Nonprofit Law Basics: Can the Executive Director Serve on the Board of Directors?
The members of the board of directors are the governing body of your nonprofit. They are legally accountable to the public, to your supporters, and to your beneficiaries to oversee the organization. To properly serve in their role overseeing a nonprofit organization, the board of directors needs to be free of any potential conflicts of interest.
Nonprofits may face a conflict of interest if the key employee of the organization, who is often called the executive director, (“ED”) is also a member of the organization’s board. This is a scenario faced by many newly formed nonprofits since the founder of the organization often times serves as the board president and ED.
A conflict of interest can occur if the ED is a paid employee of the organization and a voting member of the board of directors, since every decision the board makes relating to budget and compensation will impact the ED.
How to handle this potential conflict?
- Exclude the ED from discussions involving the budget and compensation, but allow the ED to have a vote and remain a part of the board for other business.
- Invite the ED to attend board meetings as a guest instead of as a voting member. The ED can have a voice, but not a vote, on the board. The ED’s involvement and attendance at board meetings is still an important one since the ED often sets the agenda and to shapes the work of the board.
When deciding whether your ED should continue as a voting member of the board or should transition to a guest of the board, consider your IRS annual reporting requirements. Since the vast majority of public charities do not compensate board members, your organization may stand out to those reviewing the 990 because the compensation of the executive director, who also serves on the board, will be reported as board compensation on the 990.
Cullinane Law Group: What are the duties of nonprofit directors?
Cullinane Law Group: Are nonprofit directors liable?
Blue Avocado: Nonprofit Conflict of Interest: A 3-Dimensional View by Jan Masaoka, editor of Blue Avocado
The Cullinane Law Group works exclusively with the nonprofit sector. We set up and maintain strong and legally compliant nonprofits that have solid bases for long-term success. We provide risk management and offer practical solutions for sound governance. We help nonprofits, foundations, religious organizations, and social entrepreneurs throughout the United States who seek to create positive change.