With only a few lawyers dedicated to charity oversight in each state, it is difficult for state regulators to police the hundreds of thousands of registered nonprofits in the United States. That’s why charity enforcers look for outliers. If they spot an organization that seems sloppy in one area of its work – if, for example, its board of directors is having a messy public squabble – regulators are likely to take a closer look at the entire enterprise.
After canvassing her peers throughout the country, Janet Kleinfelter, a deputy attorney general in Tennessee, came up with a list of 10 practices that nonprofit boards should follow if they want to remain on the good side of charity regulators.
Following the advice, she told attendees at a recent meeting of the National Association of State Charity Officials, can also help nonprofits be sustainable and effective.
Ms. Kleinfelter; along with Vernetta Walker, chief governance officer at Boardsource, and James Joseph, a private lawyer and governance expert, offer these tips.
1. Make sure your board is active and informed.
Too often nonprofit board members ask their friends to fill vacant board seats, even if they’re not qualified. That sets low expectations for how much work will be required, says Ms. Walker. Board members who aren’t plugged in and engaged in the nonprofit’s work often fail to notice when an organization’s efforts start to slip.
To make sure you can find trustees who will be active, don’t talk about filling board vacancies only when they arise. “Talk about it year-round, and build a pipeline” of prospective board members who know about the group’s cause and can dedicate the time needed to do the job, she says.
2. Guard your organization’s assets and data.
Make sure you set policies for prudently investing your nonprofit’s assets and have a data-security plan in place so your donor information is safe.
3. Don’t just avoid conflicts of interest – avoid the appearance of a conflict.
Each state has its own rules governing nonprofit conflict-of-interest policies, says Ms. Walker, but even if you follow them to the letter, something may seem inappropriate to outsiders.
A good rule of thumb for knowing if something will have the appearance of a conflict, she says, is to subject it to the “smell test.” “How would you feel if you read about it in tomorrow’s Washington Post?” she asks. “Would you come out smelling like a rose?”
You don’t need to be too rigid, though, she adds. If a trustee has a financial interest in a group with which the nonprofit does business, the board does not necessarily have to scrap the contract. “You can say yes occasionally,” says Ms. Walker, such as when a vendor with a relationship to a trustee provides a valuable service for a reasonable fee. Remember to disclose all potential conflicts and check with the laws of your state for what is allowed.
4. Don’t just act as a rubber stamp for a powerful executive director.
At board meetings, don’t let the executive director run the show. Set aside some time to talk when she is out of the room, says Mr. Joseph. “I’m shocked by the number of boards that don’t kick the CEO out of the meeting,” he says.
It’s important to keep this in mind throughout an executive’s tenure. Often, Mr. Joseph says, a nonprofit leader will work to gain the board’s trust early on but later slip into bad habits if the board doesn’t exert its authority.
Especially when a foundation leader has a lot of pull, he says, be sure the salary is on par with what other executives in your region are paid for doing similar work. And make sure you have documentation that shows compensation levels at other nonprofits in case regulators question the pay level.
5. Stay true to the nonprofit’s legal charter and by-laws.
Just as they have a fiduciary duty to make sure the nonprofit is fiscally sound, board members have a duty to ensure the organization is true to its founder’s intent. Too often, nonprofits go after grants that are only tangentially related to the group’s work. To avoid mission drift, board members should be intimately familiar with the group’s by-laws, Ms. Kleinfelter says. Board members shouldn’t just be able to recite a mission statement posted to the nonprofit’s website. “Ask your board when they last read the charter,” she says.
6. Squash infighting among board members.
It’s natural for a board to squabble, but keep what happens in the boardroom inside the boardroom, says Ms. Kleinfelter. Arguments that get personal have a tendency to leak out, sometimes into the press, and that can be a sign the nonprofit is off track. “If you don’t resolve the conflicts, we will,” says the Tennessee deputy attorney general.
7. Respect a donor’s intent: Don’t misuse restricted gifts or the nonprofit’s endowment.
To respect donor intent, it is first necessary to assiduously track where the money goes. If making a grant or supporting a program seems to stray from the donor’s intent, and the donor is no longer living, check with the state charity office first to make sure it isn’t at odds with donor restrictions.
“Ask permission beforehand, because you’re not going to get forgiveness afterwards,” says Ms. Kleinfelter.
8. Stay on top of fundraising contracts.
Third-party fundraising contracts are often the first place regulators look to uncover board malfeasance. It is a good idea to take a periodic look at the vendors being used to solicit contributions, Mr. Joseph says. “Make sure you are paying a market rate and that there are no conflicts [of interest],” he says.
9. Keep adequate and timely records.
If a nonprofit isn’t able to provide an accounting of its activities when asked by state regulators, law-enforcement officials are likely to dig in. Keep all of your bookkeeping and governance documents current.
10. If you get a call from a state or federal official, be prompt in your response.
Don’t keep law-enforcement officials waiting.
