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The Good

Governance Guide

Whether this is your first foray into nonprofit board service, or you’ve spent years giving your time and energy to causes you love, there’s always room to learn more about responsible nonprofit governance.

The Basics of Nonprofit Board Service

The fundamentals of overseeing a for-profit or a nonprofit organization are similar. For example, consider this scenario: one of your neighbors sits on the board of a company in which you own shares, and another sits on the board of your local hospital. You are counting on both to do the same thing: to oversee the economic vitality of each organization, and to ensure that they deliver products or services in an effective manner, which aligns with their designated purpose.

There are some differences, of course, but the overarching rules and expectations are the same. We all want economically, socially and culturally strong communities.

Program Effectiveness:  

Having the Most Impact

Overview

  • All programs and services are aligned with the mission of the organization and reflect the stated needs and interests of the clients to be served. An integrated portfolio of programs provides clients with highly responsive services.
  • The organization has identified specific indicators with which to track outputs and outcomes and monitor program performance. These should include client satisfaction, financial performance, operational efficiency, and organizational learning.
  • Effective program delivery processes are consistently applied by staff so that they can be sustained, even with changes in organization leadership.
  • Program designs aimed at expansion or replication in other localities have clear systems in place (or in development) to support the process while sustaining the core program.
  • When warranted, the organization seeks opportunities to collaborate with other organizations to ensure that client needs are met.

Indicators of Good Governance

  • Program development is consistent with the organization’s mission and strategic directions as laid out by the Board.
  • Programs are well-structured with clear goals, performance measures, and expectations and feedback loops for staff and other stakeholders.
  • Program design and improvement methods incorporate input and feedback from all relevant stakeholders.
  • A system is in place for ongoing professional development for staff.
  • Program data collection is built into the program and the information gathered (program processes, results, client satisfaction, and client impact) is used to grow or improve programs and services.

Funding Stability:  Sustain Your Dream

Overview

  • The organization has an appropriate funding strategy with sufficient funding and financing to support its programs and organizational sustainability.
  • The organization’s mission attracts donors, both individual and institutional, who fund the organization’s area of work.
  • The organization is fully compliant with all state laws regarding registration to solicit funds and the use of third-party, professional fundraisers by tax-exempt entities.

Indicators of Good Governance

  • The organization has an appropriate funding strategy with sufficient funding and financing to support its programs and organizational sustainability.
  • The organization’s mission attracts donors, both individual and institutional, who fund the organization’s area of work.
  • The organization is fully compliant with all state laws regarding registration to solicit funds and the use of third-party, professional fundraisers by tax-exempt entities.

Questions for the Board to Ask

Does the Board approve both an annual and a multi-year fundraising plan?
Yes, and it is reviewed annual by both the fundraising and finance committees, as well as the full Board. 

Is the Board aware of and prepared to use a funding strategy that, when appropriate, diversifies funding sources to leverage other support and enhance the reach or effectiveness of programs?
Yes, Board members are aware of the benefits of a funding strategy that maximizes a strong financial base and have taken action to utilize that financial base where appropriate and feasible.

Are Board members involved in securing funding through their personal and business contacts, both individual and institutional?
Yes, Board fundraising is a systematic process managed by a fundraising committee and approved by the Board. Board members contribute consistently to fund development through individual solicitation, site visits with funders, and annual fundraising events to reach predetermined goals. 

Is there an active fundraising committee of the Board?
Yes, Board fundraising is a systematic process managed by a fundraising committee and approved by the Board. Board members contribute consistently to fund development through individual solicitation, site visits with funders, and annual fundraising events to reach predetermined goals.

Does 100% of the Board make an annual, personal contribution to the organization at a level that is encouraged or enforced for individual members?
Yes, personal gifts are made by all Board members, commensurate with their means.  [Note: A minimum get and/or give contribution may be required by some Boards.] 

Does the Board understand the impact of restricted funds and manage them correctly?

Yes, the Board is aware of:

  • Its responsibility to ensure that restricted funds are used only for their specified purpose, and understands the procedures to ensure that all restrictions are met, what the restrictions on each fund are.
  • The cash flow needs of the organization, ensuring that unrestricted funds are available when restricted funds are not yet accessible
  • What costs are not covered by or can be disallowed in a contract.

