What’s the Point of a Nonprofit Board, Anyway?
Here we take an unconventional look at three dimensions of why boards exist: Legal reasons, mission reasons, and political reasons.
Article Highlights:
Exploring the role of the nonprofit board — and how it supports your mission.
Democracy is the worst form of government, said Winston Churchill, except for all the other ones. The same might be said of nonprofit boards. Here we take an unconventional look at three dimensions of why boards exist: Legal reasons, mission reasons, and reasons related to political values.
First, all corporations, whether nonprofit or for-profit, require boards of directors, and these boards have formal responsibilities, so we’ll start with a quick discussion of the nonprofit corporation.
When a group of people sitting around a kitchen table decides to take a more organized approach to realizing a vision for community change or service, they often decide to launch a new nonprofit organization. To give the organization a legal framework, such a group would typically choose to incorporate, that is, to form a corporation. A corporation has the ability to act as a fictitious person: instead of the real individuals involved, it can sign leases, hire staff, and engage in business activity.
A next step is to obtain nonprofit, tax-exempt status for the corporation (at both the federal and state levels). Nonprofit corporations, identified as 501(c)(3) organizations (named after the section in the Internal Revenue Code that describes them), enjoy several important tax advantages.
Nonprofit 501(c)(3) corporations:
- Do not pay corporate income tax on income made by the corporation
- Can accept donations that are then tax deductible to the donor
- Are eligible for foundation and government grants that are only for nonprofits
- Are eligible for the nonprofit bulk mail postage rate
- Are eligible for state and county tax benefits in some areas
Taxes foregone — taxes that the government does not receive due to corporate tax exemption and tax-deductible donations — are estimated to be around $30 billion each year (BoardSource).
The U.S. government has granted these tax advantages to nonprofits for several reasons. Nonprofits provide services to society that will never be profitable, such as care for the poor, that means they will not be provided by the commercial sector. And community nonprofits can often perform important community roles that are less successful when done by government agencies, such as reaching young people with information on sexually transmitted diseases. Finally, nonprofits may speak out for groups or champion issues that would be ignored by either the commercial or government sectors. For example, civil rights groups, AIDS organizations, and environmental justice advocates play important roles by bringing new issues and perspectives to the attention of the public.
In a nonprofit corporation, there are no such private shareholders as there are in a for-profit corporation. But who is watching over the $30 billion of indirect tax monies, in addition to the donations, contracts, fees, and grants that nonprofits receive? The answer is the very large army of nonprofit board members, broken up into groups of five, ten and twenty, that ensures that the organization’s funds are used for nonprofit purposes, rather than to make the board members or staff members wealthier.
So the underlying legal reasons why nonprofits are required to have boards is to put in place a democratic structure (the board) to hold the organization accountable to the public. Boards do this through financial oversight, through appointing a capable chief staffperson, and through maintaining control of Big Decisions such as merging, closing, or substantial changes to mission.
Mission reasons for boards
Because community nonprofits typically arise from a group of people working on a cause or issue, the board is also a natural formalization of that group. As they volunteer together, the mission-based reasons for boards emerge.
Board members often have a sense of ownership in a nonprofit (because they represent the public/owner). As such, they are the first to volunteer, to donate, to garner support, and to advise. Think about board members you know who work incredibly hard to help their organizations succeed… and then multiply that by hundreds of thousands, even millions. Even if nonprofits were not required to have boards, those organizations that want help from the community and sustainability past the founder, would opt to have boards.
Boards also act as a safety net for the mission. Most of us know boards that have picked up the pieces after a disastrous executive or other big problem. If a small business had a similar problem, it would probably close. But many important nonprofit causes have survived to do good work again because a board has stepped in. Even the boards that have been the most asleep can wake up and work miracles in a crisis (see Board Leads Organization Out of the Ashes in the last issue of Blue Avocado).
Accountability to constituency
Finally, boards of directors represent a political value of accountability to constituency. In a for-profit company, the board appropriately asks, “What should the company be doing to maximize profits?” In a nonprofit organization, the board asks a fundamentally different question: “What does our constituency need us to do?” And in a community nonprofit, the board not only cares about the constituency, board members come from the constituency, know the constituency, are the constituency.Â
This also points to a subtler distinction between community nonprofits on one hand, and on the other hand, for-profit companies that do good and the archetypal sole social entrepreneur. In the latter two instances, individuals and companies may do important and good things for society, but there is no mechanism for holding them accountable or to keep them from changing their minds. In a community nonprofit, the organization consciously holds itself accountable to its constituency, to community and to ideals that are hard-wired into the organization. Many nonprofit leaders and organizations have a strong spirit of social entrepreneurship, and understand that having a strong board is not just a way to get help, but to keep the organization close to its constituents (not just its donors and friends).
With legal, mission, and values-based reasons for having boards, we can reframe some of the questions that we ask ourselves:
As board members, let’s ask ourselves, “What kind of board member does this organization need me to be right now?”
As executives, let’s ask, “What kind of executive director does this board need me to be right now?”
And together let’s ask, “Who is our constituency, and what do they need our organization to do right now? What kind of organization do they need us to be right now?”
See also:
- A 360 Degree Look at the Organization: Seeing Ourselves as Others See Us
- The Board Builds Its Sense of Self: Body Building for Boards
- Boards of All-Volunteer Organizations
- Meaningful Acts of Board-Staff Appreciation
You might also like:
- Insider Newsletters: An Easy Way to Keep Your Board in the Loop and Engaged
- Board Horror Stories: How to Reduce Board Resignations
- Rebuilding Nonprofit Boards: When a New Board Can Be a Fresh Start
- Five Lessons for Creating an Effective (and Accountable) Nonprofit Board
- A Cautionary Tale: Overcoming Governance Nightmares in Nonprofit Organizations
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About the Author
Jan is a former editor of Blue Avocado, former executive director of CompassPoint Nonprofit Services, and has sat in on dozens of budget discussions as a board member of several nonprofits. With Jeanne Bell and Steve Zimmerman, she co-authored Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, which looks at nonprofit business models.
Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. The opinions and views expressed in this article are solely those of the authors. They do not purport to reflect or imply the opinions or views of Blue Avocado, its publisher, or affiliated organizations. Blue Avocado, its publisher, and affiliated organizations are not liable for website visitors’ use of the content on Blue Avocado nor for visitors’ decisions about using the Blue Avocado website.
If, as it states above, "…the underlying legal reasons why nonprofits are required to have boards is to …. to hold the organization accountable to the public," then:
Can we imagine other mechanisms that would work besides having a Board of Directors, that could make this possible? Does every nonprofit really have to have a Board in order to vouchsafe its accountability?
Morrie Warshawski, Consultant
www.warshawski.com
Good article, but the next big question for NPOs is how do you use the board in a constructive and effective way? After you have answered that question, the next one should be how do you avoid conflict between the board, the executive director and the members of the organization? And finally, another important issue is how do you keep the board members active, motivated and willing to continue to make contributions year after year? For me, most nonprofit organizations have no idea how to effectively and peacefully (I might add) make good use of the skills and experience of board members.Incidently, I have served on many boards and have been executive director of several nonprofits so I have experienced boards from both vantage points.
I understand and agree with your point about using the board in the most effective way, but I would encourage all of us to think in terms of encouraging conflict rather than avoiding it, as suppressing conflict is not effective. The question is how to harness conflict and "use" it to encourage innovative thinking for the good of the organization (which some would argue can also get more board members engaged in the process). Of course, this requires trust, mutual respect, and everyone’s commitment to the organization’s mission so that when conflicting opinions and ideas do arise, there can be productive dialogue where everyone remembers they are all working toward the same goal.
Having been a Board member, a staff member and a "consumer" for what non-profts offer, I would like to take gentle issue with the "right now" question.
One organization I was involved with saw things this way:
The Board of Directorss asks: what does this organization need in the long term?
The staff asks: What does this organization need in the short term?
And the client asks what is the organization doing for me now?
If all elements focus on "right now." the organization and espcially the Board, will not be carrying out its responsibilities.
Susan Klee
Non-Profit Board Responsibilities Expand in Times of Economic Stress
In these uncertain economic times, one fact that many nonprofit board members may not be aware of is that if a nonprofit approaches bankruptcy, the board’s responsibility expands to include “all appropriate parties of interest” – including creditors, lease holders, employee benefits and retirement plans, etc. – not just the non-profit itself.
I am not a lawyer (and don’t play one on TV) but I did write a book review about the “Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength” by Ron Mattocks which does a good job of explaining how the board responsibilities expand rather than contract during times of financial distress.
During such times, even non-profits that have a balance sheet that looks strong can be at risk because of “tail-end obligations” that do not appear on current financial statements. One example of this in the book is a non-profit that had a five year lease with no cancellation clause. If they shut down with three years left on the lease, the non-profit is responsible for paying the entire amount.
Regards,
Bill Huddleston
www.cfcfundraising.com
Huddleston Consulting Group
Excellent points, Bill. Thanks for making them. In particular I’m struck by the importance of your comment that the board’s responsibilities expand in times of financial difficulty, whether or not there is a strong executive in place. Jan
Thanks for this article. In describing the difference between a for-profit and a nonprofit organization, I would place more emphasis on a nonprofit’s commitment to its official nonprofit purpose. It’s main purpose is not profit, it is something else, hopefuly some cause for good. This is what makes it different from a commercial business enterprise. A nonprofit Board should act responsibly, mind its budget, not spend more than it takes in and certainly not rely on the hope of increased money coming in during this recession. But with that said, the troops should sally forth and keep recruiting their volunteer energy towards the nonprofit’s goal. I fear that all too often Boards are in danger of going in either of two directions. One is to forget to mind its budget and commit its resources in a way that is unrecoverable by receipts. This Board may also forget to file its Form 990 tax report, violate it’s by-laws and so on. Such an organization may not be long for this world. The other direction may be one in which the Board is such a stickler for form that it begins to lose the excitement of its nonprofit purpose that created the group to begin with. This organization also may not be long for this world and may start to lose its volunteers, the heart and soul of a nonprofit organization. I would propose that a good Board is one with a good budget, by-laws, oversight, an energetic constituency and a deep and abiding commitment to that nonprofit purpose. .Thanks for your analysis and the opportunity to respond.
Stephanie Manning
Berkeley, California
I’d open a non-profit business, get a nice salary and laugh in the face of people paying taxes for their businesses. I think this is the first thing that would make me take this step. Samuel Stanislas, part of Traduceri legalizate team.
This is the way that thieves think. Sorry to hear that dishonesty reigns in this person’s life.
I hope this was said with a good cause in mind, otherwise, it sounds like something a mean, thief would say.
I served on the board of a private school, functioning as a non profit company. I was elected by the shareholders with a majority vote as a director.
I was later appointed Treasuer by the board of directors. I have requested from the chairman of the board at meetings, in writing to the Chairman and in person for financial documents, along with documentation for staff contract and all documents for which the company is financially obligated. After 4 months the documents have not been handed over. I have sent out a resignation letter stating the I resign as the appointed treasurer because I have not been able to perform my duties but not as a duly elected Treasuer. Please advice.
I wanted to clarify that nonprofits don't have shareholders, so if this organization does have shareholders, it is likely not a 501(c)(3) nonprofit. Having said that, if you were treasurer and unable to obtain the financial documents for the organization, it seems that you already have taken the step you need. It does not appear that further advice is needed.