Principle: Governance and Leadership
The nonprofit board of directors is the organization’s fiduciary steward and strategic leader. As such, the board is responsible to maintain public trust and assure the organization’s mission is met legally, effectively and efficiently. A board of directors can be effective in fulfilling its goals and expectations only when a clear shared understanding of its role and responsibilities is established and cultivated. Boards only have power when they speak together through a corporate motion. A nonprofit board considers the organization and its mission from a holistic perspective as it makes sense of the past, looks toward the future, provides strategic leadership, sets policy and ensures the organization has adequate resources. Board members serve complex and multiple roles; they must understand and maintain boundaries between any volunteer roles they undertake to help with direct programs or services and their board role as a member of the governing body. The board provides support, direct oversight and direction for the Chief Executive Officer and is responsible for evaluating her/his performance, as well as approving competitive compensation. A nonprofit board also has a responsibility to regularly evaluate its own effectiveness—both collectively and as individual members—according to the organization’s governing documents and board policies.
||★★★ Legal Practices are legally required of all Montana nonprofits
||★★ Essential Practices are widely recognized as industry standards and generally expected of all nonprofits
||★ Recommended Practices should be considered by all nonprofits, with implementation dependent on capacity and life stage
★★★The Legal Duties of Nonprofit Boards of Directors
Directors of nonprofit organizations are held to basic legal duties as a matter of state law, common law, and federal law. The core fiduciary duties are the duty of care, duty of loyalty, and duty of obedience to mission.
Duty of care—a director of a nonprofit organization shall discharge all his/her duties as a director, including those performed as a committee member:
A. In good faith;
B. With the care that an ordinarily prudent person in a similar position would exercise under similar circumstances; and
C. In a manner the director reasonably believes to be in the best interests of the organization.
The duty of care entails a duty of reasonable inquiry. Each director is obligated to ask questions and demand information to allow him/her to have sufficient information and understanding to make decisions he/she reasonably believes are in the nonprofit’s best interests. This duty means that the director must make time to attend meetings, and come prepared to participate.
Duty of loyalty—Directors are obligated to exercise an undivided and unselfish loyalty to the organization they serve. Directors must exercise their obligations and powers in the best interests of the organization and its charitable mission, not in their own interests or in the interests of another person or entity (even if charitable in nature). To assure that directors are operating within the scope of the duty of loyalty they are required to complete conflict of interest disclosures annually and acknowledge any conflict that may arise during the year.
Duty of obedience—Directors are obligated to further the mission of the organization they serve; to be faithful to its purposes and goals as defined by the articles of incorporation and bylaws; to act in conformity with all state, federal and local laws; and to obey board-approved organizational policies.
1. ★★★ The board of directors has ultimate legal responsibility for the welfare and actions of the nonprofit organization. All the organization’s powers are exercised under the authority of the board. MT
2. ★★ The board assumes responsibility and accountability for healthy functioning, diversity of thought and representation, and culture.
3. ★★ For the staffed nonprofit, directors do not manage the day-to-day affairs of the nonprofit. Instead, they delegate that function to others. Directors must, however, exercise credible, reasonable, and prudent oversight without personal bias in respect to corporate officers, agents, and employees to whom such affairs are delegated. Where board members might individually fulfill direct programmatic or member service roles, it is important to establish clear boundaries between the role of individuals when they volunteer in these support/direct mission fulfillment roles, and their role as a member of a collective decision-making governing body.
