Tips for effective not-for-profit governance

Good governance is essential for not-for-profits as they work to fulfill their missions. As not-for-profits often operate on slim margins, they require careful attention from their boards to stay on track. In this podcast, Cheryl Olson, CPA, CGMA, nonprofit solutions strategist at Clark Nuber in Bellevue, Wash., and a member of the AICPA Not-for-Profit Advisory Council, shares tips for effective not-for-profit governance.

What you’ll learn from this episode:

• How members of a not-for-profit board learn their governance role.
• How a not-for-profit can recruit and retain good board members.
• Common gaps in knowledge or training that can jeopardize a board’s success.
• How boards are handling education and training.
• Five not-for-profit governance best practices.

Visit the AICPA Not-for-Profit Section to find more information on not-for-profit accounting and financial reporting topics.

Play the episode below:

To comment on this podcast or to suggest an idea for another podcast, contact Ken Tysiac, the JofA’s editorial director, at Kenneth.Tysiac@aicpa-cima.com.

Transcript:

Ken Tysiac: Let me start by asking you, and I think this is a great place to start because it speaks to the preparation needed to serve effectively on a board, how do members of a not-for-profit board learn their governance role?

Cheryl Olson: Sure. Ultimately, some people join boards to put it on their résumé, or organizations actually seek out members to create fundraising boards. In this case, to learn the governance role, there really needs to be a shift, first at the organizational level to intentionally recruit board members with the time and the skill sets. And then for the majority of the boards, training is the best recommendation to really teach board members their roles and responsibilities, starting with their three duties of care, loyalty, and obedience.

And then looking at the specific duties with ongoing training, and really training should be mandatory. There are various [training options] that are available, and if there isn’t expertise on the board, an organization could reach out to their external auditor or legal adviser for assistance. I believe for a board member to be successful in their governance role, it requires the member to be open to it and the organization to make it part of their board recruitment and retention process.

Tysiac: A board can only be successful, I think, if the right people are serving on it. Can you tell us what an effective board recruitment and retention practice looks like?

Olson: It’s really a process. For the process to be effective, it needs to start with a matrix of skills sets for a governance board to know what type of members the organization is intentionally looking for. This looks at all different types of diversity — age, gender, race, ethnicity, location, etc. — and especially looking at the knowledge skill sets, whether that’s accounting HR, legal, property. Then they need to meet with their potential members individually so they can answer any questions and share the position descriptions so members understand what’s required of them. This is an opportunity to weed out members that won’t contribute and give potential members an opportunity to see if they’re going to be a good fit from their perspective. Many times organizations don’t allow enough time for the recruitment process, they’re just trying to fill board seats.

And then on the retention side, I believe that for an effective retention process, the year needs to start off with the retreat for all members. And often times the retreat will just be for the new members, but besides learning about the organization it’s really a great opportunity for team building. So having experienced and new members together is really important.

Then meetings need to be set for the entire year with agendas and information sent out in advance. And when you have the meetings set on your calendar for the year, there’s a better chance that people are going to be made available to attend these meetings. Then going further, committee meetings need to also align with the board meetings. Besides talking about better attendance, you’re going to have better prepared members.

Finally, boards need to be conducting their annual board assessments on their own performance.

Tysiac: Can you tell us two or three areas you find boards lacking that can cause organizational failure?

Olson: Yes. What many of us are seeing in the nonprofit sector is a strong need to educate board members in both their legal and financial basics. Besides understanding the core duties of care, loyalty, and obedience — and what that means for participation — conflicts of interest and oversight are critical. I’m also seeing contracts as an area that a lot of people in an organization aren’t familiar with the terms before they’re signed or approved. And oftentimes the board is just rubber stamping a contract because they’re going on the premise that someone within an organization has done a full review. But oftentimes staff aren’t hired with that skill set or provided that skill set to approve a contract.

I’m also hearing too many stories of boards not understanding the financial position of the organization before it’s too late. This can be tough when many members don’t have a finance background.

Tysiac: How do you get nonfinancial board members to provide financial oversight? It’s probably not necessarily an area of their expertise, but they need to be brought up to speed in a way that they can perform their oversight duties.

Olson: This can often be a huge challenge, but as I said earlier, with an effective recruitment and retention process, you’re going to actually recruit members with the financial expertise for your board. The tough part is on how to get your nonfinancial members to provide that oversight without always deferring to the treasurer. I’ve personally found success in training board members on reading nonprofit financial statements and then providing some easy exercises to give them comfort in asking questions. Then I actually do have each board member ask a question on the organization’s own financial statements.

Once they see the value in trusting their common sense on what looks odd or areas that they’d like more information on, then there are going to be more questions in the future. Then there can also be a training on reading and reviewing the IRS Form 990.

On the nonprofit side, organizations need to explore presenting their financial information using both pictures and words, not just their numbers. This is where dashboards with pictures and then commentaries explaining the differences between prior year and the budget are helpful in accompanying summarized financial statements. And when I say summarized, I do believe that board members should get a different set of financials than the more detailed ones that the finance committee would receive.

Tysiac: What are some trends you’re seeing in nonprofit board governance?

Olson: I would have to say that one of the biggest trends I’m seeing is education and training. More boards are seeking out training and even attending sessions together. Some are doing it annually, some quarterly, and there’s even some board members or some board meetings that have trainings set on every agenda.

Another trend is executive compensation and how the organization is handling it. Is the organization following the IRS’s three requirements to establish the rebuttable presumption? Does tax reform apply to your executive compensation at your organization? I’m also seeing more organizations intentionally telling their financial story through their financial statements using the words and pictures beyond numbers that I mentioned; also using their IRS Form 990 as a communication tool; putting more financial information on the organization’s website; and then taking advantage of other websites such as GuideStar and social media to tell their financial story.

Tysiac: I hear often that not-for-profits have a problem figuring out, where do you go to find good members. And I’m wondering if you have any advice on that.

Olson: It’s always tough for organizations to find new board members. Oftentimes they’re finding people that serve on multiple boards. But I think it gets back to deciding the specific skill sets you need and then actively recruiting them that way. For example, when you need someone with legal experience, you go to your law firm and see if they have any recommendations. And then if you need someone with financial expertise, you’re going to go to your audit firm or maybe your bank and ask for recommendations there.

There are also some state societies that will connect board members to organizations. So that’s why your recruitment process really needs to take time to make sure you have that opportunity to reach out and find new members. Successful organizations actually have a list of future members that they’d like to consider. I also know a lot of organizations that have success in test driving board members on committees. So depending what your committee charter is, for example, on the finance committee maybe you have half board members and half community members. So actually trying out community members on the finance committee, and then if they work well with the organization you can invite them to be part of the board in the future.

Tysiac: What are your top five best governance practices?

Olson: In picking five, I guess I’d have to say recruiting board members with the time and skill sets that contribute to a well-rounded board. Second, training members on their roles and responsibilities. And many states have do have manuals or resources on what those roles and responsibilities are.

The third would be taking good minutes, which can often be a challenge on balancing too much information with capturing the highlights of the discussion and the decisions made. This is especially important to include member names who voted against the decision.

Fourth, I would say setting the board calendar for the year with dates and key topics which align to the committee meetings. There are normal things that happen on a cycle, such as approving the audit, signing authority, new and revised policies, to name a few.

And then finally, deal with board members who aren’t performing or contributing. Don’t allow them to stay, which can always be a tough situation, especially for those organizations that have created friend-raising boards.