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Grantor-Grantee Policy Best Practices

puzzle pieces

 What is a Grantor-Grantee Policy?

A grantor-grantee policy outlines how the organization expects the relationship with grantees (other organizations applying for funding or grants) to be structured. (Sometimes you’ll see this type of policy called a funder-grantee policy.) A grantor-grantee policy will address details related to the beginning of the grant application process through evaluation and multiple points in between. The intended audience is both your internal board of directors and staff as well as current/prospective grantees.

This type of policy often sets forth details regarding the complicated details that should allow for a better, more transparent relationship from the get-go with grantees. The policy can be as general or as specific as needed for maximized effectiveness to the organization’s specific situation. I’ll explain some of the “common” points often included in successful grantor-grantee policies below.

Benefits of a Grantor-Grantee Policy

By outlining the process and details of grants, your organization benefits from having an approved, agreed-upon plan of action. This is a proactive step toward avoiding wasting time. A grantor-grantee policy also makes it simpler to navigate unexpected situations or complexities as an organization.

Grantees will certainly benefit from a clear-cut, candid grantor-grantee policy as well because it invites them to set realistic expectations about what a relationship with your organization will look like.

Reasons to Enlist an Attorney to Write your Nonprofit’s Policies

Common Points to Include in a Grantor-Grantee Policy

When drafting grantor-grantee policies, it’s important that provisions included are directly related to your actual current and/or intended operations. (This is why it is important to have an attorney draft your policies as opposed to using something found off the internet—it probably won’t apply!) The following are some points you’ll want to consider as a part of a useful policy.

What basics should be included in the guidelines?

Consider details regarding:

  • How you want prospective grantees to approach your organization to submit an application or express interest. Is it by online application, email, letter, visit, etc.?
  • How quickly can prospective grantees expect a response to an initial inquiry or a submitted grant application? How will that contact be made?
  • What does the decision-making process look like? How often does the board meet, and when are decisions made?
  • You can also include here what you do NOT permit in terms of contact, meeting, or presentations by prospective grantees to avoid undue influence or even the appearance of unethical decision-making.
  • Are grants generally restricted, unrestricted, or on a case-by-case basis?

Smart Employment Policies for Nonprofits

What is the timeline for funding?

  • Can applicants expect grants to be made on a rolling basis or are there specific deadlines?
  • What about the chance for grant renewals? When do those take place?

What are the types of proposals and information are you looking for?

Potential grantees will appreciate upfront information to decide whether to invest scarce resources and considerable time in an application for your organization. This invites a healthy amount of self-screening which enables you to evaluate the most appropriate applications. Consider these essential points:

  • Who is your ideal grantee? Do they need to operate in a certain location or within a specific realm of charitable purpose (such as, through work with animals, human services, or education)?
  • What are your preferred areas of funding? Some preferred funding areas can include: equipment; operating support; special programs/projects; financial stabilization; board/staff development; and capital projects. Will you accept proposals from outside your preferred areas or not at all?
  • What types of funding requests will you NEVER accept?
  • What qualifications and information will you consider in applications?
  • Do you want to give examples of previous grant applications you have funded? Do you want to list all grants made in the previous funding cycle in the policy or perhaps elsewhere (like on your website) or not at all?

What are the specifics of the grant application?

The grantor-grantee policy is not where your grant application should live, but important details about the application should be included. For instance:

  • What will you do to keep the application process reasonable? For instance, asking an applicant to make 10 copies for each individual board member may be unreasonable.
  • Where will the application be made available (online, in-person at the office, etc.) and in what formats (Word document; fillable PDF; etc.)?
  • How often will the grant application process and instructions be reviewed for inconsistencies and clarity? Once a year? Before any given application cycle?

What are the granting process logistics?

  • What is expected of grantees to confirm acceptance?
  • How will funds be distributed—at a specific check presentation event, through electronic transfer, or some other means?

hands in teamwork

How will the organization invite feedback?

Most grantees will not offer invaluable feedback unsolicited. Your organization may want to highlight how and when it will seek productive criticisms for continued growth.

You may not know an adjustment needs to be made until another organization tells you! How will you invite constructive feedback from current and prospective grantees regarding your funding application process? How will make certain it is seen as welcome and important?

What about an exit strategy?

Organizations evolve and priorities change. What does the process look like for informing grantees of a transition away from funding? Certainly, grantees should not expect support for forever, but they should expect respect and clarity when it comes to a grantor planning to pull support. Ample time and notification should be given, as well as the option for support in other ways (if applicable).

