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| Commentary on ECFA Standard 2 |
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Board of Directors and Financial Oversight
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"Every member shall be governed by a responsible board of not less than five individuals, a majority of whom shall be independent, which shall meet at least semiannually to establish policy and review its accomplishments. The board or a committee consisting of a majority of independent members shall review the annual financial statements and maintain direct communication between the board and the independent certified public accountants."
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When a ministry encounters failure—or even worse, scandal—its difficulties can almost always be traced to some breakdown at the board level. For this reason, ECFA places much emphasis on strong, effective board governance. This Standard is designed to help members obtain and maintain a board that enhances an environment of accountability, maximizing excellence in carrying out the Lord’s work and minimizing susceptibility to structural breakdown.
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Responsible Governance. The importance of an active, informed board cannot be overemphasized. Left unchecked, even minor board neglect can eventually intrude upon the accountability and effectiveness of the ministry. In contrast, the active, informed board will hold to the mission, protect the integrity of ministry objectives, and ensure consistent adherence to board policies.
It is also important to remember that governance is not management. Having an enthusiastic, well-informed, and committed board should not, except in certain circumstances (e.g., the temporary lack of a chief executive officer, president, executive director, senior pastor, etc.) translate into involvement in daily management affairs. Rather than manage the organization itself, the board should assure that the organization is well managed. In recognizing its responsibility to protect the long-range future of the organization, the board must avoid the position of "not seeing the forest for the trees." The board should be diligent in maintaining a strong relationship with the organization's top leader. A competent leader should be selected to carry out the ministry’s mission under the direction of the board. This relationship is pivotal. The board that adheres to accountability in its relationship with the organization's top leader will operate with greater confidence and trust, will ensure compliance with performance criteria, and will avoid detailed involvement in the organization’s day-to-day operations.
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Duties. Though not exhaustive, the following list gives examples of some of the board’s duties:
- Commit to prayer, corporately and individually.
- Identify and monitor the organization’s mission and purpose.
- Elect, evaluate, and support the top leader (the election and evaluation of the top leader may be handled through alternate procedures by a membership organization). Maintain a current job description and performance standards for the organization's top leader.
- Provide leadership to the organization's top leaders and officers of the board regarding succession planning (succession planning may be handled through alternate procedures by a membership organization).
- Elect the officers of the board.
- Approve the compensation of the organization's top leader and any housing allowances (in advance).
- Comply with all legal requirements placed upon the organization and approve all legally binding resolutions.
- Assure the organization’s ethical compliance through regular staff and program reports.
- Chart the long-range strategy of the organization along with senior management.
- Approve the annual budget in advance and maintain oversight of its implementation, or establish policies that enumerate the applicable budgetary constraints. Monitor the organization’s financial status.
- Select the organization’s independent auditor.
- Assure the organization’s financial solvency and shoulder appropriate fund-raising responsibilities.
- Approve and modify, if necessary, the corporate structure and corporate policies.
- Assure perpetuation of an independent board not dominated by family or staff interest.
- Assure full disclosure of all potential conflicts of interest within the organization and the board.
- Serve as ambassadors for the organization—interpreting its mission to constituencies and enhancing its public image.
- Counsel senior management in the organization’s administration and use of resources.
- When necessary, be available to hear complaints from employees, members, and the public.
- Maintain job descriptions for board members, board officers, and committees within the organization.
- Assess board performance, individually and corporately.
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| Board Records. In addition to the above, proper attention to written records is extremely important. Of particular concern are these three records: |
- Mission statement and bylaws. The mission statement should define the organization's reason for existence. The bylaws are the established rules to guide board procedure.
- Policy statements. Decisions concerning recurring problems or issues should be recorded. In some cases this can be a simple list, but in more complex organizations it may consist of a body of administrative law. Usually the CEO drafts and recommends policy statements for board approval.
- Minutes. Minutes provide an indispensable record of the board's deliberations. Minutes can also protect the board from litigation or other administrative proceedings. The minutes should list board members present as well as those absent. The meeting's location, start time, and ending time are also essential elements of the minutes. The minutes should record actions taken by the board, contain enough discussion to substantiate the actions taken, and reflect the abstention of interested parties when addressing related-party transactions. Approved by the board chairman and signed by the board secretary after adoption by the board, the minutes should be filed and stored together for ready access.
If an executive committee of the board convenes between board meetings, minutes of executive committee meetings should also be maintained and presented to the full board at its next regularly scheduled meeting.
