The Role of the Board
and Board Members
There are some universal truths applicable to every nonprofit organization, beginning with legal responsibility. Whether as board members you are called trustees, directors, governors, or something else, you are in essence the trustees in the literal and legal sense of the term. No matter how the organization is structured or the degree of authority delegated to staff, committees, or affiliates, the board and therefore the trustees are ultimately accountable.
Whether it is a service agency or a cause-oriented membership association, the board has the principal responsibility for fulfillment of the organization's mission and the legal accountability for its operations. Usually the bylaws stipulate something like, "The affairs of the corporation are vested with the board." There have been several legal cases where board members were held legally accountable, largely because they had failed to exercise reasonable oversight and objectivity. When those cases are reported in the newspapers, the trustees are often quoted as, ". . . not having seen financial reports," ". . . not having known," or ". . . not aware that the organization had contracted with a firm owned by one of the staff or board members," or in other ways making clear that the trustees had not taken responsibility for knowing what was going on.
Although the legal responsibility is real, and some boards and agencies are highly complex, the role of the board should still be seen in the fairly simple framework of "What are trustees accountable for?"
The BBB Wise Giving Alliance (a merger of the Better Business Bureau's Philanthropic Advisory Service and the National Charities Information Bureau) has developed "Standards for Charitable Accountability" and indicates that, "Organizations that comply with these accountability standards have provided documentation that they meet basic standards . . . in how they govern their organization, in the ways they spend their money, in the truthfulness of their representations, and in their willingness to disclose basic information to the public."
The Alliance Standards also are specific about board performance, for example:
Governance and Oversight
Other of the Alliance Standards relate to such relevant topics as evaluations, finances, and fundraising. The full current standards are available from the BBB Wise Giving Alliance, 4200 Wilson Boulevard, Suite 800, Arlington, VA 22203, tel. 703-276-0100 or on the www.give.org web site at http://www.give.org/standards/index.asp.
The governing board has the ultimate oversight authority for any charitable organization. This section of the standards seeks to ensure that the volunteer board is active, independent and free of self-dealing. To meet these standards, the organization shall have:
- A board of directors that provides adequate oversight of the charity's operations and its staff. Indication of adequate oversight includes, but is not limited to, regularly scheduled appraisals of the CEO's performance, evidence of disbursement controls such as board approval of the budget, fund raising practices, establishment of a conflict of interest policy and establishment of accounting procedures sufficient to safeguard charity finances.
- A board of directors with a minimum of five voting members.
- A minimum of three evenly spaced meetings per year of the full governing body with a majority in attendance, with face-to-face participation. A conference call of the full board can substitute for one of the three meetings of the governing body. For all meetings, alternative modes of participation are acceptable for those with physical disabilities.
- Not more than one or 10% (whichever is greater) directly or indirectly compensated persons(s) serving as voting member(s) of the board. Compensated members shall not serve as the board's chair or treasurer.
- No transaction(s) in which any board or staff members have material conflicting interests with the charity resulting from any relationship or business affiliation. Factors that will be considered when concluding whether or not a related party transaction constitutes a conflict of interest and if such a conflict is material, include, but are not limited to: any arm's length procedures established by the charity; the size of the transaction relative to like expenses of the charity; whether the interested party participated in the board vote on the transaction; if competitive bids were sought and whether the transaction is one-time, recurring or ongoing.
Marc Owens, an Alliance board member and former director of the IRS Exempt Organizations Division from 1990-2000, confirmed the comprehensiveness of the new standards. "Over the years, I have seen quite a broad range of problems regarding the accountability of charitable organizations. These proposed new charity standards comprehensively address both existing and emerging ethical issues facing charities today."
It's revealing that the Standards emphasize the role of the board itself. Although it may seem simplistic to say that the first role of the board is to be sure that the board is fulfilling its role, that's often the last place where accountability is exercised. Board members blame staff, committees, the fundraising chairman, the treasurer, and everyone else for failures in the operation, but rarely take a look at whether the board itself meets the kind of standards laid down for boards by the Alliance.
In "Major Challenges to Philanthropy," a paper commissioned by INDEPENDENT SECTOR, Robert L. Payton, former president of the Exxon Education Foundation and later director of Indiana University's Center on Philanthropy, put it on the line:
As a group, it is the trustees who are most important in protecting the standards of philanthropy. If you smile at that, knowing from our own experience of trustees whose ignorance or single-mindedness made them part of the problem rather than part of the solution, I also smile-but in pained discomfort. Like it or not, the trustees are the structural bulwark defending the public interest in philanthropy. And if I'm right about that, then the education of trustees claims a very high priority on our collective agenda.
The Role of the Chief
Many volunteer heads of voluntary organizations confide that they're well into the job before they really understand what it's all about. This is sorry state of affairs, particularly because much of what the volunteer president or chairperson's term will mean is represented by what is accomplished during the first months on the job. The planning, recruiting, orienting, training, and other essential leadership functions have to be accomplished and accomplished early if the operation is to have sensible direction and exciting thrust. It's toward the goal of early preparation that the following urgent suggestions are made.
