Governance Framework

The Non-Profit Board’s Role in Governance, provided an overview of the various responsibilities of a non-profit board. The next challenge for a board is to put its governance model into practice. There are many different ‘governance frameworks’ used by organizations.

The following ‘governance framework’ is compiled from various sources, but primarily modeled on the outline provided by Barbara Laskin in Governance Works, which “consists of a series of tasks and responsibilities that are distinct from management and that fall largely, although not necessarily exclusively, to the board.” In this case, the Governance Framework is the more detailed work the board does to fulfil its responsibilities of:

• Ensuring good governance is in place;
• Developing and maintaining a long-term perspective;
• Ensuring sound performance;
• Ensuring financial health; and
• Ensuring sound relationships.

There are different governance models that vary according to how much control and decision-making a board wants to have in its oversight of the organization. One size does not fit all.

ENSURING GOOD GOVERNANCE IS IN PLACE

As stated in Nathan Garber’s Governance Models: What’s Right for Your Board, there are different governance models that vary according to how much control and decision-making a board wants to have in its oversight of the organization. One size does not fit all. A board must review each model and determine which best suits the needs of the organization. Sometimes it is a combination of models. Once identified, the board should ensure governance processes are in place that reflect its decision-making needs.

At the heart of the board’s governance, should be the core documents that guide the organization (bylaws, articles of incorporation), as well as applicable policies that impact business practices. Each board member should have a solid understanding of the organization’s mandate and parameters of operation, which includes any legislation that guides the non-profit organization.

Secondly, the board should have an understanding of the policies, practices and conventions that define how the governance process is supposed to work and who makes decisions. It is important for any good governance model to make a clear distinction between the work and responsibilities of the board, and those of staff. Deloitte and Touche’s Governance Framework includes the development of a Board Mandate, that includes all the roles, structures and processes used by the board. SaskCulture’s modified Policy Governance Model has a binder of governance policies that guide their monitoring and decision-making.

Once a board has a clear idea of its role, it can begin to lay out the tasks it needs to accomplish over the year. Many organizations create an annual Board Work Plan to help the board effectively and efficiently plan the time for all work required, and ensure decisions are made in a timely basis.

Another important responsibility the board has in ensuring sound performance is the hiring the right executive director, planning for succession, as well as providing performance evaluations and determining compensation. The board gives direction to the Executive Director, who then operationalizes the work of the organization. The Executive Director must receive clear parameters for what will be considered a success. It is important for the board to act as one in its direction to staff.

Once a board has a governance system in place, it is essential that the board monitor and evaluate its own performance on a regular basis. An effective board will hold itself accountable to its own performance standards and policies.

Finally, a board must always be thinking of succession. It should aim to have a regular infusion of new energy and ideas to ensure it is representative of the changing needs of its members and the diversity of the province within which it operates.

DEVELOPING AND MAINTAINING A LONG-TERM PERSPECTIVE

According to Barbara Laskin, from her work on Governance Works, it is generally understood that the role of the board is to focus on the big picture – the high-level issues that confront every organization – such as the vision, mission and goals of the organization.

As the organization’s legal steward, the board of directors must be concerned with the organization’s survival over the longer term. It means thinking strategically and ensuring the appropriate mechanisms are in place so that the mission is fulfilled and goals are achieved. Depending on the organization, it may mean working on strategic planning with staff. At the very least, it should be given an overview of the strategic plan for the organization, an assessment of resources, as well as an assessment of risks and alternatives.

ENSURING SOUND PERFORMANCE

Sound performance includes the bottom line, but in cultural organizations it also means how well the organization is addressing key measurable objectives or performance indicators. Once the board has created or reviewed its long-term direction, and worked on strategic planning, it must determine what it will measure to ensure the organization is heading in the right direction, at the right pace, and at the right cost (resources).