If the organization utilizes an audit committee, the minutes of that committee's meetings should be recorded as well. The board should be presented with minutes of audit committee meetings and should act on any recommendations made by the audit committee. This will inform and assure the board that audit review responsibilities are being met.
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| Board selection, tenure, and training. Recruiting competent board members with varying and appropriate areas of expertise will enhance the responsible governance of the organization. The organization should seek individuals whose individual gifts and abilities will benefit the organization and who will provide dynamic interaction at board meetings. A "rubber stamp" board cannot govern responsibly. The ministry's mission and purpose, as well as size and complexity must be considered when selecting board members. In addition to procuring people with program orientation, large organizations may need members with legal, financial, and fundraising backgrounds. Every organization's board should include individuals with experience in the organization's particular ministry objective. Subsequent task forces and subcommittees will be more effective with experienced leadership.
Continuity is also an important issue. The need for stability and long-range perspective are often cited as reasons for the long tenure of board members. However, lengthy tenure can narrow the breadth of representation on the board. Other problems associated with long tenure are stagnation, partiality, and burnout. Terms of service for board members should be long enough to provide continuity of policy, but short enough to ensure a fresh viewpoint. New blood is needed to advance fresh ideas and insights in the changing environment of evangelical outreach. In reviewing decisions previously made by longstanding board members, the board must be not be encumbered by a lack of objectivity. Determining the length of service should also relate to maintaining accountability between the organization’s board and staff, especially those in leadership roles. Terms of board service should be staggered so that no more than one-half and, preferably, no more than one-third of the terms expire at one time.
After selecting suitable candidates for board service, the organization should provide an orientation session and training. Training should include a background or history of the organization, as well as an understanding of the organization's current mission. Any long-range or strategic plans should also be made available. Board members should receive the organization’s essential corporate documents: the articles of incorporation, bylaws, corporate policies, financial statements, and management reports. To ensure a clear understanding of responsibilities and accountability, job/position descriptions should be established for officers, committees, and the board as a whole. Since the individual duties of all board members differ in some respects, the organization should provide specific training to individual board members, based on the expectations of each position.
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The relationship of the board and the organization's top leader. Often overlooked, a critical duty of the board is to evaluate the organization's top leader (membership-style organizations may handle the evaluation of the organization's top leader through alternate procedures). When things are going smoothly and the organization's top leader is well liked, the board can easily sidestep the need to formally evaluate the organization's top leader's performance. However, the board must develop a formal written review system to both assess annual performance against established standards and plan future performance goals. The organization's top leader will then receive a clear, written communication of expectations. In this capacity, it is important to note that the board must operate as a whole, and not as individual members. The board’s role is one of service to the organization’s ministry.
A healthy relationship between the board and the organization's top leader will enhance communication and accountability. This relationship is the crux of accountability within an organization. Very often, boards fail to govern because of the unquestioning confidence in the leader, or the founder, or the chair, or some other single personality. The organization takes risks when it aligns itself too closely to one individual, regardless of how good that person may appear to be.
Boards should meet in executive session, without the organization's top leader present, during a portion of at least one board meeting each year. This will facilitate communication and candor among board members in dealing with the organization's critical issues.
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Size of the board. ECFA has established this minimum size in order to avoid a "clannish" group from controlling the organization. This size also allows the board to reflect greater diversity of experience. If a board is too small, it cannot provide adequate policy guidance or assistance to the organization. Increasing the number of members lends itself to a greater level of independence.
On the other hand, a board should be small enough to act as a deliberative body. If the board grows too large to meet as a collective entity, then it loses its ability to effectively discuss issues and make effective decisions.
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Board independence. This Standard includes the following requirement, "Every member shall be governed by a responsible board of not less than five individuals, a majority of whom shall be independent...."
The following are examples of "independent" board members in ECFA's view (also see Standard 6 regarding related-party transactions which could impair board member independence):
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Persons who are not employees or staff members of the organization.
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Persons who may not individually dictate the operations of the organization similar to an employee or staff member. A person who is an uncompensated CEO, for instance, is not independent.
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Persons who are not related by blood or marriage to staff members. Blood or marriage relationships are defined for the purposes of the Standard as being spouse, parent, in-law, child, sibling, grandparent, grandchildren, aunt, uncle and first cousin relationships.
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Persons who are not related by blood or marriage to other board members.
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Persons who do not report to or are not subordinate to employees or staff members of the organization.
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Persons who do not report to or are not subordinate to other board members.
