

FBI Warns of Rise in Hacking

Cyber Security for Nonprofits: Council of Nonprofits 

California Legislative Information on Security Breaches

The Purpose and Importance of a Gift Acceptance Policy

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A Gift Acceptance Policy is an important document for following best practices in nonprofit fundraising. This policy determines in advance which type of donations or gifts the organization will or will not accept. It might seem odd to think of turning down any type of donation when nonprofits are usually so strapped for funds, but that’s one of the primary benefits of developing a Gift Acceptance Policy: to anticipate and think through unusual situations related to donations or gifts to the nonprofit before they occur.

This type of policy is normally used to determine how to handle “Non-Standard Contributions” to the nonprofit. Having a policy for gift acceptance to review non-standard contributions is not legally required, but it is considered a best practice for nonprofit governance. The IRS defines these types of gifts as the “contribution of an item that is not reasonably expected to be used to satisfy or further the organization’s exempt purpose and for which (a) there is no ready market to liquidate the donation to convert it to cash, and (b) the value of the item is difficult to ascertain or speculative.” https://www.councilofnonprofits.org/tools-resources/gift-acceptance-policies

Therefore, if the potential contribution doesn’t further the mission and values of the nonprofit, it could be difficult to deal with and might cause a distraction from your normal activities. For example, a nonprofit that provides some form of housing might be offered a parcel of land with a home. While this might seem to further the mission of the organization, it could end up being a distraction if the property needs major repairs, has tax issues, or raises any other concerns that would make it hard (or impossible) to sell or use for the intended mission of the nonprofit. Trying to deal with the gift might take a long time and require countless staff hours, impacting your already limited budget.

Of course, there could be non-standard gifts that the nonprofit can handle and turn into an asset for the organization. The Gift Acceptance Policy allows you to determine where the offer falls, and can help head off any awkwardness with a donor if you know right away that the gift does not meet the nonprofit’s donation criteria. Having a clear-cut guide for gift eligibility also lessens any chance for misunderstanding or miscommunication with potential donors.

While you might not face the issue of a non-standard contribution, it is an advantage for a nonprofit to have this policy as it clarifies what the organization will or will not accept, and why. It lets the Board of Directors think through donation issues before they arise in order to better address them. The first consideration should always be that any gift accepted by the nonprofit must support and further the mission and values of the nonprofit. It also helps to define the type of in-kind contributions that the nonprofit can’t handle or dispose of easily or safely.

Your Gift Acceptance Policy doesn’t have to be elaborate. It can be as simple as a statement from the Board of Directors saying the organization “reserves the right to turn down any gift that is not in keeping with its mission or that it feels it cannot properly steward.” Alternatively, the policy can be more detailed and extensive depending on how the nonprofit is structured.

A Gift Acceptance Policy must be disclosed on IRS Form 990 by completing Schedule M, as well as reporting any non-cash contributions/in-kind gifts. (https://www.irs.gov/pub/irs-pdf/f990sm.pdf)

Upholding a Gift Acceptance Policy is a best practice for nonprofits. You can learn much more about these policies and get guidance to develop your own from the references in the article and this additional resource:  

Gift Acceptance Policy Template https://bloomerang.co/resources/templates/gift-acceptance-policy-template/

Your Budget is Your Friend

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If it’s time to create your budget for the upcoming year, congratulations. Your nonprofit budget is your best friend and the source of direction for all of your operations during the year. I know working on the budget may feel like torture, but it is one of the most important documents to support your nonprofit organization. It can actually be exciting to create.

Here are three reasons the annual budget is your best friend.

 

  1. Budgets provide a view of operations through numbers.

For some, numbers are scary, but budgets don’t need to be. Similar to your personal or home budget, your organization budget creates a guide to manage your finances each month. It lets you project how much income you need for operations during the year and identify the source of that income. For instance, you can list income sources as grants, donations, events, or other fundraising. Depending on your organization, you might project income generated from membership, services, or programs fees. After determining your projections for the year, allocate that income to various expenses needed to operate the nonprofit business. These expenses include salaries and benefits (don’t forget all mandatory employee benefits), rent, supplies, costs associated to operate your programs, services, and insurance and so on. Include as many expense categories as necessary to prevent underestimation of overall expenses. In general, it’s best to estimate income conservatively and estimate expenses generously.

 

  1. Budgets are a working document for financial controls.

Once you create your budget, you have to manage it. Each month the budget should be a part of your financial reports which include your Statement of Activities (Profit and Loss statement), Statement of Financial Position (Balance Sheet) and the Statement of Cash Flow. Compare the amounts you budgeted for each account shown on these statements to the actual monthly amounts to understand your current financial position. Hopefully you’ll meet or exceed your income projections while keeping the expenses in range or lower than projected. You might also get the opposite, that is, less income than projected or higher expenses, but you’ll be able to make adjustments to the budget to keep your operations on path. Your board treasurer and bookkeeper should be your helpers in these areas.

 

  1. Budgets guide the strategic operations of the organization.

Use your nonprofit budget to guide your strategic operations. Having determined the goals that will drive your mission for the year, you now have a projected dollar amount to support those goals. Use the budget and current financial statements to monitor your finances and determine if you can meet the goals or if you need to make adjustments. For example, you might have projected adding another employee position. If you find you’re meeting the projected income goals for the new employee, you can move ahead with that goal. However, if the income is not there (or not foreseeable), you might need to adjust the goal. (This doesn’t mean you can’t get the position filled in some manner. For example, you might seek a volunteer to get the help you need. Sometimes, that person might be the one to help you reach the financial projections for the year.) Another example of how your budget guides your strategic operations occurs when you analyze if you have enough income to manage your programs or services, or if you need to seek more private donations and grants. Your budget can even help you project if a fundraising event is feasible or if you should look for money in a different manner. Reviewing budget results each month lets you know how much you’re spending in each expense category and where you might have enough or need to cut back on expenses.

If you need help in the budgeting process with your best foot forward, here are the following resources:

For smaller nonprofits that are entirely volunteer-run, the Virginia Society of Certified Public Accountants offers this handy guide to help you address the budgeting challenges unique to your organization and resources. Budgeting for Small NPOs

For larger organizations, nonprofit consultant and author Joan Garry outlines an innovative strategy to creating a budget that is meaningful and realistic for all the stakeholders within your organization – board, fundraising staff/volunteers, and program staff/volunteers: https://www.joangarry.com/budgeting-for-nonprofits/

These tips are certainly not all of the uses for your annual budget, but you can see how important the budgeting process is. Like a good friend, treat it well, pay attention to it, and it will be your guide to successful operational planning.

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