How about opportunities for collaboration?

In addition to or apart from funding, what are other ways you invite collaboration with past/current/future grantees? Beyond money, additional chances for working together can further strengthen community connections and enhance mutually beneficial partnerships.

The Ethical Nonprofit: Beneficial Policies

Drafting Your Policies

I would be happy to discuss the particulars of your organization’s needs and goals to ensure your grantor-grantee policy is tailormade to best set your organization up for granting success. Contact me at any time via email (gordon@gordonfischerlawfirm.com) or by phone (515-371-6077).

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Good Governance: Tax-Exempt Organizations to File Forms Electronically

sign here on phone

From online donations to individually-tailored policies and procedures there’s a lot for nonprofit professionals to stay on top of. One of the ways I like to serve my mission of promoting and maximizing charitable giving in Iowa is to help nonprofits leaders in the state understand the ever-changing regulatory landscape to be the most successful they can.

In December 2019 the Internal Revenue Service (IRS) announced that tax-exempt organizations are now required to electronically file certain documents. This comes after the passage of the Taxpayer First Act in July 2019, which affected tax-exempt organizations in tax years beginning after July 1, 2019. This is a change from the previous option where organizations had the option to mail in paper forms. Organizations that have previously filed paper forms should receive a notice from the IRS telling them of the change.

The following IRS forms should now be filed electronically:

• Form 990, Return of Organization Exempt from Income Tax
• Form 990-PF, Return of Private Foundation (or Section 4947(a)(1) Trust Treated as Private Foundation)
• Form 8872, Political Organization Report of Contributions and Expenditures
• Form 1065, U.S. Return of Partnership Income (if filed by a Section 501(d) apostolic organization)

I’ve written about Form 990 in-depth before. While nonprofits don’t generally file annual tax returns (hence the tax-exempt status) most nonprofits need to file an important annual information return (a version of Form 990). If you want to learn more, I recommend giving these posts a read:

Interested in other aspects of successful nonprofit operations and great governance? Confused about any other regulatory changes? Don’t hesitate to contact me for a consult at gordon@gordonfischerlawfirm.com and 515-371-6077.

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25 Days of Giving: Nonprofit Policies Your Organization Needs to Consider

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heart in pages of book

Welcome to the newest post in the 25 Days of Giving series. Have questions or a topic related to charitable giving you want covered as a part of the series? Contact me!

You want your favorite charity to be wildly successful. Whether you’re working for the nonprofit as staff, serving on the board of directors, or assisting as a donor or volunteer, you want your nonprofit to have every chance to reach its goals and objectives. 

The Internal Revenue Service (IRS) strongly encourages nonprofits to adopt specific governance policies to limit potential abuse, protect against vulnerabilities, and prevent activities that would go beyond permitted nonprofit activities. The IRS also audits nonprofits, just as it audits companies and individuals, and having these policies in place can only help you should you be audited. Finally, and perhaps most importantly, having solid policies and procedures in place will provide a foundation for soliciting, accepting, and facilitating charitable donations. 

Each nonprofit is unique, and accordingly policies and procedures needed will vary for each. For instance, a non-operating private foundation will likely need a different set of documents than a public charity. However, most nonprofits will want, at the very least, to consider having the following policies in place. 

Articles of Incorporation

Articles of incorporation are necessary to even form a nonprofit corporation; the document is filed with the state and accompanied by a filing fee. This policy can be known by other monikers as “certificate of incorporation,” “articles of organization,” or “charter document.” Think of this as the constitution of the organization. While it can be fairly short, there are some necessary elements in the articles that are required for federal tax-exempt status. Those elements include a statement of purpose, legal address, emphasis on not-for-profit activities, duration, names and address of director(s), and a dissolution clause, among others. You may want to check out the IRS’ sample charter.

Board Roles and Responsibilities

Nonprofit board members are generally tasked with two major responsibilities of support and governance. A board’s rules and responsibilities document should outline the requirements and responsibilities of board members. Some examples of basic components include fundraising participation, determining the organization’s mission and direction, selecting and regularly evaluating the nonprofit director/CEO, and protection of public interest. A policy regarding board roles and responsibilities should encourage nothing short of ethical and legal integrity within board members.

boardroom chairs

Bylaws

If you’ve ever been part of any board or committee, you’ve definitely heard reference to the bylaws and received a copy upon joining the organization. Nonprofit bylaws serve as the internal operating methods and rules that specify things like the election process of directors, employee roles within the nonprofit, and operational manners of meetings. Specific language in the bylaws is not required by federal tax law, but some states may require nonprofits to have written bylaws to be considered tax-exempt. This document can most often be used to resolve uncertainty between board members and takes the guesswork out of operations.

