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A Note from BauerGriffith

We are living in difficult times – the coronavirus pandemic, wildfires, global warming, racism, and a lot of rancor, political and otherwise. This year, 2020, can’t be over soon enough. Please know that what is important to you is important to us. We are here for you.

Stacy and Nancy

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Business Basics 105 – Starting a Small Business

The Small Business Administration advises that one of the major causes of failure of small businesses is poor management. This could mean poor planning, cash flow management, recordkeeping, inventory control, promotion or employee relations, among others. It likely also includes poor capitalization. There are several key steps for starting and managing a small business, as follows:

You may come up with an idea and begin discussing it with your friends, family, professors, and other business people. At this stage you need a business plan, which is a detailed written statement describing the nature of the business, the target market, the advantages the business will have over its competition, and your (the owner’s) resources and qualifications. The business plan forces you to be quite specific about the products or services you intend to offer. It requires that you analyze the competition, calculate how much money you will need to start, and cover other details of the operation. It is also a must document for talking with banks and other investors.

A good business plan takes time to write, but you’ve got just five minutes, in the executive summary, to convince your readers not to throw it away. Next comes an outline of the comprehensive business plan. Remember, there’s no such thing as a perfect business plan, it will and should change as the business changes and grows. Getting the business plan into the right hands, finding funding sources, requires research. The time and effort you invest before starting your business will pay off many times later. Remember, the big pay off is survival.

The next step is financing your business. After your personal savings, friends and family are often the next source. Additional sources of funding can include banks and other financial institutions, angels, crowdfunding and venture capitalists, the Small Business Administration (SBA), the Small Business Investment Company (SBIC) Program, and a Small Business Development Center (SBDC). Once you have planned and financed your business, it’s time to get it up and running.

Step three is knowing your customers/market, which consists of people with unsatisfied wants and needs who have both the resources and willingness to buy. After identifying the market and its needs, fill those needs. Offer top quality at fair prices with great service. Not only do you want to get customers, but to keep them as well. Small businesses have the ability to know their customers better and adapt quickly to their ever changing needs. To best know your customers, LISTEN. Don’t let yourself get in the way of changing to meet the wants and needs of the customers.

As your business grows it becomes more difficult to oversee every detail, thus you must hire, train and motivate employees. Yet it is difficult to find good employees when you offer less money, skimpier benefits and less room for advancement than larger companies do. This is one of the reasons that good employee relations are a key to small business management. Employees of small companies tend to be more satisfied with their jobs than their counterparts in big companies because they find their jobs more challenging, their ideas more accepted, and their bosses more respectful. Employees who feel they are part of the team work to make that team, and thus the company, successful. Don’t fall into the trap of promoting employees simply because they have been with you the longest, or are family members, but aren’t qualified to serve as managers. You need to delegate to the most qualified individual(s). You may be best served to fire those who don’t meet your requirements, regardless of their tenure and regardless of family relations, so that you can recruit and groom employees for management positions who you can rely on as you delegate more of your responsibilities.

Small business owners often say the most important step in starting and managing their business was in accounting. Setting up an effective accounting system early will save you a lot of headaches later. Accurate record-keeping allows you to follow daily sales, expenses and profits, and also helps with inventory control, customer records and payroll.

Many businesses fail as a result of poor accounting practices leading to costly mistakes. A good accountant can help you with tax planning, financial forecasting, choosing sources of financing, and writing requests for funds. The key is to find an accountant experienced with small businesses. This critical advisor can help you to not only survive, but also to thrive.

Small business owners have learned, often the hard way, that they need outside advisors, especially early in the process. This includes legal, tax and accounting advice, and also marketing, finance and other areas. A necessary and invaluable advisor is a competent, experienced attorney who knows and understands small businesses. We can help with leases, contracts, operating agreements and protection against liabilities. A marketing advisor is also key and should help you make your marketing decisions long before you introduce your product or open your store. Market research can help you determine where to locate, who to select as your target market, and an effective strategy to reach it. Experience with small business marketing can be enhanced if this advisor also has experience with building websites and using social media. Two more critical advisors are a finance expert and an insurance agent. The finance guru can help you design a business plan and provide valuable financial advice, and an insurance agent will explain the risks associated with a small business, and in your industry, and how to cover them most efficiently with insurance and other means. And finally, don’t forget to seek out other small business owners and discuss and exchange ideas.

