Keeping it Ethical is our weekly blog series highlighting the 33 Principles for Good Governance and Ethical Practice. Throughout the series, we hope to highlight the importance of each Principle and the helpful resources associated with it, and learn more from you about how you’ve incorporated these Principles into your charitable organization.
Boards. Boards. Boards. Clearly, they’re important. Have you seen the number of posts we’ve written about them? We’ve covered board responsibilities, meetings, size and structure, and the importance of board diversity, with lots more to come. But Principle 12 focuses on an absolute requirement for all boards – that their actions on behalf of the organizations they serve be taken without regard for the personal interests of board members.
Nonprofits must be able to trust and have confidence in the impartiality of board decisions. And according to good practice, the best way to maintain that trust and confidence is for organizations to require that the majority of their board members – at least two-thirds – be independent.
But what exactly does “independent” mean? In a nutshell, it means a board member:
- doesn’t receive compensation from the organization as an employee or independent contractor;
- doesn’t have their compensation determined by those who are compensated by the organization;
- doesn’t receive material financial benefits from the organization, as a rule; and
- isn’t related to anyone falling in the categories described above.
It’s important that your organization stay up to speed on the IRS definition of an independent board member since you’re mandated to report information on independent board members annually to the IRS.
When founders of charitable sector organizations name family members or business partners as board members, it is even more important that a majority of other board members be independent, and free and clear of any potential conflicts of interest. In fact, some states have laws that establish the minimum number of independent members for nonprofit boards. So head over to our state specific survey for details.
There may be times when adhering to Principle 12 isn’t appropriate or feasible, for example a faith-based organization may require that clergy or other representatives paid by the institution sit on the board. In those cases, it is imperative to have established procedures to ensure that independent and objective oversight of the organization is maintained.
Independent board members ensure the trust of your organization in their decision making process and assure stakeholders that they are proactively exercising their “duty of loyalty” in the best interest of your organization.
Learn more about Principle 12 and associated resources.
Are we missing a great resource associated with this Principle? We want to hear that, too. Leave your thoughts in the comments and let us know what you think. You can also use #npethics on social media.