Code of Ethics

Just as it sounds, a code of ethics document puts in place a set of guiding principles for behavior, decision making, and activities of those involved in the nonprofit, including board members, employees, and volunteers. While principles innate to your organization such as honesty, equity, integrity, and transparency may be understood by all involved, this formal adoption allows those involved to make a formal commitment to ethical actions and decisions. Sometimes this document is known as a “statement of values,” or “code of conduct.” Many organizations post their code on their website to demonstrate accountability and transparency.

Compensation Policy

Competitive compensation is just as important for employees of nonprofits as it is for for-profit employees. Having a set policy in place that objectively establishes salary ranges for positions, updated job descriptions, relevant salary administration, and performance management is used to establish equality and equity in compensation practices. A statement of compensation philosophy and strategy which explains to current and potential employees and board members how compensation supports the organization’s mission can be included in the compensation policy.

Confidentiality

A nonprofit’s board members have a duty of confidentiality due to their fiduciary obligation to the organization. This duty is there regardless of any written policy or not, but it’s certainly a best practice to clarify and explain why and how confidentiality is important to the specific organization. A confidentiality policy can include elements such as the following:

  • definitions of what matters are considered confidential
  • determination to whom the policy applies
  • a statement that board members do not make any public statements to the press without authorization
  • a process by which confidential material may be authorized for disclosure

secret mouth

Conflict of Interest

This is arguably one of the more essential policies a nonprofit board should adopt. A conflict of interest policy should do two important things:

  • require board members with a conflict (or a potential conflict) to disclose it, and
  • exclude individual board members from voting on matters in which there is a conflict.

Note the IRS Form 990 asks whether the nonprofit has such a policy as well as how the organization manages and determines board members who have a conflict of interest. This policy is all too important as conflicts of interest that are not successfully and ethically managed can result in “intermediate sanctions” against both the organization and the individual with the conflicts.

Document Retention

A document retention policy doesn’t mean that EVERY piece of paper and digital report should be kept for a specific duration. But, consider if a document is unknowingly tossed by a nonprofit employee and is later needed in a legal matter. That can cause irrevocable damage. So, ensure all board members, staffers, and volunteers are trained and have a copy of the document retention policy, which should clarify what types of documents should be retained, how they should be filed, and for what duration. This policy should also outline proper deletion/destruction techniques.

Employee Handbook

An employee handbook is another one of the more common nonprofit documents. A quality handbook should clearly communicate employment policies and enforce at-will provisions to all employees. Employment laws are complicated and complex. An employee handbook written/reviewed by a licensed attorney is a good legal step toward avoiding employment disputes. (Yes, just as you need a lawyer to write your estate plan, you’ll need a lawyer to craft/review your employee handbook.) Review your employee handbook regularly, as an out-of-date or poorly written handbook can leave the organization open to employment ambiguity and conflicts.

When is an Employee Handbook not an Employee Handbook?

Financial Policies and Procedures

This document specifically addresses guidelines for making financial decisions, reporting the financial status of the organization, managing funds, and developing financial goals. The financial management policies and procedures should also outline the budgeting process, investment reporting, what accounts may be maintained by the nonprofit, and when scheduled auditing will take place.

Endowment

This resolution concerns funds (and the interest from these funds) that are kept long term. It generally aids the organization’s overall operations. An endowment policy should consider the purpose of the endowment, how the endowment will benefit the mission of the nonprofit, management practices of the endowment, disbursement policies, and investment strategy. (This blog post from GuideStar offers five steps to starting an endowment.)

Gift Acceptance

Gift acceptance is yet another policy the IRS considers to be a best practice for any tax-exempt nonprofit, and the gift acceptance policy can help set acceptance policies for both donors and the board/staffers. There is no federal legal requirement, but this policy does allow you to check “Yes” on Form 990. If well-written and applied across the organization, the policy can help the organization to kindly reject a non-cash gift that can carry extraneous liabilities and obligations the organization is not readily able to manage.

