Nonprofit Governance: The Basics
72 Pages Posted: 3 Mar 2018 Last revised: 2 Jul 2019
Date Written: March 1, 2018
Many nonprofit organizations are governed by boards of directors comprised of individuals who often have been invited to join the board based on their contributions of time and money. For many, this is either their first board membership or yet another conducted within an environment lacking the experience and structure of board governance typically found in a publicly-traded corporation. Accordingly, governance of many nonprofit enterprises presents both similarities and differences from the governance of a for-profit entity.
How is nonprofit governance different from that conducted in for-profit organizations? How do you build the best board for your nonprofit? What attributes and skills are required by law and what mix of experiences and talents will give you the best result? What are the commonly required director attributes that are a must for each board and how do you customize and fine-tune your efforts to achieve a high-performance board? Optimal board composition; achieving the best mix of director skills and experience, will depend on many enterprise-specific variables. Some of the most important of these for nonprofits include, but are not limited to: (1) enterprise lifecycle stage, (2) extent to which certain experiences and skills are mission critical (detailed understanding of target culture, mission, stakeholder composition, and risk; (3) unique technology dependence (social media); and (4) the need for capacity expansion (fundraising). Our goal in writing this paper is to provide: answers to these basic questions; a roadmap for the nonprofit enterprise faced with recruiting a board; a matrix methodology that every nominating committee and board can employ to systematically inventory their people assets, strengths and weaknesses, define their needs, explore their options; and provoke radical thinking about how any enterprise-specific system of governance may be improved by questioning existing fundamental assumptions.
Our article proceeds in six parts. First, we offer a few thoughts about nonprofits, their various missions and common challenges. Second, we discuss why good governance is important in a nonprofit setting and highlight examples of frauds that have been reported due to the absence of good governance. Third, we present a look at Internal Revenue Service (IRS) requirements imposed on nonprofits. Fourth, we explore the law of nonprofit corporate governance applicable to all directors serving on the board of a nonprofit. Fifth, we discuss board composition and committee structure. Sixth, we present a process that involves an inventory of current board strengths and weaknesses and then offer some thoughts about use of a matrix template to assist in discovering necessary board skills and experiences of board candidates. And last, we conclude.
Keywords: Audit, Board Committees, Board Selection, Corporate Governance, Directors, Ethics, Fraud, Gender, Internal Controls, IRS, Law, Lead Director, Leadership, Madoff, Nominating, Nonprofit, Ormerod-Trautman Cybersecurity Model, Philanthropy, Sandusky, Strategy, Succession
JEL Classification: H20, K22, L21, L30, L31, M14, M15, M3, M42, M48, O33
Suggested Citation: Suggested Citation