Best Practices in Nonprofit
Corporate Governance
Elaine Waterhouse Wilson
Quarles & Brady LLP
Elaine.Wilson@quarles.com
(312) 715 5141
Governing Law and Principles
• What determines good corporate governance?
– Your state of incorporation's nonprofit corporation code sets the basic
standard
• Some provisions can be varied;
• Some are a floor that can be increased but not decreased; but
• Others cannot be varied at all!
– Other state laws
• Illinois Charitable Trust Act
• Illinois Charitable Solicitation Act
– Federal law
• Tax law
• Sarbanes-Oxley
– Best practices in the sector
Best Practices
• Definition:
A best practice is a technique or methodology that, through
experience and research, has proven to reliably lead to a desired
result. A commitment to using the best practices in any field is a
commitment to using all the knowledge and technology at one's
disposal to ensure success.
Source: www.SearchSoftwareTechnology.com
• Sources:
– Industry Publications and Press
– Tax forms
– Legislation
– Experience
The Purple Book
• In Illinois, one of the best collections of "best
practices" in nonprofit corporate governance is
the booklet "Illinois Nonprofit Principles and Best
Practices" published by the Donors Forum
(known as the Purple Book).
• The Purple Book lists ten principles of good
governance, followed by a discussion of specific
issues and examples.
Principle 1 - Mission
• The organization has a clearly stated
charitable or educational mission,
approved by the governing body, in pursuit
of the public good.
– Requires the organization to state its purpose
in the mission
– Ensure that the mission is responsive to the
organization's constituencies
Your Mission
• What is your corporate purpose?
• Do you have a mission statement? Where
is it stated?
Remember, it will be reported on the new
Form 990!
• When was it approved? How often do you
review it?
Principle 2 – Roles &
Responsibilities
• The roles, responsibilities, selection, and tenure
of the governing body are clearly stated in the
organization's governing and policy documents
and understood by the governing body
members.
– Governing body size, election, term
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Committee structure and power
Meeting frequency and preparation
Communication and review
CEO compensation
Your Governance Structure
•
Board of Directors
– Directors and officers are different positions – but one person can wear both
hats.
– Meetings and Action by the Board: Board action can be taken at a duly called
meeting OR by informal action.
• Attendance at a board meeting must by communications technology that allows
simultaneous communication. See 805 ILCS 105/108.15(c).
• Illinois law does not authorize voting at a directors meeting via email!
• Informal action requires Board actions to be taken informally by unanimous written
consent of all of the Directors. See 805 ILCS 105/108.45.
• Illinois law does recognize electronic signatures on unanimous written consents
– How often and preparation?
• Regularly scheduled
• Board book and contents
• Written minutes and resolutions
Your Governance Structure
•
Committees
– Except to the extent that the members are required to vote, the power and duty
to run the organization resides in the Board of Directors
– The Board may choose to delegate some of its authority to a committee if
authorized by the Articles or Bylaws.
• A committee that has the authority of the Board must have at least two directors; must
be made up of a majority of directors (exception for nominating-type committees); and
must serve at the pleasure of the Board. See 805 ILCS 105/108.40.
• The scope of the delegation is set out in the Bylaws or in a resolution of the Board.
• A committee may not have the power to dissolve; approve or recommend member
actions in certain circumstances; to fill vacancies; to elect or remove any officer or
director; to amend the articles and bylaws; to merge; or to contradict a full board action.
– Any committee that has not been delegated Board authority is advisory only; it
may have any membership but its actions must be adopted by the full Board.
– You retain the obligation to oversee any delegation of authority, whether to a
committee or an agent.
Your Governance Structure
• Officers
– Officers are named in your Bylaws: usually,
President, President-Elect, Secretary, and Treasurer
– Authority of the officers:
• All officers and agents of the corporation, as between
themselves and the corporation, shall have such express
authority and perform such duties in the management of the
property and affairs of the corporation as may be provided in
the bylaws, or may be determined by resolution of the board
of directors not inconsistent with the bylaws and such
imposed authority as recognized by the common law from
time to time. See 805 ILCS 105/108.50(b).
Principle 3 - Knowledge
• The governing body ensures that its members
are competent and knowledgeable, and it seeks
diverse points of view and experience as
needed to provide credible and effective
oversight of all aspects of the organization's
work.
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Needed skill sets
Board training
Providing information and viewpoints
Consulting experts
Principle 4 - Assessment
• The governing body regularly assesses
the organization's mission and the
effectiveness of the organization and its
leadership in achieving it.
– Self-evaluation
– Setting long- and short- term objectives
– Review mission and programs
– Solicit and act on feedback
Your Knowledge and Assessment
• Do you have a list of desired skill sets for the Board?
