The Future Is Now: Board Governance

The second decade of the 21^st century begins on the heels of the first decade marked with significant failures in public and private enterprises. Many of these failures are encroached in the absence of accountability by the governing board of the organizations. These failures highlighted the need for good governance in order to establish integrity vital to the public trust. State Attorney Generals, the Internal Revenue Service, and the United States Department of Treasury each have responded and have expressed their views on the virtue of effective board governance.

The heightened awareness and concern for good governance can lead to reactionary policies and procedures that exceed practical requirements for most organizations. The “cost to benefit” principle is a valid measure of the worthiness of governance policies. Boards should refrain from zealous adoption of all available polices being touted by regulatory and industry authorities. An excellent starting point for evaluating the organization’s board governance is the Ohio Attorney General’s publication “Guide for Charity Board Members” (the Guide) available from the Ohio Attorney General’s website www.OhioAttorneyGeneral.gov.

The Guide describes the legal duties of board membership. These duties are:

• Duty of care
• Duty of loyalty
• Duty of compliance
• Duty to maintain accounts

The Guide states that “trustees can be held individually responsible for breaches of fiduciary standards within a charity.” An accountable governing board will measure itself and its policies relative to these four duties.

Duty of Care

Board members must act with care, diligence, and skill in carrying out their responsibility to the organization. Examples of appropriate actions include:

• Attend all board meetings.
• Actively participate in the discussion and the decision-making process.
• Exercise independent judgment according to the prudent person principle.
• Participate in the risk assessment and strategic planning process.
• Ensure that major commitments of the organization are properly approved.
• Evaluate the quality of financial reporting provided to the board to ensure that effective stewardship is achieved.

Duty of Loyalty

Board members must always act in the best interest of the organization. The interests of the organization must take precedence over personal, family, friends, and business interests of the board member.

An organization should have a written conflicts of interest policy for board members. Annually, each board member should review and provide a written representation indicating their understanding of the policy. In the event transactions with a board member and the organization occur, these should be timely and completely disclosed to the board and documented in the board’s minutes.

Duty of Compliance

Board members must be faithful to ensure the organization is obedient to its purpose and mission. Board members should review and understand the organization’s governing documents as well as laws and regulations that pertain to the organization and its operations. A board member should be familiar with the articles of incorporation, constitution, bylaws, codes of conduct, codes of ethics and any other governing documents. Ideally the board member should have a copy of each document. Board members should understand how management monitors and safeguards the organization’s compliance with the governing documents, laws, and regulations.

Duty to Manage Accounts

Board members are the stewards of the organization’s financial and other resources. The stewardship responsibility is accomplished with effective policies and procedures that assure the organization operates in a fiscally responsible manner. Examples of what a board member should do include:

• Ensure that the financial reporting process records all business and accounting transactions throughout the year – for the entire organization. The financial information should be provided to the board members in a timely manner.
• Review and approve the annual budget. Financial reporting should include comparisons to the budget.
• Ensure that the internal controls are appropriate and operating effectively.
• Ensure board minutes properly record all board discussion and approval for major expenditures and business transactions.
• Evaluate the fundraising goals and processes; make certain that fundraising activities are presented honestly and fairly.
• Prudently invest assets of the organization.

As we enter the new decade the financial pressures on federal, state, and local governments as well as the economic constraints placed on organizations and individuals will be significant drivers on organizational success. Trustees and directors of these organizations make an essential contribution to the success by encouraging these board practices. Truly, the future is now.

We will be pleased to discuss these and other board governance matters with you and your organization. Please contact us for information on how we may help you and your organization.