‘Good Housekeeping’: The Nonprofit Version

bylawsBy Robert Evans

I am something of a neat freak: I keep my work desk, car, closet, everything really, as tidy as I can. Perhaps it is just a personality trait; I have known plenty of colleagues and clients who have a tolerance for messiness that far exceeds mine. And when it comes to nonprofit operations, I am a proponent of good housekeeping and it is a major pet peeve of mine when nonprofits are unnecessarily neglectful.

What do I mean by “good housekeeping?” I am referring to the details that don’t generate headlines or press releases but which govern the way that nonprofits operate, including by-laws, donor acceptance policies, and board policies.

Recently, I learned from a longtime associate that a major metropolitan nonprofit (a Jewish federation no less) has gone decades without updating its by-laws. This means their by-laws have remained unchanged since before email became the primary mode of communication. I should have been shocked, but I know that nonprofits tend to focus their staffing and volunteer manpower on immediate issues relating to fundraising and let policy reviews slide.

I recently spoke with Laura Solomon, founder of Laura Solomon & Associates, a premier law firm serving nonprofit clients located in suburban Philadelphia. According to Solomon, this is a common problem in the nonprofit world, one that can cause headaches for organizations, turn off potential donors and, occasionally, lead to more serious legal issues.

“Nonprofits are great at devoting their limited resources to charitable missions and to delivering their services to those who need them most, but sometimes they struggle with the seemingly less urgent operational and maintenance issues,” said Solomon. “Many organizations have not reviewed or updated their articles, by-laws, or policies since they were formed. And, sometimes it’s not a problem, but these documents serve as internal operating rules and guidelines which, if updated and followed, can help the organization and the Board operate in a legally compliant, healthy way.”

Solomon cautioned that a lack of required language in an organization’s by-laws could be an obstacle in getting sales or real estate tax exemption. “If your organization’s by-laws don’t include language that permits the organization to indemnify directors and officers to the maximum extent permitted by law, those well-meaning volunteers are exposed.” Other pitfalls include policies and by-laws that don’t address the investment and management of donor-restricted funds and the use of email and teleconferencing – which can be critical in getting a quorum of the Board for meetings.

Essentially, nonprofit by-laws outline who should be doing what and how things are run. It is a legal document, but it should be written in a way that is user-friendly. If nobody except an attorney can understand the by-laws, the document won’t be of much use.

“By-laws should be user friendly,” said Solomon, “but oftentimes they’re not tailored as needed to the organization or drafted in a way that’s helpful to the Board.”

At the very least, failure to update by-laws on a regular basis can lead to a crisis of confidence among certain donors – who may see the lack of compliance as a sign of potentially bigger problems. At the worst, said Solomon, neglecting by-laws can endanger a nonprofit’s tax-exempt status or lead to the incursion of penalties. She noted that federal and state laws change frequently.

For instance, the New York Nonprofit Revitalization Act, which went into effect on July 1, 2014, introduced dramatic and expansive changes to the legal requirements for the governance, oversight, formation, and administration of New York nonprofit organizations. Specifically, the Act sets forth new requirements for annual reporting and financial oversight, and also imposes restrictions on the process for determining executive compensation, qualification for serving as Board chair, and the permissibility of related party transactions, among other changes, all of which must be documented in the organization’s by-laws and corporate policies.

Many factors, including years of poor decision making and shoddy practices led to the announcement late last year that the Federation and Employment Guidance Services, a major player in the New York Jewish nonprofit world, would close amidst a $20 million revenue shortfall. But it seems that a lack of adequate investment guidelines – a vitally important document for any nonprofit – led to a series of misguided financial moves that ultimately decimated the once venerable organization.

I concur with Laura by recommending that by-laws be reviewed every two-three years, and in any case when the law changes, both by knowledgeable board members – who can evaluate if the laws make sense from an operational standpoint – and by their general attorney. While few nonprofits have an overabundance of financial resources, many attorneys will charge a quite reasonable fee for performing this kind of document review.

I am not an attorney, but I am continually surprised how few nonprofits have solid gift acceptance policies in place, and if they do, how rarely those policies are reviewed. Would your nonprofit accept:

  • A timeshare in Florida?
  • A vintage wine collection?
  • An automobile?

Believe me, these things do come up and our clients have encountered each. Gift acceptance guidelines can’t be expected to be so specific that they name every possible type of donation an organization would or wouldn’t expect to receive. But clear guidelines should allow development professionals, lay leaders, and executives to determine whether a potential gift corresponds to a nonprofit’s guidelines and mission.

Policies matter. By-laws matter. Housekeeping matters. I hope that I don’t hear many more examples of any nonprofits going decades without updating important policies. We know that Americans are giving more money to charity than ever before. At the same time, with a series of well-reported mishaps and scandals at some of our nation’s top charities, Americans may be more skeptical of nonprofits than ever before. Other nonprofit leaders and I have exhorted organizations to become more transparent. Updating and reviewing vital documents is part of the effort to become more responsive to donors. Each and every nonprofit must do its part to make sure its documents are in order, not only for their sake, but for the benefit of the nonprofit community as a whole. When it comes to the policies that govern their organizations, all nonprofit leaders must be neat freaks.

Robert Evans is founder and president of the Evans Consulting Group, a firm that helps nonprofits meet and exceed their strategic and fundraising goals. The Evans Consulting Group leads fundraising campaigns, facilitates strategic planning processes, engages in donor research and cultivation, coaches nonprofit leaders and performs a number of other development-related services. Mr. Evans is a member of the Giving USA editorial review board and is also a board member of the Giving Institute. A regular contributor to eJewishPhilanthropy.com, he can be reached at revans@theevansconsultinggroup.com.