In Part I of this series, I discussed the individuals that hold fiduciary responsibility within an organization. In this article, I will address the documents that guide and direct an organization in the furtherance of its mission and how these documents may be used by the Board or an organization to guide its activities and decisions.
Governing documents are the documents that are drafted by the founders of an organization as it is formed. At a minimum these will include the Articles of Incorporation and the Bylaws. These are typically required by the incorporating state to open a corporation, whether it is organized as a for-profit or a nonprofit corporation.
The Articles of Incorporation establish the purpose of the organization, its initial directors, how many directors are to be maintained on the organization’s board and how the assets will be distributed upon dissolution. The latter element of the Articles is essential as these documents are reviewed by the IRS in determining whether an organization qualifies for tax exemption. For an organization to be considered tax-exempt, its assets, even upon termination, must further exempt purposes.
In addition to the Articles of Incorporation, an organization’s Bylaws provide more detail into the specific operations of an organization, its functions and how they are to be conducted. The main items addressed in the Bylaws are board composition, including minimum and maximum number of required directors or trustees, officer’s titles, terms, termination proceedings, and any committees, voting procedures, a general statement of how conflicts of interest will be handled, and how amendments to the Bylaws may be made. Bylaws may also address how Board meetings may or may not be conducted and the number of meetings required per year.
As these governing documents are the general operating “guidelines” for the organization, they should be reviewed annually by each board member. This helps each member understand what is not only expected of the member, but also what is expected of the board as a whole. This can help avoid potential departures from the organization’s structural guidelines.
Each bylaw is important to follow in order to establish the Board’s intent to accomplish the purposes of the organization. This may be evidence of how seriously the Board takes its fiduciary responsibility. For example, the number of board meetings required should be followed closely to show due care by the Board’s members to participate in the management oversight of the organization. This is one factor that is scrutinized when there appears to be a breach of fiduciary responsibility within an organization. In addition, term limits are established to ensure that turnover happens so that no one person exhibits undue authority over the organization. If these limits set in the governing documents are superseded, it reflects poorly on the Board’s responsibility unless the departure is clearly addressed in the minutes to the Board meeting in which it is addressed or the Bylaws are amended.
Conflict of Interest Policy
Every organization granted exempt status is required by the IRS to have a Conflict of Interest Policy that meets IRS standards for exempt organizations. On the Form 990 long form, there are specific questions pertaining to whether your organization has a conflict of interest policy and whether the policy is “regularly and consistently” monitored to enforce compliance.  It also asks for specific examples of how this is accomplished.
In essence, the Conflict of Interest Policy ensures that no one that sits on the Board of an organization can unduly influence the organization to hire, pay or divert tax-exempt funds by virtue of their influence over the organization. Typically, if a relationship is noted between the board member and a person or entity that a tax-exempt organization may be contracting, the board member must not be part of the vote. In some cases, the board member may not be able to participate in the deliberation. Most corporations also have a conflict of interest policy to protect the organization from unwise financial decisions due to a board member’s influence.
The Board needs to be adhere to this policy consistently, especially due to the tax-exempt nature of the assets that an exempt organization board deals with. This policy is crucial to ensure that no private inurement or private benefit occurs. This is a fancy way of saying that the tax-exempt, or public, assets do not go into a private individual’s pocket. The Conflict of Interest Policy, if adhered to appropriately, will be an organization’s front line defense to maintaining its tax-exemption, but this policy alone cannot keep an organization from failing to protect public assets. The diligence of its managers and directors is of first and foremost importance.
Other Policies to Consider
The Governing documents and Conflict of Interest Policy are universal documents, virtually required for every tax exempt institution. Other policies, however, may be just as crucial to the conduct of the organization and its management and board. For example, if a Board determines that it needs a Finance Committee within its Board, it would be prudent to establish a list of policies and procedures for the committee to follow prior to making recommendations to the Board or to establish review procedures for the financial statements before they go to the Board for approval. If there is a compensation committee, that committee should also have policies and procedures to follow when looking at compensation packages, either for contractors or potential employees. First of all, such policies assist in consistency of the procedures followed by the committee as turnover occurs and the people who begin a committee will not, and should not, remain on the same committee.
Smaller organizations may not have enough board members to comprise a committee, but it would still be prudent to have policies for the Board and management to address procedures to follow when approving financials, addressing compensation, looking at technology and security risk, as well as many other possible business operation issues. It is also helpful for key officers and directors to have policies and procedures that help them navigate their role within the organization and understand their responsibilities of oversight.
Reviewing Organizational Documents and Policies
Each new member to the Board should be given, at a minimum, a copy of the governing documents and the conflict of interest policy. Any other policies that pertain to their role or that would help their knowledge of the organization should also be provided to the individual. These should be reviewed a minimum of once a year and referred to as questions arise in board proceeding. These documents and policies are, after all, there to be followed, not just a “one and done” deal. They are breathing documents, changing with the organization as its needs change and growth opportunities arise.
Once the Conflict of Interest Policy has been reviewed by each new board member, potential conflicts should be reported. Most boards require a written disclosure and declaration of these conflicts once a year for all board members, but board members should also report conflicts as they arise within course of the year. In addition to reporting conflicts, it may be beneficial to receive assurance that the governing documents have been reviewed by each board member. Requiring attendance at the meetings and establishing those dates ahead of time is also helpful.
In summary, the Board and its management must remain aware of all governing documents and policies that pertain to their roles within the company. At a minimum these should be reviewed annually, as these documents help preserve the integrity of the organization and its tax exempt assets. Although this practice cannot prevent malpractice, it certainly will avoid mistakes due to ignorance of the purpose and specific procedures specified by the organization. In the next article in this series, I will address board composition and measuring board effectiveness.
 Form 990, Part VI, Section B, Question 12c.