Board Matters: Creating a Governance Policy

As wise not-for-profit leaders know, many tough situations can be avoided by having policies in place that cover various issues. Board governance is a case in point. Do you have a board governance policy that spells out the role and duties of board members, and gives an overview of how the board will operate?

A board governance policy protects your not-for-profit’s board of directors as it guides the organization. It’s a framework for making ethical decisions, taking appropriate actions and handling real or potential conflicts.

Stating the policy’s purpose

The beginning of your board governance policy should explain its purpose. For example, the Montana Nonprofit Association’s (MNA’s) policy describes its purpose, in part, as helping “assure that the decisions and conduct of the directors and officers of the board … are at all times consistent with their duties and obligations and with the [organization’s] charitable mission.”

Another purpose of a governance policy is to make board members aware of their fiduciary duties under state law and obligations related to the not-for-profit’s federal tax exemption. And your mission statement, a common thread that weaves through board members’ obligations, also should be included in your policy.

Explaining board member duties

The next section in your policy should describe board member responsibilities and obligations, and emphasize that the board has the authority to oversee all organizational operations. This is a fitting place to differentiate between board member and staff responsibilities.

For instance, the MNA’s policy states, “The directors do not manage the day-to-day affairs of [the organization], but delegate that function to others. Directors must, however, exercise reasonable and prudent oversight with respect to corporate officers, agents and employees to whom such affairs are delegated.”

The governance policy also should advise board members that they may rely on information and reports from officers or employees of the organization they believe to be reliable and competent in particular areas. The same holds true for board members’ reliance on professional advisors, such as attorneys and CPAs.

Discussing core duties

The heart of your governance policy should explain board members’ core fiduciary duties:

Duty of care. Board members must exercise reasonable care in all decision making, and not place the organization under unnecessary risk. They should act in good faith when performing their duties and do so in a manner they believe to be in the organization’s best interests.

Duty of care implies reasonable inquiry. The board must ask questions and demand information that allows them to make informed decisions. For example, not every board member must be a financial expert. But every board member should make it a point to understand basic financial terminology, be able to read financial statements and judge their soundness, and have the capacity to recognize red flags that signal a possible change in the not-for-profit’s overall financial health.

Duty of loyalty. Board members, as stewards of public trust, always must act for the good of the organization. As the MNA describes in its governance policy, each board member must “exercise an undivided and unselfish loyalty” to the organization and “exercise his or her obligations and powers in the best interest of [the organization] and its charitable mission, not in his or her own interests or in the interests of another person or entity. …”

The duty-of-loyalty section of your policy also should state that board members must fully comply with the organization’s code of ethics and conflict-of-interest policy. And it should require that board members refrain from taking advantage of business or personal opportunities that become known because of their position as directors.

Covering the basics

Some not-for-profits have a governance committee that oversees organizational policy and helps ensure that the organization operates in compliance with its governing documents. A governance committee can operate effectively without a formal policy as long as it is able to coordinate the board’s manner of governing.

A board handbook is another useful tool. It details the board’s size, term limits, and required committee structure (although some of these responsibilities may be found in your bylaws) and includes other policies that relate to the board and its oversight of your organization.

Revisiting the policy

To be effective, a board governance policy must be referred to often. And requiring an annual review and update of the policy may provide insight into needed policy changes.

Copyright © 2013 Thomson Reuters / BizActions.