Both BauerGriffith attorneys and BG Consulting Group consultants serve as trusted advisors. Let us help you get your business off the ground.

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Business Basics 104

Part 4 – Corporate Expansion

A merger is when two companies combine into one, whereas an acquisition is one company purchasing the assets, or assets and liabilities, of another company.

A merger might be of two companies operating in different parts of related businesses, putting their businesses together for an increased percentage of the supply chain. Or it might be two companies in the same industry combining in order to achieve economies of scale, or dominance in the market. Or it might be two companies in unrelated industries combining to diversify their business operations and investments.

Sometimes, with or without the owners’ approval, employees, management or a group of private investors will attempt to buy out the stockholders of a company, typically by borrowing the funds needed for such purchase. This is known as a leveraged buyout and, if successful, the employees, managers or investors, as applicable, become the new owners of the company.

The franchise is a specialized type of business operation. Some people are uncomfortable starting a business from scratch, preferring to join a business with a proven track record. A franchise agreement is an arrangement whereby someone with a good idea for a business, the franchisor, sells the rights to use the business’s name and sell its products or services to another, the franchisee, in a given territory. The franchisee can structure her business in any of the ways discussed previously, a sole proprietorship, a partnership or a corporation.

Advantages of a franchise include management and marketing assistance, personal ownership, nationally recognized name, financial advice and assistance, and lower failure rate. A franchisee usually has a greater chance of succeeding than a non-franchise start-up because she has an established product or service to sell, help choosing her phsyical location, and assistance in all phases of promotion and operation. Franchisors typically provide extensive training to their franchisees, so it is like having your own store but with consultants whenever you need them. Some franchisors also help with local marketing efforts rather than having its franchisees rely solely on national advertising. In addition, franchisees have a built in network of other franchisees with whom they can share their experiences and discuss similar problems they may be facing.

A franchise business is still your business , you are still your own boss, but you must follow more rules, regulations and procedures as required by the franchisor. With an established franchise, you get instant recognition and support from a product group with established customers nationally, or even internationally. Franchisees often get valuable assistance and advice from their franchisor, including in two of the most problematic areas for small business owners – arranging financing and learning to keep good records.

There are also disadvantages to the franchise model, including large start-up costs, shared profit, management regulation, coattail effects, restrictions on selling, and fraudulent franchisors.

Most franchisors require a fee for rights to the franchise, which might be as low as a few thousand dollars up to over a million dollars. In addition to purchasing the franchise rights, the franchisee typically pays a royalty either as a large share of the profits, or a percentage commission based on sales, not profit. Management assistance often has a way of becoming managerial orders, directives and limitations. Franchisees feeling burdened by the franchisor’s rules and regulations may lose the drive to run their own businesses. However, franchisees will often band together to resolve their grievances with the franchisor rather than wage their battles alone.

Unlike independent businesses, the actions of other franchisees impact each franchisee’s future growth and profitability. If fellow franchisees fail, this coattail effect could force the franchisee out of business even if her franchise has been profitable. In addition, unlike the owner of an independent businesses, who can sell her company to whomever she chooses and on whatever terms, many franchisees face restrictions on the resale of their franchises. Franchisors often insist on approving a new owner to ensure he meets its standards and as a measure of quality control. Many franchisors are small, even obscure companies that prospective franchisees know little about. Although most are honest, beware of franchisors that deliver little to nothing of what they promise.

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Business Basics 104

Part 2 – How to Form a Business, Corporations

You don’t have to be a big business to form a corporation. A corporation, sometimes known as a C corp., is chartered with the secretary of state, and is a unique “person” with separate liability from its owners, known as stockholders. The biggest advantage of forming a corporation is that it limits the stockholders’ liability to the amount they’ve invested; they do not have personal liability for the debts or other problems of the company. A corporation also allows multiple people to share in the ownership, and hopefully the profits, of a business without the necessity of working there or other commitments to the company. Corporations choose whether to offer ownership to outside investors or to remain proviately held.

