The need for nonprofit services in the community has increased significantly in the past year, making it crucial for nonprofit organizations (NPOs) to implement dedicated and strategic governance in order to meet the growing needs of their service demographic.
Like for-profit businesses, it is recommended that a nonprofit have a board of directors charged with governance of the organization.
Governance is defined as “a system by which an organization makes and implements decisions in pursuit of its objective.” This means governance can include two phases: 1) decision-making and 2) implementation. A nonprofit’s board of directors is responsible for making decisions and then guiding the implementation of those decisions. In turn, this process equips the NPO to achieve its mission.
The essential elements of an NPO board include:
- Active participation
- Understanding of fiduciary duties
- Understanding of the organization and the ability to assess risks
- Development of a code of conduct for the organization
- Establishment of an audit committee
Actively participate – It’s crucial that board members are willing to devote their time and expertise to the organization. Directors should attend all meetings and be prepared to address agenda items. Board members should be willing to share professional expertise with management as needed and support the organization through financial contributions, if required. Expectations of directors should be clearly communicated when the position is accepted.
Understand fiduciary duties – There are three categories of fiduciary duties: care, loyalty and obedience. To adhere to the duty of care, a director should make decisions that are in the best interest of the NPO. The duty of loyalty requires a director to act in good faith for the benefit of the nonprofit and not for personal benefit. The duty of obedience requires that members comply with regulatory, legal and compliance requirements.
Understand the organization and assess risk – It’s very important for directors to have a thorough understanding of the organization’s operations and the processes needed to meet its objectives and accomplish its mission. In addition, the board should be prepared to access the risks the organization may face on an annual basis. These risks may include regulatory and compliance requirements, liquidity needs and management capabilities.
Develop a code of conduct – A code of conduct should include the NPO’s mission statement, policies and procedures, and disciplinary actions. The code of conduct should be communicated and available to all directors, management and employees of the organization.
Establish an audit committee – If an organization is required to have any kind of audit performed, the audit committee can monitor the process and recommend the board approve the audited financial statements.
Special thanks to SST Senior Audit Manager Bridget Losa for providing the content for this post.