Financial Oversight:  Watching Your Dollars

Overview

  • All revenue and expenses, including grant funds, are accurately recorded and capably managed.
  • Resources are allocated appropriately:
    • To programs that achieve the mission of the organization,
    • To enable proficient oversight by management, and to support all fundraising activities.
  • The organization can demonstrate the indicators of good overall financial health by:
    • Covering current liabilities with current cash and receivables,
      Increasing total revenue and/or decreasing total expenses,
    • Increasing total net assets each year, and
    • Monitoring the accumulation of Liquid Unrestricted Net Assets (LUNA).

 

Indicators of Good Governance

  • The Board has established sound internal financial controls and reviews them annually.
  • The Board approves an annual operating budget before the start of the fiscal year.
  • The Board approves large expenditures in excess of a pre-determined limit.
  • The Board reviews regular financial reports to monitor budget compliance and fiscal health, and responds appropriately when performance varies from original plans.
  • The Board approves the annual audit after it has been recommended by the audit committee and/or presented by the auditor to the Board in Executive Session.
  • The Board actively oversees or manages the organization’s investments and financial assets.
  • The Board understands the organization’s exposure to risk and actively manages that exposure.
  • The Board approves the executive compensation level and ensures that it is within the range of community norms and within legal bounds regulating excessive compensation.

Questions for the Board to Ask

Has the board approved a fiscal policies and procedures manual, including policies on record-retention, conflict of interest, and whistle-blower protection?
Yes, because the absence of internal controls, or lack of clarity as to the Board’s role in maintaining them, places the organization at high risk for mismanagement. 

Does the board approve the budget prior to the beginning of the fiscal year?
Yes, although for some organizations, the Board approves a preliminary budget prior to the beginning of the fiscal year and then reviews it quarterly or as necessary.

Does the board regularly receive: accurate balance sheet, cash flow statement, and year-to-date comparison budget reports with a management narrative that highlights significant areas?
Yes, and an emphasis is placed on comparison budget reports and cash flow projections.

Is there a standing committee that oversees and evaluates the organization’s fiscal performance?
Yes, and while the Board Treasurer can offer advice to the operating management, a committee of Board members should fulfill this role.

Is the annual audit overseen by an audit committee and approved by the Board?
The Audit Committee oversees an annual audit that is then approved by the full Board.

Does the organization have strategies for creating and/or maintaining liquid financial reserves that are invested and monitored competently?
Financial reserve accumulation is considered on an annual basis as part of the budget process.  The reserves are monitored by a Board Committee. 

Does the board have strategies that ensure its fiduciary responsibilities are fulfilled by the actions of the organization’s management?
Yes, while the Board cannot make management decisions, it provides the overall direction for the organization.

Does the board have policies and procedures regarding investments, reserves, and spending rates?
Yes, investment, reserve, and spending-rate policies are under the auspices of a Board Committee and are reviewed annually. 

Has the board approved a risk-management policy that dictates how the organization will act in order to maintain the public trust?

 

Constituent Voice:  Listening to Your Stakeholders

Overview

  • The composition of the organization’s Board, staff, and clients reflects the interests, needs, and concerns of the constituency it serves and the community in which it operates. The composition also reflects the distinct needs of the organization at its particular stage of development, as well as the needs it is trying to address.

     

    Indicators of Good Governance

    • The inclusion of diverse viewpoints and representation adds value to the organization’s mission and work and furthers its success.
    • The Board and the organization have systematic mechanisms in place to facilitate input (skills, perspective, and resources) from diverse constituent groups and stakeholders. Such input ensures that the organization is understanding of and highly responsive to its base of consumers.
    • Board members are aware that they have an obligation to give priority to the interests of the organization over personal interests or the interests of other parties.

    Questions for the Board to Ask

    Does the organization set appropriate levels of Board participation for each segment of its constituency?
    Yes, inclusion is based on an objective and systematic process. The organization is sensitive to this issue and actively seeks to achieve balanced participation of relevant groups and their interests.

