What Decisions Require Nonprofit Board Approval

Key Takeaways

• Boards of directors guide both for-profit and nonprofit organizations by overseeing strategy, management, and compliance.
• Board committees (executive, audit, compensation, nominating) handle specialized functions, while the full board makes broader strategic and governance decisions.
• Nonprofit boards must approve major decisions such as hiring executives, setting compensation, entering into loans, amending bylaws, and acquiring or selling property.
• In membership nonprofits, members may also need to approve structural changes such as dissolutions, asset sales, or amendments that affect member rights.
• Boards can take action either through formal meetings or written consent, but decisions must always be documented in minutes or resolutions.
• Executive directors of nonprofits generally need board approval for large expenditures, real estate commitments, hiring senior staff, and strategic programmatic shifts

What decisions are made by a corporation board of directors include those that guide the direction of the company, represent its shareholders, and oversee the activities of a for-profit or nonprofit entity.

A board of directors is established to protect the interests of both the investors and the corporation itself. Shareholders elect board members. These individuals are expected to maintain the company's stability and profitability. Public companies are required to have a board of directors. Private companies often have boards but they are not required to do so.

What Makes Up a Board of Directors

Boards of directors usually have between seven and 15 members, but can have up to 31 members. While there are no set rules when determining board composition, it has been shown that increased board diversity results in better decision-making for the corporation. The Securities and Exchange Commission established "The Governance Disclosure Rule," which requires companies to take diversity into consideration when selecting candidates for nomination.

Board Committees Types and Functions

When establishing a board, there are four types of primary board committees: executive, audit, compensation, and nominating. Other types are possible and can be chosen based on the overall corporate philosophy and the line of business the company is in.

• Executive committees are a smaller subset that meets if the full board is not available to attend.
• Audit committees review necessary financial statements with internal and outside audit companies.
• Compensation committees oversee decisions related to salaries and bonuses of the board and top-level executives.
• Nominating committees take the lead in selecting candidates for available board of director openings.

In addition to establishing committees, there are differences in requirements and overall decision-making if the board is for-profit or nonprofit. These include:

• Nonprofit members are not paid, while for-profit members are.
• For-profit board members focus on how to maximize profits for shareholders, while nonprofit board members seek to further the overall positive effect on their community.

Nonprofit vs. For-Profit Board Decisions

While for-profit boards are largely focused on maximizing shareholder value, nonprofit boards prioritize mission fulfillment and community benefit. This distinction directly impacts what decisions require nonprofit board approval. For nonprofits, decisions often extend beyond financial oversight to include programmatic direction, grant policies, and compliance with tax-exempt status requirements. For example:

• Nonprofits approve executive director hiring and performance reviews.
• Boards review fundraising strategies and oversee grant acceptance.
• Certain community impact initiatives may require formal approval to ensure alignment with the mission.

This contrasts with for-profit boards, which typically focus on shareholder distributions, acquisitions, or executive compensation packages.

The Board of Directors' Role

A board of directors is put in place for specific purposes and roles:

• The first, and arguably the most important, role is the task of recruiting, supervising, retaining, evaluating, and compensating the CEO or general manager.
• Determining the organization's direction and strategy. This is completed with the CEO or general business manager to establish the vision, mission, and overall goals.
• Establishing rules that govern how the board interacts with the general manager or CEO and having a fiduciary responsibility to protect the organization's assets and the members' investments in the company.
• Making sure any audit is managed properly and completed in a timely manner.

Decisions Reserved for Nonprofit Boards

Nonprofit boards hold fiduciary responsibility to safeguard the organization’s assets and integrity. Key matters that require formal approval include:

• Hiring, firing, and setting compensation for the executive director and key officers.
• Purchasing liability insurance for directors and officers.
• Approving leases, purchases, or sales of real estate.
• Consenting to loans, debt obligations, or other major financial commitments.
• Amending articles of incorporation or bylaws.
• Issuing classes of memberships or changing member dues and assessments.
• Overseeing fundraising programs and ensuring compliance with charitable solicitation laws.

