Can Board Members of Nonprofits Make Money?
The Sarbanes-Oxley Act of 2002 enacted accountability and transparency rules for publicly traded companies. The question of whether board members of nonprofit organizations should serve in a voluntary capacity or receive compensation has become even more important in the post Sarbanes-Oxley environment. Though Sarbanes-Oxley does not directly govern most nonprofits, it has had a huge effect on the culture and responsibilities of the board of directors.
The purpose of a nonprofit board is twofold. It acts as the vision-setting and planning body for the organization. Whereas it is the chief executive’s job to move the company forward, it is the board’s job to set the direction for that movement. The ethical and financial oversight that is part of the board’s duties is always performed with an eye on the future of the organization. The other responsibility of the board of directors is to ensure that the organization has financial resources. A nonprofit board is, at its core, a fundraising tool. The integrity of the board enhances the public standing of the organization. Nonprofit board members should be able to generate funds for the organization either by asking for contributions from peers or by making contributions themselves.
No regulations prohibit compensating board members. It is not illegal as long as it is properly reported to the Internal Revenue Service. The annual IRS 990 filing asks for any compensation to officers, directors, trustees, key employees, highest-compensated employees and independent contractors. Because a nonprofit cannot inure benefit to an individual, the compensation must be fair and in accordance to self-dealing rules that set criteria for direct and indirect financial benefit between those who supply funding and those who receive funding.
Just because it is legal to compensate your board members does not mean that it is in the best interest of your organization to do so. According to the Council on Foundations, less than one-quarter of foundations compensate their board. Most nonprofits see their board as an extension of the organization’s public service. Since a primary responsibility of the board is fundraising, compensating the board becomes self-serving and erodes to board’s ability to generate funds. Funders may ask whether they are funding the organization’s services or funding the board of directors.
Being a board member can be a lot of work. At some time in throughout their tenure, the organization will want to acknowledge the board members. This acknowledgment may be anything from a one-time gift of cash to a breakfast and a plaque. One of the benefits of compensating the board, whether it is a one-time gift or a monthly stipend, is that it lends value to the job that the board is doing. This is necessary to attract and maintain qualified members.