As previously stated, a corporation offers limited liability for its owners. Additional advantages include the ability to sell stock to raise money from investors; to borrow money from banks or investors; perpetual life, i.e. the company does not terminate with the death of its owner(s); ease of ownership change; ability to offer stock options to attract valuable employees; and to raise money separate from getting investors involved in management of the business.

The corporate heirarchy, from the top down, begins with the owners/stockholders who elect the board of directors, the board hires officers, the officers set the corporate objectives and hire management, the managers supervise the employees, and the employees perform the functions of the business. Thus the owners help dictate who runs the company, but not its day to day operations.

There are also disadvantages to corporate entities, including the initial set up costs; paperwork, both initially and ongoing; double taxation – first the corporation pays tax on its income before any is distributed to stockholders as dividends, then the stockholders pay income taxes on the dividends they receive; two tax returns, a corporate return and individual return; once started a corporation is hard to end; and finally the potential for conflict between directors and management.

While we are all aware of many large corporations, IBM, AT&T, Apple, many corporations are small business owners who typically do not issue stock to outsiders, focusing more on limited liability and possible tax benefits.

An S corp. is a regular corporation that elects to be taxed like a partnership, thus avoiding double taxation. Profits of an S corp. are taxed only as the personal income of the shareholders. In order to qualify to make this election, the company cannot have more than 100 shareholders, must have shareholders that are individuals or estates, and who are citizens or permanent residents of the United States, must have only one class of stock, and must derive no more than 25% of its income from passive sources. If an S corp. loses its status as such, it must wait five years to make another S election.

Finally, there’s an interesting hybrid known as a limited liability company. This entity does not have the formal requirements of a C corp. and has the tax advantages of an S corp. It offers limited liability to its members; is taxed as a partnership, though it can choose to be taxed as a corporation; does not have the same ownership restrictions as an S corp.; has flexible distribution of profits and losses, which do not have to be distributed in proportion to the money each person invests, but is by agreement of the members; anddoes not have to comply with the ongoing operating requirements of a corporation, such as annual meetings, minutes and written resolutions, though an operating agreement is a good document to put in place.

LLCs have disadvantages as well, including limitations on transferabiity of membership interests; a limited life span, which could be triggered by the death of a member; inability to deduct fringe benefits, thus few incentives available for employees; although less paperwork than a corporation, more than a sole proprietorship; and members must pay self employment taxes on their profits.

Determining the appropriate form for your business typically involves input from both a lawyer and an accountant to ensure you create the best opportunity for you and your company.

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Business Basics 104

Part 1 – How to Form a Business, Sole Proprietorship and Partnership

The form of your business can have a tremendous impact on its long-term success. The three major forms of business ownership are sole proprietorships, partnerships and corporations. Each has pros and cons.

A sole proprietorship is a business owned and usually managed by one person. When two or more people legally agree to become co-owners of a business, it’s called a partnership. While these two forms of organization are relatively easy to form, there are advantages to creating an entity that is distinct from its owners. A corporation is a separate legal entity with authority to act and have liability apart from its owners. There are several options for a corporate entity, the most popular being the limited liability company, or LLC.

Sole Proprietorship

This is the easiest to start and end, all you need to do is just start or stop, as the case may be. You may need a license from your local government, but this is typically a simple task. All of the sole proprietorship’s profits are taxed as personal income of the owner, and the owner pays normal income tax on that money. However, the owners do have to pay the self-employment tax (social security and medicare), and have to estimate their taxes and make quarterly payments to the government to avoid penalties.

On the down side, a sole proprietorship offers no protection to its owner in terms of liability. In fact, the sole proprietor has unlimited liability, including the risk of personal losses. The sole proprietor and business are treated as one, so any debts or damages incurred by the business are those of the owner. This is a serious risk to be discussed with a lawyer, accountant, insurance agent and others.