Outstretched hand

Investments

One way a Board of Directors can fulfill their fiduciary responsibility to the organization is through investing assets to further the nonprofit’s goals. But, before investment vehicles are invested in, the organization should have an investment policy in place to define who is accountable for the investment decisions. The policy should also offer guidance on activities of growing/protecting the investments, earning interest, and maintaining access to cash if necessary. Many organizations hire a professional financial advisor or investment manager to implement investments and offer advice. This person’s role can be accounted for in the investment policy.

Legal & Financial Responsibilities of Nonprofit Board Members

Whistleblower

Nonprofits, along with all corporations, are prohibited from retaliating against employees who call out, draw attention to, or “blow the whistle” against employer practices. A whistleblower policy should set a process for complaints to be addressed and include protection for whistleblowers. Ultimately this policy can help insulate your organization from the risk of state and federal law violation and encourage sound, swift responses of investigation and solutions to complaints. Don’t just take it from me, the IRS also considers this an incredibly helpful policy:

“A whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported. (Instructions to Form 990)”

Policies = Powerful

While these documents may sound like a lot of work, the time and energy you place into ensuring your nonprofit is set up for success will pay off in the long run by saving you legal and IRS fees, internal conflict, violations, and compliance issues. Plus, you can enlist a qualified nonprofit attorney to do the leg work for you! 

You may say, “My organization already has a great set of policies in place!” Which is great. But, you should continuously update them as needed/wanted. A policy from 2002 may have been perfect at the time but could be in dire need of updates.

I’d advise making policies the main subject of a board meeting to review what policies have been adopted, which policies need revisions, and which policies you’re missing altogether. If you’re not sure where to start, or how policies should be drafted, read, or enacted, I would be happy to offer you a free one-hour consultation. You can also take me up on my 10 for 990 policy special.

Nonprofit Policy Special: 10 for Form 990

I’m here to assist in drafting or revising your set of nonprofit policies, so don’t hesitate to contact me via email or phone (515-371-6077). We’ll schedule your free one-hour consultation and make a plan to set your organization up for success!

(Note this article is provided for general information only and not intended as legal advice for your specific nonprofit organization. Again, please contact me to discuss your organization’s unique needs.)

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Nonprofits & Sarbanes-Oxley Compliance

two boardroom tables

If you’ll think back to the early 2000s, in the aftermath of the Enron scandal (among others such as Tyco, Global Crossing, and WorldCom) the climate of distrust and dramatic malfeasance demanded reform of corporate accounting, governance, and other business practices. Accordingly, U.S. Congress passed the Sarbanes-Oxley Act, a law name that’s easier to remember than the actual full legislation name: The American Competitiveness and Corporate Accountability Act of 2002. In summary, the legislation required adherence to certain governance standards by corporate management, and expanded the role the governing board plays in financial and auditing oversight and procedures. It also applied standards of operation to public accounting firms.

Sarbanes-Oxley’s intended consequences were multitudinous, including closing accounting loopholes, increasing accountability and disclosure requirements, rebuilding public trust in American corporations, and increasing penalties for corporate and executive wrongdoing.

Although Sarbanes-Oxley was passed with publicly-traded companies top mind, there are two provisions that are explicitly relevant to tax-exempt organizations: the whistleblower policy and document retention and destruction protocol.

Whistleblower

A whistleblower policy is not technically mandated for nonprofit organizations, but it makes smart sense to adopt such a policy. Why? First off, it encourages stakeholders in the organization to bring attention to problems in the early stages where issues may be more solvable. It’s also important for state and federal liability purposes and ensuring organization executives, board members, and other stakeholders understand their right to report as well as the implications of inhibiting such reporting.

Collective Responsibilities of Nonprofit Boards

Section 1107 of Sarbanes-Oxley makes it a federal crime to knowingly take any action with the intent of retaliation against a person who has reported truthful information to law enforcement relating to any current or possible federal offense. Violators of this provision are subject to fines and/or imprisonment for up to 10 years.

An ideal nonprofit whistleblower policy should both set a process for complaints to be addressed and include protection for whistleblowers. A well-written whistleblower policy can encourage an appropriate, swift response of investigation and solutions to complaints.

Form 990, the annual information report the majority of nonprofit organizations are required to file, states the following in its instructions:

A whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported.

Record-keeping

macbook on table

The acts of document retention and destruction are also covered under Sarbanes-Oxley. Section 802 of the Act defines the criminal penalties for tampering with documents in relation to federal investigations and bankruptcy. It reads:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

You read that right. Violators of this provision can be fined and/or imprisoned for up to 20 years.

