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Board Governance Principles for Nonprofits

Introduction

The staff of the nonprofit foundation has a significant impact on shaping the specific programs under its goals and values. However, the influence of the staff should not be overestimated, as the foundation’s board has the right to approve or not approve the staff’s recommendations (Hofland, 2007). In addition, the board’s decisions must follow certain principles of governance, which stem from the duties of the board and regulate the activities of a nonprofit foundation. The board governance principles serve to prevent the misuse of funds and the trust of the foundation’s donors and are directly influenced by the Internal Revenue Service’s (IRS) Practices of Good Governance.

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Board Governance Duties

The federal government and IRS have gained the power to define the legal responsibilities of nonprofit foundations. In “The Sibley Hospital Case” of 1974, judge Gerhard Gessell found evidence of fiduciary responsibilities breached by the board’s directors (Worth, 2021). After that, Gessell required the board to adopt new policies of governance and articulated standards of board responsibilities (Worth, 2021). Those responsibilities are summarized as the duties of care, loyalty, and obedience (Worth, 2021). The members of nonprofit boards are expected to fulfill those duties.

Care

The duty of care means exercising a diligent approach to monitoring the organization’s finances and the actions of other board members. For example, missing the board meetings, sleeping at them, not reading board materials, or voting without understanding the issues would be classified as a lack of care (Worth, 2021). In addition to discipline, the duty of care includes prudent management of finances, such as investments of endowment assets into a diversified portfolio to minimize risks (Worth, 2021). Overall, the duty of care prevents the board from recklessness, indifference, and miscalculated decisions.

Loyalty

The duty of loyalty means prioritizing the organization’s interests over the business interests of other individuals and companies. As a result, board members cannot use their office in the nonprofit organization to strengthen positions of their own business (Worth, 2021). In addition, the duty of loyalty helps solve any possible conflicts of interest. A conflict of interest might happen when the board member has connections with other partner organizations or tries to employ a relative (Worth, 2021). In those cases, a loyal board member discloses the conflict and puts it for the independent vote of the board.

Obedience

The duty of obedience implies that the board ensures the organization’s compliance with all active laws. Moreover, obedience requires that all board actions also stay consistent with the organization’s mission and governing documents (Worth, 2021). This notion is crucial for accepting grants, as they might have more strings attached than can be justified by the added resources (Zweibel & Golden, 2007). Therefore, the duty of obedience provides compliance with the law and ensures that the nonprofit foundation does not stray from its original mission.

Principles of Effective Governance

In 2018 BoardSource, a nonprofit consulting organization for boards of directors, assembled a panel of experts to define the principles of effective board governance. In the end, the experts formulated twelve principles of governance that power the exceptional boards (Worth, 2021). Those principles generally stem from the duties of care, loyalty, and obedience explored in the previous section. The principles can be separated into three groups related to their respective duty.

Principles Related to Duty of Care

Exceptional boards govern in a constructive partnership that includes cooperation between the chief executive and the board members. That partnership is based on trust, candor, respect, and honest communication (Worth, 2021). Exceptional boards also introduce a culture of inquiry that leads to sound decision-making (Worth, 2021). In addition, exceptional boards sustain resources and promote an ethos of transparency to secure funds and provide accurate information regarding finances and operations (Worth, 2021). Overall, those four principles stem from the duty of care since they ensure a caring attitude among the board members and secure the organization’s financial situation.

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Principles Related to Duty of Loyalty

Exceptional boards adhere to several principles in order to fulfill their duty of loyalty. First of all, their members are independent-minded in their decisions, which means they put the organization’s interests above anybody else’s, including themselves (Worth, 2021). Secondly, exceptional boards invest in intentional board practices to create structures that transcend individuals. Finally, exceptional boards emphasize revitalization and continuous learning, which allows members to remain loyal to the organization (Worth, 2021). Those means make it possible to instill and uphold the duty of loyalty among the board members.

Principles Related to Duty of Obedience

The last group of governing principles is related to the duty of obedience. Most importantly, exceptional boards are mission-driven, which means that they shape and uphold the organization’s mission and ensure the congruence between the core values and decisions taken (Worth, 2021).

Strategic thinking adds an extra layer for ensuring congruence between decisions and values. Compliance with integrity means a full recognition of fiduciary responsibilities and the development of the compliance culture in the organization (Worth, 2021). Finally, orientation on results allows keeping track of advancement towards the organization’s goals. (Worth, 2021). Overall, these governance principles oversee the organization’s obedience to its mission and values, which might be even more challenging to uphold than compliance with the national legislation.

IRS Practices of Good Governance

When it comes to Practices of Good Governance recommended by the IRS, it is possible to notice a clear connection between them and the duties and principles of board governance. Moreover, the IRS’s recommended practices are directly aligned with the duties and principles of the board governance since the latter were introduced after the “The Sibley Hospital Case”. As a result, the federal government, in the shape of the IRS, possesses a strong influence over the governance of nonprofit organizations.

For example, the IRS underscores the importance of the organization’s missions and organizational documents. The article Governance and Related Topics – 501(c)(3) Organizations explicitly states that charities should establish a mission and review it regularly (Internal Revenue Service [IRS], 2008). In addition to that, the IRS demands the presence of documents that provide the framework for an organization’s governance and management (IRS, 2008). These requirements align with the duty of obedience and the board principles stemming from it.

The duty of care is reflected in Section 5 Financial Statements and Form 990 Reporting. In that section, the IRS openly suggests that a charity with substantial assets should obtain an audit from an independent auditor (Internal Revenue Service, 2008). A duty of loyalty is underscored in part B of Section 4 Governance and Management Policies, which encourages charities to adopt and constantly review a written conflict of interest policy (Internal Revenue Service [IRS], 2008). Therefore, the IRS’s Practices of Good Governance have a direct influence over board governance principles.

Conclusion

In 1974, “The Sibley Hospital Case” created a precedent for government regulation of nonprofit organizations. As a result, the still applicable duties of care, loyalty, and obedience have emerged. Those duties provide a basis both for the board governance principles and the IRS’s Practices of Good Governance. Therefore, the principles of board governance are directly influenced by the IRS’s Practices of Good Governance for nonprofit organizations.

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References

Hofland, B. F. (2007). How American foundations plan and make decisions: A guide for the perplexed. Generations, 31(2), 54–59.

Internal Revenue Service. (2008). Governance and related topics – 501(c)(3) organizations. Web.

Worth, M. J. (2021). Nonprofit management: Principles and practices (6th ed.). Sage Publications.

Zweibel, N. R., & Golden, R. L. (2007). What foundations and nonprofits can do to foster productive relationships? Generations, 31(2), 41–46.

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