For professionals who are passionate about a cause, joining a nonprofit board is an excellent way to give back to the community and build a more well-rounded career.
While some board members come from a financial background, many who bring other areas of expertise are surprised to learn that all members of a nonprofit board have a fiduciary responsibility.
Nonprofit board members have a legal obligation known as “duty of care,” which includes ensuring that the finances of the organization are managed effectively. This aspect of the role may be intimidating to board members without extensive finance experience, but the basics are relatively straightforward.
Financial health oversight
Every board member should review and understand the organization’s financial statements, including the statement of financial position, statement of activities and functional expenses, more commonly known as the balance sheet, income statement and operating expenses.
Management team members of many organizations are pulled in many different directions and are deeply involved in the day-to-day operations — the board needs to take a broader view and ensure resources align with the strategic plan.
Any unusual or unexplained financial activity should spark a discussion with the nonprofit’s directors. As with any business, reality will differ from the plan, and it’s best when these discussions are collaborative and don’t take on a confrontational tone.
Questions that can guide these discussions include:
- Are we allocating enough resources to achieve our mission effectively?
- Are we in compliance with all financial regulations and reporting requirements?
- Are there any major financial concerns that the board should be aware of?
- What are the biggest expense drivers, and are they in line with our mission and priorities?
- Are there any cost-saving opportunities, or areas where we could improve efficiency?
Ensuring internal controls
Part of the responsibility of each nonprofit board member is to ensure internal controls are in place to prevent fraud and mismanagement. Each individual board member should approve or review policies for financial management, such as expense reimbursement, procurement and segregation of duties.
For example, if a key staff member suddenly leaves their position, could the organization continue to pay its bills and access its finances seamlessly?
Or, if a staff member committed fraud or inadvertently paid a bill twice, is there a system in place where another staff member would certainly detect this? If any one leader has access to both the checking account and reconciliation system, duties have not been sufficiently segregated.
For board members to avoid liability if something goes awry, there needs to be sound and well-documented controls in place. The nonprofit may have directors and officers liability (D&O) insurance that could provide some protection, but documenting internal controls would be part of making a claim.
Additional responsibilities for foundation board members
Public charities include organizations such as food banks, churches, schools and animal shelters, and they typically take donations from a wide range of sources. Many foundations are funded by one source (an individual, family, corporation or their own investments) and make grants to other nonprofits rather than operate programs directly.
While nonprofit organizations are tax exempt, foundations do have to pay an excise tax on net investment earnings. Currently, the tax is a flat 1.39% on net investment income including interest, dividends, capital gains (net of losses), royalties (in some cases) and rents from investment property. There are currently pending changes to these tax rates though, so stay tuned on what is to come.
In addition, private foundations are required by the IRS to distribute at least 5% of the average fair market value of their assets each year for charitable purposes. This rule ensures that foundations actively support charitable work, rather than just accumulate wealth.
Ensuring these obligations are met is part of the role of a foundation board member, in addition to the overall fiduciary responsibility of maintaining financial stability and internal controls that apply to any nonprofit.