Mr. or Mme. President, you are the person morally responsible for your public agency. No matter how inadequate you may feel or even if you have people to whom you can delegate, you are the person who is accountable to your fellow citizens for the expenditure of their dollars contributed to help your agency pursue its service to society.
It's your responsibility to see that the activities that the officers, board of directors, and committee heads set out to do are being carried out. One of the basic approaches is to have certain checkpoints during the year. At these times, provide project and committee chairpersons with an opportunity to report at meetings of the board of directors. It will also be important for you to stay close enough to be able to judge the progress or lack of it and to sit down with the chairpersons to discuss any impediments.
If a key subordinate is letting you down, face up to the task of replacement. Usually the individual will be relieved to be out from under the responsibility. But even if he or she is unhappy with your action, your larger responsibility is to the contributors and to your community.
To have time for basic management responsibilities, it will be essential for you to avoid being directly responsible for immediate projects. Find people who can carry these projects for you. Your function and goal is to see that the volunteer talent of the organization is being developed. To the extent that you get trapped into assuming responsibility for individual projects and issues, you will not be using your limited time to expand the capacity of the organization to deal with an increasing number of projects and issues.
Be fully conditioned to the human relationship aspects of the role of president. Be prepared and leave time for dealing with many different personalities, most of whom at some point will need soothing, stroking, and encouragement.
Your success will be measured in three important ways: 1) the achievement of the things you set out to accomplish; 2) the fulfillment of the organization's other major projects and its response to unexpected crises and opportunities; and 3) the increase in volunteer involvement, leadership, and responsibility that has been generated during your term.
Over the years I've developed a list of "musts" for presidents. Individual situations vary, and perhaps not all of these will fit your circumstances, but my observation is that the president who rates well on this checklist will be running an exciting operation. On the other side, in the breakdowns I've seen of presidential leadership in nonprofit organizations, the failures can usually be traced to ignoring some of these musts:
- Decide in advance that your largest goal for the year will be to increase the degree of volunteer leadership within the organization.
- Be the president. This leadership role cannot be delegated to the staff, and to the extent that you are confused about your leadership responsibility or that you turn over this role to staff, your success will be compromised.
- Involve your key officers and other colleagues, including staff, in a planning session to determine effectively where you as a team want to be at the end of your term. Be sure that these plans are realistic and attainable. Be sure that the board of directors has the final opportunity to approve them.
- Approve all board of directors and executive committee meeting agendas, and make certain that these are sent out at least ten days in advance of the meetings. Much of what you will be trying to do as the leader of the organization will be lost unless these meetings are your meetings and represent your checkpoints for progress toward the year's goals. It is essential that the agendas be sent in advance so thoughtful people can give thorough consideration to the issues.
- Involve your key partners, and keep in regular personal touch with them.
- Appoint, orient, encourage, and follow up on your project and committee chairpersons. If you leave it to the staff, it may be done, but it won't be accomplished with the same degree of warmth that your personal contact supplies.
- Plan regular meetings with your executive director. Set aside ample time so that the two of you can get into some of the current issues and have enough time left over to check on progress or lack of it on the year's goals.
- Plan for the annual evaluation of the executive director. Even if he or she is tops, small problems can grow into larger ones if there is not some process by which the volunteers can make observations and suggestions. Build it into the system that the board of directors should do the annual evaluation, and then set aside time for it.
- Build positive relationships within the total organization. If your group is part of a larger organization, develop personal relationships with the volunteer leaders at the other levels. Try to do everything possible to minimize friction and to promote effective relationships.
- Make it exciting and worthwhile. Keep in mind your unique position and opportunity to know what's going on in the organization. Provide regular occasions through board meetings, newsletters, personal communications, and every other possible way to help your fellow volunteers enjoy the fun of being part of an organization that is making a difference.
- Realize that you are responsible. If you leave a void, it will be filled of necessity by the executive director, who thereby will become too influential and too preoccupied with doing your job to help expand volunteer involvement and impact. Don't worry about making the staff director too important. The greater danger occurs when you let the staff become too important at the expense of building volunteer responsibility.
The fundraising commitment must begin with the board and must be high on the agenda of a significant number of the trustees. Not only must it be of high priority, it must also be high in status and recognition within the organization. That's not easy. If you're wondering how to get moving, you probably are familiar already with the problem of having board members not really recruited with fundraising responsibilities distinctly in mind. And if you're already getting most of your support from fees, contracts, or a federated fund such as United Way, it's even harder to stir up real fundraising interest and urgency. Raising money takes dogged persistence, bullheadedness, salesmanship, year-round cultivation, board support and encouragement, a plan, an attainable goal, and lots of excitement-to wit, it's hard work. But if the board decides it is going to raise money and is willing to allocate at least 20 percent of its energy and resources to accomplish it, you can and will succeed.
Every time I'm asked by a board delegation if I think their organization can raise money, I repeat that they are in for some awfully hard work. I don't say this to discourage them. Indeed, I hope they'll push on, and I hope this applies to you. But if you're timid, or your organization isn't really determined, you won't survive the obstacles, heartaches, and difficulties that, unfortunately, I can promise you are ahead. On the other hand, if you have a cause that deserves support and you're willing to scratch, kick, and beg, you can raise money.
