Nonprofit Board Members—Are They Aware of Their Independent Director Duties?
By Eugene Fram
The vast majority of nonprofit board members serve as independent directors. They are not members of management, have other occupations as their major focus, but have some significant responsibilities to a community, profession, government or trade association. Mary Jo White, Chair, U.S. Securities & Exchange Commission, recently outlined the responsibilities of fund board members who also are independent directors to overview the investment dollars made by 53 million U.S. households. Many of her comments, in 2016, easily apply to nonprofit board members and their responsibilities as Independent directors. Note: The italicized materials following are White’s direct quotations. *
• You represent (stakeholders) in (nonprofit board rooms) when crucial decisions are made that affect (stakeholder) investments. … [M]uch is expected of you in your oversight role, but I fully recognize the distinction from the role of management and that the issues can occur even in (nonprofits) with the strongest board.
The division of board and management roles is often not clear in nonprofit organizations because many nonprofit boards retain a startup culture, long after it is needed. As a result the board takes an active role in organization operations. Micromanagement becomes part of the board’s DNA, hampering the vitality and growth of the organization. Example: I know one board chair, an attorney and board chair at small college who felt he had an obligation to meet with the president weekly. He also felt he had to be available to develop active role if an emergency occurred while the president, who traveled for fundraising, was away from campus.
Most nonprofit board members do not have a significant personal financial investment in the nonprofit. True they can have liabilities if they violate conflict of interest laws, due care obligations or state or federal laws—e.g., Intermediate Sanctions Act. But they often forget that they can suffer reputationally, if they find themselves unwittingly in nefarious situations impacting stakeholders.
• (Nonprofit)…directors need to be vigilant in considering whether (the organization) is fully addressing current and potential future risks. … Asking tough questions of (management) now can help ensure that your (nonprofit) is as prepared as possible, and you are informed as to how potential issues would be handled. (Make certain management has reliable relationships with) service providers … and that… compliance policies and procedures, nonprofit continuity plans and back-up systems (can) address these (tough questions.)
For examples, the tough questions need to center around
1. Liquidity: At the least, all nonprofit directors should be familiar with fund accounting balance sheets, income statements and cash flow statements. They should be able to follow trends of revenues, accounts receivable, payable and cash flow trends. However, they should not become overwhelmed with nitpicking small items on the budget. In addition, under fund accounting, donations in kind are reported as revenues. Consequently, there needs to be a clear understanding of the cash flow statement, monthly and year-to-date.
2. Redundancy of critical service providers: One stakeholder group about which I have never seen nonprofit board questions posed centers around the redundancy available in the organization’s own facilities and those of critical service providers. The failure of either can cause significant problems. And the board needs to be aware of such a potential. For example, the kitchen facilities for a nonprofit providing lunch to the elderly failed, but it was able to continue service through planning with an outside vendor to provide cooked foods.
3. Cyber Security: Most nonprofits have records that need a high level of security—donor lists, personnel evaluations, health records, all of the loss of which could conceivably cause a significant financial and/or reputational risk. Example: Many high school students in 2016 have the abilities to hack into governmental data bases. It might be “child’s play” to access the computer system of a mental health facility and published the personal records of teachers and fellow students.
Impacts nonprofit board members can make:
They need to develop a reasonable balance between management and oversight. They need to operate as partners in good faith with management, not in anyway second guessing management. For nonprofit boards, this sometimes can be a tall order to deflect the micromanagement DNA that seems ever in the background thinking of volunteer directors.