Additionally, Section 1102 of Sarbanes-Oxley makes it a crime to tamper with a record or otherwise impede an official proceeding. Violators of the provision may be fined and/or imprisoned up to 20 years if they “corruptly” alter, destroy, mutilate, or conceal a record, document or other objects, or make an attempt to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding. (Note, the term “corruptly” is not defined, but your organization can and should use the best judgment on the word.)

Your nonprofit should include specifics related to these Sarbanes-Oxley provisions in a “document retention and destruction policy.” This policy should clarify what types of documents should be retained, how they should be filed, and for what duration. It should also outline proper deletion and or destruction techniques to ensure compliance and reduce liability risks.

Get Policies Set in Place: 10 for 990 Policy Special

Nonprofit Policy Special: 10 for Form 990

Nonprofit organizations should have relevant and updated policies in place that provide guidance for compliance with these Sarbanes-Oxley requirements. I’m offering the 10 for 990 nonprofit policy special where I’ll draft 10 policies related to annual reporting on Form 990 for only $990. Two of the policies included—whistleblower and document retention and destruction—specifically address requirements under Sarbanes-Oxley.

Seize the opportunity to get strong policies in place for a compliant future! Additionally, if you have specific questions about Sarbanes-Oxley compliance don’t hesitate to contact me directly via email (Gordon@gordonfischerlawfirm.com) or by phone (515-371-6077).

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The Ethical Nonprofit: Beneficial Policies

never settle ethics picture

Acting ethically as a charitable organization is paramount to success. Even the illusion of unethical operations can cause lasting damage to your organization. (Case in point: Look at what happened to the Donald J. Trump Foundation and, by association, Eric Trump’s foundation.)

Smart nonprofit boards adopt, in writing, crucial values such as honesty, integrity, transparency, confidentiality, and equity. Sure a policy or two cannot “create” a certain culture or ethical operations by itself. But, well-drafted policies CAN actively promote and reinforce ethics in conduct and decision-making to all involved within the organization.

Reasons to Enlist an Attorney to Write your Nonprofit’s Policies

Major Benefits of Promoting Ethics

The realities of modern communication and social media mean that just about anyone can be a publishing “journalist.” This also means that organizations, especially nonprofits, can be subject to intense scrutiny. Because of tax-exempt status and dependence on charitable donations, nonprofits tend to be held to a higher standard than their for-profit counterparts.

An ethical issue—even the illusion of one—can split boards, cause stakeholders to pull back, snap donors’ wallets shut, and even result in expensive litigation. Fortunately, there are policies and procedures that can prevent your hardworking organization from having to deal with such controversy, by deterring unethical situations from every occurring. These policies include:

Code of Ethics

Every nonprofit should adopt a set of ethical principles to guide its decisions and conduct of its board members, officers, employees, independent contractors, volunteers, and other stakeholders. These ethical principles are typically called a “code of ethics,” “statement of values,” or “code of conduct.” Regardless of the title, the purpose of formally adopting a set of ethical principles is to provide guidelines for making ethical choices and to ensure that there is accountability for those choices. When board members adopt a code of ethics, they are actively expressing their deep commitment to ethical behavior. Making such a commitment can help earn and maintain the public’s trust.

 Confidentiality

Respecting the privacy of donors, prospective donors, employees, and volunteers, as well the nonprofit itself, must be a paramount value. For example, financial information of a donor must be treated as highly confidential, and not be disclosed or discussed with anyone without the express, explicit permission.

Care should also be taken to ensure that unauthorized individuals do not overhear any discussion of confidential information and that documents containing confidential information are not left in the open or inadvertently shared. In short, it is critical to adopt a confidentiality policy regarding identity, financial institution accounts, credit card numbers, and all such information about finances.

 Ethical Fundraising

Federal and state law significantly impact nonprofit fundraising. Beyond merely meeting what the law requires, nonprofits can demonstrate a first-class commitment to legal compliance by adopting an ethical fundraising policy. This would codify, for example, that all communications to donors and potential donors are honest and accurate. Another example: requirements to provide attributions for marketing imagery and never include information with minors that could be considered personal identifying information.

