This article by BoardSource provides values to use as a framework for any board’s code of ethics.
Why Do You Need a Board?
All nonprofit organizations need a board. Although the specific responsibilities may vary due to mission focus and different phases of an organization’s existence, the basic role and purpose of all nonprofit boards remain the same. There are legal, ethical, and practical reasons to build a board when a nonprofit is created. These reasons create the foundation for good governance and are explained in-depth in this article from BoardSource.
State laws are explicit to indicate that nonprofit corporations need a board to assume the fiduciary role for the organization’s well-being. These laws designate overall responsibility and liability to that board. In addition to the board’s responsibilities as a governing body, individual board members are bound by their legal obligations: the duties of care, loyalty, and obedience.
These duties serve in the courts as the test for their compliance if a board member’s performance or decisions ever become a legal issue. State laws generally stipulate the minimum size for a board — varying between one and three members — and other de minimis requirements that define how boards may function or be structured. Some state laws define the lowest acceptable number of independent (i.e., devoid of personal benefit or attachment) board members, but normally the laws do not address board composition issues.
The organization’s articles of incorporation and bylaws define the internal authority within the nonprofit and clarify the board’s role on top of the decision-making hierarchy. (Naturally, in a formal membership organization the members have certain rights to approve major board decisions.)
The federal law is even less specific in determining how the board should be structured, but it does expect this fiduciary body to serve as the gatekeeper for the organization. When applying for recognition of tax-exempt status, board members for the new nonprofit must be listed to allow the IRS to determine whether proper oversight has been established. In complying with federal law, one of the board’s roles is to ensure that no inappropriate private inurement takes place deviating organizational assets into the hands of individuals who can influence the affairs of the nonprofit. Intermediate sanctions regulations directly designate the board as the body to approve all the major financial transactions in the organization.
One of the key ethical reasons to build a board is to create a structure that functions to assure the public and all individual stakeholders that the organization is in good hands. The board assumes the responsibility for the achievements, or lack thereof, within the organization. Its role in this capacity is to go beyond the legal requirements and ensure that the organization not only does things right, but does the right thing.
The board acts as the agent for the organization’s constituents. When a supporter, client, or customer relies on the organization to use its funds appropriately or provide trustworthy and quality services, the board sees to it that these expectations are met. Board members are not there to benefit personally from their affiliation; during decision making they are expected to place the interests of the organization above any other considerations.
Oversight is a primary duty for all boards. It consists of working closely with management to ensure that goals are met and that ethical principles serve as the guidelines for all activities of the organization. As overseers, board members also spell out the expectations and evaluate the results. The board is there to go above and beyond the status quo, keeping the organization viable and able to grow by reacting to and anticipating stakeholders’ needs.
The board’s role is not limited to control and supervision. A board is made up of individuals who, at one time or another, become worker bees to assist the organization in getting its work done. This is particularly the case in start-up boards that, for example, regularly help draft the organizational documents, hunt for supplies and equipment, and procure funding. Before staff is hired, board members usually manage the daily affairs and run the programs of an all-volunteer organization. They wear various hats depending on the need of the moment.
In most nonprofits, as soon as the situation allows, the board hires the first staff person — often the first chief executive — and delegates the daily affairs to him or her, with the necessary support and guidance. At this point the board can devote its time to governing, providing direction, and securing that the mission of the organization stays on course.
The board also represents the stakeholders of the organization. A board that is familiar with the constituency and its needs is better able to steer the organization in a direction that is helpful to those it serves. If its composition reflects that of the constituency, this becomes an easier task for the board to accomplish.
As a detached body from the daily affairs, the board is able to differentiate the trees from the forest — to look at the organization as part of its larger sphere and not just as an office that carries out the strategic plan. The perspectives that board members bring to the boardroom complement those of the chief executive. Together, they should be able to ask the probing questions necessary to avoid stagnation and keep the organization moving forward.
And finally, the board is the body that provides continuity to the organization. Individuals come and go but the board as an entity remains. When good practices are institutionalized, the changing of the guards does not adversely affect the good work that has been accomplished.
Fiduciary Responsibilities of Board Members
One of the main responsibilities of nonprofit board members is to maintain financial accountability of their organization. Board members act as trustees of the organization’s assets and must exercise due diligence to oversee that the organization is well-managed and that its financial situation remains sound.
Here is an outline, provided by BoardSource, on how nonprofit board members can fulfill their role as fiduciaries.
What does fiduciary mean?
Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient. Board members, as stewards of public trust, must always act for the good of the organization, rather than for the benefit of themselves. They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.
Understanding of financial basics
Not every board member can be a financial wizard. Every board member, however, needs to be a financial inquisitor. It is essential to understand basic terminology, be able to read financial statements and judge their soundness, and have the capacity to recognize warning signs that might indicate a change in the overall health of the organization. If a board member does not understand something, he or she must be willing to find out the answer.
Specific questions board members should ask:
- Is our financial plan consistent with our strategic plan?
- Is our cash flow projected to be adequate?
- Do we have sufficient reserves?
- Are any specific expense areas rising faster than their sources of income?
- Are we regularly comparing our financial activity with what we have budgeted?