    Does the organization ensure that constituent needs are understood and addressed?
    Yes, sustainable, diverse structures are in place to allow input to the organization’s strategic decisions from all constituent groups. [Note: These structures may include such things as an advisory council or alliances with representative organizations.]

    Are the leadership skills of constituent groups being developed?
    Yes, the Board actively cultivates leadership among its constituent groups, especially those on the Board, by:

    • Accommodating differences, whether in language, culture, or experience;
    • Encouraging everyone to speak up;
    • Providing training/mentoring to less experienced Board members;
    • Making sure participants are informed about all of the organization’s projects and activities; and
    • Performing outreach, as needed, to specific Board members or constituent groups whose representation may be lagging or dormant.

     

    External Relations:  Sending the Messages You Intend

    Overview

    • The organization and its programs are publicly recognized for their quality and effectiveness. The Board is engaged in activities that enhance its understanding of the context in which the organization operates and that raise community awareness of the organization and its work.
    • The organization has established and maintains relationships with local media, elected officials, community leaders, funders, and public and private sector organizations with whom it cooperates as well as partners as appropriate.
    • The organization is involved in strategic alliances that enhance the quality and/or quantity of services provided to the community, while remaining true to its mission. The alliances are viewed positively by all stakeholders.

     

    Indicators of Good Governance

    • Board members can describe the mission and key programs accurately, and demonstrate understanding of the organization’s competitive advantages and developmental needs.
    • Board members readily identify and take advantage of opportunities to raise and protect the organization’s profile in the community and/or field.
    • The organization has a communication strategy to publicize its message compellingly and attract support from the community and its leaders.
    • The Board is aware of the concept of branding. It effectively and consistently portrays the organization and its services in a positive light.
    • The Board is prepared to manage crises responsibly. A designated team and communication strategy are in place for major public relations needs.

    Questions for the Board to Ask

    How do Board members engage their networks to support the organization’s mission?
    Board members actively endorse the organization’s interests outside the Boardroom, through their personal and professional contacts. They are well-versed in the mission and activities of the organization, and take the initiative to enthusiastically promote it.

    How do Board members learn about programs and clients?
    Board members receive formal orientation and materials. They are exposed to programs through site visits and through presentations at Board meetings by staff and other stakeholders. The Board is kept up-do-date on the organization’s activities, personnel, and impact on clients and their needs to ensure that Board members’ statements about the organization are relevant and grounded in the experience of current staff and clients.

    Is there a strong Board presence at major events?
    Yes, Board members are expected to attend and take an active role in the organization’s events to remain engaged and informed, and to demonstrate the Board’s commitment to its stakeholders.

    Has the Board developed and approved a communication strategy?
    Yes, the communication strategy includes a plan to identify local community leaders — both official and unofficial — and establish relationships with them as well as with local media. The strategy includes a range of communication tools such as social media, websites, branding, etc.  The plan encourages cooperative activities with other community organizations and development of materials for the media about programs, events, and outreach.

    Has the Board developed and approved a crisis-management response?
    Yes, the Board has approved a crisis-management response that includes, at minimum, a plan for designating a spokesperson, notifying stakeholders, and maintaining a regularly updated list of professionals — attorneys, public relations specialists, public officials — who could be called upon to help in a crisis situation.

    Organizational Evaluation:  

    Everyone Walking the Same Walk

    Overview

    • The organization has identified meaningful goals, metrics, and tools to measure and evaluate its overall effectiveness.
    • Organizational performance is reviewed annually by the Board against established benchmarks.
    • The organization’s work is continually strengthened, and the organization more respected in its field and community and by its funders.

    Indicators of Good Governance

    • Evaluation results are reported to and reviewed by the Board annually.
    • Overall organizational performance is compared to established rating indicators and organizations that are considered to be leaders in the field.

    Questions for the Board to Ask

    Which areas of operation are evaluated regularly/annually?

