Where was the Board?

When nonprofit scandals occur, many people ask the question, “Where was the board of directors?” Auditors and accountants would like to believe the fairy tale that a board of directors should be able to safeguard an organization from every threat that could occur. However, experience has taught us that there are dangers in that assumption.

Typically, nonprofit board members have full time day time jobs and are volunteering their time because they believe in the organizations’ missions. It would be a stretch for anyone to think that a volunteer board would be able to mitigate every risk facing the organization. However, it is not outrageous to expect that the people selected to carry out the organizations’ missions would be properly trained and fit for the journey.

One of the critical factors to mitigating against the risk of a scandal occurring is to have a focused and objective application of board governance as it applies to the composition of the board and the organization’s bylaws. A hands-off approach to the design of the board of directors opens the door to potential for abuse.

A mixed interpretation of board governance can impact every aspect of board composition and the design of the bylaws. By focusing on what defines the basic qualifications for good board members, the right people can be selected and trained on effective board governance. The challenge with defining the basic qualifications is that somebody with a fundraising background may have a different opinion of basic qualifications than somebody with a legal or accounting background. The last thing that an organization wants as a weakness is a lack of focus that haunts honest people who are trying to be effective board members.

The public’s expectation is that boards are inherently good and will uphold the integrity of the organization. This is a tremendous leap of faith given the scandals that we have seen over the years. Optimistically, we would all hope that this is a truth, but realistically we know that it is not. Doing due diligence in selecting qualified people, checking their references, and validating their character is a critical factor to minimize the potential of abuse by any board of directors.

There are various approaches to addressing weakness in the structure of a board. A few fundamental practices can be implemented relatively easy which could have a tremendous impact on the effectiveness of any board of directors.

• Have management and the board of directors agree upon the basic level of expertise for each board member.
• Develop a code of ethics for every board member to sign upon entering the board and yearly thereafter.
• Expect the board of directors to have a solid knowledge of the mission of the organization in order to carry out its objectives and clearly communicate it to others.
• Expect some level of business acumen from the members of the board of directors and appoint one member to be the financial expert overseeing the financial reporting of the organization.
• Have the board of directors work with management to perform a risk assessment to define the areas of which the organization is most exposed to risk. Develop internal controls addressed to mitigate those risks.
• Ensure that the board has a fair representation of independent board members who are independent from each other, independent from the organization, and independent from management.
• Make sure that prospective board members are made aware of these standards prior to accepting the role and then have a thorough understanding of what their role would be in carrying them out.

As with any change, the key to successfully implementation is to have the new policies and procedures documented in writing, clearly communicated to the board and the organization over and over again, and kept current and relevant by updating them as circumstances change. Successful board governance should be considered a standard not an exception.

It can be overwhelming for an organization to try and tackle this on their own. Fortunately, many professionals have had to go through this process before. Seeking input from experienced and trusted professionals can help your organization mitigate against the terrifying possibility that abuse could happen at any organization.

November 2011

Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.

Tags: Non-Profits