Independent Sector’s Principles for Good Governance

The phrase Own It in magazine letters on a cork notice board

The legal duties of a board member go beyond ensuring that the organization complies with applicable law. A board member must act with reasonable care and good faith in the best interests of the organization. The best interests of a 501(3)(3) organization are related to its performance of its charitable, educational, religious or other qualifying exempt purpose. Accordingly, the board should take reasonable steps to position the organization to be able to pursue its exempt purpose effectively and efficiently. Independent Sector’s Principles for Good Governance and Ethical Practice is a valuable resource for boards to consider in fulfilling its responsibilities.

The Principles for Good Governance and Ethical Practice outlines 33 principles of sound practice for charitable organizations and foundations related to legal compliance and public disclosure, effective governance, financial oversight, and responsible fundraising. The Principles should be considered by every charitable organization as a guide for strengthening its effectiveness and accountability. The Principles were developed by the Panel on the Nonprofit Sector in 2007 and updated in 2015 to reflect new circumstances in which the charitable sector functions, and new relationships within and between the sectors.

A very abbreviated summary of the principles follows:

Legal Compliance and Public Disclosures

  • Comply with all applicable laws
  • Adopt a code of ethics
  • Adopt conflict of interest policies and procedures
  • Establish and implement a whistleblower policy
  • Establish and implement a document and data retention policy
  • Make information about the organization’s operations, including its governance, finances, programs, and activities, widely available to the public

Effective Governance

  • Review and approve the organization’s mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies
  • Meet regularly enough to conduct the organization’s business and fulfill its duties
  • Establish and periodically review the board’s own size and structure
  • Include members with diverse backgrounds
  • Maintain a board composed of a substantial majority (at least 2/3rds) of independent members
  • Hire, oversee and annually evaluate the executive
  • Ensure that the paid executive (if any), board chair, and treasurer are positions all held by different individuals
  • Establish an effective, systemic process for educating and communicating with the board
  • Evaluate the board
  • Establish the length of terms and appropriate consecutive term limits
  • Review governing and organizational documents at least every 5 years
  • Serve without compensation or with compensation, but only after using appropriate comparability data and full disclosure

Strong Financial Oversight

  • Keep complete, current, and accurate financial records and ensure strong financial controls; have financials audited or reviewed annually
  • Institute an investment policy
  • Do not provide loans to directors, officers, or trustees
  • Spend a significant amount of the organization’s annual budget on programs that pursue its mission while ensuring that it has sufficient administrative and fundraising capacity to deliver those programs responsibly and effectively
  • Establish an expense reimbursement policy
  • Do not pay or reimburse for travel expenses of a spouse or other companion

Responsible Fundraising

  • Ensure solicitation and other public communication materials clearly identify the organization and are accurate and truthful
  • Use contributions consistent with donor’s express intent or the applicable solicitation materials
  • Provide donors with sufficient acknowledgments
  • Adopt an appropriate gift acceptance policy
  • Provide appropriate training to, and supervision of, the organization’s solicitors
  • Do not compensate fundraisers based on a commission or percentage of the amount raised
  • Respect the privacy of donors (except where disclosure is required by law)

The more the nonprofit sector promotes and succeeds at effective self-regulation, the less likely it will face new legislation that addresses a problem with a tiny segment of the sector but creates burdensome and restrictive requirements that apply to a much, much broader group (e.g., all charities). While the term “best practice” may similarly be overbroad, the principles of good practice here are a worthy discussion point for all nonprofit boards.