4. ★★★ In the performance of his/her duties, a director may rely on information and reports received from officers or employees whom the director reasonably believes to be reliable and competent, as well as on professional advisors (e.g., attorneys and certified public accountants) and other persons with regard to matters the director reasonably believes are within the person’s professional or expert competence. A director may also rely upon a committee of the board of directors of which the director is not a member as to matters within its responsibility, if the director reasonably believes the committee merits confidence. MT
5. ★★★ If urgent and necessary, a board may take an action without a meeting if the action is taken by all members of the board by written consent describing the action taken, which can be distributed and returned via e-mail or post, signed by 100% of the board members; this should occur rarely. The signed, written consents must be included in the nonprofit’s minutes. If the action warrants discussion, the discussion takes place in person, by phone via a conference call or other interactive audio-visual communications technology prior to the action being approved. A committee of the board, such as an Executive Committee, also may be authorized by the board in the articles of incorporation or bylaws to act in place of the board in emergencies with some exceptions. MT
6. ★★★ A nonprofit must file appropriate Form 1023 with the Internal Revenue Service to be recognized as tax exempt under federal law as a 501(c)(3) organization. Excepted from this requirement are churches, synagogues, temples, and mosques. US
7. ★★★ A nonprofit is required to file articles of incorporation and all amendments with the Montana Secretary of State. MT
8. ★★★ A nonprofit is required to maintain current bylaws. MT
9. ★★★ A nonprofit must file for state nonprofit tax exempt status certification through the Montana Department of Revenue. MT
10. ★★★ A nonprofit is required to file a current annual report with the Secretary of State due by April 15. MT
11. ★★★ A nonprofit must annually file an applicable Internal Revenue Service Form 990 according to its annual gross receipts and any state filings as required. Also in “Financial Management”, MT, US
12. ★★ The board of directors performs a meaningful review of Form 990 prior to filing. Also in “Financial Management”
13. ★★★ A nonprofit that owns and uses real property for its charitable work must apply to the Department of Revenue to receive exemption from property tax. MT
14. ★★ The members of a nonprofit board are chosen to represent the best interests of the organization. The board defines what diversity means for the board and the organization. Diversity covers a range of characteristics and will look different from organization to organization; however, it reflects the diversity of the community and who the organization aspires to serve, including traditionally marginalized members of the community. Board diversity is critical to ensure a balanced approach toward service delivery and for an understanding of the community and targeted populations’ issues in the near- and long-term.
15. ★★ A substantial majority of the board of directors of a nonprofit, usually meaning at least two-thirds of the members, are independent. The Internal Revenue Service defines independent individuals as those:
a. Who are not compensated by the organization as an employee or independent contractor;
b. Whose compensation is not determined by individuals who are compensated by the organization;
c. Who do not receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; and
d. Who are not related to (as a spouse, sibling, parent or child), or do not reside with any individual described above.
16. ★★★ A nonprofit must have a minimum of three board members. MT
17. ★★ A nonprofit board of directors has at least five persons, unrelated to each other or to staff, to ensure appropriate deliberation and diversity.
18. ★★ The executive director or other staff may be members of the board of directors; however, due to conflicts of interest, the executive director or other staff are not voting board members.
19. ★★★ The officers of a nonprofit are designated in the bylaws and/or articles of incorporation. MT
20. ★★★ Unless otherwise provided in the bylaws or articles, a nonprofit has a president, secretary, treasurer, and other officers appointed by the board of directors. MT
21. ★★★ A person may simultaneously hold more than one office in a corporation; however, it is not recommended for the board president to hold more than one office to allow for distribution of power. MT
22. ★★★ A nonprofit may not lend money to, or guarantee an obligation of, a director or officer of the corporation. MT
23. ★★ Although monetary compensation for board members is not prohibited by law, in general nonprofit board members do not receive monetary compensation for their board duties other than reimbursement for board-related expenses.
24. ★★★ If a board member is hired for professional services, compensation for the services must be reasonable. MT, US
25. ★★ If a board member is hired for professional services, the board of directors determines that the board member is qualified and that the compensation is reasonable based on comparable data prior to approving and paying the compensation. The board member to be hired, and any other board members with a conflict of interest in the decision, recuse themselves. The basis for the board’s determination, the recusals, and approval is promptly documented in board minutes.
26. ★★★ Board member term lengths and limits are designated in the bylaws or articles. MT
27. ★★ The board of directors, along with staff, actively participates in developing plans to accomplish the organization’s mission, annually or as determined by the board. The board oversees the implementation of the plan and evaluates its success.
28. ★★ Board meetings are to be held at least quarterly. Board members are expected to attend all meetings preferably in person or via interactive technology such as conference calls or audio-visual software.
29. ★★★ A nonprofit corporation must keep as permanent records minutes of all committee, board, and special meetings and financial and membership information. MT
30. ★★ The board of directors establishes and leads a process for selecting new board members with input from the executive director. The process ensures adequate infusion of new ideas and community perspectives, while preserving institutional memory.
31. ★★ Directors articulate prerequisites of board membership to prospective board members; new and prospective board members are provided with a position description that includes clearly stated expectations, a history of the organization, and a description of current programs. Board members fully understand their roles and responsibilities to the organization and to the public; they are prepared to articulate the organization’s mission and vision and describe its programs to the public. The executive director/CEO ensures that board members are provided regularly with information about current programs and activities that will strengthen the board members’ role as organizational ambassadors.