Because so many cultural organizations depend on grants, sponsorships and donations, Laskin notes that they may have to also take into account the criteria imposed by external, as well as an internal voice. They must develop the capacity to monitor and evaluate performance against all these goals and criteria.

STRATEGIC PLANNING

Sound strategic planning is critical for an organization’s success because it helps define and communicate what the organization wants to accomplish and the steps necessary to get there. Just as in governance, there are many planning models that can be used to take board and staff through a process, but the outcome is usually the same. Planning involves:

• Identifying the parameters: the time period for the plan, what and who is involved, and who is responsible for its compilation and management;
• Reviewing and assessing the current environment: this is often done as a SWOT analysis – Strengths, Weaknesses, Opportunities and Threats – to understand any changes or impacts that will alter thinking in a plan. It should include feedback and some kind of analysis of the stakeholders of your organization;
• Setting goals, objectives, outcomes: many terms are used, but it is essentially identifying the desired outcome of the organization’s work during a time period. Each outcome should be measurable and answer, “how will I know when I get there?”
• Implementation: what are the steps needed to get the work done. This can also be broken down into actions. It can include a timeline.
• Budget and Resources: what else is needed to get this work done?
• Evaluation: Before closing the book on one plan it is important to measure the effectiveness of what has come before. Determine the measurements in the beginning and provide a summary of how effective the plan was when complete. This summary can be part of the Review and Assessment in the next planning cycle.

RISK MANAGEMENT

In virtually every area of operation, there are decisions to be made about what level of risk to tolerate and what measure to put in place by way of mitigation or aversion: financial management, stakeholder relationships, funding charitable status and fundraising, issues surrounding property and other capital assets, staffing and employment issues, timing of events, programming, investment, insurance and liability, etc. As their organization grows, the board must commit to managing the risks associated. Many risk management plans are available to help non-profit organizations.

HUMAN RESOURCES

While the Executive Director/CEO are responsible for the hiring and managing of staff of the organization, the board is still responsible for ensuring human resource policies are in place to help guide decisions in this area. Changes are occurring all the time in labour standards and employment practices.

ENSURING FINANCIAL HEALTH

The management of an organization’s finances is one of the least understood, yet most important responsibilities of a board member. This responsibility is on two levels – as an individual board member and as a board collectively. Individually, each board member votes on financial policy and budget. Collectively, the board carries the fiduciary responsibility (the responsibility for funds and assets entrusted to the board on behalf of the public) for the organization. The budget, the accounting system and financial policies are the tools the board uses to exercise its fiduciary responsibility.

THE BUDGET 

The budget has two main functions: planning and monitoring. In planning, the budget documents, in monetary terms, the goal and objectives of the organization for a specified period of time (usually one year). In monitoring, the budget serves as a guide to track the organization’s progress on the achievement of its goals.

Depending on what level of support a board has, it should determine who is preparing the budget and ensure they follow the five steps of effective budget preparation for a board.

• List the objectives or goals of the organization for the year.
• Estimate the cost of each objective or goal.
• Forecast the expected income of the organization over the time period.
• Compare the total expected revenue to the expenses.
• Present the budget to the board ratification or approval.

Once the budget is approved, it must be divided into time-based segments (usually monthly or quarterly). Boards must decide on the frequency and the format of the financial reports it will use for monitoring. The reports must show the revenues, expenses and their variance from the budget for each time period. This alerts the board to potential adjustments needed before a crisis occurs. Some organization’s use a financial dashboard to highlight the key areas board members should monitor.

Depending on the size of the organization’s budget, the board does not need to review each expenditure; however, the board should be aware of major purchases and costs, as well as ensuring there is an internal control in place for organizational spending. Internal control is a system adopted by the organization to prevent fraud and detect errors and to ensure the timely and accurate reporting of financial information. One of the basic elements of internal control is that no individual should handle all aspects of a financial transaction. For example, the person who approves a bill to be paid should not be the same person who signs the cheque to pay for it.

