Q&A #42 – When must an Executive Director obtain Board approval for a transaction?

Question: I am the Executive Director of a nonprofit organization, and I have never been sure exactly when I am required to bring transactions to the Board of Directors for its approval. For example, my organization is considering entering into a 2-year lease for space for one of our programs. This expense and the overall program were included in the last Board-approved budget. Should I seek Board approval of this particular contract?

Answer: This is one of those questions that is both extremely common and unusually difficult. Whether or not a transaction should (or must) have Board approval depends on the individual organization and the particular transaction. In some cases, the answer is clearly yes, such as with the sale of a major asset like a building. However, there are many cases where the answer is not so clearly defined.

The first place to look for an answer is your applicable nonprofit corporation statute, although these laws usually address only major transactions such as liquidations, dissolutions, and mergers, as well as sensitive matters like conflict of interest transactions.

Next, consult your organization’s Bylaws. Sometimes the Bylaws set clear parameters for the authority of the organization’s executive leaders with regard to certain types of transactions, such as those involving compensation and the hiring of staff. However, the Bylaws usually don’t address the authority for most types of transactions that come up in an organization’s day-to-day operations.

The organization’s formal policies and procedures are likely the most important documents to consult regarding this question. Most organizations address, in some level of detail, the approval authority of its executive leaders in policies such as investment policies, cash management policies, and/or contract approval and spending guideline policies. Additionally, an organization’s accounting policies and procedures manual should have some guidance regarding the process for approving and executing contracts and making purchases. For example, the organization might have an established policy that requires the Executive Director to seek Board approval for any contracts exceeding $50,000 and/or which entail obligations exceeding 12 months in duration.

Lastly, expect that there will be many situations, some unexpected, where there is no clear answer to guide the approval process. In these cases, I generally advise nonprofit executives to look to past precedent within the organization and, in particular, how similar matters have been communicated to the Board of Directors in the past. If your gut is telling you to run the transaction by the Board, there is most likely a good reason to do so.

Planning Tip – If you are unsure whether you have the authority to approve a transaction without the Board’s approval (and there is no clear answer in the organization’s Bylaws or policies), choose to err on the side of transparency. Start by informing the Chair of the Board or the relevant committee. Consider also having informal discussions about the transactions with the Board and including details in your regular Executive Director reports and other written communications. The Board members will probably let you know if the transactions merits further Board deliberation. Most importantly, keeping Board members informed will enhance their confidence and trust in your performance.

 In your case, I am assuming the organization’s Bylaws and policies do not clearly answer the question. The fact that the expense and the program were already in the Board-approved budget suggests that you are probably authorized to execute the contract (unless perhaps the lease is significantly more expensive than originally planned). However it is generally advantageous to keep the Board informed about unusual transactions and seek their input and encourage their comments .

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