A Framework for Nonprofit Governance

July 12, 2016 |
1 minute read

Two important laws enacted in the last 15 years have had an impact far beyond the intent of their original authors, causing major, if little-noticed, changes in nonprofit governance.

The Sarbanes-Oxley Act of 2002, which addressed governance of public for-profit corporations, contained two provisions which applied to nonprofit entities. Other provisions of the law, however, have now become part of an established best practice standard for nonprofits. Another statute, the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which sets standards for investing, spending and managing donor-restricted funds, has increasingly been applied to unrestricted and board-designated funds.

This resource explores these two laws, which address specific areas and issues and have had a substantial impact far beyond their original intentions.  In this newly-created “normative environment,” nonprofits can appear to be departing from best practice if they fail to comply with the standards set by these laws, even if the laws were not intended to apply directly to those situations, and boards of such institutions may increasingly face questions as to why they choose not to comply with these standards. This legislated normative environment fills in voids that were previously the purview of common law fiduciary, corporate governance and investment jurisprudence and raises fundamental challenges to trustees and others charged with oversight of nonprofit institutions..

Until the 20th century, the regulation of nonprofit governance and investments within the United States was effected through common-law principles which had evolved over time as a result of centuries of court decisions. Each state had a separate court system, which led to variations between the states in their treatment of governance, fiduciary, and investment issues.

As the U.S. economy began to function on a more national basis, it became apparent that a more unified approach to nonprofit governance among the states was necessary, creating a new challenge for lawmakers and attorneys.

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