6 Operating Policies Your Nonprofit Must Have

Whether you are talking about a commercial business or a nonprofit, every organization runs more smoothly when it has solid operating policies.  Way too often, however, these are an afterthought, and you find yourself needing to refer to a policy you don’t already have in place.

Our team at Foundation Group has had the privilege of working with many thousands of nonprofits over the years.  One of the things we frequently see, unfortunately, are organizations that have no policies in place to guide governance and other essential activities.  Or if they do have them, they were borrowed from another organization, and they don’t actually follow the policies or know what they say.

In this post, let’s look at 6 policies that we believe every nonprofit should have and follow.

A properly compliant Conflict-of-Interest policy is the first among equals when it comes to essential policies to have and to follow.  While not legally required, the Conflict-of-Interest policy is the one most asked about and referenced by the IRS.  The annual Form 990 filing asks numerous questions about whether or not your nonprofit has one, plus how and when your organization’s board members are required to review and sign-off on it.

Given how much concern both the IRS and state law has regarding conflict and the prohibition on inurement and private benefit, failure to have a Conflict of Interest policy is not really an option.  But what should yours contain?

A well-written Conflict of Interest Policy lays out expectations for conduct by and between officers, directors, key employees, related individuals, and the nonprofit itself.  It also spells out specific procedures to follow should conflict arise, including how those with a conflict are to give notice to the others that such a conflict exists.  For example, if your nonprofit is potentially going to do business with a company partially owned by your Executive Director, what’s the procedure for dealing with the conflict?

A situation like this occurred on a private school board I served on a few years ago.  The school was needing to build a new restroom and concessions facility at the sports fields.  One of my fellow board members owned a commercial construction business and was among the contractors who bid on the project.  When it came time to review the bids and select a contractor, per our Conflict of Interest policy, he recused himself from both the discussion and the vote.

Your Whistleblower Policy is related in some ways to your Conflict of Interest Policy.  Ideally, if your organization is conducting its activities the right way, the Whistleblower Policy can sit in a file and never have to be used.

This policy is designed to instruct and protect those with knowledge of wrongdoing.  For example, let’s say a staff member becomes aware that one of the key employees with bank account access is writing checks to herself for expense reimbursement, contrary to both the organization’s policies and logical best practice.  The Whistleblower Policy should describe how the staff member should address this issue to leadership, as well as protect him for any recrimination for having exposed the practice.

Admittedly, this is a subject that makes some people uncomfortable.  But, this is another policy that the IRS specifically asks about on Form 990.  And, the Sarbanes-Oxley Act made adopting a Whistleblower Policy a matter of regulatory requirement.  The bottom line is, best-practice says that you need it to protect your people.  The law says you need it because it’s expected that your nonprofit has it.

The Records Retention and Destruction Policy is another of the policies your Form 990 asks about.  Therefore, it should be considered essential.  It’s also another policy required by Sarbanes-Oxley.  You may remember that Congress passed the Sarbanes-Oxley Act in the wake of the corporate and accounting scandal involving Enron in the 1990s.

Part of being transparent and accountable is records retention.  At a bare minimum, a nonprofit should be keeping records for at least 3 years.  In some cases, it should be substantially longer.  Even if it wasn’t required by law, it should be logical that important data is retained.  Federal and state law make records retention a requirement for those seeking grant funding.

The types of records to be retained include board meeting minutes, tax documents and other regulatory filings, donation records, records of receipts and disbursements, contracts, etc.  The list could go much further.

One question that often comes up is whether original paper must be retained.  If you have a foolproof way to digitize documents, that will usually suffice for purposes of retention.  Given how much of this data is never in the form of paper just reinforces that.

The “destruction” part of your policy should outline specifically how your nonprofit must go about disposing of any records once the retention period has elapsed.  If physical paper, physical destruction (such as shredding) should be the default.  Digital data should be permanently deleted, not just sent to your file trash bin.  Keep in mind that you can keep everything forever, too.  If its digital, why not keep it?

The Employee Compensation Policy provides your nonprofit with a consistent approach to determining salaries, wages, and benefits for your employees.  Some nonprofits have a policy that only deals with executive compensation, but it is better to address how everyone gets paid.

The IRS has a regulatory requirement that nonprofit employees are limited to being paid “reasonable compensation”.  As is typical for IRS, this is a situation where the requirement is stated, but the details on what’s considered “reasonable” leaves a lot to subjective conjecture.  Suffice it to say that salaries, wages, and benefits assigned to an employee should be considered in light of experience, job requirements, comparisons with similar organizations, and financial ability of the charity.

That leaves a lot of wiggle room, to be sure.  Best to create an overall Compensation Policy that dictates how each employee’s pay, from part-timer to Executive Director, is to be determined.  What are the comps to be used?  Who or what committee is making these decisions?  How are pay raises evaluated?  You get the picture.

If someone is wanting to give your nonprofit a donation, you just take it, right?  Not necessarily.

A Gift Acceptance Policy may deal with gifts of money, but more typically it’s to address in-kind gifts.  In-kind gifts are non-cash gifts like land, buildings, vehicles, food, clothing, jewelry, etc., the acceptance of which might be great…or could be more hassle than their worth.  Sometimes there are legal ramifications to accepting an in-kind gift such as taxes or licensing.

The idea is to think ahead about what types of gifts your nonprofits wants or needs to accept.  It’s OK to accept in-kind gifts, but it is best to have a plan of what to do with it once you get that car donated.

Also, this is yet another policy that Form 990 asks you about.

Financial management and control is one of the most critical responsibilities of any nonprofit organization.  It is absolutely essential that there are tight controls on cash flow and the transparency that naturally should come with that.

A good Fiscal Management Policy can help.  It should outline how money is handled from gift, to bank, to expenditure.  Who makes deposits?  Who can spend money (bank account signatories, credit cards)?  Can it be spent without pre-approval from the board or another committee?  How many signatures on a disbursement check?  Can the same person write checks and reconcile the books?

Hint on that last one…the answer should be, “No!”  Hire a good bookkeeping firm, like us, to help with accounting and financial reporting.

I cannot stress enough how important financial controls are.  Not only does it provide the necessary guardrails to protect and steward the organization’s limited resources, it also protects the people involved from accusation, assuming proper separation-of-duties is consistently maintained.  And lastly, it provides your members and/or donors a great deal of confidence that their support is managed properly.