- Are our expenses appropriate?
- Do we have the appropriate checks and balances to prevent errors, fraud, and abuse?
- Are we meeting guidelines and requirements set by our funders?
(Questions adapted from The Financial Responsibilities of Nonprofit Boards by Andrew Lang.)
Setting up and monitoring key financial indicators
Having the proper tools to monitor and evaluate financial performance strengthens the board’s capacity to judge the health of the organization. Board members need to agree on general guidelines and standards to measure the effectiveness of organizational accomplishments.
Appropriate policies must be in place to guide management and board decision making.
Ensuring adequate control mechanisms
Control mechanisms are not intended to detect fraud but rather to prevent it. Ensuring clarity in
job descriptions and responsibilities; defining financial and accounting procedures (signing checks, handling of cash, approving expenses, outlining parameters for credit card usage); managing potential conflicts of interest with a clear policy; and requesting regular external audits are all manifestations of fiduciary responsibility.
Approving the budget
The budget creates the framework for program management and overall administrative decisions. The annual budget approval process helps curb any tendency for the board to micromanage. Securing necessary funding is part of a viable budget. Examining financial statements regularly, comparing actual figures to the projected ones, allows the board to verify that the general guidelines stay on track. The board should question any major variances.
Overseeing the organization’s legal obligations
The board verifies that all filing requirements and tax obligations are completed. The organization must fill out Form 990 completely and file it on time. It must regularly withhold and pay employment taxes. To avoid intermediate sanctions, the board must document and justify its executive compensation and any financial transactions.
What Are the Basic Responsibilities of Nonprofit Boards?
Ten Basic Responsibilities of Nonprofit Boards:
- Determine mission and purpose. It is the board’s responsibility to create and review a statement of mission and purpose that articulates the organization’s goals, means, and primary constituents served.
- Select the chief executive. Boards must reach consensus on the chief executive’s responsibilities and undertake a careful search to find the most qualified individual for the position.
- Support and evaluate the chief executive. The board should ensure that the chief executive has the moral and professional support he or she needs to further the goals of the organization.
- Ensure effective planning. Boards must actively participate in an overall planning process and assist in implementing and monitoring the plan’s goals.
- Monitor and strengthen programs and services. The board’s responsibility is to determine which programs are consistent with the organization’s mission and monitor their effectiveness.
- Ensure adequate financial resources. One of the board’s foremost responsibilities is to secure adequate resources for the organization to fulfill its mission.
- Protect assets and provide proper financial oversight. The board must assist in developing the annual budget and ensuring that proper financial controls are in place.
- Build a competent board. All boards have a responsibility to articulate prerequisites for candidates, orient new members, and periodically and comprehensively evaluate their own performance.
- Ensure legal and ethical integrity. The board is ultimately responsible for adherence to legal standards and ethical norms.
- Enhance the organization’s public standing. The board should clearly articulate the organization’s mission, accomplishments, and goals to the public and garner support from the community.
What Are the Legal Responsibilities of Nonprofit Boards?
Under well-established principles of nonprofit corporation law, a board member must meet certain standards of conduct and attention in carrying out his or her responsibilities to the organization. Several states have statutes adopting some variation of these duties which would be used in court to determine whether a board member acted improperly. These standards are usually described as the duty of care, the duty of loyalty, and the duty of obedience.
Duty of Care
The duty of care describes the level of competence that is expected of a board member and is commonly expressed as the duty of “care that an ordinarily prudent person would exercise in a like position and under similar circumstances.” This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.
Duty of Loyalty
The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.
Duty of Obedience
The duty of obedience requires board members to be faithful to the organization’s mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public’s trust that the organization will manage donated funds to fulfill the organization’s mission.
What Are the Responsibilities of Individual Nonprofit Board Members?
Individual board member responsibilities:
- Attend all board and committee meetings and functions, such as special events.
- Be informed about the organization’s mission, services, policies, and programs.
- Review agenda and supporting materials prior to board and committee meetings.
- Serve on committees or task forces and offer to take on special assignments.
- Make a personal financial contribution to the organization.
- Inform others about the organization.
- Suggest possible nominees to the board who can make significant contributions to the work of the board and the organization.
- Keep up-to-date on developments in the organization’s field.
- Follow conflict-of-interest and confidentiality policies.
- Refrain from making special requests of the staff.
- Assist the board in carrying out its fiduciary responsibilities, such as reviewing the organization’s annual financial statements.
Personal characteristics to consider:
- Ability to: listen, analyze, think clearly and creatively, work well with people individually and in a group.
- Willing to: prepare for and attend board and committee meetings, ask questions, take responsibility and follow through on a given assignment, contribute personal and financial resources in a generous way according to circumstances, open doors in the community, evaluate one self.
- Develop certain skills if you do not already possess them, such as to: cultivate and solicit funds, cultivate and recruit board members and other volunteers, read and understand financial statements, learn more about the substantive program area of the organization.
- Possess: honesty, sensitivity to and tolerance of differing views, a friendly, responsive, and patient approach, community-building skills, personal integrity, a developed sense of values, concern for your nonprofit’s development, a sense of humor.
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Updated: 20 May 2017