Fresh Iowa Lawyer Mag Read: Policies & Procedures Iowa Nonprofits Need

 Financial Management

Nonprofit board members, both individually and collectively, owe a fiduciary duty to ensure the organization’s assets are used in accordance with donors’ intent and the charitable mission. To ensure prudent financial management, nonprofits should adopt financial management policies.

Financial management policies clarify the roles, authority, and responsibilities for essential activities and decisions. Examples of nonprofit financial policies commonly used include a description of how cash is handled; whether and how travel expenses will be reimbursed; and the board’s role in reviewing executive compensation. 

Financial Transparency

Nonprofits also should adopt a financial transparency policy. An example of a fundamental financial transparency practice is to make information accessible to interested individuals regarding the nonprofit’s budget, sources of revenue, and information about board composition, programs, outcomes/impact, and staffing.

Basic “Good Governance” Practices

There are several basic practices every nonprofit should engage in to maintain “good governance”:

  1. Maintain corporate minutes
  2. Annual review of “conflicts of interest”
  3. Annual review of compensation
  4. Self-assessment process
  5. Diversity
  6. Board orientation/training

Updating Ethics Policies

If you already have some (or all) of the above-listed policies in place, seriously consider the last time they were updated. How has the organization changed since they were written? Have new legislative policies impacted these policies at all? It may be time for a new set of ethics policies for your organization.

Additional Policies Need

Note nonprofits also need additional policies for optimal compliance. In addition to the ten major policies and procedures that support the best possible IRS Form 990 (such as public disclosure, gift acceptance, and whistleblower) nonprofits should have documents in place covering the topics of employment; grantors and grantees; endowment management; and legal training for directors.

Smart Employment Policies for Nonprofits

Questions? Please don’t hesitate to contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss your nonprofit’s specific needs and policies promoting ethics, with you at your convenience.

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Read GoFisch: February Newsletter Announces 10 for 990 Policy Special

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Did you miss the most recent edition of my monthly newsletter, GoFisch? It “swam” (punny, get it?) into inboxes on Valentine’s Day and fittingly featured how estate planning is a way of saying “I love you.” While Valentine’s Day has come and gone, every day is a great day to show your friends and family you care, so give the highlighted posts about different aspects of estate planning (like final disposition of remains and testamentary trusts) a read.

This GoFisch edition also included:

  • An exciting policy special for nonprofit organizations running through March 15. Read more about the 10 For 990 deal here.
  • A love-inspired curated Spotify playlist to play while you work through your estate plan.
  • Iowa-based nonprofit & philanthropy news.
  • Must-read GoFisch blog post highlights.

Like what you read? Don’t forget to subscribe to GoFisch and tell your friends! You can also scan through previous editions of the newsletter here.

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Collective Responsibilities of Nonprofit Boards

talking at a table

If you’re like me, you love watching team sports be it baseball in the summer, basketball through the winter, or curling and volleyball during the Olympics! For a shot at winning, each of the team members must expertly perform their position. While not as exhilarating to watch, nonprofit boards are similar to team sports; the board of directors (the team) can only be successful if each of the individual members (just like individual athletes) play their positions well. That means individual board members must hold one another accountable for the overall outcomes of the nonprofit organization. In this way, there is shared responsibility of the individual board members for their actions, for the good of the board as a collective entity.

While each nonprofit can vary in structural organization, let’s review what a typical board of directors is collectively responsible for. (Note: directors can be known by other names, such as trustees, regents, directors, or a council.)

Governing with Compliance Top of Mind

cooperative on rock

The board has a responsibility of compliance.

First off, it’s important to remember that the nonprofit board is the ultimate governing authority of the tax-exempt organization. The board is therefore responsible (and can be held legally liable) for what happens within and to the nonprofit. Compliance is the word to keep in mind. A board makes certain the organization is compliant with local, state, and federal laws, as well as its own policies and procedures. Nonprofit policies are invaluable documents that provide structure and guidance in operations and decision-making. They supersede the individual team members’ opinions for the good of the nonprofit as a whole. Without updated and relevant adopted policies, nonprofit boards have a significantly difficult time achieving a solid standard of compliance.

Download my free guide for nonprofit leaders on policies and procedures your organization needs. Then, check out my special deal on nonprofit policies related to Form 990 (annual information return) such as gift acceptance, investment, conflict of interest, and whistleblower policies.

