Your organization probably has policies in place, and some of them may even be written! But what policies do you really need? Are your current policies strong enough to serve their intended purpose?
As organizations grow in size and/or experience, policies naturally develop. What information is required to cut a check? Who is authorized to sign checks? What types of in-kind gifts are not accepted by the organization? However, it’s fairly common for these policies to be left unwritten. Most organizations have a written conflict of interest policy and some basic accounting procedures, but are they sufficient? Do board members know what to do if they have a potential conflict? Do they understand the definition of a conflict of interest? Would a new bookkeeper know how to get things done if the prior bookkeeper suddenly vanished? Written policies and procedures are key to business continuity and also ensure proper communication and documentation for matters that could be questioned later, whether it’s receipts to prove a business purpose or board minutes to prove how a questionable contract was approved. A good set of nonprofit policies will range from the basic policy for approving purchase requests to policies that guide investment decisions. Each organization needs to decide which policies make sense based on the nature of activities, available resources and liquidity needs, but here are a few policies that you should consider.
Conflict of interest policy – This should primarily address board member and officer/key employee conflicts of interest. Generally, a conflict exists when the board member/officer/key employee could potentially benefit from a particular transaction. Examples include hiring a relative, signing a contract to do business with a relative or business in which the person has an ownership interest, and financial loans from the nonprofit. Policies should address how a person notifies the Board that they have a potential conflict, documenting that the person did not vote and documenting why the deal is fair if the person is chosen as the best vendor for a transaction. Ideally, board members and officers/key employees should sign a disclosure annually identifying any potential conflicts of interest.
Investment policy – If your organization has enough funds to set aside some money in investments, the board should decide on a risk tolerance level. Remember that this should not reflect the risk tolerance of individual board members, but the tolerance of the Board as fiduciaries of charitable assets. Nonprofits, especially charities, are generally not as risky as other investors, but should not be so conservative that they could be accused of not earning a fair return on investments. It’s also a good idea to avoid hedge transactions and other debt-funded trading since this will generally be considered taxable income (same rule that makes unrelated business rent from a mortgaged building taxable).
Compensation policy – Some organizations maintain salary ranges that are deemed “reasonable” for each position at the organization. While that’s a great tool for HR purposes, the IRS is focused on officers and key employees when they audit an organization. It’s a good idea to have a policy stating that officer/key employee compensation is determined by independent persons, is reasonable based on written comparability data and a written record of the deliberation process is maintained. Organizations with gross revenues less than $1million may rely on the compensation reported by similar nonprofits for similar positions on Form 990.
Accountable plan – This is very important if your organization reimburses employees or board members for business expenses like travel or supplies. To avoid the reimbursement being considered taxable compensation, you must have a written plan stating that a reimbursement will only be allowed if the employee/board member documents the business purpose of the purchase and turns in a receipt showing the date of purchase and amount of the purchase. No exceptions can be made for the executive director or anyone else – if the accountable plan is not followed, the reimbursement should be withheld or added to taxable wages. If it’s added to wages, be sure total compensation for the year is still within the reasonable range.
Remember that your funders, especially government funders, will often have their own requirements for various written policies and procedures your organization must have in order to qualify for funding. The industry of your nonprofit may also dictate the policies you need (ie. school discrimination policy, hospital customer acceptance policy, etc.).
Finally, once policies are in place, be sure to keep them current and follow the policies. Employees and board members need to be aware of all policies and be held accountable for following them.
Let us know if you need help drafting policies and procedures that fit the needs of your organization.
