3 Ways Not-for-Profit Board Members Can Act as Fiduciaries (article)

3 Ways Not-for-Profit Board Members Can Act as Fiduciaries (article)

The concept of a fiduciary often arises in discussions about financial advisors, attorneys, estate executors and scenarios that involve professionals handling financial assets or affairs on behalf of an individual or organization. These professionals are trusted to act in the best interest of the individual or organization. In many situations, such as with fiduciaries of retirement plans, this also means that professionals should be taking steps to ensure that applicable regulations are being followed or the fiduciary could be held liable for compliance issues.

But the term fiduciary can apply to a much broader set of relationships as well, such as the one between a not-for-profit’s board and the organization. Fiduciaries can be any entity that has the trust, responsibility or power to make decisions on behalf of another.

Not-for-profit board members, who are appointed to help a not-for-profit with the management of the organization, should be evaluating the role and responsibility of the fiduciary. Board members who act as fiduciaries can help their organization avoid key risks, monitor operational activity and address concerns before they trigger external consequences.

What Do Fiduciaries Do?

Fiduciaries do not have a set of requirements they need to meet, rather they should be making decisions that are in the best interest of the party they serve.

To act in the best interest of the not-for-profit, board members must consider the organization’s operational needs above their own and above those of the not-for-profit’s leadership. For example, if a not-for-profit experiences a decline in donations and a low level of reserves, there may need to be conversation about compensation or wage freezes until the not-for-profit regains its financial health.

Fiduciary board members also need to be aware of how the not-for-profit addresses its key risks. This typically involves making sure reporting requirements are being met, ensuring key transactions do not have conflicts of interest, monitoring spending, and overseeing evaluations of executive compensation.

Financial Fiduciary Roles

Boards need to ask the tough questions about how a not-for-profit is being managed financially. Decision-making by leadership should align with the organization’s strategic plan, the current economic environment, and its emerging risks. Not-for-profit board members can help assess whether this is happening by understanding the ins and outs of an organization’s cash flows, among other indicators of financial performance.

Members should be familiar with the not-for-profit’s major sources of income, level of reserves, and significant expenses. If expenses are rising in one area, consideration should be taken to reduce expenses in other areas. The organization’s annual budget should be monitored on a monthly basis to make sure that the not-for-profit is not spending more than it’s taking in.

To help monitor financial performance, metrics should be regularly evaluated by the not-for-profit and reviewed with the board to ascertain whether the organization is keeping enough in reserves to address its emerging risks and unexpected expenses that may arise during the course of operations.

Members of the board also should be knowledgeable of the organization’s major transactions, including how they were conducted, the accounting issues that may arise from the transactions, and whether the financial statement accurately reflects the exchanges.

Board Members as Risk Managers

The board plays an increasingly important role in the risk management of their not-for-profit, and as part of this role, the board has a fiduciary responsibility to ensure the not-for-profit meets its legal requirements. It should be monitoring the filing and completion of the not-for-profit’s IRS Form 990. Board members should also be kept apprised of any other activity that could threaten an organization’s tax-exempt status, such as use of bond-financed facilities and unrelated business income.

As part of their fiduciary responsibilities, boards should also ensure that the organization is using adequate controls over its internal reporting, information technology and other key areas of risk within its operations. A robust control environment is one of the best ways organizations can identify and address emerging issues before they become potential problems.

Compensation Advisors

Not-for-profit organizations receive heavy scrutiny for their executive compensation practices.  In addition, the rules about what level of compensation is appropriate for a not-for-profit are vague. An organization must demonstrate that compensation levels are reasonable. Typically this involves enlisting the help of executive search professionals or conducting reviews of pay and benefit packages at similar size organizations.

The board frequently weighs in on the determination of executive benefit packages, and so as fiduciaries, they should be double-checking that the processes in place support the pay a not-for-profit’s leadership team receives. Regulators will be looking at this, and so will the public. Listing top-paid employees is a required part of the Form 990 process, and the Form 990 is available to the public.

Stay Involved

For board members to fulfill their role as trusted caretakers of the organizations they serve, they need to be involved in the operational decisions being made by the not-for-profit’s leadership. Financial management, internal controls, and risk monitoring and compensation should all follow procedures that meet compliance requirements and potential for error, abuse or fraud. Board members can provide oversight and direction that helps the not-for-profit meet those standards.

To learn more about how a not-for-profit can serve as a fiduciary for their organization, contact your local CBIZ MHM service professional.


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3 Ways Not-for-Profit Board Members Can Act as Fiduciaries (article)Fiduciary takes on a broad range of definitions, and it's a term with which board members of not-for-profits should be familiar....2016-06-27T14:02:00-05:00Fiduciary takes on a broad range of definitions, and it's a term with which board members of not-for-profits should be familiar.