This article was originally published on Philanthropy.com.
What is the guiding principle board members should use to govern well?
The best board members practice stewardship: the careful and responsible management of something entrusted to one’s care. Nonprofit boards are responsible for ensuring that organizational assets help designated charitable beneficiaries. Board members must remember, therefore, that their job is to preserve those assets and see that they are properly used for others.
Too often, people join boards for social benefits or career building, with only a vague sense of the organization’s mission and how to support it. Such board members may unwittingly fail to govern adequately and, consequently, waste or imperil charitable assets despite the best of intentions.
Here are five tips to help board members practice sound governance.
1. Closely monitor assets.
No one person, whether a founder, funder, or charismatic leader, may exercise private dominion over an organization’s assets. As a guiding principle, stewardship should lead the board as a group to reject any proposal or circumstance in which any one person (director, executive director, CFO, etc.) attempts to control resources.
Board members also must avoid conflicts of interest, prohibit private use of a charity’s assets, and limit compensation to fair value for services received. Fair compensation for services of equal value does not diminish assets, but excessive compensation or conflicts do.
Board members also may decide to limit terms of service to allow for fresh input. This can be a scary thought, especially when a board’s leaders are loyal. However, stewardship may require long-serving members to retire to prevent ownership-like attitudes or perspectives.
2. Fully research all proposals, and seek outside help when warranted.
As a board member, you may properly delegate day-to-day operations to staff, but your job does not end with the selection of a vetted and apparently competent leader. Board members as stewards must reasonably monitor operations and make sure that management commits resources to proper uses.
For example, when management proposes to enter into an agreement or expend charitable assets, there must be a logical explanation to support the proposed use. It is up to you to ensure that you are reasonably informed of the logic supporting such proposals before voting to accept them. To do this, ask questions until you are reasonably satisfied. If you’re not satisfied, you must vote against the action or abstain by explicitly expressing your desire to abstain. If board members are silent when a vote is taken, that silence equals consent.
Board members may also need to take control of the board reporting and meeting process. If inadequate board meetings or insufficient information precludes a reasoned review, insist upon a greater opportunity to review proposals, even if it would delay things. A steward would not sit by and allow proposed uses to be approved without good reason.
Board members often fail to apply stewardship principles in this context, especially when they are asked to approve complex transactions such as annual budgets or other projects based on sophisticated financial forecasts or reports. While board members are not expected to become experts in these areas and may rely upon qualified committees (such as finance committees) for guidance, you cannot simply rely upon the general assurances of management.
As a steward, each board member must understand the basic logic behind a proposal. Ask questions until you get the explanation you need. If you have doubt about a proposal based upon documentation, rationale, or previous errors or instances of bad judgment, you may require outside support to validate projections or assumptions.
It’s important to note from a steward’s perspective that spending money on consulting or legal guidance to evaluate complex transactions can, in fact, be the best use of resources to preserve assets and reduce or mitigate risks. In each case, a board member will need to decide, based upon the dollars involved and the complexity of a proposal, when it is best to use consultants, attorneys, or both.
3. Set measurable goals and track them.
A board member’s stewardship obligation does not end with the execution of an agreement or commencement of an arrangement. You must monitor and track an arrangement and reasonably ensure that planned goals are satisfied. If necessary, be prepared to force the organization to modify or terminate an arrangement. To do this, you must be familiar enough with a proposal’s terms and conditions to ask sufficient questions. In fact, you may wish to require management to report on predetermined goals or milestones as a project progresses.
For example, for organizations that receive grants, board members should monitor and receive updates periodically concerning the organization’s satisfaction of grant terms and conditions. Simply accepting a blanket report such as “grant terms and conditions are satisfied” is not sufficient. Rather, a steward might require an annual audit to ensure compliance and, of course, check more closely and more often if concerns are raised.
Internal financial reports also provide a meaningful opportunity to track and monitor the use of assets. Board members must ensure that the reporting is reasonably accurate and that actual operating numbers can be tracked against the budget or the prior year’s numbers. Variances should be identified, and management should be required to explain causes and provide plans to address such variances.
Finally, the board — not staff — must insist upon engaging the auditor who performs the annual audit! The annual audit is one of the more important tracking and oversight tools. The board members, as stewards, must obtain the benefit of a third-party review and understand any auditor findings and any disagreements between the auditor and management.
4. Ensure compliance and reporting accountability.
Charitable organizations are required to satisfy tax code, state law, grant, and, in many cases, additional regulatory terms and conditions. A board member must reasonably ensure that compliance failures do notrisk charitable assets.
Board members must establish a culture of accountability at the top by requiring members to disclose conflicts of interest and adopt board policies that spell out compliance requirements and consequences for those who do not comply. You also must track and monitor staff efforts to meet day-to-day compliance requirements and require periodic reporting on compliance efforts.
As a result, the board — not management — must engage legal counsel directly to address compliance concerns! The board is ultimately responsible for compliance and must be able to secure independent legal advice, especially when compliance concerns may involve management.
Similarly, the board also must drive and be responsible for accurate reporting to the government, such as the proper preparation and filing of Form 990. These reports should be treated as communications from the board, not management. Therefore, the board cannot simply delegate the preparation of such reports to management or the audit firm without adequate review and understanding.
5. Know the terms and conditions of charter and bylaws.
Because the charitable purpose and mission of the organization should govern its actions and stewardship goals, it is essential that board members know and understand key terms and provisions from the bylaws and charter. Any proposed change to the mission or vision of an organization should be reviewed in light of these documents.
The bylaws also provide key terms and conditions governing the authority of officers.
Board members who use stewardship as their guiding principle will likely treat the resources of the organization like those of a friend entrusted to you for safekeeping and effective use. Board members also will be more likely to seek expert assistance, when appropriate, to guide them through difficult situations. With the commitment to board service fully understood and properly guided, board members can enjoy without concern the social and career benefits that come from board service!