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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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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.

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A Guide to Standing Committees for Nonprofits — General Principles

No matter how big or small your organization is, having a solid structure for your volunteer board and committees is one of the best ways to make sure your board is efficient, engaged, and adding value to your management team. While there are templates and guidelines galore for committee descriptions, not every organization will need (or be able to support) the same committee structure. This blog series will look at the most common standing committees, what they can do, what they really should do, and how to integrate them within your larger board structure.

First, let’s outline some basic concepts. Your committee structure should be outlined in your organization’s By Laws or, as they’re called in Ohio, Code of Regulations. I’ll be speaking to Ohio’s nonprofit corporation law, but in terms of committee powers, most states are very similar. If you’re not in Ohio, though, be sure to check you state laws to make sure there are no conflicting provisions.

The theory behind any committee structure, no matter how simple or robust, is that many hands make light work. While the whole board should be involved in certain activities, and should always be the final decision making authority for the organization, the detail work of researching, investigating and advising management to recommend actions should be done by smaller groups of volunteers. That way when you present a strategy to your board, you’ve really run down all the pros and cons and can put a viable plan in front of them to discuss and, hopefully, adopt.

Committees are also the place to pull in expertise from people who don’t sit on your board. Accountants, lawyers, industry experts, consultants, service providers, and others with specific experience in your service area often have much to offer in vetting possible strategies. These people are often not the best choice for board members, though, because they may not be willing or able to engage in the kind of fundraising, outreach or advocacy that your whole board really needs to do. (We’ll dive in to that more our post about development committees.)

Remember, most importantly, that committees are supposed to help management, not add to their work load. If you’re a nonprofit manager and you routinely worry about creating an agenda for committee meetings because you don’t know what they’re supposed to do, don’t feel like you have work for them, or don’t want to have to manage the less than helpful suggestions that come out of your committee meetings, then I’d like to suggest you don’t have the right committee structure. Your board and your committee structure are not the place to steward and engage your biggest donors. Any organization’s committee structure must be a reflection of the organization’s mission and work plans, and help your staff work most effectively.

Next up we’ll look at the Board Development Committee. Until then, practice removing the phrase “nominating committee” from your vocabulary!

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The Nonprofit Board/Staff Relationship

I do a lot of speaking and coaching on the topic of board governance and board responsibilities.  I also do a lot of ballroom dancing, and lately it occurred to me that the relationship of ballroom partners is a great example of how the relationship between a nonprofit’s board and staff should work.

In ballroom dance, the gentleman determines the step and the general direction in which it will go.  This is not accomplished by using an iron grip to force the partner to do a certain step or go a certain way.  It is accomplished by keeping a good connection with the partner, staying aligned with your center, and giving the partner room and permission to do her part of the job.

The woman, in turn, is responsible for executing the step, filling up the space offered by her partner, and giving the step shape and style.  This is not accomplished by making independent decisions about what step should be done or what direction should be taken.  It is accomplished by keeping a good connection, responding to the movements of the partner, and maximizing the opportunities your partner gives you.

When each partner does his or her job, it supports the other partner and the partnership.  The dancing flows, creativity grows, steps are more powerful and shapes are stronger.  Yes, sometimes one partner or the other might go further than expected and the couple may get off balance, but they regroup and use the opportunity to find the right balance for them as a team.  Mutual trust and individual confidence are the keys to success.  Along with hours and hours and hours of practice, but that’s another topic!

dancersTake a look at this picture and try to imagine how either of these dancers could achieve this line without the other.

Think about this dynamic in terms of the nonprofit board and staff.  The board determines the mission and vision of the nonprofit.  They are responsible for good communication with the CEO and staff (the connection), to ensure programs and services are aligned with the mission (staying aligned with center), and for giving the staff the room and opportunity to do their work by effectively delegating the running of the business (giving room and permission).

The staff is responsible for keeping the board informed of successes and challenges (the connection), responding to the strategic direction set by the board (the partner’s movements), and maximizing the opportunities presented to the organization for its programs and services.

When the board and staff each do their jobs, and each allow the other to do their jobs, the organization is strong and dynamic, powerful, and successful.  Yes, sometimes the relationship may get off balance, but with a good connection, staff and board can regroup and regain focus.  Mutual trust and individual confidence are the keys to success.

Remember your role, have confidence in your partner, and maximize your opportunities, for the good of the whole.

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Corporate Basics

Corporate shareholders are the owners of the company, their most important function being to elect the board of directors.  The board has overall responsibility for the company’s business, and elects the company’s officers.  Officers manage the day to day business of the company.