Partnership

A partnership is a legal form of business with two or more owners. It can be a general partnership, a limited partnership or a limited liability partnership, and while not always required, it is wise to put the relationship in writing. In a general partnership, all owners share in operating the business and assuming liability for the business’s debts. A limited partnership has one or more general partners and one or more limited partners. The general partner is an owner with unlimited liabiity and is active in managing the company. Every general partnership has to have at least one general partner. A limited partner is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond her investment. Limited liability means that her liability for the company’s debts is limited to the amount she put into the company, and her personal assets are not at risk. The limited liability partnership (LLP) was created to limit the disadvantage of unlimited liability. It limits the partners’ risk of losing their personal assets to the outcomes of their own acts and omissions as well as those they supervise. A limited partner in an LLP can operate without fear that one of his partners might commit an act of malpractice resulting in a judgment that relieves him of his personal assets. Many states, however, do not extend this personal protection to contractual liabilities such as bank loans, leases or business debt of the LLP.

It may be easier to own and mange a business with one or more partner. While you might excel at marketing, your partner might be skilled at accounting. When two or more people pool their money and credit, paying the rent, utilities and other bills becomes easier. It is also easier to manage the day-to-day affairs of the business when you have partners. Having one or more partner can free up time for you away from the business, as well as provide different skills and perspectives. Partnerships tend to survive longer than sole proprietorships, and like a sole prop, the profits of parnerships are taxed as personal income of the owners.

On the flip side, conflict and tension are always possible when two or more people are involved. In addition, sharing risk also means sharing profits. Plus, each general partner is liable for the debts of the business, regardless of who caused the problem. A general partner is liable for her partner’s mistakes as well as her own so, like a sole prop, her personal assets are at risk. A partnership is also more difficult to terminate than the sole prop. Although you can quit, questions remain about who gets what and what happens next.

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A Guide to Standing Committees for Nonprofits — The Investment Committee

Last week we discussed the role of the Finance Committee for nonprofit organizations. Now we’d like to take a quick look at the Investment Committee, which generally has responsibility for overseeing the invested assets of an organization.

An Investment Committee can provide a good check and balance to ensure that restricted or reserved assets are properly stewarded for their intended purpose. The most common type of assets in this category would be your endowment, whether it’s a true endowment or a board restricted fund. An endowment is meant to have some degree of permanence, so it’s important to make sure the assets aren’t depleted just to balance the budget or cover routine expenses. In addition to an endowment, organizations sometimes have an investment account with less formal restrictions, but that operates more like a savings account may to an individual.

The Investment Committee:

  • Creates an investment policy to reflect the risk tolerance of the organization and provide guidance on the general portfolio makeup of the account
  • Creates a spending policy to clarify how much of the account can be drawn each year and how that amount is determined
  • Monitors the performance of the organization’s investments
  • Helps moderate the conflicting desires to create a large reserve fund that can provide consistent support to the operating budget through the yearly draws, and the desire to spend the money to balance budgets and expand programming

The following is a sample description of the Investment Committee:

The Investment Committee shall: (a) recommend policies to the Board concerning the management and use of the Corporation’s assets, including its endowment funds; (b) review and assure compliance with such policies that are adopted by the Board; (c) select a professional investment advisor to assist the Committee with periodic evaluations of the investment performance of assets, asset allocation, selection and monitoring of investment managers, and the execution of its responsibilities; (d) select and monitor the performance of investment managers and custodians; (e) for planning and budgeting purposes, recommend a policy for determining the annual transfer of funds from the any endowment funds to the operating or program budget; (f) report to the Board at least annually on the management and performance of endowment assets versus relevant benchmarks; and (g) if authorized by the Board, develop policies and guidelines for, and monitor the performance of, investments in any retirement or pension plan for the benefit of the Corporation’s employees.

The Investment Committee can be a good place for non-board volunteers to serve in an advisory capacity, even as voting members. As part of your board’s overall duty to manage the organization’s finances, though, it is important that any policies created by the Investment Committee be recommended to and approved by the full board.

