Big Cat Rescue's Board Policy
A charitable organization must have a governing body that is responsible for reviewing and
approving the organization’s mission and strategic direction, annual budget and key financial
transactions, compensation practices and policies, and fiscal and governance policies.
The board of directors bears the primary responsibility
for ensuring that a charitable organization
fulfills its obligations to the law, its donors, its
staff and volunteers, its clients, and the public at
large. The board must protect the assets of the
organization and provide oversight to ensure that
its financial, human, and material resources are
used appropriately to further the organization’s
mission. The board also sets the vision and mission
for the organization and establishes the broad
policies and strategic direction that enable the
organization to fulfill its charitable purpose.
When the board determines that the organization
is ready to add paid staff, the board is responsible
for selecting, overseeing, and, if necessary, terminating
the chief staff officer. In smaller, unstaffed
organizations, the board may have a more direct
role in overseeing and sometimes delivering the
organization’s programs and services. In larger
organizations, the board generally works as a
strategic partner to the staff leadership in ensuring
that the organization meets its goals and
commitments.
Legal Background
Federal, state and local laws governing charitable
corporations and trusts require that each organization
have a governing body that is entrusted with
the power to act on behalf of the beneficiaries of
the organization.
The duties and requirements for directors of charitable
organizations are generally determined by
the laws of the state in which the organization was
founded or incorporated. Some states also have
established requirements for the board of directors
of any organization that conducts activities, particularly
fundraising, within its borders.
The Revised Model Nonprofit Corporation Act,
adopted in 1987 by the American Bar Association’s
Subcommittee on the Model Nonprofit
Corporation Law of the Business Law Section, sets
forth parameters for the structure and composition
of boards. It also sets forth duties of loyalty
and due care by requiring that: “a director shall
discharge his or her duties as a director, including
his or her duties as a member of a committee
(1) in good faith; (2) with the care an ordinarily
prudent person in a like position would exercise
under similar circumstances; and (3) in a manner
the director reasonably believes to be in the best
interests of the corporation.”17
The Revised Act has been adopted in whole or
in modified form by 23 states18 for regulation of
nonprofit entities, including charitable organizations.
The original Model Act (developed in 1952)
has been adopted in whole or in modified form by
six other states and the District of Columbia.19
17 Revised Model Nonprofit Corporation Act § 8.30
18 The Act has been adopted in whole or with modifications
in Alaska, Arkansas, California, Colorado, Georgia, Hawaii,
Idaho, Indiana, Maine, Minnesota, Mississippi, Missouri,
Montana, Nebraska, North Carolina, Oregon, South Carolina,
Tennessee, Utah, Vermont, Washington, West Virginia,
and Wyoming.
19 Alabama, New Jersey, North Dakota, Texas, Virginia, and
Wisconsin have adopted the original Model Nonprofit Corporation
Act as promulgated or modified.
The board of a charitable organization should meet regularly enough to conduct its business and fulfill its duties. assets; electing or removing directors; and altering the organization’s governing documents. However, committees may investigate and make recommendations on any of these issues, subject to the full board’s consideration and decision. While many charitable organizations find it prudent to meet at least three times a year to fulfill basic governance and oversight responsibilities, some with strong committee structures, including organizations with widely dispersed board membership, hold only one or two meetings of the full board each year. Foundations that make grants only once during the year may find that one annual meeting is sufficient. Legal Background The Revised Model Nonprofit Corporation Act and many state laws stipulate that the rules regarding meetings of the board, including their frequency, should be established in the bylaws of the organization. Most state laws allow a charitable organization to stipulate meeting quorum requirements, that is, the number of board members who must be present before the meeting begins, in its governing documents. In the absence of such stipulations in the governing documents, state laws generally require that organizations hold at least one annual meeting with a majority of board members present. Regular meetings provide the chief venue for board members to review the organization’s financial situation and program activities, establish and monitor compliance with key organizational policies and procedures, and address issues that affect the organization’s ability to fulfill its charitable mission. Charitable organizations should ensure that their governing documents satisfy legal requirements in establishing rules for board activities, such as quorum requirements and methods for notifying board members about meetings. The board should establish and implement an attendance policy that requires board members to attend meetings regularly. Given the time and expense involved in traveling to meetings, some boards may choose to conduct their business through conference calls or forms of online communication that permit members to hear and be heard by all other participants. In such cases, the organization’s governing documents should specify