Are your not-for-profit’s board members subject to term limits? If not, you might want to consider implementing what’s widely considered a best practice.

Some board members lose enthusiasm for the job over time or might even become ineffective or disruptive. Negative attitudes at the board level can easily trickle down and harm your organization’s programs and initiatives, not to mention its financial health. Then there are the board members who invest so much time and energy in your nonprofit that they risk burnout. Term limits give all of these board members a way to make a graceful exit.

Pros and cons

One of the great advantages of term limits is that they can help your organization build a more diverse board over time. They allow you to add people with certain skills and perspectives (such as financial or political expertise) as needed and make it easier to ensure your board represents its community’s gender, racial, economic, religious and other diverse groups. And as board positions open up, you can expand your circle of invested stakeholders beyond the usual core group of volunteers.

Another advantage is that term limits preempt “power hoarding” issues that can occur when authority is concentrated in the hands of a small, entrenched group. Sometimes, such cliques intimidate new members, as well as staff, and block necessary change. Regular turnover provides opportunities to eliminate domineering personalities and improve group dynamics.

Also, term limits can help prevent insider fraud. It’s generally easier for long-term board members who know an organization’s ins and outs to override internal controls and hide fraudulent schemes.

Term limits could have some disadvantages, however, including potential loss of institutional knowledge, expertise and donations from both board members and their networks. You could lose significant volunteer hours, as well. Regular turnover also requires time and resources. You’ll need to regularly identify, recruit and train new members and work to build the cohesiveness required for collaboration.

Setting terms

If term limits sound like a good idea, you’ll need to establish rules. Don’t adopt terms that are too long because it could discourage new members from applying. On the other hand, terms that are too short don’t give members sufficient time to make meaningful contributions, at least if they’re combined with tight limits on the number of terms a member can serve. Short terms also mean holding frequent elections.

You might, for example, allow two consecutive three-year terms or a total of six years with a minimum one-year hiatus between terms. To reduce disruption, structure it so that only one-third of the board departs at a time. Consider conferring emeritus status or establishing advisory boards to keep these departing board members invested.

Amending bylaws

If you don’t already have term limits, you’ll need to amend your bylaws to establish them. Contact us for help doing so or to discuss other governance issues.

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Within a period of just a month, a Minnesota woman was charged with skimming more than $300,000 from her animal rescue charity, a Florida man was charged with multiple felonies for running several charities for his personal benefit, and a New York man was sentenced to 18 months in prison for defrauding his trade association employer. Not-for-profit organizations have about a 9% chance of being defrauded, according to the Association of Certified Fraud Examiners. Think of it this way: That’s almost one in 10.

Fortunately, strong internal controls can reduce your nonprofit’s risk. You may not think you need them, particularly if your leaders, staffers, volunteers and clients consider themselves to be one big happy family. But controls and trust can coexist.

Are your controls effective?

Internal controls are policies and procedures that govern everything from accepting cash to signing checks to training staff to keeping your IT network secure. Most nonprofits have at least a rudimentary set of internal controls, but dishonest employees and other criminals can usually find gaps in environments where controls aren’t thorough or adequately followed.

Why might nonprofits skimp on controls or enforcement? They may be so focused on programming that they don’t allocate enough budget dollars and other resources to fraud prevention. It’s not uncommon for executives or board members to indicate that fraud prevention is low on their priority list — probably because they underestimate their fraud risk.

Nonprofit boards may inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike their for-profit counterparts, nonprofit board members may lack financial oversight experience.

Which controls are critical?

Some of the most common types of employee theft in nonprofit organizations are check tampering, expense reimbursement fraud and billing schemes. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to different staff members — is a relatively easy and quite effective method of preventing such fraud. Strong management oversight and confidential fraud hotlines open to all stakeholders also have been proven to reduce employee theft.

Indeed, although you should trust staffers, you should also verify what they tell you. Conduct background checks on all prospective hires, as well as volunteers who’ll be handling money or financial records. Also, provide an orientation to new board members to ensure they have a clear understanding of their fiduciary role and the potential consequences of committing fraud.

Finally, handle fraud incidents seriously. Many nonprofits choose to quietly fire thieves and sweep their actions under the rug. But if an incident is hushed up, rumors could do more reputational damage than publicly addressing the issue head-on. It’s better to file a police report, consult an attorney and inform major stakeholders about the incident.

Do you trust too much?

Trust tends to be the biggest potential fraud weakness for nonprofits. Although it’s fine to regard your staff, volunteers and other stakeholders like family, you need to set guardrails. Contact us for help determining which controls you might lack and how to implement them.

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If you’re looking for another way to attract and retain staffers that won’t bust your nonprofit’s budget, consider offering an accountable plan. It’s an easy and low-cost way to reimburse employees for out-of-pocket expenses free from income and employment taxes. Let’s take a look.

Reasonable reimbursements

Accountable plan reimbursement payments aren’t subject to income or employment taxes. That’s a big bonus for employees who, for example, travel frequently for work or often pay for work-related supplies out of their own pocket. Your organization can also benefit because reimbursements aren’t subject to the employer’s portion of federal employment taxes.

The IRS stipulates that all expenses covered in an accountable plan have a business connection and are “reasonable.” In addition:

• You can’t reimburse employees more than they paid for any business expense,
• Employees must account for their expenses, and
• If an expense allowance was provided, employees must return any excess allowance within a reasonable time period.

