Private companies and governmental entities don’t begin to fulfill many of the services that the general public needs. This is why governments created a structure that provides tax exemptions for nonprofit organizations. Governments designed the nonprofit structure so that boards are responsible for managing public donations responsibly, and don’t take advantage of not having to pay taxes. The board directors are the leaders who provide strong organizational structure. The Internal Revenue Service (IRS) doesn’t specify exactly who may serve on a nonprofit board of directors, so boards have the flexibility to appoint whomever they choose.
The nonprofit realm has developed best practices to address areas of nonprofit operations that state and federal governments omit.
The Nonprofit Board of Directors Serves as the Governing Body
Among other things, nonprofit board directors are responsible for overseeing the organization’s programs and activities. Laws require nonprofit boards to meet at least once annually, but most nonprofit boards meet as often as necessary to carry out their programs and activities responsibly. Nonprofit board members use their meetings to discuss matters that affect the nonprofit. Board discussions provide varied perspectives as the board votes and makes decisions.
As part of their bylaws, most nonprofit organizations outline terms for board directors that run between two and five years. Nonprofit boards usually set an odd number for their board seats in order to avoid tie votes. The bylaws usually outline staggered terms for board directors so that all or most terms won’t expire at the same time. Board refreshment is important to good governance, but it’s not good practice for the entire board to refresh at the same time.
Role of a Nonprofit Board of Directors
Nonprofits usually function best when many people serving in a variety of roles come together to fulfill the nonprofit’s mission and vision. In addition to the board, nonprofits may get some help from staff and volunteers. The role of the board and its officers differs substantially from the roles of paid staff, managers and volunteers.
As governing body, nonprofit boards of directors focus on the organization’s mission. Their primary duties are working on strategy, setting goals and objectives, overseeing programs and activities, and actively managing risks. Additionally, the board is also responsible for the selection, evaluation and if necessary, replacing the CEO. This is vastly different from the role of paid managers or staff, who are responsible for implementing the plans that nonprofit boards outline.
The Role of Nonprofit Board Officers
Nonprofit boards typically have three or four officers. The officers are voted on by the rest of the board. They hold a higher degree of responsibility than other board members. The organization’s bylaws should spell out a description of each officer’s role, duties and responsibilities.
Nonprofit board officers have terms similar to those of board members, and sometimes their terms are shorter than those of at-large board members. Board officers are allowed to accept financial compensation for their service as leaders, except with certain public boards.
All nonprofit board members are responsible for ensuring that the organization’s programs and activities are in accordance with the nonprofit’s mission, purpose and bylaws. Anyone can serve on a nonprofit board of directors. Best practices for nonprofits suggest that boards choose individuals within their communities who have passion and experience that supports the nonprofit’s mission statement. However, in some industries, especially in healthcare, there is a movement to have some board members who are not from the community. Sometimes, small communities cannot find the expertise that they need.
The following is a general description of officer roles and duties:
The individual who holds the position of nonprofit board chairman is the leader of the board. The board’s chairman supervises all business and affairs of the board. The board secretary often works closely with the board chairman to set the agenda for board meetings and to ensure that the nonprofit is continually compliant with all federal, state and local laws. The board chairman is usually also the facilitator for all board meetings.
The vice chairman of a nonprofit organization fills in for the chairman as needed. Vice chairmans may also have various other duties as outlined in the bylaws. Some nonprofits, either formally or informally, structure their boards so that the current chairman mentors the vice chairman, preparing that individual to take the next term as chairman.
Nonprofit secretaries also have important duties. Secretaries often help the chairman gather issues for agenda items and prioritize them according to importance. The secretary ensures that all compliance documents are completed and submitted in a timely manner. During board meetings, the secretary takes the minutes and prepares them for approval at the next meeting. They are also a source for reminders of what the by-laws say about an action, for example, in regards to a quorum. They are also responsible for understanding Robert’s Rules of Order. Additionally, most of the board communication goes through the secretary, who keeps contact information for all board members and puts out most of the correspondence for issues that concern the full board.
Nonprofit board treasurers prepare the annual budget, as well as the income and expense reports. Treasurers also make recommendations to the full board regarding financial matters. Nonprofit boards usually set up another officer, such as the chairman or the vice chairman, to be the second, required signer for paying the organization’s outstanding invoices. Having two signers ensures that nonprofits are accountable for transactions. Treasurers have an important position because they keep board members informed about the financial health of the nonprofit.
Protecting Nonprofit Board Members
As the individuals who are responsible for providing insight, direction and oversight, nonprofit board directors are important assets in and of themselves. Nonprofit board directors don’t get paid for their service, yet they accept lots of liability by virtue of their role.
One of the most important ways that nonprofit board directors can protect themselves is simply by knowing the types of things for which they could be held liable.
Nonprofit board member liabilities typically fall into three categories — corporate, federal and general liability. For all nonprofit boards, even the smallest organizations, it is advised that they have D&O insurance.
Nonprofits are primarily governed by state law. Thus, they must follow state laws and abide by their bylaws. Nonprofit board members also have a responsibility to handle employment taxes.
Section 501 (c) of the federal law describes the process for organizations that qualify as charitable organizations to qualify for tax exemptions. Not following the federal tax exemption laws can cause nonprofit organizations to lose their tax-exempt status.
Nonprofit board members also expose themselves to general liability exposures, such as gross negligence. Examples of this include not taking the proper steps to ensure safety at nonprofit facilities or not conducting proper background checks for volunteers.
Boards can take some steps to help protect themselves by covering certain risks with D&O insurance. Board portals are another viable way that boards can use to prove they’ve taken due diligence in board decision-making.
In conclusion, serving as a nonprofit board director can be a rewarding experience. It’s one that comes with much responsibility. Nonprofit board members who accept their positions responsibly, and with the intent on making the nonprofit the best that it can be, improve the overall function of the organization.