The Investment Committee can be chaired by a vice chair of the board, or the assistant treasurer, or another officer or board member. However, if your treasurer chairs your Finance Committee, make sure he/she does not also chair the Investment Committee, in order to preserve the value of the checks and balances this committee is meant to create.

If you’re managing a smaller organization and have been reading this blog series, you may have begun to feel that I have suggested more standing committees than you have members of your board. Certainly there is room for overlap in the committee membership, and as I mentioned above, the Investment Committee is a place where non-board member volunteers can be effective. If you do have invested assets, though, I strongly recommend against operating with a combined Finance and Investment Committee. It may be possible to combine the duties of the Investment Committee with the Executive Committee. You may also want to make the Investment Committee a “committee of the whole”, which means your full board would take on these responsibilities.

Creating your investment and spending policies is very important work, and in a future post, we’ll take a look at some of the big questions to be considered when establishing these guidelines for your organization.

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A Guide to Standing Committees for Nonprofits — The Finance Committee

The next three standing committees we’ll examine are very closely related. These are the Finance Committee, the Audit Committee, and the Investment Committee. Sometimes the names of these committees are interchanged or combined, so as we move forward, make sure to focus on the function of the committees, not the names, to sort out the structure that will be best for your organization.

The Finance Committee is the group that has principal responsibility for your organization’s budget and financial performance. It is generally chaired by the organization’s Treasurer. The budget process will be the focus of the committee toward the end of the fiscal year. In close consultation with staff, the organization’s Treasurer and the committee will look at last year’s performance and determine new targets for income and expenses. The process isn’t really any different for a nonprofit organization than it is for any for profit business, and should produce a well reasoned, well supported projection of the next fiscal year’s full financial picture based on past financial and performance history.

I always recommend that the whole organization have a deep involvement in the budgeting process. Staff in your program areas will have the best information on the need for your organization’s services, be they social services, education, performing arts events, or anything else. The budget process is time for them to examine what resources they need to to their jobs, what the need is in your community for those services, and what the community can and will pay for them. Understanding this information will help them engage in meaningful discussions of what expenses will be needed, and what earned or contributed income is likely for the next year. Your organization’s development staff will also have an important role in the discussion, as they will be able to assess the extent to which the philanthropic community will support the services your program staff suggests.

In large organizations, this staff budgeting process will likely be coordinated by the executive director. However, when staff has made their initial budget recommendations, a robust discussion with senior staff and the Finance Committee should follow to balance not only the organization’s priorities but also the budget.

Once the Finance Committee is satisfied with the budget, a recommendation is made to the full Board for approval, since establishing and monitoring the budget is one of the primary duties of a board of directors. If possible, keep the Board updated on challenges during the budgeting process. When you present the final recommended budget to the board, I strongly recommend you include a narrative description with your spreadsheets, describing why each line item, or at least each group of line items, is increasing, decreasing, or staying the same compared to prior years. I find most boards want to see at least 3 years of past performance, meaning budgets and actual performance for each year, in order to understand the trajectory of the organization.

I understand this all sounds very formal and cumbersome, and if you’re leading a smaller nonprofit, you may not think it’s really necessary. However, I’d like to suggest that the process of establishing a budget really is the same, no matter the size or type of organization. For smaller budgets or organizations focused on a single line of business, the process may not take as long, but staff involvement is very important, and having a board committee dig into budget and performance is crucial for sustainability and success.

Remember, a budget is only an aspirational expression of your organization’s financial situation at the beginning of a fiscal year. Equally important is regular monitoring of actual performance compared to budget. This monitoring, along with regular reporting to the full board, is the second primary responsibility of the Finance Committee. In my experience, board members like to see regular, monthly updates, along with same time last year benchmarking to judge progress. To the extent possible, regular monthly or quarterly projections of where you’ll be at fiscal year end relative to budget are also extremely important, and allow you to communicate both good news (perhaps a new, large gift or grant or contract for services), and bad news (a loss of regular or anticipated funding) to the full board in a timely and meaningful way.

