Q&A #107 – Should a majority of a nonprofit’s Board members be independent?
Question: My nonprofit has recently had to report that several of its Board members are not “independent” for purposes of the Form 990. I am concerned that the number of non-independent Board members may grow. Is it important that at least a majority of a nonprofit’s Board members be independent?
Answer: While it is not necessarily a bad thing to have some non-independent members on the Board of Directors of a nonprofit organization, it is important for both perception and governance reasons to ensure that a majority of the Board members are “independent” as defined in Part I, Line 4 and Part VI, Line 1b of the Form 990.
As discussed in Weekly Thoughts #101, the question about Board member independence addressed in Part I, Line 4 and Part VI, Line 1b of the Form 990 is one of the most visible questions on the entire form, as one of the Form 990’s few repeated questions with placement so high on the first page.
Having some non-independent Board members (in other words, reporting that less than 100% of organization’s Board are “independent”) is not by itself a cause for concern. On the contrary, this could reflect positive circumstances such as a Board member has providing an interest-free loan to the organization or providing services to the organization at reduced cost (for more information on how to determine whether Board members are independent, refer to the Form 990 instructions and our Part VI, Section A Guide Sheet).
However, having a majority of non-independent Board members is likely to have a detrimental impact on the public’s perception of your organization, and could potentially compromise the Board’s ability to make unbiased decisions that are solely in the best interests of the organization.
First, be aware that charity watchdog groups look closely at this issue. For example, an organization will lose points under Charity Navigator’s Finance & Accountability beacon methodology if its percentage independent Board members drops below 50%. It is best to avoid making this negative impression on grantors and donors who refer to these ratings.
Additionally, having a majority of non-independent Board members may have implications under the applicable state nonprofit corporation statute. For example, California law provides that no more than 49% of a charitable organization’s Board may be composed of directors who have been compensated by the organization for services within the last 12 months or family members of such a person.
Planning Tip – Simply maintaining a majority independent Board as defined under Part I, Line 4 and Part VI, Line 1b of the Form 990 is not necessarily sufficient to properly manage actual and potential conflict of interest transactions. Is important to have a conflict of interest policy with established procedures in place that are consistent with best practices under the “excess benefit transaction” rules. This generally involves having interested person transactions reviewed by Board members who do not have a conflict with respect to that particular transaction. Read Q&A #55 for more information on how to determine whether directors are “disinterested” for these purposes.
There are also important reasons to maintain a majority independent Board from a governance perspective. There is an implicit tendency for Board members who have engaged in financial transactions with an organization (such as loaning funds or receiving compensation) to be influenced by those transactions when making decisions on the organization’s behalf. Maintaining a majority independent Board helps to ensure that these natural biases are offset by other Board members who are in a better position to remain objective.
