April 12, 2021

What are Best Practices for a Not-for-Profit?

By Megan Budd, Director, Assurance Services

What are Best Practices for a Not-for-Profit? Nonprofit & Social Sector

We often hear the term “best practices” for a not-for-profit, but what does that truly mean? There is no one definition of best practices, but there are legal obligations which can vary by state – ethical standards and policies and practices that hold governance and management accountable and transparent. A not-for-profit has a responsibility not just to the population it serves but to its donors, so ensuring best practices are being followed can benefit the organization two-fold. Your local state association can be a great source for in-person educational programs to understand specific state requirements.

Funding and staffing constraints can make adhering to effective policies and procedures difficult for a not-for-profit. Too often, recruiting and retaining board members can be a significant issue. Not-for-profits should focus on securing governance that can fill certain areas of needed expertise such as financial, legal or programmatic. Management and governance must have clearly defined roles, responsibilities and authority, which should be outlined in formal policies and procedures. Board orientation and training should include organization-specific matters focusing on the mission of the organization, as well as education about responsibilities of the board including fiduciary, legal liability, conflicts of interest and independence, financial, tax and regulatory matters, risk management and public relations. Strong governance practices also includes maintaining minutes of all board and committee meetings.

Thanks to revised questions on Form 990, there has been an increased focus on not-for-profits having certain formal policies in writing. Some of these top polices include the following:

Conflict of Interest Policy

This policy will assist in enforcing the duties of employees and governance through disclosure where the director, officer or employee reports any interest in a related individual or entity, or a vendor of goods or services; of course, this includes disclosing whether the individual is a recipient of goods or services. If such interest exists, the individual should recuse him- or herself from any decisions specific to this interest. Governance should complete a conflict of interest form on an annual basis.

Code of Ethics / Whistle-Blower Policies

The revised Form 990 asks if the organization has a formal whistle-blower policy, which has resulted in many not-for-profits adopting formal written policies. This is often done through a code of ethical conduct policy that encourages reporting unethical or illegal conduct and provides that there will be no retaliation for reporting pursuant to the policy. Many not-for-profits have set up toll-free telephone hotlines that are monitored by an independent outside party to enable and accommodate anonymous reporting.

Compensation Policy

The revised Form 990 asks if the organization is using a procedure for setting compensation, where an independent portion of the board uses comparable compensation data from similar organizations to determine that compensation for officers and key employees is reasonable. Not-for-profits should pay close attention to all elements of compensation in order to ensure compliance with IRS rules; a formal Policy and Compensation Committee assists in this process.

Gift Acceptance

A written gift acceptance policy is critical to ensure governance and employees understand their responsibilities concerning gifts to individual board members, employees or the organization and to provide helpful guidance to prospective donors.

Not-for-profits play a vital role in our society by fulfilling their mission-driven purposes. Effective management and governance go a long way towards ensure accountability and transparency.