A caution for staff: Board and committee members who are unfamiliar or uncomfortable with formal financial reporting often request staff to prepare budgets and updates in many different formats, I believe in an effort to help them understand the reports they’re reviewing. Some want more information, some less. Some what spreadsheets, some want graphs. Some want dashboard style reporting, others just want the P&L. Listen to their concerns, adopt a standard form of reporting, and try to stick to it. Spend some time, or have your committee chair spend the time, teaching board members how to read the reports you are generating, to avoid spending time reformatting your reporting every month. (Yes, I have seen that happen.)

I’m often asked what kind of volunteers will make good Finance Committee members. Accounting expertise is helpful, but often your business office or outsourced CPA can advise on these technical issues. I like to see savvy business people who are used to the budgeting and financial monitoring process in their own business as members of this committee. I also strongly recommend a member of the development committee sit on the Finance Committee. Without that voice, it’s just too tempting for the contributed income line item to be whatever number is needed to balance the budget.

Another frequent question is whether non-board members can serve on the Finance Committee. In general, I recommend against this. I feel it is very important that the individuals setting and monitoring the organization’s finances be members of the board with the fiduciary duties of care and loyalty. That said, it is quite appropriate to use non-board volunteers for advice and counsel if your board does not have sufficient expertise in financial matters. These volunteers should not, however, be voting members of the Finance Committee.

The following is a sample job description for the functions of a typical Finance Committee:

Finance Committee

The Finance Committee shall: (a) review and make recommendations to the Board concerning the Corporation’s annual operating budget; (b) review and make recommendations to the Board concerning the Corporation’s annual capital budget; (c) monitor compliance with and variances from the budgets during the course of each year; (d) ensure that the Corporation’s financial reports provide accurate and timely information to the Board; (e) review proposed financings and borrowings, and make recommendations to the Board with respect thereto; (f) review the Corporation’s risk management and  insurance needs and policies, and make recommendations with respect thereto; (g) assist the Corporation’s Chief Financial Officer with long-term financial planning; and (h) review and approve fiscal policies, including those relating to check signing authority, accounts receivable collection, and management of accounts payable.

You’ll see this job description includes risk management, which we have not discussed in this blog. Some organizations make risk management a staff responsibility, which is quite appropriate. Including this activity in the responsibilities of your Finance Committee may depend on the expertise you have on your board.

You’ll also see that this job description does not include investment management, which I recommend, for organizations with investable funds, be housed in an Investment Committee, the subject of our next blog installment.

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Business Basics 103

Part 3 – Corporate Social Responsibility

Corporate social responsibility (CSR) refers to companies as good citizens, concerned with the welfare of society and not just the owners. CSR is based on fairness, integrity and respect. While a company’s loyalty and obligation is to its owners, being a good corporate citizen can increase profitability in the long run. Companies with a good CSR reputation are cosidered ethical and often attract and retain better employees, enjoy greater employee loyalty, and draw more customers.

There are a variety of methods for CSR, including corporate philanthropy, corporate social initiatives, corporate responsibility and corporate policy. In addition to money, many companies allow their employees to volunteer during company time.

We know that companies have a responsibility to customers, pleasing them by offering real value. All things being equal, customers tend to favor the socially conscious company over its less socially conscious competitors. In fact, customers are often willing to pay more for goods from the socially responsible company. Thus CSR is also a tool to attract new customers. The question then becomes, how to make customers aware. Social media has become a low-cost, efficient way of conveying a company’s CSR efforts, allowing companies to reach and interact with a broad and diverse audience. However the company must live up to its hype or face dire consequences. If a company does not follow through on its CSR as claimed, it loses customers’ trust; customers do not want to do business with a company they don’t trust.

Many investors also believe that it makes financial sense to invest in companies engaged in CSR , and that ethical behavior adds to the bottom line.

Companies that treat their employees with respect usually earn the respect of their employees. This mutual respect can have a significant impact on the company’s profit. Retaining good employees saves money, is good for business and also good for morale. A disgruntled employee can wreak havoc on a business, thus loss of employee commitment, confidence and trust in the company can be extremely costly.

