Best practices in Nonprofit Governance

Governance refers generally to the organizational documents, management structure, and operational and administrative policies that help ensure that an organization is operated consistently with its purposes and in compliance with applicable laws. All nonprofit and tax-exempt organizations should give careful consideration to establishing appropriate governance structures, practices and policies.

The IRS has become increasingly concerned with the governance practices and policies of 501(c)(3) organizations. Certain governance matters must be disclosed to the IRS, upon initial application for tax-exempt status and/ or with the annual tax return.  These documents are made public and may be used by potential donors and others to assess whether an organization is governed appropriately.

Larger organizations that file IRS Form 990 (rather than 990-EZ or 990-N) will be required to respond to a number of governance-related questions beginning in 2009.

While there is no one-size-fits-all standard of governance, each organization should carefully consider the following:

• Mission. Have a clearly articulated mission.
• Organizational documents. Ensure that organizational documents comply with federal tax and state law requirements.
• Governing body. The size and composition of the governing body (board of directors or trustees) should be appropriate for the organization, ensuring attention to financial, legal and other areas while ensuring against inappropriate use of charitable resources.
• Policies. 501(c)(3) organizations should give serious consideration to adopting policies addressing the following:
• Executive compensation policy, ensuring that senior management is compensated reasonably (and not excessively), based on a review of comparable organizations.
• Conflict of interest policy, ensuring that directors and management act solely in the interest of the organization, and without regard to personal interest.
• Investment policy, ensuring appropriate oversight over the investment of charitable funds.
• Fundraising policies, to ensure compliance with applicable federal and state laws.
• Policies regarding documentation of governing board minutes, to ensure contemporaneous documentation of actions taken by an organization's governing body and committees.
• Document retention and destruction policy, setting forth procedures for document retention and destruction in compliance with applicable laws. The retention and destruction of electronic documents should be considered.
• Code of ethics and whistleblower policy, ensuring adherence to ethical standards, and providing procedures for reporting misuse of charitable funds and other ethical violations.
• Joint venture policy, if applicable, to ensure that the organizations tax-exempt status is protected.
• Financial Statements and independent auditors. The IRS encourages organizations with substantial assets to have an annual audit conducted by an independent auditor, even if not required by law. The IRS notes that an audit committee may also be appointed, to select independent auditors and evaluate their independence from management of the organization. Organizations that file form 990 will disclose publicly whether they undergo an independent audit.

  Many private foundations and government funding agencies require audited financial statements. In addition, prospective donors may be more willing to contribute to an organization that has its financial statements audited.

Board review of IRS Form 990

• While board review of Form 990 is not a condition to section 501(c)(3) status, the 2008 Form 990 requires disclosure of whether an organization's board has reviewed the Form 990. Note that this becomes public information.
• Washington State law now requires that all financial reports required to be submitted to the Secretary of State's Office, including the Form 990, be reviewed by the organization's board of directors or committee thereof.

The IRS' governance recommendations can be found at the IRS website.

A more extensive list of governance guidelines has been issued by a nonprofit panel convened by Independent Sector.

All information provided on this website is intended for general informational purposes only and is not intended to provide a comprehensive analysis of any subject. The use of this website does not create an attorney-client relationship. Individual circumstances vary, and laws are subject to change. You should consult an attorney for specific legal advice in connection with any matter.