Board Responsibilities for Non-profit Organizations
BOARD RESPONSIBILITIES FOR NONPROFIT ORGANIZATIONS
Fiduciary Duty
The IRS gives charitable organizations special status to encourage charitable donations. Contributions to 501(c)(3) non-profit organization reduce taxable income of the donor and potentially taxes. To qualify non-profit organizations must follow rules such conducting business under a higher level of scrutiny referred to as a fiduciary duty and not becoming involved in politics. To be successful, non-profit organizations must insure donor confidence.
Donor Confidence
Donors need and deserve confidence that non-profit organization they are supporting will use their money for the charitable purpose they promote. There are approximately 260 non-profit organizations in the upper Roaring Fork Valley competing for donor dollars. This competition makes it even more important that nonprofits present themselves in the best possible light to engender confidence and sustain financial and volunteer support.
Subscribing to accepted standards of conduct or policies and procedures help non-profit organizations maintain their tax exempt status and attract financial support for their designated purpose.
The law requires that a non-profit organization’s board members conduct the organization’s business with a higher duty of care and loyalty commonly referred to as a “fiduciary duty.” Fiduciary duty means that a board of directors must prioritize the organization's best interests over personal or other affiliations (duty of loyalty) and make decisions based on each member’s independent, good faith judgment (duty of care).
Requirements for Board responsibilities are summarized as follows:
Be organized and operate exclusively for exempt purposes.
None of its earnings may inure to any private shareholder or individual.
Maintain a nonprofit structure.
Ensure that the organization’s activities align with its stated purpose.
Comply with financial reporting requirements.
6. The board acts as one body in the best interest of the organization.
These requirements translate into the organization’s policies and rules:
1) Bylaws that establish a clear and consistent basis of operating;
2) Noticed Board meetings with Agenda to allow each board member to contribute their independent, best judgement on important decisions; and
3) Approved minutes of Board meetings to document the decision making process.
This open, documented process shows the public and donors that the board is acting as one body in the best interest of the organization and not for the benefit of any one person or organization. The process is also a written record of the Board fulfilling its fiduciary duties.
Committees
Directors and staff lack individual authority; all major decisions are made by the full board. The independent opinions of each board member contribute to forming a transparent consensus that best serves the interests of the organization. To help with board responsibilities, the board can delegate separate duties or responsibilities to committees consisting of less than all the members of board. These committees normally follow the same procedures as the board and report back to the full Board with their recommendations. The full board then makes the major decision in noticed meetings and records them with written minutes.
Conflict of Interest Policy
The collective strength of a non-profit board is, in part, due to individual strengths and expertise of board members to provide necessary expertise and services. Conflicts are unavoidable and therefore the reason for having a strong conflict of interest policy.
Board actions that serve personal interest or have the perception of serving personal interest erode the confidence of donors and threaten non-profit status. A conflict of interest policy protects donor confidence and an organization’s tax-exempt status with full disclosure of any actual or perceived conflict and a board vote to approve or disapprove of a transaction or arrangement with a board member who has a conflict.
A director breaches their fiduciary duty if they act based on personal interest rather than in good faith. Under a conflict of interest policy, the board member with the conflict recuses themselves from voting. The board then makes a decision based on the organization's best interests. Even if a board member benefits from an action or service, the process discloses the conflict and focuses on the organization's best interests, not the individuals.
With a conflict of interest policy the Board and its directors have the flexibility to provide the services that an organization needs for its operation.
Board and Staff Boundary
Directors of nonprofit organizations typically do not receive income due to potential conflicts of interest. The 990 Form filed by all non-profits will show a conflict of interest if any board of director receives income. This is one reason executive directors are not usually on the Board. Executive directors and staff are paid employees of the organization and that status as an employee means that board decisions affect their employment with the organization. If an executive director were on the board, potentially all the major decisions would personally impact the Executive directors which would necessitate their having to recuse themselves from most important decisions. Not an efficient way to operate a non-profit organization.
Executive directors and other paid personnel wield considerable influence within a non-profit organization. They are appointed by the Board of Directors and bear the responsibility of reporting the operational status back to the Board. In fact, an executive director’s influence may be more powerful outside the stricter rules required of board members. They have been hired for their expertise to run the organization upon which the board relies. A board’s main function is to make major policy decisions and not to micro-manage the executive director as they manages the day to day operation of the non-profit enterprise.
Summary
Being a board member of a non-profit organization is more than identifying with and supporting a charitable cause. A board member assumes responsibility to know how to operate a non-profit organization to maintain its non-profit status. Policies and procedures are typically in place to guide directors. To play an integral role in sustaining and growing a charitable purpose, understanding how to curate donor support is taking a bigger view of the charity within a larger community context.