THE FINANCIAL STATEMENTS

The Financial Statements are made up of three reports: the Operating Statement, the Balance Sheet and the Statement of Changes in Financial Position. The three of them together provide a picture of the organization’s overall financial health.

• Operating Statement (Revenue and Expenditure Statement or Profit and Loss Statement) shows the amount of income received over a period of time (usually a year) and the amount that was spent. Watch for one of three outcomes: revenues and expenditures will balance, there will be a surplus, or there will be a deficit.
• The Balance Sheet shows the total assets, liabilities and equity of an organization at a fixed point in time. Assets are what the organization owns or is owed. Liabilities are debts the organization has not paid. Equity is what is left after the liabilities are subtracted from the assets, plus any reserves.
• Statement of Changes in Financial Position shows all the funds flowing into the organization and flowing out of it during a certain period of time. It shows funds other than revenue such as a bank loan or money raised in a fundraising campaign. It also shows payments that are not recorded on the Operating Statements, such as a bank payment or an investment in bonds.

The board may also want to consider:

• Key operational statistics that impact finances
• Key ratios (crucial success factors – days of cash on hand, months of operating reserve)
• Explanatory notes – explanations of variances.

THE AUDIT

An audit is an independent study of the accounting records and system of an organization to determine if its financial statements are fair and reliable. The auditor gives a professional opinion of the extent to which the organization’s financial activities followed “generally accepted accounting principles”. The auditor will point out instances where principles were not adhered to and the board will need to take corrective action. For non-profit organizations, an audit must be done by a professional accountant (Chartered Accountant – CA, Certified Management Accountant – CMA or Certified General Accountant – CGA)

Many board’s also play a key role in fundraising. Some are massively involved in developing and implementing fundraising strategy, while others leave it to staff or volunteer committees. For a governance perspective, Laskin notes that if fundraising is a necessary part of survival, the board will most likely have a role to ensure the financial health of the organization.

According to Margaret Genovese, How to Get the Board you Need, Orchestras Ontario, “The level of a board’s personal giving to a cause is a prime indicator of the organization’s fundraising potential. A board with a low level of giving acts as a deterrent to the whole fundraising effort. Board that are not capable or willing to maximize their own giving will not be successful at fundraising.

ENSURING SOUND RELATIONSHIPS

Making sure the organization builds and maintains sound relationships both internally and externally is another board responsibilities. Inside the organization, this means there is trust, respect and high standards in human resource practices. The board sets the tone and policies that protect the organization in a legal sense and make it a good employer.

The importance of good chemistry between the board and the management of the organization is critical. This relationship is usually depends on the clarity and differentiation of roles and function of board and management roles. The challenge is to find the right balance.

Besides clearly delineating the roles and expectations, the board and staff must also know how to work collaboratively. The dialogue must remain open and the flow of information must go both ways. The board must recognize the demands it is placing on staff to meet its governance role – for example, asking for too many reports, or micro-managing the work – and scale back in accordance with staff’s ability to respond. Management, on the other hand, must also value and utilize the talents and resources of the board, while having the confidence to challenge the ideas that may not be in the best interests of the organization.

Externally, the board must also be able to forge sound relationship with stakeholders and partners – those critical to maintaining the health of the organization and its reputation in the community: funding bodies, sponsors, donors, suppliers, and the media. In many cases, the staff carry the principal burden of regular contact with these external players. When crisis occurs, the stakeholders will look to the board to ensure that the organization is on top of the issues and prepared to act.

Many non-profit boards have an advocacy function. This role goes beyond merely enhancing the image and reputation of the organization, but encompasses the need to exert influence on public policy. It is important that the board speak with one voice on an issue – that board and staff don’t contradict one another – and that careful planning focuses the outcomes of the advocacy efforts.

Information for this section excerpted from Governance Works by Barbara Laskin, published by Arts and Cultural Industries of Manitoba Inc. and SaskCulture Inc, 2007.