Nonprofit Board Toolkit Get Started
The Impact and Importance of Board Service
Serving on a nonprofit board gives you the chance to connect with your community and make an impact in ways that may not be possible through other volunteer service.
Effective board service may involve a significant commitment of time and other resources. But the work required is often outweighed by the potential benefits you’ll experience in the personal, professional, and community aspects of your life.
As a board member, you can make an impact on the social or environmental issue you care about. Board service allows you to connect with your community and those your organization serves from a strategic and active position. You have the opportunity to use your voice and connections to help shape the organization’s mission and its impact. Board service offers vast opportunities to learn, grow, and broaden your perspective on your organization’s service sector and mission.
Serving on a board allows you to broaden your professional network and hone your leadership skills. Decision-making, facilitation of group processes, governance, financial management, and marketing and branding are all skills you can cultivate as a nonprofit board member. Additionally, some employers view and support employee nonprofit board service as both leadership development and a component of the company's community engagement.
Serving on a nonprofit board provides a unique vantage point to observe your community’s problems and identify opportunities for impact. Collaborating with diverse groups—including fellow board members, staff, organization constituents, and other local resources—empowers you to be a change agent.
Hello everyone. I'm Caroline Grossman, director of programs at the Rustandy Center and an alumna of Booth. Today, I'm going to be discussing nonprofit boards to provide an overview to alumni and students who are new to board service. Although you may have a conception of what a nonprofit is, my goal today is to help you better understand that definition, along with the role, a board can play within an organization.
Put simply non-profits are classified based on tax designation and legal structure. 501c3 is the federal tax designation for an organization that has a primary mission of social impact and not financial gain.
Some for-profit organizations have a social mission, but they must have a 501c3 is status to be considered a nonprofit. The indicator of a nonprofit and economics parlance is the nondistribution clause, which means that any earnings or gains the nonprofit makes must go back to the organization.
A for-profit organization, even one that is more mission-driven, would not be considered a nonprofit, as a mission-driven for-profit could still take investments, then distribute those gains back to investors. This type of organization would have a corporate board, not a nonprofit board.
The IRS classification of organizations actually goes deeper than just for-profit and non-profit. In the first row, you can see three types of tax exempt organizations. In the second column, we discuss 501c3 is organizations, which the IRS calls charities. These are the organizations that most people are referring to when they talk about serving on nonprofit boards. The federal designation for 501c3 is nonprofits requires that they be charitable, religious, educational, scientific, literary, a foundation, or a private school. In contrast, a 501c4 is a social welfare organization, and 501c6 is a trade a trade association.
The differences between these designations gets very important when you're a voting member of a board. If you look at this chart, you'll see the different classifications along with their purpose, some examples, and how they differ on lobbying and electoral activities. Social welfare and trade organizations are very involved in lobbying, and they exist to have a role in electoral activities. However, nonprofits, 501c3 organizations, or charities on this chart can have no role in electoral activities.
If you sign on to join a board, you must be aware of any conflicts of interest. During elections or in the middle of a city budget crisis, board members cannot speak out about what the government is doing or run for election themselves.
Now, we're going to take a deeper dive into the differences between and 501c3 nonprofit organizations. There are three key differences. One is in structure and oversight. Nonprofits don't have shareholders, but they do have a board of directors. And that board is obligated to act in the best interest of the organization. Another difference is that nonprofits have a dual responsibility to maximize social benefit, as well as financial stability. Without shareholders in the need to maximize profits for those investors, the decisions around how to achieve and measure success can be more complex.
If you join a board, you'll hear interesting discussions around what should be done, who the organization is serving and how the organization can best serve them. The third difference is in the finances. In a nonprofit the budget is supported by a combination of earned income and donations.
We’ll now discuss how nonprofit boards are typically structured. The structure of nonprofit boards varies, especially with the size of the organization. The size and complexity of a board tend to be commensurate with the size of the organization, as measured by annual revenue. That said there are some commonalities regardless of size. Most boards have a president, a chair, and other leadership roles, like a secretary, treasurer, or vice chair. In some larger organizations with larger boards, the folks holding leadership positions typically lead committees, such as finance, fundraising, or a special events committee.
