Good Governance Policies for Nonprofits

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It is hard to know what ‘good governance’ is. You recognize it when everything goes smoothly, and you also feel the lack of it when times are rocky. While there is no cookie-cutter approach to good governance, there are lots of recipes for disaster, so how can a board of directors be sure that the charitable nonprofit is governed well today, and also ready to handle challenges ahead?

Good Governance is Like a Recipe

Good governance requires the right ingredients (the right mix of board members!), a chef to provide leadership and accountability, and careful mixing and stirring of candid discussions, transparent practices, and governance policies. You can help your board master the recipe with the right resources. Your state association of nonprofits may already have given you all the resources you need by identifying principles and practices and standards for excellence for nonprofits in your state. State associations also frequently offer educational programs on good governance practices.

Here is a very basic recipe for good governance. While the policies below are those that the IRS highlights on the Form 990, even smaller nonprofits that file the 990-N should be aware of and adopt these basic governance practices.

5 Basic Good Governance Practices

  • Maintain minutes of all board meetings (and committee meetings for committees that are authorized to act on behalf of the board, such as an executive committee). (See IRS Form 990, Part VI, Section A, line 8)
  • Annually review a written policy and complete a questionnaire about conflicts of interest. (See IRS Form 990, Part VI, Section B, Line 12) and document in minutes of board meetings when the policy is invoked.
  • Approve the executive director/CEO’s compensation and benefits, and document how the board determined that the compensation is appropriate, and not excessive. (See IRS Form 990, Part VI, Section B, line 15)
  • Require the board to review a copy of the IRS Form 990 before it is filed. (See IRS Form 990, Part VI, Section B, line 11) For smaller nonprofits that only file the Form 990-N, make sure the board knows about the annual filing requirement.
  • Disclose to the public the nonprofit’s three most recently filed annual returns with the IRS, as well as its application for tax-exemption and related correspondence and attachments.

4 More for Good Measure

There are four additional governance policies that the IRS Form 990 asks whether a charitable nonprofit has adopted:

For more information on what the IRS asks for take a good look at IRS Form 990, Part VI, and also Schedules M and O, and the instructions to the Form 990.

Practice Pointers

  • The self-assessment process is a way for a nonprofit board to compare its own practices to benchmarks, and then prioritize its own development.
  • A focus on inclusion and sensitivity to cultural differences (i.e., diversity of staff and boards) can help ensure that decisions your nonprofit staff and board make are based on a full spectrum of perspectives.
  • Orientations can help onboard new board members so that they are aware of good governance practices from the start.
  • Being aware of the conflict of interest policy is one thing – recognizing when a conflict of interest exists is another! Take out the policy and talk with the entire board (and staff) about the types of situations where a conflict can arise and role play what would happen if one of the board members disclosed that s/he had a conflict of interest.
  • Board members need an awareness of the external environment that affects the organization in order to make good decisions. Encourage them to subscribe to their nonprofit state association's newsletters as well as the National Council of Nonprofits' free e-newsletters; Share state specific nonprofit data and information about nonprofits' overall financial health (State of the Sector Survey report prepared by the Nonprofit Finance Fund)
  • Help raise the board’s awareness that good governance means being an advocate with a discussion guide: Stand for Your Mission (BoardSource)
  • As you are planning agendas for board meetings throughout the year, keep in mind that there are some issues that need regular attention. Here's our annual board checklist and a calendar of agenda items for board meetings is a useful tool. (Nonprofit Law Blog)

The resources that follow can help nonprofits develop governance policies referred to in Section VI and VII of the IRS Form 990:

Resources

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