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Persons who do not receive a significant amount of consulting, speaking or any other remuneration from the organization.
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Persons who do not have relationships with firms that have significant financial dealings with the organization, officers, directors or key employees.
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Persons who are not the paid legal counsel, related to the paid legal counsel, or are employed by the firm that is the paid legal counsel of the organization.
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Persons who are not the auditors, related by blood or marriage to the auditors, or are employed by the auditing firm of the organization.
The organization should take care to maintain the reality, not just the appearance of independent board governance. Requiring the predominance of independent board members helps ensure the board will take official action without partiality, undue influence, or conflict of interest.
To assess the reality of board independence, ECFA looks beyond the majority of independent board members on the board roster. ECFA is just as concerned about the reality of board independence as with the mathematical determination of a majority of independent board members.
It is appropriate for the board to establish and adopt a conflict of interest policy, and ask board members to complete a conflict of interest disclosure statement annually.
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Meetings of the board. To realize effective governance, the board must meet regularly. A quorum must always be present for the transaction of business. The quorum should be defined by the organization's bylaws and should require the presence of 51% or more of the voting members. In addition, that quorum must reflect a majority of independent board members in order to maintain the intent of Standard 2. Two board meetings per year at reasonably spaced intervals are the absolute minimum requirement for ECFA membership. This minimum requirement is intended to underscore the importance of board involvement and to prevent long interim periods between board meetings.
While face-to-face meetings are always preferable and should remain the norm, one of the two meetings may be conducted using a remote electronic communications system, including telephone conference calls, videoconferencing technology or the Internet, only if: (1) each person entitled to participate in the meeting consents to the meeting being held by means of that system; and (2) the system provides access to the meeting in a manner by which each person participating in the meeting can communicate concurrently with each other participant. Board members must be serious about attending board meetings. Before accepting an invitation to serve on the board, prospective members should evaluate their ability to attend meetings regularly. When an organization’s board meets only twice a year, an executive committee of the board should meet regularly. It should then immediately inform the full board of its decisions and actions.
To maximize the effectiveness of the board during board or executive committee meetings, board members should be well prepared for meetings. Appropriate assistance from the organization's staff will facilitate this preparation.
The board has a role in ensuring that the organization is acting in accordance with the ECFA Standards of Responsible Stewardship. Since these Standards are required of all ECFA member organizations, the board should periodically review the ECFA Standards to verify the organization's compliance.
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Financial statements oversight. As part of its mandate for financial accountability, the board is responsible for interacting directly with the independent certified public accountants who perform the annual audit, review, or compilation, or for delegating this responsibility to a committee. If a separate committee is used to carry out the review function, the committee must be comprised of a majority of independent members. Adequate financial expertise should be represented on the committee.
The criteria set forth to ensure the independence of the board may also be applied to the committee to which this responsibility may be delegated.
If the board utilizes a committee to carry out the review function, the committee should have three to five members (with at least one member having financial experience)—large enough to provide diversity in opinion and background, yet not so large as to be cumbersome.
The majority of the committee should be independent. The committee chairman should not be an employee of the organization. A member of the independent certified public accounting firm performing the audit, review, or compilation should not serve as a member of the committee, but should serve only in an advisory capacity.
Missionaries, volunteers, and staff must be in the minority on the committee. Persons who volunteer a substantial number of work hours each year can meet the “nonemployee/staff” qualification, as long as their services are not in decision-making roles.
Staff individuals, such as the chief financial officer, should normally be invited to committee meetings to answer questions and to provide information. When the committee meets with the independent accountants, all staff persons should be excused from the discussion for at least part of the time. All minutes should be presented to the full board of directors.
The responsibilities of the board or a delegated committee are to:
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Make recommendations for the appointment an independent certified public accounting firm.
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Annually meet with the independent certified public accounting firm.
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Review, evaluate, and oversee any recommendations the independent accountants make in their reports about the organization's internal accounting and management controls.
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Review the annual statements with the independent accountants.
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Maintain communication between the board and the independent certified public accounting firm.
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Summary. Effective board governance is critical for the health of the organization! Accountability by definition implies a level of discomfort and vulnerability. Being accountable means being obligated to report, explain, and justify. By holding the organization accountable, the board fulfills its own obligation to the organization's beneficiaries, donors, and the public.
Perhaps the best scriptural verse to describe ECFA's overall desire for its member organizations to emulate strong, effective board governance is Proverbs 27:17. "As iron sharpens iron, so one man sharpens another."
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