Heading into the new year requires an important look back

As the new year begins, it is incumbent on all boards to step back, take a critical look and assess their structure, composition, committee charters and past performance to determine whether the board is prepared for the current challenges and risks associated with its organization’s strategic plans.

For any organization to be successful it must commit to improvement. To improve, an organization must look at its current practices and make changes where necessary. This includes changes to the board’s composition and practices. While some boards may be instilling new members this year through election or to fill a vacancy, the majority of the directors on your board today constitute the team that will lead your organization over the next year. To get the most out of this team, your organization should consider the following items that relate to the board’s structure and certain industry trends that many boards may need to address in 2012.

Board Structure and Composition Matters

Annual review of the roles and responsibilities of board committees and committee charters

All organizations need to review their committee charters, annually at minimum, to ensure that such committees have the requisite authority necessary to complete their delegated tasks and also to ensure that such committees do not have authority greater than what the full board desires to grant. Committee charters are often the most ignored governing document for any organization. The charter of any committee should be discussed, if not negotiated, annually between the directors who are on the committee and the remaining directors who will rely on the committee.

A charter not only protects non-committee members from liability but also imposes that liability on the committee members. For directors, state law allows them to rely upon a committee of directors of which they are not members. However, a director may rely upon a committee only for matters within the committee’s designated authority; the committee has a legal duty of care to carry out that authority as an ordinarily prudent person in a like position would do under similar circumstances.

The committee also has a legal duty of loyalty to carry out that authority when it is only in, and not opposed to, the best interest of the organization. Thus, it is imperative that the authority of a specific committee is properly and clearly designated in its charter.

Best practices audit

Most organizations, either by choice or regulation, have their financial statements audited on an annual basis. However, very few conduct an audit, either formal or informal, of its corporate governance practices. An annual audit of governance practices goes a long way in creating a productive board.

Board Evaluations/Individual Director Evaluations

“If you want one year of prosperity,
grow grain
If you want ten years of prosperity,
grow trees
If you want one hundred years of prosperity,
grow people.”

Boards must strive for excellence in their corporate governance and not just adhere to minimum standards prescribed by law. This requires a goal of continuous improvement. Similar to evaluating the organization’s chief executive officer and management for the organization’s performance, the board must evaluate itself to constantly improve. A yearly board evaluation will allow an organization to:

• Check progress against mission and goals;
• Give directors a meaningful measure of accountability;
• Allow for a check of strengths and weaknesses;
• Emphasize the accomplishments of the board;
• Provide a yardstick with which the goals of the coming year can be measured;
• Encourage a teamwork approach to decision making; and
• Give a feeling of accomplishment.

Board Composition/Succession Planning is critical to the life of any organization. As such, one of a board’s most important responsibilities is its succession of management. A good succession plan helps to prevent staleness on the board. Preventing staleness or “institutionalization” of thought on the board is in the best interest of the company. However, adding directors with fresh or non-institutional thoughts comes with a price, whether accomplished through traditional approaches such as term limits or age restrictions or by involving the board in making itself an “expertise” board. Getting your board to buy into a succession plan helps create a multi-generational board that is future-oriented and prepared for emergency absences.

CEO succession

Boards need to consider a succession plan for the key management of the organization. This is especially true in the nonprofit community. Many nonprofits are known by the image and strength of their management in the community and some nonprofit organizations have become synonymous with their executive director/CEO in the eyes of the community.

For example, in the for-profit world Steve Jobs was Apple and Apple was Steve Jobs. A few years ago when Steve Jobs took his first leave of absence for an undisclosed reason and the board did not have a succession plan in place, the negative reaction was significant and was evidenced by a sharp decline in Apple’s stock price.

Because of the potential questioning by the community if an executive director or CEO voluntarily leaves the organization, or becomes ill or unable to perform their functions, the board needs to have a plan in place – even if only to provide temporary leadership and quell any fears or rumors in the community. Otherwise the community and funders may question whether to continue funding an organization that is not prepared to act in the absence of the executive director. The community may question whether its donated funds will be well managed. These are both issues that a nonprofit organization does not want to face. Even though it seems like an issue that can be put off, all organizations must be prepared for the unthinkable.

Board education/training

“A board’s effectiveness depends on the competency and commitment of its individual members, their understanding of the role of a fiduciary and their ability to work together as a group [including] an understanding of the fiduciary role and the basic principles that position directors to fulfill their responsibilities of care, loyalty, and NACD Key Agreed Principles. Boards will be measured by their least common denominator, so it is important that all members are knowledgeable not only with the policies and governance of the organization but are also educated on how to be better directors. Such education sessions can be reserved for one or two day board retreats or as part of a board’s regularly scheduled meetings. Either way, it is important that all boards know what it means to be a board and how to fulfill their duties as board members.

Commitment to continuous improvement requires work. Committing to accomplishing any of the above five topics, if not all, will lead to improvement with your board. In turn, such commitment adds to the growth and performance of the board’s organization.

Do not forget conflicts of interest

As a result of the revised Form 990, conflicts of interests have garnered more attention in the nonprofit boardroom. Conflict issues have also been a critical component of state corporation law, which provides that a contract may be void or voidable if the material facts as to a director’s relationship or interest as to the contract, action or transaction are not disclosed and the decision to approve the contract, action or transaction is made by those interested in the matter.

More important is the potential lasting effect of not have a well written and monitored conflict of interest policy. Organizations that do not focus on their conflicts of interest policies and ensure that such policies are followed run the risk of an IRS audit, lasting negative impact in the community, media exposures, loss of key board members and failure to attract new board members. All organizations should ensure they have a proper conflict of interest policy in place and an annual disclosure of potential conflicts by all board members.

Issues of Concern

While we cannot predict all of the issues that your organization will encounter in 2012, two specific issues that all organizations will face this year are the ability of the organization to participate in 2012 election activities and social media.

Lobbying and political activity

The focus of the news cycle for 2012 will be the presidential election, seats that are up for election in Congress, as well as significant state issues up for consideration. While politics often have an impact on the mission of a nonprofit, it is critical to remember the restrictions the IRS has on tax-exempt nonprofits to engage in governmental affairs activities. When your organization is a 501(c)(3) public charity, you must avoid all political campaign activities and keep lobbying within permissible limits. If your organization is a 501(c)(6) trade association, you may engage in limited political campaign activities and may lobby as its primary activity. The board needs to understand the limitations to provide the appropriate oversight function as it relates to the organization’s role in the 2012 election cycle.

Impact of social media on your organization

Social media and online networking are here to stay. Organization leaders must consider the role that these technologies will, or may, play in their organizations’ futures, which is likely a critical one for the nonprofit industry. Due to the increasing role that social media and online networking are playing, organizations must consider the potential pitfalls from utilizing these tools. Organizations must be prepared and understand the risks, which can include intellectual property infringement, privacy issues, discrimination and the general sharing of information by employees or volunteers that could expose an organization to liability.

For instance, if your organization utilizes a “donate” button that allows visitors to a website to contribute to the organization, you are now soliciting to the entire web and likely states where your organization has not registered. Additionally, imagine a situation where one employee takes an innocent photograph of another employee sitting at his or her desk and posts it to Facebook or another social networking page. By itself this may not be an issue, but when the computer screen on that employee’s desk shows private information about employees or donors that can be viewed in plain eyesight or by zooming on the photo, that is another story. The bottom line is that organizations need to address in 2012 – if they have not already – a social media policy that allows the organization to make full use of the benefits of social media while still protecting the organization itself.