    The following areas of operation are evaluated regularly/annually, based on established standards in the field:

    • Board performance;
    • strategic planning;
    • programs;
    • operating infrastructure (systems, IT, etc.);
    • talent management/human resources;
    • financial health and long-term sustainability;
    • constituent voice;
    • diversity and inclusion; and
    • communications and external relations.

    What is the Board’s role in the evaluation process?
    The Board sets performance goals and requires that a comprehensive analysis of the organization’s performance be undertaken each year or every two years, as appropriate.

    Is the Board aware of contract and grant requirements?
    Yes, the Board receives briefings on all significant obligations that funders require of the organization. 

    How often does the Board review evaluation results?
    The Board receives periodic reports on organizational performance based on a schedule approved by the Board.

    How are evaluation results used to assess the general effectiveness and efficiency of your organization?
    Qualitative and quantitative measures are applied to evaluate communication and compromise between various departments. These measures are compared to the standards recommended by ratings agencies (e.g., the Better Business Bureau and Charity Navigator).

    How does evaluation influence planning for the subsequent year?
    Both strategic planning and annual planning utilize results and lessons learned from past evaluations.

    What is your organization’s profile in the community? How is your organization perceived in terms of program effectiveness by its customers/clients, community leaders, funders, and peers?
    The Board is aware of how the organization is perceived in program effectiveness, management, and approach to community needs. The Board also is briefed on the organization’s standing with ratings agencies.

    Board Effectiveness:  

    Clear Vision, Engaged Board

    Overview

    • The organization is well managed: it has a clear mission, policy, and goals under the leadership of a capable, engaged Board of directors.
    • The organization has a positive profile in the community as a result of effective, well-managed programs.

    Indicators of Good Governance

    • The Board of directors is actively engaged in its oversight role and knowledgeable about key issues that might affect the organization’s success.
    • The Board focuses on policy development, strategic direction, and evaluation of the organization. It respects the staff’s responsibility to implement policy directives.
    • The Board’s effectiveness is apparent in suitable programs, well-managed operations, ample funding, and organizational sustainability and longevity.
    • The Board has established clear leadership roles to capably drive its activities and fosters the development of new leaders to fill future roles as needed.
    • The Board understands its fiduciary and legal responsibilities and actively manages the organization’s risk exposure.
    • The Board understands the restrictions, if any, on the organization’s grants and contracts.

    Questions for the Board to Ask

    Is the board playing an appropriate role for the current stage of the organization’s life cycle?
    The delineation between governance and operational roles is clear. [Note: Beyond the start-up phase of the organizational cycle, the Board is not involved in day-to-day operations.]

    Does the Board evaluate itself?
    The board regularly appraises its own performance.

    Does the Board evaluate the performance of the chief executive?  Is this evaluation based on goals previously agreed upon by the Board and the chief executive (e.g. staff retention, fundraising goals, overall organizational performance)?
    The Board regularly assesses the performance of the chief executive.  (Note: Organizations that perform executive evaluation sporadically should be encouraged to do it regularly.)

    How does the Board set the chief executive’s compensation?
    The Board sets the chief executive’s compensation at a “market” level, based on research of current data and the performance evaluation.

    Has the Board worked with the chief executive on succession plans for key staff and Board?
    A succession plan is in place or under discussion for board leadership roles, the Chief Executive, and (where relevant) key staff members.  Board recruitment is strategically conducted by the Governance Committee, with succession planned for officer positions.  An emergency succession plan exists in the event of an unexpected departure of the Chief Executive.

    Board Operations:  A Well-Tuned Machine

    Overview

    • The board meets regularly to address matters of policy, strategic direction, organizational performance, and community impact.
    • The board receives financial and other important information sufficiently in advance of the board meeting to allow adequate time to review and prepare questions.

    Indicators of Good Governance

    • The board meets regularly throughout the year, with a majority of directors in attendance.
    • Board candidates are formally selected with an emphasis on the skills needed to advance the work of the organization.
    • Accurate minutes of board meetings are kept, reviewed, and approved at the subsequent meeting.
    • New directors receive comprehensive orientation after election to the board.
    • Ongoing training is provided regularly to the board to ensure effective service by directors.
    • The board maintains active involvement through rotation of duties and/or term limits.
    • Meetings deal primarily with policy formulation and the review and evaluation of the work of the organization. Routine matters are handled with dispatch.
    • The committee structure reflects the organization’s strategic priorities and changes, when necessary, to advance the mission. Committees are used effectively so that board members with relevant skills can focus on key issues.
    • The board understands its legal obligations.
    • A conflict of interest policy is reviewed periodically and signed annually by board members.
    • The board is aware of all federal, state, and local obligations (and liabilities) applicable to the organization.