Other examples of committees are listed here on the bottom of the slide. Boards decide their own committees and can also form temporary committees on topics like strategic planning. Many of our alumni who join boards often end up on the treasury or finance committees since nonprofits see a lot of value in the Booth business toolkit.
Now we're going to talk about the roles, duties, and obligations of directors. A director is a fiduciary with specific obligations to a nonprofit. A fiduciary has the power and the obligation to act in the interest of another entity. A board member has three duties. The duty of loyalty to always act in the best interest of the nonprofit. The duty of care to manage the affairs of the nonprofit in good faith. And the duty of obedience to ensure that the organization and its directors comply with the law and stay true to the organization's purpose.
The board also has a responsibility to ensure an organization is operating properly. The executive director reports to the board. So, the board supervises the executive director and the board is in charge of asking the executive director for their development plan and for updates on their work
Board members make sure the organization sticks to its stated purpose, uses resources properly, and follows specific rules, as well as laws and compliance issues around things like filing taxes and adhering to employment and regulatory law. Board members also support the organization. You might hear about a board’s “give get policy,” which requires board members to donate a certain amount of money each year. This can take the form of direct contributions, soliciting direct contributions from others, or selling tickets to events. Board members aren't responsible for day to day operations or managing and hiring or firing staff other, than the executive director.
The final obligation that we'll cover in this portion of the presentation is the legal obligations. The first caveat is that only a lawyer can provide a legal overview of legal obligations, and I am not a lawyer. So, should you have legal questions please seek counsel. That said the legal obligations of board members and common questions can be summarized, which is what I will do here. Board members are required to exercise their judgment and help ensure that the organization complies with the law. This includes employment laws, handling of donations, the filing of federal state and IRS forms and taxes, maintaining and updating corporate records, including the bylaws, etc.
This presents a liability. So, most states provide some protection to unpaid board members. In addition, boards typically purchased directors and operator’s insurance to protect members if a lawsuit is filed against the organization, which means board members would not be held personally liable. We suggest that you ask an organization if their board has this insurance before joining. All of these protections though important don't mean that board members should take their fiduciary responsibility lightly.
That concludes this portion of the presentation. Thank you so much for joining us today. And don't hesitate to contact the Rustandy Center with any questions about this presentation or other portions of the toolkit.
Nonprofit organizations fill a vital role in our economic landscape. With a focus on building healthy communities and providing critical services that contribute to economic stability and mobility, nonprofits can create sustainable impact on our local and global economies.
Operating within a nonprofit framework means that nonprofit organizations distribute any profits back into the organization or toward other organizations (such as a foundation) to fulfill their social missions.
Nonprofit organizations work across a diverse array of service areas, including faith-based organizations, social welfare agencies, social and recreational clubs, organizations devoted to animal welfare or homelessness, educational institutions, and professional and member-based associations. What they all have in common is a nondistribution clause specifying that any profit generated must be used to advance the mission of the organization, rather than being distributed to owners. Nonprofit organizations are limited in the amount of political lobbying they can do on the basis of their classification.
Federal and state governments recognize that nonprofits provide incalculable value to society and provide services that the government may not be able to provide itself, effectively lowering the cost of serving citizens and often generating greater scaled impact. The Internal Revenue Service (IRS) provides a tax exemption to these organizations so that their profits can be redirected back into mission-centric work and support for staff. Nonprofit organizations are also exempt from other taxes, including sales tax.
Board members are the fiduciaries who steer the organization toward a sustainable future by adopting sound, ethical, and legal governance and financial management policies, as well as by making sure the nonprofit has adequate resources to advance its mission.
Typically, an organization’s board is made up of volunteers. As a governing body, the board of directors focuses on the organization’s mission, strategy, and goals. Managerial staff members, on the other hand, are responsible for the implementation of the mission. Some smaller and startup organizations may have members who serve dual roles, but the ultimate goal is to have separation between the board and staff to reduce conflicts of interest.