CSR has many benefits, each of which can increase a company’s profitability while also doing good for society as a whole.

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A Guide to Standing Committees for Nonprofits — The Executive Committee

The Executive Committee of a nonprofit board can have many different forms and functions, often depending on the size or engagement of the board. Today we’ll look at several options and their advantages. First, though, let’s look at some rather universal concepts.

The Executive Committee is generally the body that directly oversees an organization’s highest paid staff member. Hiring, compensation, performance evaluation, and firing decisions are nearly always made by this group, which then informs the board of their decisions or recommendations. Housing these sensitive personnel matters in the Executive Committee provides important perspective and check and balances for your board president, and also confines the discussion of potentially sensitive personal information to a small, trusted group of board members, as opposed to presenting these discussions in the more open setting of a full board meeting.

In addition, the Executive Committee should have a strong voice regarding the agenda of meetings of the full board. In this role, the committee should ensure all important information and items for discussion and decision are included on your board agenda at the appropriate time to meet target dates in the strategic timeline or legal/regulatory deadlines. The Executive Committee should also ensure that any matter presented to your board for decision has been fully investigated and vetted, thereby ensuring your board members have all the information they need to make a decision for the organization.

If your organization has a large board, the Executive Committee can play a very important role in communicating information to and from your organization’s leadership. In this scenario, the chairpersons of each committee of the board, along with the board’s officers, generally comprise the membership of the Executive Committee. These members take decisions about the organization’s strategic direction to the various committees, which then work to implement those decisions in more detail. The members of the Executive Committee also report on their committees’ progress, to ensure continued alignment and to prevent duplication of efforts.

For a smaller board, the Executive Committee may only include the officers of the board, who may occupy a more hands on role in assisting your Executive Director.

Whichever structure makes sense for your organization, think of your Executive Committee as the body that helps coordinate the work of the board to maximize board engagement and effectiveness.

And because the Executive Committee plays such a central and often sensitive role, I recommend all members of this committee be members of your board currently in office. We’ll look at other committees where non-board members can appropriately serve, but the Executive Committee isn’t one of them.

With these concepts in mind, let’s look at another common function of the Executive Committee. Most state laws permit the Executive Committee to act between meetings of the full board, provided their actions are reported to and ratified by the full board at its next meeting. While this power certainly allows decisions to be made quickly and permits the scheduling of less frequent meetings of the full board (which, admittedly, means less work for staff), it may also contribute to less board engagement. There is a danger that, since the Executive Committee is easier to assemble and often consists of the Executive Director’s and board president’s closest colleagues, more and more decision making will be shifted over time to the committee, instead of allowing the full board the opportunity to consider important issues and feel engaged in the work of the organization. I generally recommend that the power of the Executive Committee to act between meetings of the full board be limited to emergency situations.

The following is a sample description of the Executive Committee’s responsibilities:

Membership of the Executive Committee shall be comprised of the officers of the Corporation, the chairpersons of each of the Corporation’s standing committees, and such other individuals as may be appointed by the Chair of the Board, provided that all members of the Executive Committee shall be Directors of the Corporation currently in office. The Executive Committee will serve as the compensation committee and is responsible for hiring and determining compensation for the President of the Corporation.  The Executive Committee, if necessary to meet legal deadlines or obligations or in emergency situations where action is required immediately, may have and exercise all of the authority of the Board of Directors in the management of the Corporation except as such authority is limited by the Articles of Incorporation, the Regulations, or by statute, or as may be limited by the resolution relating to the Committee.  All action taken by the Executive Committee shall be reported at the next full Board meeting.  The Executive Committee may act by a majority of the members of the Executive Committee at a meeting or in a writing or writings signed by all Executive Committee members.

One final comment for smaller organizations — if a board lacks sufficient members to staff all of the standing committees you might like to have, it is possible to have the Executive Committee assume the typical duties of the Board Development Committee, especially when an organization is in its formative years.