    Questions for the Board to Ask

    How often does the board meet?
    The board meets in person at least four times per year. If there is a strong committee structure with meetings on a regular basis two to three full board meetings may be adequate.  If committees do not meet on a regular basis then more meetings will be necessary.   [Note: If the board meets too often, it may be micro-managing the organization. A board that meets rarely tends to have little impact and oversight. In either extreme, board accountability for the organization is compromised.]

    Does the board practice the basic steps of board development, recruitment, orientation, training, and renewal?
    Yes. There is a formal process of nominating and interviewing candidates; orienting and training new directors; and continued education of the board.

    Have terms been set for Officers of the Board?
    Terms of at least two years have been set. [Note: Some newer organizations may not be ready to set terms, but should set them as the organization becomes more.]

    Does the board conduct annual or periodic self-evaluation? How are the results used?
    Board performance is assessed periodically. Membership composition, selection process, structure, satisfaction, turnover, and overall performance are considered. Results are used to plan for board development, as warranted. 

    Does the board have a functioning committee structure that reports to the board on a regular basis regarding important issues?
    Active standing and/or ad hoc committees bring matters to the full board for discussion or approval at each meeting or on a regular basis. [Note: The board may use a consent agenda for some, but not all, committee reports.]

    Are board members aware of their legal responsibilities to the organization?
    All the relevant policies are in place and enforced, including a Conflict of Interest Policy which is reviewed and signed annually by each board member.

    Are terms for Officers of the Board enforced?
    Terms are enforced as part of an established commitment to maintain board effectiveness through renewal.

    Does the organization have Directors and Officers Liability Insurance?
    Yes, this policy is in place to protect board members and the organization in event of legal action not covered by a general liability policy.

    Strategic Planning:  Know Where You Are Headed

    Overview

    • The Board upholds the organization’s mission. They can articulate a clear vision for its future and the values that will guide decisions and behavior.
    • The Board is integrally involved in setting strategic direction through strategic planning, organizational alignment, and implementation.

    Indicators of Good Governance

    • A strategic plan, with attainable goals, has been developed and approved by the Board, with staff input and support.
    • The plan is a working document that is updated periodically to adjust for progress, changes in the environment, and critical opportunities.
    • The Board receives regular progress reports from the chief executive relative to the implementation of the plan.
    • Board members can speak knowledgeably about program goals, outcomes, and client needs. When applicable, they have visited program sites and/or met clients.
    • Board members articulate a shared vision for the future of the organization and evaluate strategic choices in this light. Board members draw on their individual resources to support progress in achieving the vision.

    Questions for the Board to Ask

    Does the organization have a current strategic plan that charts program and operational directions for your organization and supports the organization’s vision?
    A plan has been developed and approved by the Board — or the Board is currently involved in developing a strategic plan — that supports the organization’s mission and vision. The full Board — guided by a strategic planning committee of the Board, and with the participation of staff — was involved in the development of the plan including review of the mission statement, objectives, and priorities. The plan was developed for a 3 to 5 year period.

    How does the Board monitor progress on the plan?
    Updates are provided to the Board by management at regular intervals as appropriate for the organization’s needs.

    Do Board members have a clear understanding of the organization’s mission, relative to the current competitive environment, and are key leaders able to articulate this mission?
    The Board has developed and can articulate a mission statement and a vision that distinguishes the organization’s place in its field, with its desired impact on its constituents. The vision motivates staff and volunteers.

    How does the Board respond to changing circumstances?
    The strategic plan is a working document that is updated periodically to adjust for progress in achieving goals and objectives, changes in the internal and external environments, and critical issues and opportunities that arise.