Designing Governance: At the Intersection of What You Have to Do

In installment #1 of this series, “Exercising Our Power for the Governance We Need”  I encouraged organization leaders to lean into their power and be intentional about creating the board and governance system they need to meet the missions of their organizations. In this installment I want to share some basics about what is required when it comes to nonprofit boards. My point in doing this is to emphasize that there are very few actual state or IRS-driven requirements associated with board structures and practices, and a lot of room for creative and expansive approaches to create the right systems and structures for your organization.

Let’s start by looking at board size.  As I referenced in the last blog, I have sat on boards as small as 2 people and as large as 25 people.  Given the time it takes to manage a board, it is wise to be thoughtful in deciding how many people you need on a board and for what purpose.  So what is the required number of people on a nonprofit board? Contrary to popular belief, the size of your board is only somewhat dictated by the IRS.  In order for a nonprofit to be tax exempt federally, the IRS does require 3 board members - the thinking being that this helps minimize the potential trap of a conflict of interest as the result of actions taken by only one person.  An organization can choose whether it wants federal tax exemption (some states may require it to operate). Depending on what state you are in, your required board size can be as few as 1 person (even though many states with this requirement also encourage nonprofits to have more for the same reason the IRS does. See The Attorney General’s Guide for Charities for California as an example).  So, if your board has 25 people, that is a choice that either you and your board, or some group of people before you have made. And if it is a choice that isn’t working for your organization, you can make a different choice.

All boards have fiduciary responsibilities. Many of you will be familiar with these duties - Duty of Care, Duty of Loyalty, and Duty of Obedience (aka duty to the mission).  Every state’s Attorney General’s office sets expectations (i.e., makes recommendations) for how individually and collectively directors should fulfill these duties.  This includes things like regularly attending board meetings, ensuring and regularly confirming that there is no conflict of interest that could potentially threaten the financial integrity of the organization, overseeing financial audits, ensuring there are financial controls in place, ensuring fair compensation of the CEO or ED, etc. How a board meets these obligations, these duties, is determined by the board and the organization’s leadership. Some boards meet monthly, others quarterly, others annually. Who can be a board member and who attends board meetings is determined by the organization and the board, not by the state.

Another thing I observed during the GEO session I talked about in my last blog, was that participants were conflating “governance” and “the board”. As a result they were giving more power than they needed to to their boards for making governance-related decisions.

Here is a definition of governance provided by a LinkedIn article on the subject:

Organizational governance provides a framework of rules, relationships, systems, and processes that enable authority to be exercised and controlled within an organization. This includes the way the organization and those people that lead it are held accountable.

A board is a structure, a body of people tasked with governance responsibilities. But which specific responsibilities belong to them and to others is set in an organization’s by-laws. And they can vary greatly based on the needs of an organization.  This includes things like policies, financial controls, voting, hiring, etc.  So an organization can make an intentional choice about what role or roles the board will play for the organization and what role or roles others in the organization will play when it comes to governance.  Boards frequently delegate various responsibilities to staff acknowledging they have relevant knowledge and experience for making a given set of organization decisions.  It is also true that an organization can delegate some responsibilities to people who are neither board members or paid staff.  I have sat on boards where committees were made up of a combination of board members and other external stakeholders who brought unique knowledge and experience to the work of the committee. Who is delegated what decision authority should be determined jointly by the board, staff, and other relevant stakeholders to ensure the best interests of the organization are met.

Now, let's talk more about bylaws.  According to Boardsource, “Bylaws are a framework that guide the board’s actions and decisions. They clearly outline rules regarding authority, rights, and processes.” They go on to say, “Bylaws, like other policies, should be reviewed on a regularly scheduled basis in order to reflect how the organization works and remain relevant.” 

Bylaws can be changed.  And though some bylaws make it very difficult for change to happen, it is possible and even advisable, that they be changed as needed to be relevant and aligned with the purpose and values of the organization.  With leadership from the CEO or ED and other organization leaders and stakeholders in partnership with board members, change can happen.  

For those of you looking to make changes to your governance system and board, I hope this gives you a place to start your journey. I don’t mean to make it sound easy - like all organization change, it is an inherently human endeavor, so it will likely be challenging in a variety of ways.  And if you are up for it, and you and your colleagues can link arms in the shared purpose of the organization’s mission, I am certain you can make your way. 

If you are in the early days of a new organization, I strongly encourage you to put in the time and intention into setting the organization up right from the beginning with a mission- aligned governance system, clear board roles and responsibilities, and the right people to fulfill them.  Create by-laws that are robust but that also give you flexibility.  We know the only thing we can count on in life is change. So design your by-laws so your organization can respond to the inevitable changes that come with as little friction as possible.

In the 3rd and final installment of this series, I will share my thoughts on designing the board you want and need by identifying, recruiting, and onboarding the best right people.  In the meantime, if you need someone to talk to boards and/or governance, put some time on my calendar.

Sit with it for a minute…let me know what you think.