32. ★★★ The articles of incorporation and bylaws are legal governing documents of the organization; board members familiarize themselves with the articles of incorporation and bylaws upon joining the board, and refer to and follow the bylaws when there is question about action in board meetings. MT, US
33. ★★ The board regularly reviews and, if appropriate, updates the bylaws.
34. ★ New board member orientation is conducted before a board member is expected to attend a meeting and vote on board business. The orientation is led primarily by board members with a focus on board roles, responsibilities, expectations, and key organizational questions.
35. ★★ At least biannually, the board of directors reviews the organization’s articles of incorporation and bylaws, mission statement, and governance policies and amends each as needed to reflect organizational growth and development. The nonprofit considers if the amendments to the organizing documents meet the disclosure requirement on the 990.
36. ★★ A nonprofit’s board of directors assumes overall responsibility for ensuring sufficient resources are raised to meet the organization’s budgeted objectives.
37. ★★ As fiduciary stewards of the organization and to set an example for all stakeholders, all board members make an annual financial contribution to the organization that is generous within their means. In addition, board members engage in activities that raise and/or generate funds from external sources. Also in “Fund Development”
38. ★★ The board of directors reviews and approves an annual budget for the organization. The board is responsible for ensuring administrative and fundraising costs are realistic and are not unreasonably disproportionate to program expenditures. Also in “Financial Management”
39. ★ When approving an annual budget, the board reviews and approves an annual operational plan and fund development plan.
40. ★ When hiring a new chief executive, the board of directors establishes a hiring plan that supports the comprehensive organizational plan and identifies the skills and experience needed to meet long-term goals.
41. ★ The board of directors conducts an annual outcome-based performance review of the chief executive. The chief executive’s performance is assessed in light of organizational accomplishments.
42. ★★★ A nonprofit’s board of directors or its designees must set reasonable compensation for the organization’s chief executive; such compensation includes salary, raises, bonuses, and other benefits. Also in “Employees and Volunteers”, US
43. ★★ The board of directors determines that the compensation is reasonable based on comparable data, and reflects the chief executive’s qualifications and performance, prior to approving and paying the compensation. Any board members with a conflict of interest in the decision recuse themselves. The basis for the board’s determination, the recusals, and approval is promptly documented in board minutes. They also stay informed about the compensation of other key personnel. Also in “Employees and Volunteers”
44. ★ The board of directors establishes a temporary organizational transition for planned or unplanned absences and succession plan to maintain daily operation during the time of a change in executive or board leadership.
45. ★★ The board of directors develops organizational policies, including policies that guide how the board will govern and policies that are listed in Form 990, Part VI. See also organizational policies under list under other principles.
46. ★★★ Directors and officers must recuse themselves when they have a conflict of interest regarding a transaction over which they have authority on behalf of the nonprofit. Also in “Accountability and Transparency”, MT, US
47. ★★ To assist directors and officers in recusing themselves when they have a conflict of interest, the board of directors adopts a written conflict of interest policy regarding board members, staff, volunteers, consultants, and other contractors and adheres to this policy in all dealings. The conflict of interest policy clearly outlines potential conflicts and procedures for disclosure and dealing with conflicts; it provides for review by members of the board not involved in the conflict. Each director reviews, updates, and signs his/her conflict of interest statement annually. Potential conflicts are monitored and the conflict of interest policy is enforced in the event of a conflict.
48. ★ The board of directors establishes and implements a Code of Conduct and Code of Confidentiality governing the professional behavior of board members, including a requirement that every director publicly support actions taken and decisions made by the board and a requirement to keep corporate plans and actions along with donor and client information confidential.
49. ★ As organizational leaders, the board assures that there is a clearly defined set of organizational values. It is the board’s responsibility to emulate these values in all their actions and to ensure that these values guide organizational and staff decisions and actions.
50. ★ Board members are provided an opportunity annually to evaluate and collectively review their individual goals; participation; educational and skill development needs; and the overall effectiveness of the board of directors as a whole.
51. ★★★ The Montana State Attorney General oversees charitable nonprofits in Montana. Dissolution, disposal of all or substantially all assets, and specified mergers must be reported to the Montana Attorney General. MT
Fund Development ~ Human Resources
Items appearing on this page are protected by copyright.
Material may not be copied or reprinted without prior written authorization from the Montana Nonprofit Association.
If you have any questions regarding organizational development, please contact us at firstname.lastname@example.org.
All rights reserved © 2017 by Montana Nonprofit Association