Money on the Mind

Speaking of important policies, nonprofit boards have a responsibility to approve some compensation decisions. Boards are involved with compensation decisions to various extents, from approval of just the top executive’s salary, to all staffers’ compensations—it just depends on organizational structure. However, at the very least, board members should be involved with compensation points asked about on Form 990. (Again, a great reason to snag the 10 for 990 deal!)

Keep a Quorum

The board has the responsibility to maintain a quorum for meetings. Your nonprofit’s bylaws (a foundational document a part of formation) should define a quorum—the minimum number of voting members present—needed to hold a meeting. How do you decide on a quorum? It’s the minimum number of board member who should be reasonably able to attend a meeting. Maintaining a quorum means a majority of voting members are making decisions on behalf of the organization. If a quorum is left to be too flexible, the organization runs the risk of a few members (not the majority) making executive decisions.

Three Ds

The board’s responsibilities can be summed up in the easy to remember “three Ds”: duty of care, duty of loyalty, and duty of obedience. This isn’t just a useful pneumonic device, these are the legal standards (as defined by case law) to which a board’s actions are collectively held.

  • Duty of care: This means that board members are expected to actively participate in making decisions, resolving issues, and participate in planning.
  • Duty of loyalty: Board members must put the interests of the nonprofit ahead of their own personal and professional interests. This means that even merely potential conflicts of interest must be studiously avoided. (Your nonprofit MUST have a conflict of interest policy dispersed, reviewed, and signed by each board member.)
  • Duty of obedience: Compliance with all local, state, and federal regulations and laws applicable to the nonprofit, is an essential responsibility for board members.

Legal & Financial Responsibilities of Nonprofit Board Members

Mission Ready

Ultimately the board has the responsibility to keep the organization committed and focused on its stated mission. This is encompassed within the three Ds. In working to uphold the tax-exempt purpose of the nonprofit it’s important all board members recognize their individual responsibilities, and those of the board as a whole, overlap. If the board fails to uphold its duties, in some situations, an individual on the board could be found legally liable (and typically served with fines and/or other restrictions).

Questions about collective responsibilities and how they apply to a nonprofit board you’re involved with? Want to schedule a board training or orientation to brief board members on their legal and financial duties? Need to get those important policies asked about on Form 990 in place? Don’t hesitate to reach out via email or by phone (515-371-6077).

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Legal & Financial Responsibilities of Nonprofit Board Members

nonprofit board members discussing duties

In wise words attributed to Voltaire (and the Spider-Man comic book), “With great power, comes great responsibility.” Never have these words been more true than when it comes to serving on a nonprofit’s board of directors. Being asked or elected to serve on a board can be a huge honor, but it also comes with great legal and fiscal responsibilities.

Legal Duties

Let’s start with three of the major legal duties:

  • Duty of care: This means that board members are expected to actively participate in making decisions, resolving issues, and participate in planning.
  • Duty of loyalty: Board members must put the interests of the nonprofit ahead of their own personal and professional interests. This means that even merely potential conflicts of interest must be studiously avoided. (Your nonprofit MUST have a Conflict of Interest Policy that each board member signs.)
  • Duty of obedience: Compliance with all local, state, and federal regulations and laws applicable to the nonprofit is an essential responsibility for board members.

Additionally, these three major legal duties ensure the organization is committed and stays true to its stated mission.

 

nonprofit board room

Financial Duties

Board members must act as fiduciaries by closely overseeing the nonprofit’s finances. Board members are tasked with reviewing financial reports (i.e. donations received and expenses), evaluating policies (such as a cash handling policy or a gift acceptance policy), and approving budgets. They must also take into account the resource needs of the organization, in addition to accountability to donors, parties served, and the general public.

Whether you’re donating your time and serving on a nonprofit board, or running a nonprofit and are training the board (sometimes called “managing up,” and not an easy thing to do), it’s important the aforementioned duties are fully explained and understood by all parties.

Let me suggest two good and very practical ideas. First, consider providing a board orientation, once a year, where the entire meeting is devoted to an outsider explaining and discussing with the board the full extent of its legal and fiscal duties. Second, consider drafting and distributing a “job description,” not only for your employees, but also for your board members. Put in writing what you expect of the board, including the legal protection they must offer.

Working with nonprofit leaders is one of my passions and a critical part of my main mission to promote and maximize charitable giving in Iowa. If you’re on the board of, or work for a nonprofit that is facing challenges, or if you simply want to be prepared to avoid challenges, don’t hesitate to reach out. 

I can be contacted at anytime by phone (515-371-6077) or email to schedule a free consultation.

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