5 key governance issues your nonprofit needs to address

Considering periodic cases of nonprofits finding themselves entangled in scandal, it’s prudent that you carefully address governance challenges now—in order to avoid any unplanned and unwanted crises at some point in the future. Empowering your organization with the information, tools, and resources to overcome these challenges will also help to inspire the highest level of confidence from stakeholders.

Issue #1 - Conflicts of Interest

“The greatest threat to the not-for-profit sector is the betrayal of public trust.” —Joel Fleishman, Professor of Law and Public Policy Sciences, Duke University

Can board members be paid for professional services rendered to the nonprofits they serve? Can a nonprofit executive hire relatives to fill positions under their direct oversight? Is it okay to rent office space at a discount from an advisory board member?

You must always be aware of potential conflicts facing your organization. The reputational risk of negative publicity is one of the greatest threats to the hard-earned trust your organization has established with donors, volunteers, and members. A simple conflict of interest policy is one of the most vital governance tools that your nonprofit can adopt—defining transactions or agreements that might be construed to benefit the private interest of any officer, director or board member.

Once implemented, your policy should be circulated and rigorously discussed amongst board and staff annually. Any potential conflicts of interest should be disclosed and documented, with interested persons abstaining from any vote or discussion on the matter. Keep in mind that on the Form 990 tax return that tax-exempt organizations must file annually, the IRS specifically asks whether your organization has a written conflict of interest policy and how conflicts are managed.

Issue #2 - Risk Management and Personal Liability

“There have been several cases where large endowments allowed board member-directed investments to represent a significant portion of their multi-million dollar portfolio,” notes Quanda Allen, Group Vice President of Truist Foundations and Endowments Specialty Practice. “While illegal activity was probably not involved, arrangements like this can easily appear as conflicts of interest. So the best solution is simply to avoid them.”

Can board members be sued? If someone falls on property owned by our nonprofit, is the organization liable? Is it ok to sell donor databases to for-profit entities?

Risk management is everyone’s responsibility in a nonprofit organization. From executive staff to volunteer leadership, proactive steps taken to mitigate risk improve the likelihood that your organization won’t be derailed by an unanticipated event. Ultimately, however, board members hold the fiduciary responsibility for your nonprofit’s operations. Yet over the years many studies have noted that only a little more than half of nonprofit boards indicate they’re ‘actively engaged’ in setting organizational policy or financial oversight. It’s a responsibility gap that poses significant risk to board members.

Essential Risk Management Policies

• Confidentiality Agreement
• Conflict of Interest
• Document Retention and Destruction
• Executive Compensation
• Gift Acceptance
• Investment Management
• Whistleblower Protection

In a well-documented case from several years back, a $5.5 million judgment was levied against a New York nonprofit CEO, a subsidiary that he controlled, and the charity’s five board members. The $1 million judgment assessed to board members was a direct breach of fiduciary duty penalty—relating to their allowing of complex financial arrangements between the charity, the CEO, and a company controlled by him and his wife.^{Disclosure 1} It’s an unfortunate example of board members incurring a heavy personal cost for failing to employ a more rigorous risk management policy.

If risk isn’t well managed, your nonprofit could even jeopardize its tax-exempt status. So, to protect the opportunity to fulfill its mission, your nonprofit must undertake the task of putting risk management policies in place and of evaluating insurance as a way to transfer the financial impact of unknown occurrences with negative consequences.

Issue #3 - Outcome Measurement

“Nonprofit organizations often tell their stories by illustrating the impact they’ve had on the lives of a single individual, family, or member. While powerful, these stories don’t replace a solid theory of change tied to specific, measurable outcomes. You need to make the transition towards measuring the impact of your programs and services,” advises Ms. Allen.

How do we know if we’re fulfilling our mission? How do funders compare our performance to similar organizations?

Today, the United States is home to

1.54 million

tax-exempt organizations contributing more than $1 trillion to the nation’s economy.^{Disclosure 2} As the number and size of tax-exempt organizations continue to increase, constituents are demanding a higher level of self-assessment and outcome measurement. It’s about heightened accountability. Stakeholders want to understand what difference your nonprofit’s programs are making and how successful you are in fulfilling your mission.

Integrating an outcome evaluation process into program design and measurement will be essential to your organization’s long-term sustainability. The process begins with a self-assessment. The next step is to identify key elements of program evaluation, and to implement a method for collecting data to manage daily performance. Benchmarking performance against other organizations in a similar program area is a meaningful practice that provides insight into areas of improvement and excellence.

Issue #4 - Investment Oversight

Is it mandatory to have board members with finance experience serve on the investment committee? Is a 5% spending policy a reasonable, achievable target considering the challenges facing today’s economy?

Given the unprecedented impact of the recent pandemic and ongoing market volatility, many nonprofits are seeking to improve their ongoing investment oversight. The process begins with the board of directors establishing a finance or investment committee. This committee is responsible for initiating an investment policy statement (IPS) that clearly outlines the organization’s investment objective, roles and responsibilities, performance expectations, spending needs, and any prohibitions.

The legal and fiduciary responsibilities of managing investment assets pose a significant challenge for nonprofits of all sizes and complexities. In many states, regulations like the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) provide guidance related to the governance of investment assets.

Issue #5 - Ethics and Accountability

Should our organization have a code of ethics?

Are we required to retain documents for public review for more than one year?

Nonprofit organizations must foster a culture of ethics and accountability. Losing public confidence would erode the very foundation upon which your organization is built. For most nonprofits, a great place to start is with a code of ethics that’s rooted in the values, vision, and mission of your organization. The adoption of a formal code provides staff, board members, volunteers, and stakeholders with clear guidelines for making ethical choices.

Charity Navigator, Guidestar, the Better Business Bureau, and the Internal Revenue Service (IRS) represent just a handful of organizations that are ratcheting up the pressure on nonprofits to make financial transactions transparent. While there’s no blanket document retention regulation or guideline for all nonprofits, the National Council of Nonprofits offers some guardrails.

And as the federal government (and most states) continue strengthening whistleblower laws, you should consider documenting an internal process for addressing complaints about financial management and accounting practices to better comply with state and federal laws. Adopting a whistleblower protection policy also helps signal to employees, board members, and the donating public, that your organization is open and transparent.