This article outlines some “best practices” for governance of non-profit organizations. Of course, the governing board of the non-profit remains ultimately responsible.
While this list is not characteristic of all possible best practices, it provides a good starting point for improving governance practices. Which practices should be adopted and how they are implemented depends on the size, nature and complexity of each organization. For example, a non-profit hospital should follow most of the best practices, while a small non-profit providing services in a lightly regulated area can be more selective.
Board Practices
Examples of best board practices include:
Board Size and Composition. Limit the board to a functional size. Identify expertise and representation to fulfill the organization’s mission; recruit members with desired attributes; consider defining independent board members and requiring that a majority of the board be independent; and establish term limits.
Oversight and Evaluation. Employ active, knowledgeable and independent oversight and evaluation of the organization’s activities, including for example, following the charitable mission, fundraising/fundraising overhead and updating the organization’s mission and strategic planning as appropriate.
Management Reporting to the Board. Establish programs to promote compliance with legal and regulatory requirements; assess management and organization effectiveness; fulfill public reporting requirements; hold regular executive sessions without management present to allow for candid board discussions; and conduct self-evaluations.
Policy Review and Development. Develop, adopt and oversee policies regarding: conflict of interest and organizational ethics; compliance; legal review of contracts; purchasing and contract authority; and other policies as appropriate.
Conduct Effective Board Meetings. Distribute an agenda and materials in advance; provide adequate time to consider and discuss issues; provide periodic reports relating to compliance, finance, quality and other material issues; establish board attendance and/or commitment standards; and keep appropriate minutes of meetings.
Board Officers and Management Roles. Define the role of the board chair and its relationship to the CEO and the role of the treasurer/finance committee chair in relation to the CFO; define board responsibility for evaluation of the CEO and CEO succession planning; and obtain board approval or ratification of retention of legal counsel.
Committees. Identify expertise and representation needed to fulfill committee duties; develop a process/procedure for committee selection; delineate areas of responsibility and authority for each committee; conduct regular evaluations of committees; have each committee hold regular executive sessions; and rotate membership and chairs.
Board Education. For example, provide new member orientation; review of board roles/responsibilities; regular briefing on legal developments affecting the organization and the industries it serves; board members’ functions; the duty of loyalty to the corporation; and specialized training for committee members.
Document Performance. Use the board minutes to document oversight functions. Legal counsel can assist in the level of detail that should be included in the minutes.
Finance and Audit Practices
Examples of best practices relating to finances and audits include: CEO and CFO Certification . Certify the appropriateness of financial statements and reports and adequacy of information reporting systems. No Loans. Prohibit loans to board members or executives.
Establish an Audit Committee. This committee should normally be separate and independent from the finance committee. Also, limit the committee to independent, non-management members with no financial relationships with the corporation; conduct routine executive sessions without management present; include at least one financial expert; pre-approve all audit-related services and providers; and rotate the auditor partner every five years.
Audit Committee Policies and Practices . Prohibit the auditor from providing non-audit services; have auditors report directly to the audit committee rather than to management; conduct an annual review of Form 990 and other disclosures to assure adequacy; require officer certification of Form 990 and assure that it is available to the public as required; adopt a policy prohibiting management interference or undue influence with audit process; establish procedures for anonymous reporting of complaints regarding accounting and auditing matters; adopt periodic review of internal controls and a policy prohibiting use of an audit firm if the CEO, CFO, controller or other senior finance employee has worked for the audit firm within the last five years (or some other time period that establishes independence).
Executive Compensation and Benefits
Compensation has been a hot topic, especially for non-profits. Examples of best practices include establishing compensation by a committee of independent board members in executive session; making compensation and benefits consistent with and structured to promote the organization’s charitable mission and purposes; authorize the committee to engage outside compensation experts as appropriate; if possible, comply with the process for a rebuttable presumption under the Internal Revenue Service intermediate sanctions regulations; and establish policies on expenses and their documentation, plus require travel in a “cost effective manner.”
Conflict of Interest, Confidentiality, Loyalty
These areas can be addressed through policies regarding conflict of interest; confidentiality, a code of ethics and disclosure by board members and management of all information of any type that is relevant to the board’s duties, including disclosure of corporate opportunities (and refraining from undertaking such opportunities on their own behalf ).
Establish an Organizational Commitment to Legal and Regulatory Compliance
Consider whether the organization requires a compliance officer. Assure that the compliance officer and staff have adequate resources and authority to perform their function and adequately report to the board; be informed about and oversee an information and reporting system to prevent and discover compliance issues; and adopt a records retention policy that is reviewed by the board and counsel and that suspends document destruction during any investigation or litigation.
Adopt a whistleblower protection/communications policy, including encouragement for individuals to come forward with credible information of illegal practices or policy violations. Also, conduct a board review of organizational and governing instruments, key financial transactions and compensation policies and practices at least once every five years.
Fundraising/Charitable Obligations
These obligations include compliance with charitable solicitation laws; control of administrative expenses; oversight of compliance with donor expectations and restrictions; appropriate use of funds; making financial information available to the public; and providing detailed information about programs, including methods used to evaluate the outcomes of programs, and make other information available to the public through an annual report, Web site and other means.
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Doug Albright and Karen Sutherland are, respectively, the chairs of the Healthcare Practice Group and Employment and Labor Law Practice Group of Ogden Murphy Wallace, PLLC. To contact them, email dalbright@omwlaw.com or ksutherland@omwlaw.com.
