Promoting good governance with a board policy
Your nonprofit’s board of directors should enjoy the role, the opportunity to support a cause close to their hearts and the camaraderie of working with others who’re dedicated to achieving the same mission. But the job can be challenging. For example, boards must take ethical and practical action in times of crisis and always avoid conflicts of interest. You can help your directors navigate obstacles and make appropriate decisions with a board governance policy.
Start with a purpose
Begin your board governance policy by explaining its purpose. In general, your policy should provide a framework for making decisions consistent with your charitable mission. Be sure to include your nonprofit’s mission statement, a common thread that weaves through directors’ obligations, in your policy. Another purpose is to inform board members of their fiduciary duties under state law and obligations related to your nonprofit’s federal tax exemption.
From there, your policy should describe director responsibilities and obligations, emphasizing that the board can oversee all organizational operations. This is a good place to differentiate between board member and staff responsibilities. Also, the policy should advise board members that they may rely on information and reports from staffers and professional advisors they believe are dependable and competent in particular areas.
Recognize fiduciary responsibilities
The heart of your governance policy should explain board members’ core fiduciary duties, starting with their duty of care. This duty stipulates that directors must exercise reasonable care in all decision-making and not incur unnecessary risk. When performing their duties, board members should act in good faith and in a manner they believe to be in your nonprofit’s best interest.
Duty of care implies “reasonable inquiry,” meaning directors must ask questions and demand information that allows them to make informed decisions. They don’t have to be financial experts, but they should:
- Understand basic financial terminology,
- Be able to read financial statements and judge their soundness, and
- Know how to recognize red flags that signal a possible change in your nonprofit’s financial health.
As stewards of public trust, they also have a duty of loyalty. In a nutshell, directors must always act for the good of your organization. Mandate that they fully comply with your nonprofit’s code of ethics and conflict-of-interest policy. And state that they must refrain from taking advantage of business or personal opportunities that become known because of their position on your board.
Support your effort
Some nonprofit boards have a governance committee that oversees organizational policy and helps ensure that the organization complies with its governing documents. A governance committee can operate effectively without a formal policy as long as it’s able to coordinate the board’s manner of governing.
A board handbook is another tool you might consider. It details the board’s size, term limits, and required committee structure (although some of these responsibilities may be found in your bylaws) and includes other policies that relate to the board and its oversight of your organization.
Finally, professional support is critical to good governance. If your board is unsure how to act in a particular situation — or simply needs assistance formulating a governance policy — consult your financial and legal advisors.
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