Internal Controls in a Not-For-Profit World: Church Governance
As is the case with all corporations; church corporations have a board of directors that are responsible for the oversight of the ministry. The board of directors is charged by the church membership to protect, guide and serve the body of Believers that call their church home. In this article; I will discuss the importance of a well-structured board of directors as well as typical guidelines for the composition of the board of directors in addition to the responsibilities that should be entrusted to the members of the board of directors.
Church governance is typically structured in one of two ways; major decisions and governance is accomplished on the local congregational level by member vote or by a group of appointed members of the board of directors. In my opinion; one method is not necessarily better or worse than the other but properly structuring the board of directors is essential to organizational success if that method is adopted by the ministry. I will be focusing primarily on the role and composition of an appointed board of directors since the congregational method is fairly straight forward; membership votes on all major decision.
The role of the board of directors in a local church is not to limit the role of the senior pastor, but rather provide oversight and assistance to senior ministry staff so that they can effectively serve the members of their church and community. Since this body is the primary decision makers for the church; it is essential that the board of directors be structured in a way that ensures accountability and continuity of leadership.
The board of directors should consist of five (5) or more members; not including the senior pastor if he/she decides to be a part of the board of directors. The membership of the board of directors should consist of a majority of lay personal; non-ordained members of the congregation or by another association to the church to ensure that the church congregation – membership is adequately represented on the board of directors. The board of directors should also not consist of more than 20% of members who are related by either blood or marriage to the senior pastor and/or chairman of the board to ensure autonomy. The board of directors should be appointed to their position for a term of more than one year and less than ten years with staggering end dates to ensure continuity of board direction. In addition; just as with the senior pastor, there should be a mechanism in place that would allow the board of directors of the congregation to remove and replace a board member if needed.
In some cases, the chairman of the board might retain a veto power or possibly the senior pastor, which is not acceptable because doing so would undermine the effectiveness and authority of the board of directors. Also, the board of directors should be self-perpetuating, which is to say that appointment of board members should be made by the board members themselves and not by one individual; such as the senior pastor or chairman of the board. An alternative to the board of directors appointing new board members themselves is that any prospective board member appointment must be voted on and ratified by the church congregation by a majority or super majority vote.
The responsibility of the board of directors can be fairly broad but should include at least the audit committee, financial committee and compensation committee responsibilities. The board of directors should be the primary decision makers for any large financial transactions that include acquisition and disposal of assets or other actions that impact the financial position of the corporation. Once again, no one or two individuals should have the authority to make large financial decisions without the consent of the board in the form of a unanimous or super majority vote.
The board of directors should also be responsible for assessing and determining the compensation of top and key leadership positions which include that of the senior pastor. Many churches within the US expense close to 40% – 50% of their annual budget on salary and personnel, which accounts for the majority of their annual budgets so a clear compensation policy should be implemented. The board of directors must have the responsibility to approve appropriate compensation for the executive staff and to approve new hiring of senior staff since these decisions have a significant impact on the financial operations of the church. This process is consistent with the necessity that the board of directors be the managing body that reviews and approves the annual budget for the ministry.
Another option to directing the auditing, financial and compensation committee responsibilities to the board of directors is to present these decisions to the congregation in the form of a congregational vote. Many ministries already utilize this approach for major financial decisions such as purchasing a new facility or entering into a construction project, but most prefer not to openly share compensation amounts with the congregation so this method is rarely utilized for compensation decisions.
Senior Pastor Appointment
Inevitably in the life of a ministry; the role of senior pastor will be passed along from one person to the next – one generation to the next. The reasons for the transition are as varied as you might imagine; retirement, death, resignation or removal. Unfortunately, even Christian ministries are not without their own fair share of scandals amongst senior pastors and other ministry leaders. This requires the church corporation and board of directors to have in place a mechanism that would allow for the removal of the senior pastor, chairman of the board or other senior leader in the case of a moral, legal or other failure. This can be accomplished by bringing the matter to the congregation for a majority vote; which is the preferred method or a unanimous “vote to remove” by the board of directors.
Whatever the situation, the board of directors will be charged with smoothing the transition from one key leader to the next. The process must be clear, well thought out and successfully implemented to ensure as little disruption as possible. It is my experience that an interim senior pastor should be appointed by the board of directors to lead the ministry during this time of transition. The person appointed should be a well-known and respected executive staff member of the church that will help to provide assurances to the congregation and to ensure that the direction of the ministry will continue. The board of directors should then convene a pastoral search committee to identify, vet and present a new senior pastor candidate to the church congregation for approval. This process should take 9 – 18 months since this decision will shape the ministry for many years to come. Ultimately, the church congregation must be the voting party to the acceptance or decline of the candidate that the board of directors presents to them.
I believe that properly structuring your church governance is an essential component to ensure that your ministry is able to continue to serve your community and the Kingdom by sharing the Gospel for generations to come. A great reference for church leaders as they weigh the composition, duties and responsibilities of their board of directors is the Evangelical Council for Financial Accountability (www.ECFA.org). The ECFA offers a wide array of ministry guidelines including their “Standard 2 – Governance” which mirrors the guidelines laid out in this article.
I have received some criticism about this article as it relates to my position on church governance. This article was written from the perspective of “best practices” for church board governance from an internal control stand point as described by COSO “Committee of Sponsoring Organizations of the Treadway Commission” as it relates to assessing internal controls during an audit. These guidelines are those that are generally held as “best practices” by Certified Public Accountants and others who are charged with assessing the internal controls of an organization – including a church corporation.
I would be the first to highlight and freely admit that these principles are not Biblically based but rather based upon industry standards. The governance model described within my article is not the only structure utilized by the local church, but does conform to COSO and Evangelical Council for Financial Accountability “ECFA” guidelines.
My intent in writing this article on church governance was to share a possible structure and not discount a Biblically-based governance structure that is not consistent with COSO guidelines. Please hear my heart; I want to serve the Kingdom by helping ministries with their financial matters and not condemn or discount any other church leaders’ interpretation of Biblical governance.
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