Some nonprofits agonize over whether to allow the paid head of the organization to serve on its board. Board members understand that what seems like a good idea in planning often becomes a huge problem in practice. The IRS requires volunteer nonprofit board members -- who hire and determine salary for the organization’s executive director -- to govern the organization and manage its assets in a manner that promotes its mission and adheres to nonprofit tax law. While there might not be legal barriers to a paid executive director serving on the board, ethical considerations and appearances often influence the decision.
Paid CEO Board Service
No federal laws, including IRS tax-exempt organization laws, prohibit a nonprofit’s paid executive director or chief executive officer from serving on the organization’s board. However, you should check with your nonprofit attorney or your state regulatory agency about state laws for nonprofit board membership. Many states have laws that set a percentage, such as 50 percent or less, of paid staff or relatives who can serve on a nonprofit board.
Service and Voting Options
Many nonprofits prohibit board service for paid staff, including the executive director, while others carve out limited board roles for paid staff. Paid CEOs often serve on nonprofit boards as ex-officio members whose appointment is automatic and not subject to normal selection procedures. Your nonprofit might choose to invite the CEO to board meetings as a non-voting guest or advisor. Another option is to allow the paid CEO to serve on the board, but limit her voting power to exclude voting on budget, compensation and performance evaluation issues.
Issues to Consider
The governance role of the nonprofit board affects the organization’s tax-exempt status as a 501(c) charity under IRS tax codes. Many boards prefer to separate the organization’s governance from its management. However, with proper controls the paid CEO can achieve positive results, such as a better-informed board and improved board-staff relationships, through board service. Common worries about CEO board service are conflict of interest and strained relationships among board members. Also, the practice might cause concern to outsiders, such as donors. The IRS requires nonprofits to report board member compensation on annual tax forms. The nonprofit with a paid CEO serving as a board member must report the CEO’s salary as board member compensation.
Making the Decisions
Nonprofit boards usually make the decision to allow CEO board service before filing for incorporation or applying for tax-exempt status. The nonprofit’s organizing documents, which are the articles of incorporation and bylaws, specify whether the executive director can serve on the board and, if so, whether she has voting power and any limitations. A nonprofit board that decides after formation to initiate or discontinue the practice must vote and add an amendment to its organizing documents. The board must file the amendment with the state agency that regulates corporations.