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Effective Not-for-Profit Governance Policies

Effective Not-for-Profit Governance Policies

Strong and effective not-for-profit governance policies are crucial for tax-exempt organizations to be successful. Effective governance can provide protection from regulatory intrusion and assist in creating the public’s trust in an organization. Often times this may lead to a greater willingness for public support and services.
In contrast, governance deficiencies can damage an organization by not only impairing the organization’s reputation but also reducing its ability to raise funds and meet its objectives.

A government, corporate and private donors are asking more organizations to provide information with respect to their governance policies and processes to demonstrate that their donated funds are being spent and used for their intended charitable purposes. Organizations must be aware of governance policies, the increasing need for transparency and accountability and the importance of these policies.

Sound governance policies help ensure the organization is meeting their intended charitable purpose, following best practices to comply with IRS regulations and to account for unusual and infrequent transaction. The following is a sample list of commonly seen polices as listed in the June 21, 2013 issue of the Journal of Accountancy, “15 Policies for Sound Not-for-Profit Governance”:

  • Written Code of Ethics. For board members that states the organization’s values and is presented to board members during the orientation process. The code should become part of the organization’s culture rather than a stale document that is easily forgotten.
  • Conflict of Interest Policy. For board members that requires periodic disclosures and consistent monitoring. Some boards read the policy before every meeting, and some have quarterly or semiannual reminders.
  • Whistleblower Policy. This policy should allow everyone associated with the organization to come forward without fear of retaliation. Some organizations use a hotline, while others designate a certain person in the organization to receive and respond to complaints.
  • Document Retention and Destruction Policy. This policy should undergo legal review to make sure it complies with state and federal laws and requires regular compliance monitoring.
  • Expense Reimbursement Policy. This policy should follow Internal Revenue Service (“IRS”) guidelines, requiring documentation and receipts for all purchases over a specific dollar amount, which often is $25. There should be no payment of personal expenses or family travel from expense accounts, and reviewers should be empowered to question any and all expenditures.
  • Gift Acceptance Policy. This policy should also be reviewed by legal counsel. Potential gifts should be screened to determine whether ethics, financial circumstances, or other interests are compromised by the acceptance of the gift. A best practice is to liquidate gifts of securities immediately to avoid losing a portion of the donation if the value of the securities suddenly drops.
  • strong>Form 990 Board Review and Approval Process Policy. A process that allows all board members to review Form 990, Return of Organization Exempt From Income Tax, prior to filing.
  • Board Compensation Policy. Organization board members are generally not compensated, however, in some instances, stipends are paid. If compensation is paid, the review and approval process should be well documented
  • Audit Committee. Best practices call for an independent audit committee that monitors financial practices and is involved in auditor selection. Recruiting board members with financial expertise is critical to assist with this process.
  • Endowment Spending Policy. This policy can determine the amount investment return and reserves can be used on an annual basis.

As organizations are gathering their information in preparation of their current year Form 990 the above are amongst governance policies which should be considered. Disclosure as it pertains to governance on Form 990 is a common theme, as evidenced in (1) Core Form, Part VI, Governance, Management and Disclosure, (2) Schedule I, Grants and Assistance to Organizations, Governments and Individuals and (3) Schedule M, Noncash Contributions. Governance policies and procedures of tax-exempt organizations will continue to be an area highly scrutinized by the IRS.

Need More Information?

If you have any questions about this not-for-profit update, please contact your WithumSmith+Brown professional, fill in the form below.


The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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