Does a Nonprofit Board Have to Approve Contracts or Can the Executive Director Do That?

by Terry Masters
A nonprofit's board is legally responsible for overall governance and financial oversight.

A nonprofit's board is legally responsible for overall governance and financial oversight.

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A nonprofit's board of directors is legally responsible for financial oversight of the organization. By adopting bylaws that set organizational controls and hiring a competent executive director to manage the nonprofit's day-to-day affairs, the board ensures that the organization can further its mission without needing its daily input. While the board of your organization can delegate authority to handle ordinary business matters, certain types of contracts may still require board approval.

Nonprofit Governance Under State Law

A nonprofit operates under the laws of the state where it is incorporated. Since a nonprofit pursues a mission rather than profit, the law places heightened responsibility on the organization's board for financial and managerial oversight. The board of nonprofits with federal tax-exempt status are also held responsible by Internal Revenue Service for proper fiscal management to ensure taxes are paid and revenue is spent in legal ways.

Delegation of Authority

Although your nonprofit's board must govern the organization and provide oversight, it probably delegates day-to-day management authority to an executive director who is an employee of the nonprofit. For most organizations, it's not feasible or desirable for the board to be involved in every operational decision. A nonprofit, like most businesses, typically functions best with a single leader who is completely involved in day-to-day affairs. Your organization's board of directors can meet its oversight responsibilities by adopting bylaws putting policies in place to define the role of the executive director and hiring a qualified candidate to fill the executive director position.

Routine Contracts

Unless your organization's bylaws or a specific policy adopted by the board says otherwise, the executive director is typically expected to execute contracts that further the nonprofit's mission. Your board might meet once a month or less frequently, and the directors are probably volunteers who have other engagements. It would be difficult for your nonprofit's executive director to get board approval for every contract that the organization needed to sign. Instead, the executive director typically has the authority to approve contracts within the scope of ordinary business without needing the direct approval of your organization's board.

Extraordinary Contracts

Generally, an executive director can approve contracts unless prohibited by the board. However, the board may establish protocols that require board approval for certain types of contracts. For example, the board may require board approval for contracts involving dollar amounts above a set limit. Proof of board approval may also be required by the other contracting party if it is concerned about proper authorization and board oversight of the transaction.