Board members act as trustees of the organization’s assets and must exercise due diligence and oversight to ensure that the organization is well-managed and that its financial situation remains sound. Here is an outline of how board members can fulfill their role as fiduciaries.
What does fiduciary mean?
It means board members, as stewards of public trust, must act for the good of the organization rather than for the benefit of themselves. Fiduciary duty requires board members to stay objective, responsible, honest, trustworthy, and efficient. They are expected to exercise reasonable care in all decision-making and avoid placing the organization under unnecessary risk. It also means board members ensure the programs align with the mission and that the impact of said programs is measured and reasonable.
Understanding financial basics
Not every board member can be a financial wizard. Every board member, however, needs to be a financial inquisitor. It is essential to understand basic terminology, be able to read financial statements and judge their soundness, and have the capacity to recognize warning signs that might indicate a change in the overall health of the organization. If a board member does not understand something, they must be willing to seek the answer.
Setting up and monitoring key financial indicators
Having the proper tools to monitor and evaluate financial performance strengthens the board’s capacity to judge the health of the organization. Board members set general guidelines and standards to measure the effectiveness of organizational accomplishments. Appropriate policies must be in place to guide management and board decision-making.
Ensuring adequate control mechanisms
Control mechanisms are intended to prevent fraud. Ensuring clarity in job descriptions and responsibilities; defining financial and accounting procedures (signing checks, handling of cash, approving expenses, outlining parameters for credit card usage); managing potential conflicts of interest with a clear policy; and requesting regular external audits are all indicators of fiduciary responsibility.
Specific questions board members should ask:
- Is our financial plan consistent with our strategic plan?
- Is our cash flow projected to be adequate?
- Do we have sufficient reserves?
- Are any specific expense areas rising faster than their sources of income?
- Are we regularly comparing our financial activity with what we have budgeted?
- Are our expenses appropriate?
- Do we have the appropriate checks and balances to prevent errors, fraud, and abuse?
- Are we meeting guidelines and requirements set by our funders?
- Are our programs aligned with our mission?
- Are we tracking and comfortable with the impact of those programs?
Approving the budget
The annual budget approval process creates the framework for organizational management. Securing necessary funding is part of a viable budget. Examining financial statements regularly and comparing actual figures to the projected ones allows the board to verify that the financial health of the organization remains on track. The board should question major variances.
Overseeing the organization’s legal obligations
The board verifies that all filing requirements and tax obligations are completed, including that the Form 990 is completed and filed on time and employment taxes are withheld and paid. To avoid intermediate sanctions, the board is expected to document and justify financial transactions, including executive compensation.
101 Resource | Last updated: September 18, 2023