Governance Policies Your Nonprofit Organization Needs

For a nonprofit to achieve its mission, it needs to build on a bedrock of public trust. Opaque practices and inconsistent accountability can erode that trust and threaten your organization’s future. 

While Form 990 provides a framework for organizational transparency, it also highlights key policies that every nonprofit should implement. These policies go beyond mere compliance; they’re vital tools for building a robust, ethical, and efficient organization.

Form 990 and Governance Policies

Form 990, required annually for most tax-exempt organizations, is more than just a financial report. It’s a comprehensive overview of an organization’s operations, governance, and compliance. 

Part VI of Form 990 and Schedule M specifically address governance policies and practices, and includes questions about:

•  The composition of the governing body
•  Management policies
•  Disclosure practices
•  Conflict of interest policy
•  Whistleblower policy
•  Document retention and destruction policy
•  Compensation review process

And Schedule M, which deals with non-cash contributions, also examines gift acceptance policies, which are crucial for ensuring above-board decision making. If a nonprofit has received over $25,000 in non-cash gifts, it is required to have a gift acceptance policy and to file Schedule M. As such, Part VI and Schedule M can serve as a roadmap for nonprofits, highlighting areas where strong governance policies can enhance transparency, accountability, and overall effectiveness.

Conflict of Interest Policy

A well-crafted conflict of interest policy ensures that board members and key employees act in the organization’s best interest, not for personal gain. This policy is crucial for maintaining public trust and ensuring ethical decision-making.

Key components of an effective conflict of interest policy include:

•  Clear definitions of what constitutes a conflict
•  Disclosure procedures
•  Management procedures
•  Regular review processes

A sound conflict of interest policy should also establish a process for annual disclosure statements and outline steps for managing conflicts when they occur, such as recusal from discussions and voting on related matters. Regularly review the policy to ensure that relevant parties remain aware of and compliant with its requirements.

Whistleblower Policy

A whistleblower policy protects individuals who report suspected illegal or unethical practices within the organization. This policy helps foster a culture of transparency and accountability.

An effective whistleblower policy should include:

• A clear statement of protected disclosures
• Multiple confidential reporting channels
• Well-defined investigation procedures
• A Strong non-retaliation clause

For example, if an employee noticed financial discrepancies in expense reports, a robust whistleblower policy would provide a clear, safe process for reporting their concern without fear of reprisal. As a result, the organization could potentially uncover and address financial mismanagement before it became a larger issue.

Document Retention and Destruction Policy

Effective records management and scheduled document disposal are essential for legal compliance, operational efficiency, and risk management. 

The policy should specify how long each type of document should be kept, based on legal requirements, operational needs, and historical value. It should also establish guidelines for secure storage of both physical and digital records, which might include fireproof safes for critical documents and encrypted cloud storage for digital files.

Compensation Review Process

A clear and open process for reviewing executive and key employee compensation demonstrates responsible financial management and helps prevent overpayment concerns.

Such a review process should incorporate:

•  An independent compensation committee
•  Collection of comparable data
•  A documented review process
•  Regular reviews
•  Full independent board approval

This is especially important when it comes to hiring key leadership positions. 

For example, when bringing on a new Executive Director, the compensation committee would research salaries at similar nonprofits, consider the candidate’s experience, and propose a salary range to the full independent board for approval. This systematic approach ensures that executive compensation is both fair and defensible.

Gift Acceptance Policy

A well-crafted gift acceptance policy helps your nonprofit manage donations wisely and avoid potential pitfalls, especially when dealing with unique or high-value gifts. 

This policy should cover:

• Types of gifts you’ll accept
• How you’ll review gift offers
• Rules for gifts with strings attached
• How to value different gifts
• Proper ways to thank donors

For example, if your organization were to be gifted a valuable painting, your gift acceptance policy would guide the way that your organization tracks and reports this noncash donation. 

By planning for these situations, your gift acceptance policy ensures donations help your cause without creating unexpected problems. It gives you a clear roadmap for handling all kinds of gifts, from simple cash donations to more complicated non-cash items.

Implementing and Maintaining Effective Policies

To craft effective governance policies for your organization, you first need to understand the context—in other words, the purpose of each policy, the risks they’re intended to mitigate, and the unique needs of your organization. 

Whether you’re writing new policies or reviewing and updating your current ones, try to stay aligned with these best practices: 

• Assess your organization’s specific needs and risks before drafting or updating policies.
• Involve key stakeholders in policy development for buy-in and comprehensive perspectives.
• Clearly articulate each policy’s purpose, procedures, and who is impacted.
• Provide regular governance training to board members and staff.
• Review and update policies annually to keep them relevant and effective.
• Ensure policies are easily accessible to all relevant parties.

Additionally, avoid common pitfalls such as creating policies without proper implementation plans, neglecting regular reviews, or inconsistent enforcement. 

Remember, governance policies are only effective when they’re understood, followed, and regularly updated.

Smith + Howard: Your Partners in Nonprofit Compliance

Robust governance policies are the backbone of a strong, effective nonprofit. They enhance transparency, accountability, and overall organizational health. As highlighted by Form 990, these policies are not just bureaucratic requirements but essential tools for responsible nonprofit management.

At Smith + Howard, we’re here to help you grow and strengthen your organization so that you can make an impact in your community. Our nonprofit team can offer valuable insights grounded in extensive nonprofit sector experience. 

For support assessing your nonprofit’s governance and compliance needs, contact an advisor today.