Principle: Governance & Leadership
A nonprofit’s board of directors is the organization’s steward and is responsible for developing and maintaining public trust. A board of directors can be effective in fulfilling its goals and expectations only if a clear and common understanding of its role and responsibilities is established and cultivated.
A nonprofit board of directors is responsible for defining the organization’s mission and for providing overall leadership and strategic direction to the organization. A nonprofit board actively sets policy and ensures that the organization has adequate resources to carry out its mission. The board provides direct oversight and direction for the chief executive and is responsible for evaluating that person’s performance, as well as approving competitive compensation. A nonprofit board also has a responsibility to evaluate its own effectiveness as a governing body in upholding the public interest(s) served by the organization.
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:
- in good faith;
- with the care that an ordinarily prudent person in a similar position would exercise under similar circumstances; and
- 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.
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).
Duty of Obedience — Directors are obligated to further the mission of the organization they serve, to be faithful to its purposes and goals, and to act in conformity with all laws affecting the organization.
1. All of a nonprofit organization’s powers are exercised by or under the authority of its board of directors, under whose direction the affairs of the organization are managed.
2. Directors generally do not manage the day-to-day affairs of the nonprofit. Instead, they 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.
3. 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.
4. A nonprofit must file a Form 1023 with the Internal Revenue Service to be recognized as tax exempt under Federal law as a 501(c)(3) organization. US
5. A nonprofit is required to file articles of incorporation and all amendments with the Montana Secretary of State. MT
6. A nonprofit must file for state nonprofit tax exempt status certification through the Montana Department of Revenue. MT
7. A nonprofit is required to file a current Annual Report with the Secretary of State. MT
8. A nonprofit is required to maintain current bylaws. MT
Board Composition, Characteristics, and Qualifications
9. The members of a nonprofit board should be chosen so as to represent the best interests of the organization.
10. Although Montana law allows for a minimum of three board members (MT), it is recommended that a nonprofit board of directors has at least five persons, unrelated to each other or to staff. This composition helps to ensure appropriate deliberation and diversity.
11. The officers of a nonprofit should be designated in the bylaws and/or articles of incorporation.
12. 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
13. A person may simultaneously hold more than one office in a corporation. MT
14. A substantial majority of the board of directors of a nonprofit, usually meaning at least two-thirds of the members, should be independent The Internal Revenue Service defines independent individuals as those:
- who are not compensated by the organization as an employee or independent contractor;
- whose compensation is not determined by individuals who are compensated by the organization;
- 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
- who are not related to (as a spouse, sibling, parent or child), or do not reside with, any individual described above.
15. A nonprofit may not lend money to, or guarantee an obligation of, a director or officer of the corporation. MT
16. Although monetary compensation for board members is not prohibited by law, in general board members should not receive monetary compensation for their board duties, other than reimbursement for board-related expenses.
17. The board of directors, along with staff, should actively participate in overall planning for the organization.
18. Board meetings should be held at least quarterly and directors should be expected to attend regularly.
19. A nonprofit corporation shall keep as permanent records minutes of all meetings and financial and membership information. MT
20. The board of directors should establish a process for selecting new board members that will ensure adequate infusion of new ideas and community perspectives, while preserving institutional memory.
21. Directors should articulate prerequisites of board membership to prospective board members; new and prospective board members should be provided with a position description that includes clearly stated expectations, a history of the organization, and a description of current programs. Board members should fully understand their roles and responsibilities to the organization and to the public; they should be prepared to articulate the organization’s mission and vision and describe its programs to the public.
22. A nonprofit’s board of directors assumes overall responsibility for ensuring sufficient funds are raised to meet the organization’s budgeted objectives.
23. The board of directors should review and approve an annual budget for the organization. While each board must determine the appropriate budget needed to achieve its mission, various industry benchmarks provide target ranges of 65-80% of expenditures for programs and 20-35% for administration, fundraising, and evaluation. Also in “Financial Management”
24. When hiring a new chief executive, the board of directors should establish a hiring plan that supports the comprehensive organizational plan and identifies the skills and experience needed to meet long-term goals.
25. The board of directors should conduct an annual outcome-based performance review of the chief executive. The chief executive’s performance should be assessed in light of organizational accomplishments.
26. A nonprofit’s board of directors or its designees should set reasonable compensation for the organization’s chief executive; such compensation includes salary, raises, bonuses, and other benefits. They should also stay informed about the compensation of other key personnel. Compensation should be based on a process the directors have determined, taking into account available comparable compensation data, and should reflect the chief executive’s performance. Also in "Human Resources"
27. The board of directors should establish a temporary organizational transition or succession plan to maintain daily operation during the time of a change in executive or board leadership.
28. The board of directors should adopt a written conflict of interest policy regarding board members, staff, volunteers, and consultants and other contractors, and should adhere to this policy in all dealings. The conflict of interest policy should clearly outline potential conflicts and procedures for disclosure; it should provide for review by members of the board not involved in the conflict. Each director should review, update, and sign his/her conflict of interest statement annually. Also in “Accountability and Transparency”
29. The board of directors should establish and implement a code of conduct governing the professional behavior of board members, including a requirement that every director publicly support actions taken and decisions made by the board.
30. At least every other year, the board of directors should review the organization’s bylaws, mission statement, and governance policies, and amend each as needed to reflect organizational growth and development.
31. Board members should be provided an opportunity at least every three years to evaluate and collectively review their individual goals, participation, and the overall effectiveness of the board of directors as a whole.
32. The Montana State Attorney General oversees charitable nonprofits in Montana. Dissolution or disposal of all or substantially all assets must be reported to the Montana Attorney General. MT
Overview ~ Planning
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