Principle 11: Board Diversity

Principles for Good Governance and Ethical Practice

Principle 11: Board Diversity

Principle Statement

The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnic, racial and gender perspectives), experience, and organizational and financial skills necessary to advance the organization’s mission.

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Introduction
Boards of charitable organizations generally strive to include members with expertise in budget
and financial management, investments, personnel, fundraising, public relations and marketing,
governance, advocacy, and leadership, as well as some members who are knowledgeable about the charitable organization’s area of expertise or programs, or who have a special connection to its constituency. Some organizations seek to maintain a board that respects the culture of and reflects the community served by the organization. Boards increasingly are being encouraged to be inclusive of and sensitive to diverse backgrounds when recruiting board members, in addition to purposefully recruiting board members with expertise and professional or personal experiences that will be beneficial to the organization.
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  Because the board must ensure that all financial matters of the organization are conducted legally, ethically and in accordance with proper accounting rules, it should make every effort to ensure that at least one member has “financial literacy” —that is, the ability to understand financial statements, to evaluate the bids of accounting firms that may undertake an audit or review and to assist the board in making sound financial decisions. This need not entail advanced training in accounting or financial management. If the board finds itself unable to recruit members with such skills, it should contract with or seek pro bono services of a qualified financial advisor, other than its auditor, to assist the board in its financial responsibilities.
  
  Organizations should also consider the requirements of current and prospective funding sources regarding the composition of the boards of their grantees. For example, in order to be recognized as a Community Housing Development Organization, one-third of the board members must be representatives of the low-income community the organization serves.¹
  
  Some donors to private foundations wish to involve family members on the boards of their
  foundations to ensure that the donors’ philanthropic tradition will continue through future
  generations. If family members do not have the necessary expertise and experience, the board may wish to bring in advisors. The board should also consider the advantages of diversity and the perspective offered by representatives from outside the family.
Core Concepts
- A board should have a variety of skills, expertise, backgrounds, and perspectives in order to make informed decisions.
- Every board should have expertise in budgeting and financial management.
- Family foundations should balance the desire to involve family members and honor donors’ intent with the need for professional expertise and diversity.
Legal and Compliance Issues
- There are no laws that directly define the composition of the board. Certain state laws have provisions defining the minimum level of independent members on the board.
- In membership organizations, the articles of incorporation need to define the role of members in electing board members.
Legal Background

Federal laws and regulations generally do not contain requirements for the composition of a
charitable organization’s board of directors, with four notable exceptions: 1) health care organizations that must have a community board to satisfy the community benefit test;¹ 2) organizations that qualify as publicly-supported charities based on a “facts and circumstances” test may need to have a governing board that is representative of the community; ² 3) supporting organizations that must show a close relationship with the organizations they support through specific board positions; and 4) credit counseling organizations which must
meet specific rules for board composition.³

(From The Principles for Good Governance and Ethical Practice: Reference Edition,
Published in 2007)

¹ Internal Revenue Service Audit Guidelines for Hospitals, 1992. See Fremont-Smith, Marion R., Governing Nonprofit Organizations: Federal and State Law and Regulations, The Belknap Press of Harvard University Press (2004), page 244.

² Treas. Reg. §1.170A-9(e)(3).

³ IRC § 501, 513; Pension Protection Act § 1220.
Discussion Points
These questions – from the Principles Workbook (PDF) – are intended to prompt discussion about the principle, assess the polices and practices of your organization, and encourage your organization to take steps to identify where improvements should be made.
1. Have we identified the ideal mix of skills, knowledge, experience (professional and personal), gender, and ethnicity for our board?
2. What steps can we take to be more successful at recruiting individuals to join our board that will close the gap between our present and ideal board?
3. Have we taken steps to ensure that we have adequate financial expertise either on or available to the board?
4. Does the composition of our board affect our ability to secure funding? If so, have we adequately addressed this need?