A number of factors led to an increased focus in recent years on the governance of not-for-profit organizations. The IRS Form 990, the downturn in the economy, numerous instances of fraud, and an intensified push for transparency have all contributed to this heightened scrutiny. Organizations are reviewing and modifying their approach to governance with the intention of improving board effectiveness. Though the motivation behind this increased focus is well-intentioned, five common mistakes can result in an ineffective board and a dysfunctional organization.
1. Failing to understand fiduciary duties
Board members have a responsibility to act with the duties of good faith, due care, and loyalty. They can be exposed to personal financial liability if they fail to fulfill those duties. Serving on a board includes real responsibilities and often negative consequences for members that fail to live up to their fiduciary duties. Each board member should take his or her role seriously by participating regularly in board meetings and supporting organizational functions.
2. Micromanaging staff
Managing the organization and operational functions are the responsibility of the executive director. Often, board and staff roles become confused. A separation should remain between governance over the organization and management of operations; this reduces the potential for decisions and transactions that do not have the organization’s mission as a top priority.
3. Not properly managing conflicts of interest
A conflict of interest exists when the personal or professional concerns of a board member or employee affect his or her ability to put the organization before his or her own personal benefit. A conflict-of-interest policy should have three essential elements: full disclosure, board member abstention from discussion and voting, and staff-member abstention from decision-making.
4. Lack of awareness of laws governing not-for-profits
Not-for-profit organizations enjoy various tax, financial, and other benefits, but often have additional legal requirements to follow. Board members of tax-exempt entities must be aware of the various federal, state, and local laws that apply to their respective organization. Many differences exist among a private foundation, a public charity, a supporting organization, or another form of tax-exempt entity, all of which are subject to different limitations. If the laws particular to the organization are not properly adhered to, the organization could be charged significant penalties or potentially lose its tax-exempt status. Ongoing board training and orientation for new board members are often the best solution.
5. Lack of diversity among board members
Diversity among board members is essential and can result in innovative approaches. A board comprised of like-minded individuals can limit the effectiveness of the group and stifle creativity and innovation. Achieving diversity is challenging; people with law, accounting, and fundraising skills make good candidates, as does seeking a mix of experience and youth.
Keeping these common mistakes in mind can help keep your organization running smoothly and keep the focus on fulfilling your mission.
James A. Rossi can be reached at Email or 215.441.4600.