By law, day-to-day operational decisions (e.g., staff scheduling, internal procedures) generally do not require board action.

Board of Director Benchmarks

A board of directors is designed to discuss and direct top-level topics that affect the company's future. In some instances, the board must take a more detailed approach to their involvement. This might occur if they get indications that management is off-course and negatively impacting the organization's goals and profits.

Benchmarks that should be used by a board of directors include:

• Large matters that affect the company's financial status.
• Long-term vision in relation to quality, growth, finances, and people.
• Maintaining the company's initial and continued mission.
• Focusing on high-level policy decisions while leaving lower-tiered matters to management.
• Conducting performance reviews to monitor trends that impact the company positively or negatively.
• Verifying management is keeping the board informed of any legal and media matters that can be brought by Congress, the IRS, the state attorney general, or media.
• Establishing and maintaining an open working relationship with the CEO in an effort to benefit the organization by removing any possible conflicts.

When Membership Approval Is Also Required

In corporations structured as “membership nonprofits,” members are often granted voting rights under bylaws or state law. These rights typically include:

• Electing the board of directors at annual meetings.
• Ratifying amendments to governing documents.
• Approving changes to member privileges or dues.
• Approving the sale of substantial nonprofit assets.
• Voting to dissolve the corporation.

In such cases, the board may propose action, but members ratify or approve it to finalize the decision. This system ensures accountability to the broader membership base.

When Are Board of Director Approvals Required?

While the reasons for a board of director approval vary, examples include:

• Amendments to the certificate of incorporation or bylaws.
• Equity grants or transfers (stock options or warrants).
• Distributions to stockholders.
• Borrowing or lending money.
• Adopting an annual budget.
• Hiring, terminating or amending contracts of senior management.
• Adopting employee benefit plans.
• Sale or other distribution of assets of the company.
• A dissolution or winding up of the company.
• Entering into agreements that could be of material importance to the company.

Procedures for Board Approvals

Boards can authorize actions in two ways:

1. Formal Meetings:
   • Typically held quarterly or annually, with directors present in person or virtually.
   • Allow open discussion, debate, and consensus-building on complex issues.
   • Require quorum and recorded minutes to validate decisions.
2. Written Consent:
   • A streamlined option where directors sign a written resolution outside of a meeting.
   • Commonly used for non-controversial or routine matters, such as extending a lease or approving a bank authorization.
   • Legally binding if executed properly and preserved in the corporate record.

Both methods carry the same legal weight, but formal meetings are generally preferred for major strategic or sensitive decisions.

Role of the Executive Director and Board Oversight

The nonprofit executive director manages daily operations but must seek board approval for significant decisions:

• Large contracts or expenditures beyond budget authority.
• Hiring senior leadership or key staff.
• Entering into multi-year leases or real estate commitments.
• Changing compensation structures or benefit plans.
• Shifting program strategy or partnerships that materially affect the mission.

The board provides oversight to ensure that the director’s actions remain aligned with the nonprofit’s long-term vision, fiduciary duties, and compliance requirements.

Frequently Asked Questions

1. What decisions require nonprofit board approval?
   Nonprofit boards must approve key financial, legal, and programmatic decisions such as hiring executives, loans, real estate transactions, and bylaw amendments.
2. Do nonprofit members also vote on board decisions?
   Yes, in membership nonprofits, members may elect directors and approve major structural changes like asset sales or dissolution.
3. Can nonprofit boards make decisions without a meeting?
   Yes. Boards can use written consent to approve non-controversial matters, though formal meetings are preferred for major issues.
4. Does an executive director need board approval for all actions?
   No. Routine operational decisions are handled by the executive director, but large contracts, staffing changes, or strategic shifts require board approval.
5. How are nonprofit board decisions documented?
   Actions must be documented either through meeting minutes or written resolutions, and these records should be maintained in the corporate records book.

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