One of the main responsibilities of a nonprofit board is to provide financial oversight of its organization. To properly fulfill this responsibility, board members must have an understanding of nonprofit financial basics. They do not need to be experts, but must be able to understand financial statements to determine the organization’s financial soundness. Mastering financial literacy not only enables board members to recognize potential warnings signs, but also enables them to ask questions if they do not understand something. An organization can maximize its chances of having a financially literate board by establishing process guidelines. Some guidelines to consider are:
- Create a thorough board member recruitment process
- Develop an effective board member orientation process
- Provide meaningful financial reports and data
Board Member Recruitment Process
The board member recruitment process should commence with the development of a list of expectations for the position, including;
- Time commitment to:
o attend meetings
o participate in teleconferences
o prepare for meetings
- Travel requirements
- Stipends and expense reimbursement policies
- Obligations to serve on other committees or governance groups
- Willingness to make financial contributions as appropriate
It is in the best interest of the organization and the potential candidate to share this list of expectations prior to acceptance of the nomination or appointment. Upon taking office, the board member should not face the unpleasant realization that the time and resource commitments are substantial and he/she may not be able to fulfill the requirements of the position.
Another important part of the board member recruitment process is the creation of a nominating committee. Additionally, for much broader functionality, the organization can form a board development committee that assesses the current board, its performance, strengths and areas of development. The board development committee can serve to create profiles of the kinds of people that are needed to fill vacancies on the board, especially those with financial expertise.
To fulfill the financial expertise requirements of board members, some of the leadership attributes that a successful candidate should possess are:
- Financial experience – can be obtained from service on committees and governance groups or from the candidate’s professional work
- Objectivity – ability to serve the interests of the entire organization and not for the benefit of themselves or other members or groups
- Inquisitive attitude – ability and willingness to ask questions to ensure full understanding of financial issues
Board Member Orientation
Upon the election or appointment of new board members, the orientation process should commence. Each new board member should participate in the orientation process either by attending a live meeting or participating via teleconference or videoconference. Current board members should play a part in the orientation by sharing their experience and expertise. While it is important to share a significant amount of information, every effort should be made to make the orientation an enjoyable and varied experience to promote enthusiasm in new members.
In addition to information about the organization and board operations, the orientation should include the following finance-specific topics:
- Brief explanation of financial statements and accounting terminology unique to nonprofit organizations
- Annual financial calendar showing important dates that may require board member involvement
- Current year and historical financial statements
- Current year budget
- Description of the organization’s tax status and filing requirements
- Most recently filed Forms 990 and 990T, if applicable
- Most recent audited financial statements and audit reports
Meaningful Financial Reports and Data
Now that the individuals possessing the right blend of financial expertise, objectivity, and inquisitive attitude have been selected, elected, and oriented, the responsibility falls on the organization’s chief executive officer and financial staff to ensure that they receive meaningful financial reports and data.
The board financial package should meet the following criteria:
- Concise – is the information communicated as briefly as possible but still comprehensive enough to deliver the necessary message?
- Timely – is the information provided as quickly as possible in relation to the time period?
- Relevancy – does the information help the board discharge its duties?
- Format – is the information presented in the best possible manner for the intended audience?
The financial staff may have to experiment with various reports, schedules, charts and graphs before the final iteration of the ideal board package is created. As the makeup of the board changes as new members join and others leave, it is advisable to review the contents and format of the board package on an annual basis.
It will be an ongoing challenge to ensure that board members have the requisite financial literacy to fulfill their responsibilities. Nonetheless, by following these guidelines, current board members, chief executive officers and the organization’s management team can feel comfortable that they have taken appropriate steps to ensure mastery of financial literacy for nonprofit board members.
Maureen Downs is a Chief Financial Officer in Tate & Tryon’s Outsource Services department and can be reached at[email protected].