Even the most dedicated nonprofit organizations can stumble into governance pitfalls that threaten their reputation and ability to fulfill their mission. Recognizing these potential dangers is essential to maintaining your nonprofit organization’s integrity.
Such pitfalls can take many shapes, including undisclosed or poorly managed conflicts of interest, insufficient oversight of activities and finances, and disputes between the board and the executive leadership. Sometimes, a charity lawyer is needed to resolve the dispute.
The Risks of a Passive Board
Disconnected or overcommitted nonprofit board members can create risks through a lack of oversight or a dereliction of their legal duties. However, bylaws can be essential in containing these risks by establishing clearly stated expectations for board participation, meeting attendance, and goal achievement. A good leader and specific bylaws, such as term limits, minimum attendance requirements, and expectations for those involved, can further reduce risks.
Active participation is essential if the board members mean to fulfill their care duties and act in the organization’s best interests. Lack of engagement can lead to chaos within the organization and legal issues for both the individuals involved and the organization. Active participation is essential, as is the need for clear expectations for everyone involved. There are potential legal risks involved if the structure of the organization fails.
Board vs. Management
Roles and responsibilities must be clearly defined for a nonprofit board of directors and executive leadership to operate correctly. To clarify these role definitions, nonprofits should:
- Develop well-defined job descriptions for all staff.
- Create specialized charts that illustrate reporting structures.
- Establish all responsibilities for board members and staff.
An essential principle in nonprofit governance is the separation of the board’s oversight duties from its management responsibilities. A nonprofit must maintain a friendly yet distinct working relationship between the board and the executive director.
Conflict of Interest Policies
Nonprofit organizations must establish and enforce conflict-of-interest policies, as these policies can:
- Maintain the organization’s ethical integrity
- Protect financial resources
- Preserve the organization’s reputation
- Safeguard tax-exempt status
A firm conflict-of-interest policy involves several essential elements and should include dissuading the following behavior:
- Personal connections with the organization’s associates or suppliers
- Board members profiting from the organization’s dealings
- Involvement with other organizations creates conflicts of interest
- Personal financial stakes that could cause biased decisions
A well-defined policy can help the organization achieve the nonprofit’s mission and can also discourage any personal gain or advantage.
A Fictionalized Case Study
The “Community Arts Project” (CAP) was founded to bring arts education to underprivileged children. It started small but grew rapidly due to successful fundraising events and community support.
However, as CAP expanded, the internal structure began to fail. CAP suffered from several issues, including a lack of formal board meetings, conflicts of interest with no-bid contracts, poor recordkeeping, and a failure to file proper tax forms. An audit threatened a loss of its tax credit status, leading to donor distrust and damaging its reputation.
However, board meetings, legal counsel, a financial audit, improved policies, and transparent communication with donors helped the organization recover. CAP narrowly avoided losing its 501(c)(3) status, but the near-loss served as a reminder of the critical importance of maintaining a nonprofit’s integrity through good governance habits.
Practical Steps Toward Good Governance
To make a nonprofit effective, legally compliant, and help prioritize its goals, a true leader utilizes these Six Pillars of Good Governance:
- Build a board with a variety of skills and experience.
- Organize and follow well-structured board meetings.
- Properly manage finances and accountability.
- Identify and eliminate significant risks.
- Commit to all regulatory and legal obligations.
- Engage investors and maintain transparency at all times.
A downloadable copy in PDF is available here.
The Canadian Charity Governance Checklist
A copy of the complete Canadian Charity Legal Checklist can be downloaded as a free PDF document here, or use the resource below.
- Maintain current government documents (articles of incorporation, bylaws).
- Please verify that the board of directors understands its duties (duty of care, loyalty, obedience).
- Hold regular board meetings with recorded minutes.
- Establish and follow key policies (conflict of interest, financial, fundraising, etc.).
- Fulfill annual filing requirements with the Canada Revenue Agency (CRA).
- Maintain accurate financial records and issue proper donation receipts.
- Make certain all activities comply with charitable goals.
- Avoid private benefits to directors, members, or related parties.
- Follow all fundraising regulations and ethical practices.
- Monitor programs to make sure you are achieving goals.
Govern Like a Leader
Disorganized boards lead to chaos and risk legal issues. Still, good governance through the efforts of good leaders is invaluable. It includes creating a skilled board, holding effective meetings, maintaining sound finances, mitigating risks, recognizing regulatory adherence, and providing transparent communications with donors. Good leaders build great organizations and minimize the chances of legal issues.