Effective governance is essential to fortifying the long-term effectiveness and sustainability of any enterprise, and nonprofits are certainly no exception.
The stakes are high: In today’s challenging environment, strong and engaged board leadership can make the difference between success and failure.
In this paper we cover the functions and responsibilities of nonprofit directors and how boards can take advantage of best practices to implement good governance policies and processes.
Nonprofit Boards Play a Vital Role
While each organization has its unique characteristics, nonprofit boards usually have decision-making responsibility on strategy, direction, policy and governance. A board’s scope normally includes:
- Defining the organization’s mission and goals and making decisions on strategy.
- Monitoring organizational performance to confirm that the organization is being managed capably and that there is accountability for the organization’s operations and results.
- Providing effective stewardship of the organization’s resources.
- Overseeing the stability of the organization in critical areas, including financial statement integrity and internal risk systems and controls.
- Recruiting, selecting, supporting and assessing the organization’s chief executive.
- Evaluating and strengthening the board’s effectiveness
- Enhancing the organization’s public image and generating support for its activities.
Importantly, good board governance does not involve handling day-to-day matters or operational details. Instead, the role of the board is to provide direction and guidance to the organization’s management and to monitor progress – the board should not try to manage the nonprofit or interfere with the organization’s management.
Board Members and Their Fiduciary Responsibilities
Directors of a nonprofit organization have fiduciary duties and thus have the responsibility to protect and preserve the organization’s resources for the public benefit or charitable purposes for which the organization was established. This means that the directors accept the role of stewardship of the nonprofit’s assets to confirm that resources are utilized in a reasonable and appropriate way. As persons of trust, board members have the authority and obligation to act prudently, honestly and in good faith on behalf of their nonprofit.
In general, the exercise of fiduciary responsibilities involves fulfilling the duties of care, loyalty and obedience:
- Duty of Care: Exercise prudent judgment in decision-making and provide oversight for all activities that advance the nonprofit’s effectiveness and sustainability.
- Duty of Loyalty: Act solely in the best interests of the nonprofit rather than pursuing courses of action that further a board member’s self-interest.
- Duty of Obedience: Confirm that the nonprofit obeys its stated mission and purpose and that it acts in accordance with applicable laws and ethical practices.
An extension of the duty of obedience is the duty of transparency, which is the obligation of the board to make certain that the nonprofit is open in its operations. This duty of transparency includes confirming that all tax filings have been made and are available to the public.