You can be executive director and a board member in your nonprofit. However, this tends to create some issues. Principally, you’re looking at a never ending stream of conflicts of interest. You’re also going to face some logistical challenges.
What is a Conflict of Interest?
In nonprofits, a conflict of interest arises any time you potentially have to decide between what’s best for you and what’s best for the organization. It’s only an issue if you’re in a position to make that decision.
Employment Status
One of the main roles of a board of directors is hiring and delegating managerial authority. In other words, the board of directors hires the Executive Director. If you’re both, this creates a large conflict of interest. You can correct it by abstaining from any vote on who the executive director will be and how much they’ll get paid. However, that’s a big part of the board’s responsibility you’re now unable to do.
Budgets
Another big thing the board does is approve the budget for the organization. Budgets include a lot of things an executive director would be personally concerned with like staff wages, overtime, and priorities of the executive director. Because of this conflict of interest, there’s another huge aspect of being a director you’d have to abstain from.
Two Hats
Beyond the above concerns, you’ll also have to wear two different hats in board meetings. Often times, the executive director is asked to be in board meetings to relay information. However, if you’re also a board member, you’ll be more inclined to relay information in a way that fits your own personal needs.
For example, if you’re presenting on the impact of a particular fundraising event, you’re going to give the information you think the board needs based on your executive director experience. That’s normal. However, the board will ask follow up questions. You won’t be a helpful board member in this case because you’ve already presented the information you think the board needed. Therefore, as a director, you will have no follow up questions.
In another scenario, if the executive director made a mistake worthy of the board of directors’ attention, any board member with knowledge of this mistake has to bring it to the attention of the full board. As executive director and a board member, you’d have to report yourself. See how that can be a problem?
IRS Status
Finally, we get to the IRS status. The IRS has made it clear they don’t want people serving as both executive director and director. However, it is not illegal to do so. The IRS will look at the totality of the circumstances to see if there is an issue.
However, it isn’t just about conflicts of interest for the IRS. The IRS cited a study by the Urban Institute Center on Nonprofits and Philanthropy from 2008 when they explained that having the CEO (executive director) serve on the board of directors results in a less engaged board and may undermine the stewardship role of the board of directors.
Here’s the IRS abstract: https://www.irs.gov/pub/irs-tege/eo_determs_governance.pdf
This rule doesn’t just apply when you form your nonprofit. It should continue throughout your organization’s life.
Conclusion
I can’t speak for every state or what happens in the future, but legally, you’re allowed to serve as executive director and on the board of directors. However, it is a bad idea. You create too many conflicts of interest and, as the Urban Institute study showed, you make your board less effective.
My recommendation is to separate these two roles. Even in dire circumstances, it’s more important to have an independent board than whatever reason you might have for taking on both responsibilities.
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