For most boards, one of the most important responsibilities is to hire and set the compensation of a talented CEO or executive director who is responsible for running the day-to-day management activities of the organization. Other responsibilities of the board of directors include but are not limited to:
- Determining the organization’s mission and purpose
- Supporting and evaluating the CEO with the goals of the organization in mind
- Ensuring effective organizational planning
- Determining which of the organization’s programs are consistent with its mission and monitoring the effectiveness of these programs
- Securing adequate financial resources for the organization to fulfill its mission
- Assisting in the development of the organization’s annual budget and ensuring that proper financial controls are in place
- Defining prerequisites for potential new board members, orienting these new members, and periodically evaluating performance
- Adhering to legal and ethical standards and norms
- Clearly defining and articulating the organization’s mission, accomplishments, and goals to gain support from the community and enhance the organization’s public image
Board members have a duty of loyalty to the organization, its staff, and other board members. Strive to keep conversations, debates, and votes impersonal and in the best interest of the organization and its goals. By practicing discretion and accepting decisions made on a majority basis, the board can accomplish unity and confidence in its decisions.
Board members offer guidance to the nonprofits they serve by contributing to the organizations’ culture, strategic focus, effectiveness, and financial sustainability, as well as serving as ambassadors and advocates. Nonprofit board members are fiduciaries, meaning they hold positions that require trust, confidence, and the exercise of good faith and candor.
Board members can be held personally liable on the basis of three fiduciary duties: the duty of care, the duty of loyalty, and the duty of obedience. Board members can only be held responsible for a breach of fiduciary duties if the breach is due to recklessness or willful misconduct.
- Duty of care: Exercise the same care that an ordinary, prudent person would exercise under similar circumstances. Take care of the nonprofit by ensuring wise use of all assets, including facilities, people, and goodwill.
- Duty of loyalty: Ensure that the nonprofit’s activities and transactions are, first and foremost, advancing its mission. Recognize and disclose conflicts of interest. Make decisions that are in the best interest of the nonprofit organization rather than the individual board member (or any other individual or for-profit entity).
- Duty of obedience: Ensure that the nonprofit obeys applicable laws and regulations, follows its own bylaws, and adheres to its stated corporate purposes/mission.
It is unlikely that you will encounter a situation in which you are held personally liable for violating your fiduciary duties as a board member. However, the best way to prepare for such instances is to be well informed about your duties as a board member and to seek out liability insurance either for yourself or for your organization.
Board members volunteer their expertise, time, and resources in order to ensure their organizations adopt sustainable policies and have adequate resources to advance their mission. There are no IRS guidelines for who can or cannot serve as a board member.
Board members are responsible for ensuring that activities are driving toward the organization’s mission. The composition of the board should reflect diverse backgrounds, skills, and perspectives, including the community. It is also valuable for board members to have experience with business management and operations in order to provide advice in these areas.
At a minimum, board members are expected to:
- Attend board and committee meetings as well as the organization’s functions, such as special events
- Stay informed about the organization’s mission, services, policies, and programs
- Review agendas and supporting materials prior to board and committee meetings
- Serve on committees or task forces and offer to take on special assignments
- Make a personal financial contribution and/or help with fundraising on behalf of the organization (not all nonprofits expect this)
- Inform others about the organization
- Suggest possible board nominees who could make significant contributions to the work of the board and the organization
- Keep up to date on developments in the organization’s field
- Follow conflict-of-interest and confidentiality policies
- Refrain from making special requests of the staff
- Assist the board in carrying out its fiduciary responsibilities, such as reviewing the organization’s annual financial statements
Organizations serve a vast spectrum of mission areas. Nonprofit organizations are grouped into specific classifications according to Section 501 of the federal tax code, falling under the subsection “(c),” and are often referred to as 501(c) organizations. This categorization can be divided up into even greater specifics (29 subcategories exist currently) on the basis of an organization’s mission.
The most common types of 501(c) organizations include 501(c)(3)s (charities), 501(c)(4)s (social welfare), and 501(c)(6)s. For a full list, see Types of Tax-Exempt Organizations on the IRS website.