Examples of expenses that might qualify for tax-free reimbursements through an accountable plan include tools and equipment, home office supplies, dues and subscriptions. Certain meal, travel and transportation expenses also qualify.

Establishing a plan

How do you establish an accountable plan? Although your plan isn’t required to be in writing, formally documenting it will make proving its validity to the IRS easier if it’s ever challenged.

When administering your plan, you’re responsible for keeping reimbursement or expense payments separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation that employees otherwise would have received.

The IRS also requires employers with accountable plans to keep good records. This includes documentation of the amount of the expense and the date; place of the travel, meal or transportation; the business purpose; and the relationship of the participants to your organization. You also should require employees to submit receipts for expenses of $75 or more and for all lodging unless your nonprofit uses a per diem plan.

Potential drawbacks

There are potential drawbacks to offering an accountable plan — for instance, increased administration time and costs. Contact us to discuss the pros and cons.

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Employers that outsource HR are no longer outliers. Approximately one-third of U.S. employers outsource at least one HR function, according to software company ZipDo. And for good reason: Many HR responsibilities, such as benefits administration and recruiting, have recently become more complex and specialized. If your nonprofit’s HR staff is still trying to do everything in-house, you may want to consider handing over some duties to outside professionals.

Potential savings and other benefits

First, decide which HR functions you would farm out — for example payroll; benefits planning and administration; leave management; recruiting; worker training; performance reviews; and diversity, equity and inclusion (DEI). These are all labor-intensive responsibilities where expertise counts. Transferring all or some of them to the right outside party could vault your organization to a higher level of professionalism and efficiency.

Next, gauge potential savings and other benefits. Even if the cost to outsource is more, you may decide that the extra dollars are worth freeing up staff hours for other initiatives. Also assess the drawbacks to outsourcing. Certain tasks may require an understanding of your organization’s culture and history to be effective. Plus, you need think about the impact of terminating HR people currently on staff.

Vetting vendors

Be sure you get buy-in from your management team and board of directors before you decide to vet HR vendors. When you start screening providers, ask questions about the scope of their service, how long they’ve been in business and how many nonprofit clients they have in your sector and of a comparable size.

Before choosing a vendor, make sure you understand what and how it charges — for example, by the hour or on retainer. And be clear about whether services will be provided on-site, off-site or in a combination of the two. It’s also important to set mutual expectations, including what the provider will depend on your staff and board to do. Once you’ve selected a vendor, ask your attorney to review the contract before you sign it.

Stretched too thin?

If you’re still undecided, here’s a sobering statistic that you might consider: The Society for Human Resource Management has found that nearly 75% of HR professionals feel their department is stretched too thin. Even if you don’t think outsourcing is the right choice for now, be sure to talk to your HR manager about workload issues. Unhappy HR staffers can affect your entire organization’s morale and your nonprofit’s ability to serve clients.

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Even if your not-for-profit’s fundraising results have been lackluster recently, one high-net-worth donor can turn your year around and make it a fundraising success. The question is: How do you find ultra-wealthy individuals with philanthropic intentions?

Who they are

A 2022 BNY Mellon study found that most individuals with at least $5 million in assets under professional management work with wealth management advisors on their charitable giving strategy. But 32% of these individuals have worked directly with charities. Ultra-high-net-worth (UHNW) individuals (defined as those with at least $30 million in assets) were responsible for making $85 billion in charitable donations in 2020 alone, according to a 2022 report by data analytics company Wealth-X.

Most UHNW donors are men, but the rate of women making large gifts is increasing as more women found successful businesses and benefit from intergenerational wealth transfers. In North America, the average UHNW philanthropist is age 68, and almost 75% of these donors are “self-made,” or haven’t inherited their wealth, according to the Wealth-X study.

The study also found that educational institutions receive the greatest percentage of gifts from UHNW donors, but arts and culture, social services, and healthcare and medical research organizations are also popular with this demographic. Some UHNW philanthropists helm private foundations (which must spend at least 5% of their net investment assets annually), but many, particularly younger, self-made donors, don’t.

Building relationships

One of your nonprofit’s best ways to reach wealthy donors is to build relationships with their financial advisors. These include estate planners as well as advisors to donor-advised funds (DAFs), family offices and private foundations. Work to customize your communications to this audience — for example, provide them with financially sophisticated materials and deploy your charity’s most knowledgeable staffers to meet with them.

DAFs are the fastest growing charitable giving vehicles in the United States. Due to a lack of regulatory rules about minimum payouts, many are sitting on hefty cash cushions. But public pressure and potential legislation might force DAF owners to step up their charitable donations in the near future.

To attract the attention of DAFs, include in your marketing and fundraising materials ways they can support your organization. If you know the names of DAF owners (Fidelity Charitable says 97% of its DAF grants release the donor’s name), try to engage them directly. Many big donors want to be personally involved in the charities they support. You might invite them to tour your facility, meet with board members or observe one of your programs in action.

Don’t neglect them

Although small donors are likely critical to your continued success, you simply can’t afford to ignore high-net-worth philanthropists. Make sure your collateral addresses these potential donors and that your development team is capable of making a case to them and their advisors. Contact us for more information.

© 2023