Not-for-Profit Boards and Effective Leadership

by Mike Bass
McGladrey LLP

Key steps board members can take to effectively address their oversight responsibilities...

The most effective not-for-profit organizations understand the importance of quality leadership at the board-of- directors level. Well-led boards understand that proper supervision includes, but is not limited to: governance, legal and financial supervision, executive director oversight, oversight of the board itself, and decision-making based on the objectives of the organization.

Board oversight can sometimes take a back seat to other responsibilities—until something happens that makes people question the board’s existence and its leadership abilities. Then the scramble to right whatever might have gone wrong overshadows the organization's objectives and mission, damaging the organization's reputation and eroding contributor confidence.

The likelihood of something going wrong at an NFP organization can be greater than in the private sector. Many NFP organizations operate with—and compete for—scarce resources while trying to maintain or increase service levels. This environment can create incentive or pressure conditions. Some organizations have limited administrative personnel who often don't have the knowledge or skills to implement and administer an effective system of internal controls. The prevalence of these conditions highlights the need for and importance of board oversight.

There are a few key steps board members can take to effectively address their oversight responsibilities:

Set direction for the organization.

  • Develop the mission and purpose
  • Develop a long-term vision and short-term goals
  • Regularly attend meetings.

Set the tone of the organization.

  • Recruit new board members and develop members for leadership roles
  • Adhere to legal and ethical standards
  • Represent the organization within the community.

Ensure that board members have adequate knowledge or training in their areas of responsibility.

  • Understand the budgeting processes. This will enable members to ensure management conducts the budgeting process in an orderly fashion.
  • Interpret financial statements. Understanding financial statements in general—and those of the organization in particular—will enable the board to monitor the NFP’s financial health and help facilitate decisions concerning contingency plan recommendations.
  • Understand legal requirements and policies. Requirements may include accounting for non-cash contributions and endowments and the filing of certain required IRS forms. Policies that need to be in place and enforced may include those concerning whistle-blower protection, conflict of interest, document retention and self-dealing. This will help the board to ensure compliance.
  • Identify key risks. Knowing the organization's potential vulnerabilities in its reputation, leadership or the organization itself; its standing regarding regulatory issues; its financial strength; the IT system's security; and other areas will help the board ensure that management systematically addresses key risks and has contingency plans in place.
  • Implement executive director oversight. Responsibilities include understanding the standards for executive director performance, reasonable compensation and succession contingencies.
  • Implement oversight of the board itself. Responsibilities include objectively evaluating performance against goals, understanding the board's role in conjunction with management, knowing the priorities for a board development action plan, and conducting periodic review of governing policies.

Select a separate audit committee.
The audit committee plays a vital role when it comes to board oversight, especially in NFPs for which accountability to the public and to resource providers is of utmost importance. The main responsibility of the audit committee should be to safeguard the overall objectivity of the financial reporting and internal control processes.

If the organization does not have a formal audit committee, certain board members or the finance committee may serve in this capacity. Regardless of the form, members should be well-versed in financial matters in order to competently execute their financial oversight responsibilities. Typical duties of an audit committee include:

  • Choose the independent auditor
  • Review the audit process, including the audit report
  • Oversee the financial reporting process
  • Review the work of the internal audit function
  • Oversee the compliance reporting process
  • Evaluate non-audit services performed by the external auditor
  • Prepare reports to the governing body or board of directors of all actions and recommendations taken by the audit committee
  • Ensure related decisions are based on the NFP’s objectives.

In its report on bridging effectiveness gaps, the National Association of Corporate Directors notes that "effective board oversight demands information that is as current and relevant as possible." This means, in part, that board members do whatever it takes to stay informed and to keep the lines of communication with management open.

The report goes on to suggest that boards and their committees might "consider asking external parties to gauge their performance." Such an objective measurement may go a long way towards ensuring the board meets not only its oversight obligations but displays its commitment to leadership and accountability. iBi

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