Directors must act in the best interests of the company and its shareholders.  They are fiduciaries, a relationship based on trust and confidence.  The board should not be so large as to be unwieldy, and should preferably be an odd number to avoid deadlocks. The board meets annually, but should meet more frequently to provide advice and guidance to the company.

Certain corporate actions require shareholder approval.  The corporation generally holds an annual shareholder meeting, but can hold special meetings as needed.  In addition, shareholders can approve corporate actions by their unanimous consent without a meeting.

A corporation’s minute book holds important corporate records, and should be kept current.  For instance, the minute book holds the company’s articles of incorporation, bylaws, and minutes and written consents of meetings or other actions of the company’s directors and shareholders.

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Duties of Non-Profit Board Members — Duty of Compliance

In addition to the nonprofit board members’ duties of care and loyalty, directors also have a duty of compliance with laws and legal standards. The duty of compliance has often been referred to as the duty of obedience, but “compliance” is the more common term in modern governance discussions. Obviously, the duty to comply with legal standards requires the board to ensure the organization is acting within the scope of relevant law when operating its programs.  The duty to comply with legal standards also includes the following, sometimes overlooked, responsibilities as well:

Filing tax returns accurately and on time.  In most cases, a staff member or outside firm will prepare necessary tax returns.  It is the responsibility of the board, or a delegated committee of the board, to review and approve those returns.  Ensuring procedures are in place in the organization to keep complete and accurate financial records and to monitor due dates is part of the compliance responsibility.

Registation and annual filings with state attorneys general.  Many states, including Ohio, require annual reports on fundraising activities or financial performance.  Often these reports will be required in each state in which the organization operates or solicits contributions.

Registrations for planned giving compliance.  Many states, especially New York, California, and Florida, require additional registrations and/or reports from organizations soliciting planned gifts in the states.  If you actively solicit planned gifts, especially gift annuities or charitable trusts, make sure you check on any specific state law requirements for registration, reporting, disclosure or documentation.

Lobbying activities.  Most nonprofit organizations achieve their tax-exempt status under IRC Section 501(c)(3), which specifically prohibits such organizations from engaging in most lobbying activities.  Since political alliances are often vital relationships for an organization, it is very important to have policies in place to ensure board members and staff do not engage in any activities that would be considered prohibited lobbying activities when they are acting as representatives of the nonprofit.

complianceIn most organizations, staff members will have day-to-day responsibility for legal compliance.  Sometimes, in smaller organizations, board members themselves may assume a hands-on roll.  In either case, the ultimate responsibility to ensure compliance rests with the board.  Governance best practices suggest that all compliance activities and due dates be reviewed annually, along with specific assignments for responsibility for any required tasks.

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Duties of Non-Profit Board Members — Duty to Manage Accounts

In this blog series, we’ve already explored a non-profit board member’s duties of care, loyalty and compliance.  Now we’ll look at the duty to manage accounts.

Directors of non-profit organizations have the duty to be good stewards of the organization’s assets, and the responsibility to ensure that adequate financial resources are available to accomplish the organization’s mission.  Keep in mind, though, that ensuring financial accountability doesn’t just involve reviewing financial statements.  The duty to manage accounts requires the board to:

Establish a budget.  Creating the organization’s budget and monitoring performance relative to that budget will help the board evaluate what programs the organization should offer to most efficiently promote its charitable purpose.

finsstmtsMonitor investments.  It is important to regularly review investment statements and understand the information presented.  Investment policies should reflect a risk tolerance appropriate for the organization, and should take into account necessary spending policies.

Retain records of all income and expenses.  The IRS requires organizations to be able to document all information presented in the annual Form 990 filing.  The board should ensure good records retention policies and procedures are in place. Oversee fundraising.  The board has the duty to promote the organization’s financial sustainability by ensuring there are adequate sources of support.  Director’s own financial support is a very important part of a director’s service on a board, but interestingly, there is no legal duty to fundraise or contribute.

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Duties of Non-Profit Board Members — Standard of Accountability

In previous posts, we examined the legal duties of non-profit board members — the duties of care, loyalty, compliance, and management of accounts.  Given these duties, exactly what is the standard of care required?

In Ohio, the standard of care as a matter of state law.  Section 1702.30 of the Ohio Revised Code states:

“(B) A director shall perform the duties of a director, including the duties as a member of any committee of the directors upon which the director may serve, in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.”  O.R.C. 1702.30(B).

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Directors are entitled to rely on outside information from reasonable and reliable sources.  For example, directors may rely on investment reports from the organization’s investment managers, financial reports from its accountants, legal advice from its attorneys, etc.  Directors are also entitled to rely on information and recommendations presented by committees.