The procedure for getting a new or renewed fundraising effort under way should be something like this:
- Convince your fellow trustees to make a full commitment.
- Define the need.
- Develop a fundraising plan.
Basically, a plan involves the following:
- Identify the type or types of fundraising to be undertaken.
- Establish a realistic goal for the first year.
- Determine exactly how many board members and other campaign workers you need to make the contacts necessary to raise that amount of money.
- Set a firm timetable for recruitment, training, campaigning, reporting, and recognition.
- Decide on the budget.
- Bring the plan back to the full board to get their firm support.
- Recruit the chairperson.
- Establish and keep to a regular schedule of training sessions and report meetings.
- Provide for recognition and awards.
- Put some of your best campaign volunteers on the board.
- Develop your second-year plan, with heavy involvement of those who participated in the first success.
If your reaction, and maybe even the staff's, is to apologize for becoming too much like a fundraising organization-and maybe even to decline too much involvement because "we're essentially a program agency" or because "I'm here because I'm a program person" cancel the campaign until and unless the tune is changed to "I know how important it is to raise money, so how can I help?"
An organization that handles more than $100,000 should have an independent audit and, therefore, is bound by the accounting practices spelled out in the various audit guides published by the American Institute of Certified Public Accountants.
Even if your organization is not required to have an audit, you should consult an auditor to determine what requirements or practices are necessary to protect board members, the organization, and the public, and to help structure your accounting system and your basic financial reports, including the budget, income and expense statement, and balance sheet. They will also advise you on what reports you are required to submit to state and federal authorities and the timetable for them.
Without getting into an exhaustive review of budget-making, it might be useful to comment briefly on the process of developing income and expense projections. Usually, leaders of voluntary operations are so close to the cause, or so overwhelmed with how much needs to be done, that they will overestimate income and underestimate expenses. The hard-headed realism of the treasurer and the finance committee is essential as an offsetting influence.
Income projections should be based on a practical and objective analysis of current sources of income, including a source-by-source and gift-by-gift review. This not only makes for practical budgeting but also provides sensible preparation for the degree of work necessary to renew gifts and grants and find new money. It's essential not to budget substantial new income-certainly not to count on it, to cover fixed expenses. The usual approach for nonprofit agencies is to hope so desperately for new income that it's counted in the budget; then, when it doesn't materialize, the agency ends up with a deficit or horrendous cutback. The wiser approach is to have an opportunity for budget revision during the year to allow additions according to new income actually produced.
If you have staff, expense projections are usually developed by the staff director. Here the volunteer president should be carefully consulted, and, of course, the treasurer and finance committee will be closely involved.
It is important that the finance committee never be allowed the authority to make decisions that rightfully belong to the executive committee or board. Many finance committees, in their efforts to cut or control expenditures, will make decisions about what activities should stay or go, which is beyond their authority. They should say to the president, staff, and board that their appraisal of income projections will not sustain the expenses budgeted. Then, if the board agrees with the finance committee's figures, it is up to the board and staff to decide where the cuts will be made.
The budget should be prepared early enough so that the full board of directors can be involved in its review and approval before the beginning of the fiscal year.
The format for the budget should include at least:
- a narrative summary of the year ending and the year ahead;
- a five-year review of income and expenses;
- a proposed budget including, for each line item, the prior year's budget, the prior year's actual expenditures and income, and the recommended allocations for the coming year.
An organization should produce a monthly or at least quarterly income and expense statement, balance sheet, and budget status report. These should go to the board of directors in advance of their meetings. Copies should also be sent to the finance committee.
Your most important financial report will be the annual audit, which should certainly go to the board with ample opportunity for discussion. At least some members of the board should fulfill the functions of an audit committee. Larger organizations will have a separate audit committee, but smaller groups may combine this with the work of the finance or executive committee or the full board.
Budgeting and Financial Accountability
In my long experience with nonprofit organizations I've had some pretty rude awakenings and learned some pretty sad lessons. Let me summarize these lessons from the school of financial hard knocks. The lessons and the consequences apply to both board and staff.
- Budget realistically.
- Get regular monthly reports and study them carefully.
- Be sure that the reports are accurate.
- Insist on understanding the financial picture and the reports.
- Establish a close working relationship with the auditor.
- Involve the auditor in establishing, or at least approving, your internal systems, including controls.
- Make the most of the interest and knowledge of the treasurer and chairperson of the finance committee.
- Involve the key volunteer leaders in the development of the budget.
- Recognize how easily the budget can thwart or contradict the board's decisions on priorities.
- Provide for some cushion in the budget.
- Provide for some basic reserves.
- Don't switch accounting systems until you are really on top of your information.
- Realize that voluntary agencies are never going to get rich.
- Remember that deficits are hell!
Many voluntary organizations are as elaborate and sophisticated as the best businesses in their approach to financial planning, management of cash, decentralized budgeting, profit centers, and computerization of data, so that they can provide trustees and staff with every possible analysis of financial operations and trends. However large or small the operation and however much sophisticated equipment is available to you, it still comes down to "What am I accountable for?" And at the top of the list is stewardship.