– How do you communicate those in the nominations process?
• Do you provide for Board training/retreats/strategic planning?
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Usually, new board member orientation
Annual board retreat for training and strategic planning
Opportunities for self-evaluation and goal setting
Common strategic planning period – 3 to 5 years
• How often do you consult experts?
– With regard to articles and bylaw revisions, contact your attorney for at
least a review
– Attorney attendance at meetings? Sometimes….
Principle 5 – Code of Ethics
• The full membership of the governing body is
responsible to the organization and each
member acts at all times in an ethical manner
and in the best interest of the organization and
the public
– Written code of ethics
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Conflict of interest policy
Confidentiality and privacy issues
Whistleblower policy
Document retention policy
Your Code of Ethics
• Do you have one? What is in it?
– Conflict of Interest Policy
• Does it address non-financial conflicts?
• Does it define a potential conflict?
• IRS questions on the Form 990, Form 1023
– Document Retention and Whistleblower
• Addresses Sarbanes-Oxley concerns
• IRS questions on the Form 990
– Other Policies
• Confidentiality and privacy
• Acceptance of gifts (lunches, tickets, etc.)
• Individual political and lobbying activity
Principle 6 - Compliance
• The governing body and staff know about and
comply with all federal, state, and local laws,
regulations and fiduciary responsibilities
– Education regarding tax and other legal requirements
– Seeking professional advice
– Financial management policies
– Review of Forms 990 and 990-T
– Risk Management
Your Compliance
•
Your fiduciary responsibilities:
– A director has a duty of care
• Requires you to know and follow the provisions of the organization's governing
documents
• Requires you to be involved, attend meetings, and educated and ask questions
• Requires you to exercise independent judgment
• Requires you to oversee your delegations to officers, agents and committees
• Requires you to contact experts when you need help
– A director has as duty of loyalty
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Requires you to act in good faith in the best interest of the corporation
Requires you to identify and disclose conflicts of interest
Requires you not to usurp corporate opportunities
Requires you to maintain confidentiality
Requires you to respect donor intent
Principle 7 - Oversight
• The governing body exercise active oversight of
the financial affairs of the organization and sets
policies to ensure that the organization's
resources are used appropriately in furtherance
of the organization's mission
– Budget and cash reserves
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Reasonable and necessary expenses
Compensation procedures
Accurate financial information provided and reviewed
Audit statements and audit committees
Your Oversight
• What is your budgeting process?
• How does it align with your strategic plan?
• What is your process for approval of expenditures?
• Do you have a budget or audit committee?
• How often do you receive financial information and in
what format?
• Do you receive the Form 990 prior to filing? Do you
review it?
– New IRS question on the Form 990
Principle 8 - Transparency
• The organization makes information about its
mission, program activities, and finances
available to the public and communicates in a
clear and timely manner with those who request
information.
– Ensure all information is complete and accurate
– Make certain information available to the public
– Provide contact information
Your Transparency
• Are your bylaws on your website?
– Not required by law; often made available
• Are your articles on your website?
– Is publicly available
• Is your tax status obvious on your website?
– Form 1023 and Form 990 must be produced if requested per IRS rules
– Posting your tax status and determination letter can help donors
• Are your annual report and financials on your website?
– Not required by law; often made available
• Are your internal policies on your website?
– Not required by law; are sometimes made available
Principle 9 - Fundraising
• Organizations that raise funds from the public or
from donor institutions maintain solicitation
policies that reflect the organization's mission
and use of solicited funds
– Appropriate disclosures and materials
– Honor statements in fundraising appeals and donor
intent
– Appropriate use of professional fundraisers
– Compliance with laws regarding solicitation
Fundraising Issues
• Use caution when describing the use of funds (purpose
of funds, use of income)
• Know the solicitation reporting requirements for your
jurisdiction and others
– Illinois requirements
– Multi-state filing requirements
• Oversee professional solicitors appropriately
– State law registration
• Honor donor intent
– Keep good records!
– UPMIFA, cy pres, and other ways to amend donor restrictions
Principle 10 – Grant Making
• Grant making organizations establish, follow,
and clearly communicate processes for
receiving, reviewing, and acting on grant
applications and for monitoring and evaluating
grants made
– Make grant areas and criteria readily available
– Communicate with grantees regarding policies and
changes
– Clearly explain reporting and evaluation procedures
Grant Making
• Create and publish grant criteria
• Create a check sheet for evaluating criteria
• Use a grant agreement!
– Even for simple grants
– Provide for return of misused funds
– Provide clarity on use of funds and income therefrom
– Describe reporting
• Grants are a relationship, not just a check!