Note: The table below is sourced from Nonprofit Hub.
|Tax-Exempt Purpose||Charitable, religious, educational, scientific, literary organizations, foundations, and most private schools||Civic leagues, social welfare organizations||Trade associations, professional organizations, business leagues, chambers of commerce, etc.|
|Examples of Organizations||Chicago Foundation for Women Habitat for Humanity United Way||National Organization for Women (NOW) National Rifle Association (NRA)||United States Chamber of Commerce and California Association of Realtors|
|Lobbying Allowance||Limited lobbying||Substantial lobbying||Substantial lobbying|
|Electoral Activities||No partisan electoral activities||Electoral activities must be secondary||Electoral activities must be secondary|
Many of the same business management skills are required to successfully operate both a for-profit and nonprofit, but there are some key differences between the two types:
Structure and oversight: Nonprofits are governed by directors who are to act in the best interest of the organizations’ beneficiaries, donors, and employees as well as society at large. Nonprofits do not have shareholders, so unlike for-profit organizations, there are no dividends to distribute.
Purpose: Both for-profit and nonprofit entities need financial resources to be effective and carry out their respective missions, but nonprofits must maintain a purpose-driven organization that is centrally focused on the mission and its stakeholders. The term nonpecuniary applies here, meaning that making money cannot be the prime directive for a nonprofit. Nonprofit directors and staff need to constantly balance the financial stability of the organization with its goal of providing maximum benefit to society.
Finances: Nonprofit organizations are not considered to hold capital; rather, they are supported by some form of earned income and/or donations. Similar to in for-profit settings, revenue streams need oversight to ensure that the income generated is “on mission.”
Managing nonprofit finances can be complicated. New board members can educate themselves on the relationship between separate revenue and profit models as well as the need to match operational models to funding models.
You can get involved in all types of boards, committees, and volunteer opportunities, depending on the organization. There are three primary types of nonprofit boards:
- A board of directors
- Associate boards (sometimes referred to as young or junior boards)
- Advisory boards
These boards vary from one another on the basis of need, and often a nonprofit will have a board of directors as well as associate and advisory boards. Selecting which one is right for you depends on what you do and at what level, as well as the needs of the organization.
|Classification||Board of directors (BOD)||Associate board||Advisory board|
|What||Governing body of organization||~20-to-35-year-olds||Organizational ambassadors|
|Why||Legally required of all nonprofit organizations||Developed by BOD to attract next generation of donors and BOD members||Developed by governing board to provide specific advice and talents or to honor past governing board members|
|Services Performed||Raise funds, run events, assist with day-to-day operations, formulate policy, govern, evaluate the executive director and/or CEO||Raise funds, assist with special events and projects||Varies widely: attend annual meetings, perform specific services, engage donors|
|Typical Responsibilities||Vote on governance issues, legal responsibility||Nonvoting, no legal responsibility||Nonvoting, fewer rules than governing board, no legal responsibility|
Most nonprofits have a hierarchical organization structure led by the board of directors. The board’s committees are typically made up of a smaller group of directors, while the CEO or executive director manages the staff and resources of the organization toward its mission.
Structures vary, so it’s wise to understand an organization’s hierarchy before you agree to a board position. The sample illustration above outlines a common organization structure, including standing board committees and common staff roles.
- BoardEffect: The Different Nonprofit Governance Models
- BoardEffect: What Makes a Great Nonprofit Board Member?
- BoardSource: Board Responsibilities and Structures
- Council of Nonprofits
- Nonprofit Quarterly
- IRS: Exempt Organization Types
- National Council of Nonprofits: Board Roles and Responsibilities
Insights from Andrew Puente, ’05, who is the director of global sourcing at the Dover Corporation. Puente also serves as board chair for the Center for Speech and Language Disorders.What Board Presidents Look for in a New Board Member
Insights from Nancy Cowles, who is the executive director of Kids in Danger, a Chicago-based nonprofit organization dedicated to protecting children by improving children’s product safety.What Executive Directors Look for in a New Board Member