Today, nonprofit corporations are saddled with a changing governance environment that brings with it a need to examine current board practices and consider new ones. These changes in expectations for nonprofit boards have been prompted, in part, by the new Form 990 but also by the economic crisis fueled by the host of for-profit meltdowns of AIG, Lehman Brothers, Freddie Mac, Fannie Mae and others this past year.
While the economic crisis was not driven by nonprofit companies, it will impact corporate governance of all organizations. This crisis has generated discussion and rumored regulation, and it requires nonprofit boards to adopt new practices. The evolving changes in today’s governance best practices - and the way nonprofits should respond - are critical to the health and sustainability of the organization.
Wall Street has shattered the public trust and confidence in the for-profit world, and retaining the public trust and confidence in charitable organizations and nonprofits is critical to accomplishing their missions. However, without shareholders, nonprofits are missing the built-in accountability of the for-profit world, which means that the boards and executive directors of nonprofits must play the role of watchdog to ensure that the public trust and confidence is maintained and to do their part to resurrect corporate America without increased regulation.
To do so, it is incumbent on all boards to take a step back, take a critical look and assess their structure, composition, committee charters and past performance and determine whether they are prepared for the current challenges and risks to the organizations.
As we embark on what will certainly be an uncertain year, nonprofit boards should consider taking the following steps to maintain the public’s trust and confidence in their organizations and to act before the government can react:
- Board Education. Boards should begin with educating their members to be better directors, to become more familiar with the risks to their organizations, to be more aware of the strengths and weaknesses of the members of management and to learn how to hold management accountable for information being provided.
- Assess Current Board Experience and Add Directors with Needed Experience, Skills and Expertise. Boards should assess and create a database inventorying the experience, skills and expertise of their current members. That database expertise should be reviewed periodically to evaluate whether the correct mix is represented by the current members of the board. The goal of the organization should be to create an “expertised board” composed of persons each having particular experience, skills or expertise needed for the board to have as a whole.
- Access to Independent Advisors Who Can Provide Necessary Counsel. Because it takes time to constitute a board composed of the appropriate mix of experience, skills and expertise, a board should require that it be given access to independent advisors having the experience, skills and expertise to counsel the board. This requires a board to first have access to a database of such advisors and then to have the resources to retain those advisors to counsel the board. This is important because it is likely that boards will be judged by state attorney generals, regulators, donors and eventually courts by the least experienced, least skilled or least knowledgeable of its members unless such members have access to such counsel.
- Coaching on Asking Questions. Boards should periodically receive coaching or training on how to ask questions, including: the purposes for which they should be asking questions; the extent to which they should ask questions; when they should accept answers and stop asking questions; and when they need to explore more deeply. This should be considered on a matter-by-matter basis for issues a director identifies that may need the help of an independent advisor. It also should be considered periodically as part of the board’s continuing education process.
- Authorize a Standing Committee to Oversee Enterprise Risks. Boards should delegate to a standing committee, or constitute a new standing committee with authority on behalf of the board to investigate, assess and take appropriate action with respect to risks of the organization’s enterprise. To facilitate the exercise of this authority, a board should require the organization’s management, including each of its executive officers, to report such risks to this oversight committee and to meet at least annually with the committee in executive session.
- Annual Review of the Roles and Responsibilities of Board Committees and Committee Charters. All organizations need to review their committee charters to ensure that such committees have the requisite authority necessary to complete its delegated tasks and additionally to ensure that such committees do not have authority greater than what the full board desires to grant. Committee charters are often the most ignored governing document for any organization. The charter of any committee should be discussed, if not negotiated, between the directors who are on the committee and the remaining directors who will rely on the committee on an annual basis. A charter not only protects non-committee members from liability, but also imposes that liability on the committee members. For directors, state law allows them to rely upon a committee of directors of which they are not members. However, a director may rely upon a committee only for matters within the committee’s designated authority and the committee has a legal duty of care to carry out that authority as an ordinarily prudent person in a like position would do under similar circumstances and a legal duty of loyalty to do so only in, or not opposed to, the best interest of the organization. Thus, it is imperative that the authority of a specific committee is properly and clearly designated in its charter.
- Best Practices Audit. Most organizations have their financial statements audited on a yearly basis. However, very few conduct an audit, either formal or informal, of its corporate governance practices. A yearly audit of governance practices goes a long way in creating a productive board and ensuring your board is operating effectively.
Board Evaluations/Individual Director Evaluations. Boards must strive for commitment to excellence in corporate governance and not just adhering to minimum standards prescribed by law. This is especially true in today’s environment and requires a goal of continuous improvement. Similar to evaluating the organization’s chief executive officer, executive director and management for the organization’s performance, the board must evaluate itself to constantly improve. A yearly board evaluation will allow an organization to:
- Check progress against mission and goals
- Give directors a meaningful measure of accountability
- Allow for a check of strengths and weaknesses
- Emphasize the accomplishments of the board
- Provide a yardstick with which the goals of the coming year can be measured;
- Encourage teamwork approach to decisionmaking; and
- Give a feeling of accomplishment.
- Board Composition/Succession Planning. Succession is critical to the life of any organization. As such, one of a board’s most important responsibilities is succession of management and the board. A good succession plan helps to prevent staleness on the board. Preventing staleness or “institutionalization” of thought on the board is in the best interests of the organization and its mission. However, adding directors with fresh or noninstitutional thoughts comes with a price, whether accomplished through traditional approaches such as term limits or age restrictions or by involving the board in making itself an “expertise” board. Getting your board to buy into a succession plan helps create a multi-generational board that is future oriented and prepared for emergency absences.
- Update your Organization’s Conflict of Interest Policy and Disclosure Process. All nonprofit organizations need to have a well defined conflict of interest policy and disclosure process. A failure in an organization’s conflict of interest policy will have an immediate impact on public confidence of any organization in addition to exposing the board to potential liability.
- Review Executive Compensation. Review and, where appropriate, revise executive incentive compensation arrangements to ensure that they do not encourage executives and others in management to take unnecessary and excessive risks that threaten the value and mission of their organizations.
Regardless of the cause, the meltdown of the for-profit world will directly impact how directors of nonprofit organizations must think, evaluate and make decisions. Whether viewed as an overdue wake-up call or an unfair impugning of the nonprofit director’s integrity as a result of the actions of the for-profits, it is important that all directors of nonprofit organizations understand the increased scrutiny on boards and the need for the boards to understand the risks of the organization. This includes understanding and recognizing the state of the environment the organization is operating. The economic crisis is going to have an effect on many organizations that are not interested in making a profit for private inurement. Nonprofits rely on corporate and private donations and interest income from their endowments for programs, operational support and long term sustainability. To maintain and to continue to receive this financial support in these challenging times, organizations need to strive to maintain the public trust and confidence in its operations, financial risk management and direction.
Directors need to become risk smarter. They need to broaden their view of risk and not limit discussions or analysis only to specific areas of risk. This will require directors to evaluate the role of the boards overseeing that there is adequate risk assessment and make changes where appropriate. As the watchdogs for the organization, directors must realize not only that they remain the first and best line of defense against mismanagement and fraud but also that they can be the best line of offense for good management and best practices.