What Nonprofit Boards Need to Do to Protect the Public Interest
By Beth Gazley | The Chronicle of Philanthropy | October 26, 2022
The people who serve on a nonprofit’s board of directors are legally responsible for its performance. Despite their importance, board members are rarely in the news. When they do make headlines, they may have messed up.
Perhaps the most spectacular example is what happened to Donald Trump’s now-defunct charity. While he was a sitting president, Trump was forced to dissolve his foundation and pay $2 million to other causes after New York state authorities found that the Trump Foundation had violated numerous state and federal laws.
Fortunately, such cases are rare. But as a nonprofit management professor, I find that extreme tales of board failure can help illustrate what boards are actually supposed to do and why it’s so important to get it right. Public trust in charities is at stake.
Doing More Than the Minimum
To perform their jobs at a minimal level, boards of directors have to meet legal requirements, such as convening at least once a year and supervising an organization’s top leader.
But board members must do more than that if they are to meet the expectations of the donors, volunteers, staff, and other stakeholders of the nonprofit they oversee. Let’s call these the “necessary” versus the “legal” obligations. While nonprofits’ tax-exempt status requires them to show the public they perform some community benefit, stakeholders who are supporting the organization may demand more.
So donors are wise to insist that any charity they fund have more board members than the minimum for better oversight. Larger boards — but not too large — perform better. Most have somewhere between eight and 14 members; newer organizations may have fewer.
Nonprofit boards that do more than the law requires are more likely to succeed.
There are an estimated 1.5 million registered nonprofits in the United States., with staffs that may range from a single unpaid founder to thousands of employees. These groups carry out a dizzying array of missions, ranging from community health care to boosting support for national parks.
Nonprofit boards typically recruit people who can represent the people served and who bring a range of skills and expertise in such areas as finance, communications, and management, along with a connection to the organization’s mission. Most nonprofits also expect board members to make a meaningful financial contribution to the organization themselves.
Care means board members must meet regularly enough and provide enough oversight to ensure a nonprofit’s staff, budget, and other resources are furthering the mission rather than squandering its funds or diverting them to personal expenditures.
Loyalty means they must act in the organization’s best interest, rather than their own, avoiding conflicts of interest.
Obedience has to do with ensuring that the group follows all applicable laws and regulations while acting in accordance with its own policies and mission.
These duties encompass most of what boards do: approve budgets and expenditures; ensure that audits are conducted; hire the nonprofit’s chief executive and set that person’s compensation; and ensure that required public reporting happens, such as submitting a 990 informational return to the Internal Revenue Service every year.
Nonprofit board members have many legal obligations.
Unlike in the case of businesses, nobody owns a nonprofit.
Instead, nonprofits essentially belong to themselves. Since they are mostly tax-exempt, they operate under the distant supervision of public officials such as a state’s attorney general. The board acts as agent of the state to ensure the public trust is not broken.
That’s why board members are often called “trustees.”
And on the rare occasions when that trust is broken, state officials will exercise their authority to step in, as they did with the Trump Foundation.
States set minimal standards for what boards need to do. Often, minimal compliance with those regulations does not suffice for an organization to thrive. For example, most states require boards to meet at least once every year.
A board’s structure — how big it is and how often it meets — is fairly easy to observe and measure. But what matters more is how the board behaves. How boards do their work is at least as important as what they do.
I’ve identified three kinds of cultures that help a board stay focused on what matters: a culture of learning, a culture of assessment, and a strategic culture.
Finally, boards need to devote sufficient time to planning for the nonprofit’s future. Strategic boards that do this may in turn support organizations that are more resilient — such as those that can withstand crises like the Covid-19 pandemic.
As for who can serve on a board, the honest answer is that just about any adult can. I would encourage anyone who is passionate and knowledgeable about a cause to look for leadership opportunities on a nonprofit board. If you have children enrolled at a school, how about becoming a member of its PTA board? If you enjoy shopping for fresh produce, perhaps you can join a board that manages your local farmers market.
Just be ready for the legal responsibility of being a trustee.
Editor’s note: This article is part of a partnership the Chronicle has forged with the Conversation and the Associated Press to expand coverage of philanthropy and nonprofits. The three organizations receive support for this work from the Lilly Endowment. This article is republished from the Conversation under a Creative Commons license.