Advisory Committee Principles – Principles for Effective Governance

Here are the 11 draft principles falling within the category of "Principles for Effective Governance" developed by the Panel on the Nonprofit Sector’s Advisory Committee on Self-Regulation of the Charitable Sector:

  1. The board of a charitable organization must meet regularly enough to conduct its business and fulfill its duties. The board should hold at least three meetings per year.
  2. The board of a charitable organization should establish and review periodically its size and structure to ensure effective governance and to meet the organization’s goals and objectives. The board should have a minimum of five members.
  3. The board of a charitable organization should include members with the diverse skills, background, expertise, and experience necessary to advance the organization’s ability to fulfill its mission. The board should include or have access to some individuals with financial literacy.
  4. A substantial majority of the board of a public charity should be independent — that is, individuals (1) who are not compensated by the organization as an employee or independent contractor; (2) whose own compensation is not determined by individuals who are compensated by the organization; (3) who do not receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; and (4) who are not related to (as a spouse, sibling, parent or child) or do not reside with any individual described above.
  5. The board must hire, supervise, and evaluate the performance of the chief executive officer of the organization, as well as approve annually and in advance the compensation of the chief executive officer unless there is a multi-year contract in force or there is no change in the compensation except for an inflation or cost-of-living adjustment.
  6. The board of a charitable organization that has paid staff should ensure that the positions of chief executive officer, board chair, and treasurer are held by separate individuals.
  7. The board should establish an effective, systematic process for educating and communicating with board members to ensure that the board carries out its oversight functions and that individual members are aware of their legal and ethical responsibilities.
  8. Board members should evaluate their own performance as a group and as individuals no less frequently than every three years. The board should establish clear policies and procedures on the length of terms and on the removal of board members.
  9. The board must review organizational and governing instruments no less frequently than every three years.
  10. The board should establish or review goals for implementing the organization’s mission on an annual basis and evaluate programs, goals, and activities to be sure they are consistent with the mission no less frequently than every three years.
  11. Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. Charitable organizations that provide compensation to board members must make available to anyone, upon request, relevant information that will assist in evaluations of the reasonableness of such compensation.

Here are some of my observations:

  1. The three meeting per year minimum serves more as a warning to boards that are contemplating meeting less often than a guideline for boards in general.  Many boards may need to meet more often in order to properly govern their organizations and meet their duties.
  2. California law and federal tax law permit a board that consists of one director.  However, any less than three unrelated directors may raise flags with donors and institutional funders.  A minimum of five board members may not be immediately achievable by smaller start-ups, but it is a reasonable requirement for more mature and larger organizations.
  3. All board members should possess some basic financial literacy, at least sufficient to read and understand the basic information provided by the financial statements.  Arguably, a board member would ordinarily be unable to meet his or her fiduciary duties if such board member could not tell from the financials that the organization was in severe financial difficulty or that vast amounts of the organization’s monies were missing and unaccounted for.  If board members lack such financial competency, it would be wise to bring in a consultant to train the board on the basics.
  4. California law provides that only a minority of directors of a California nonprofit public benefit corporation may be "interested directors" (e.g., compensated employee or independent contractor, or relative of such individual).  The rationale for this requirement is to preserve the independent judgment of the majority of the board.  Such restriction does not apply to nonprofit religious corporations.
  5. While a board can delegate management of day-to-day activities to an executive director (CEO), it cannot delegate oversight.  Accordingly, evaluation of the executive director should be treated as a necessary part of proper governance.  California law requires approval of the CEO’s and CFO’s compensation when such individuals are first hired, when their terms are renewed or extended, and when their compensation is modified (except if the modification is consistent with a modification made for substantially all staff members — e.g., a cost-of-living-adjustment).
  6. California law provides that the president or chairman of the board may not concurrently serve as secretary or CFO.  Principle 6 additionally provides that the paid CEO (executive director) should not serve as chairman of the board.  If the CEO is President, then the organization should have a separate chairman of the board.
  7. Board members are expected to exercise due care, including reasonable inquiry, in carrying out their duties.  This makes orientations and periodic training sessions a must. Board members must understand their legal duties, exposures to liability and ways to minimize such exposures, all in the context of the organization’s position and planned direction.
  8. Boards should evaluate their strengths and weaknesses periodically and, of course, act on such findings.  It may be beneficial to have an automatic removal provision for absentee board members to help avoid some of the political difficulties of voting to remove such a board member.
  9. Boards should absolutely review their bylaws at least every three years.
  10. Boards are responsible for taking steps to ensure that the organization is furthering its charitable purposes in an effective and efficient manner.  Accordingly, boards should have some measure of how well the organization is furthering its charitable purposes.  Additionally, boards should review their organizational, governance, and exemption-related documents whenever they engage in a new activity or change direction.
  11. Boards that compensate their members for board service would generally be wise to consult with an attorney, if the compensation is more than just a nominal sum.

You can view the Advisory Committee’s Draft Principles on Effective Governance here.