that such alternative methods of holding meetings are permitted. Boards often form committees and authorize them to handle some work between full board meetings. The organization’s governing documents should specify whether the board may create one or more such committees. In most states, the law prohibits boards from delegating certain responsibilities to committees, such as dissolving the organization’s 10 The board of a charitable organization should establish its own size and structure and review these periodically. The board should have enough members to allow for full deliberation and diversity of thinking on governance and organizational matters. Except for very small organizations, this generally means that the board should have a minimum of five members. The ideal size of a board depends on many factors, such as the age of the organization, the nature and geographic scope of its mission and activities, and its funding needs. Although a larger board may ensure a wide range of perspectives and expertise, a very large board may become unwieldy and end up delegating too much responsibility to an executive committee or permitting a small group of board members to exercise substantial control. Conversely, smaller boards may elicit more active participation from each member, but they should consider whether their members collectively have 22 Principles for Good Governance and Ethical Practice 11 The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnic, racial and gender perspectives), experience, and organizational and financial skills necessary to advance the organization’s mission. Boards of charitable organizations generally strive to include members with expertise in budget and financial management, investments, personnel, fundraising, public relations and marketing, governance, advocacy and leadership, as well as some members who are knowledgeable about the charitable organization’s area of expertise or programs, or who have a special connection to the organization’s constituency. Some organizations seek to maintain a board that respects the culture of and reflects the community served by the organization. Boards increasingly are being encouraged to be inclusive of and sensitive to diverse backgrounds when recruiting board members, in addition to purposefully recruiting board members with expertise and professional or personal experiences that will be beneficial to the organization. Because the board must ensure that all financial matters of the organization are conducted legally, ethically, and in accordance with proper accounting rules, it should make every effort to ensure that at least one member has “financial literacy” —that is, the ability to understand financial statements, to evaluate the bids of accounting firms that may undertake an audit or review, and to assist the board in making sound financial decisions. This need not entail advanced training in accounting or financial management. If the board finds itself unable to recruit members with such skills, it should contract with or seek pro bono services of a qualified financial advisor, other than its auditor, to assist the board in its financial responsibilities. Organizations should also consider the requirements of current and prospective funding sources regarding the composition of the boards of their grantees. For example, in order to be recognized as a Community Housing Development Organi- 20 Excluded would be houses of worship and specific related institutions, specified governmental instrumentalities, and other organizations relieved of this requirement by the IRS. 21 Generally corporation sole pertains to houses of worship and is a form of religious organization consisting of one person only, and his or her successors in some particular station, such as the bishop or rector of a church. As a corporation sole, certain legal capacities and rights are granted in perpetuity to the individual by right of the particular station he or she holds 22 New Hampshire requires that boards of directors of public charities (certain religious organizations excepted) have at least five voting members “who are not of the same immediate family or related by blood or marriage.” N.H. Rev. Stat. § 292:6-a. the full range of knowledge and experience necessary to inform their decisions, and, if not, provide opportunities for the board to confer with outside experts or advisory groups on specific matters. Legal Background Federal law currently permits organizations to qualify for tax-exempt status with a single director or trustee. The Panel on the Nonprofit Sector has recommended that Congress amend the federal tax code to require that each organization, with certain exclusions,20 have a minimum of three members on its governing board to be recognized as tax-exempt under section 501(c)(3) of the code. State laws in this area vary depending on whether the organization is established as a corporation or a trust. The Revised Model Nonprofit Corporation Act stipulates that a board of directors must have a minimum of three members. It sets no maximum number and allows an organization to set and change the number of directors in its bylaws, so long as there are always at least three directors in place. In practice, some states require only one director for nonprofit corporations, and some also permit the formation of a corporation sole.21 One state, New Hampshire, requires public charities to have a minimum of five directors who are not related family members.22 Charitable organizations established by trusts are governed by one or more trustees as specified in the trust instrument. A Guide for Charities and Foundations 23 zation, one-third of the board members must be representatives of the low-income community the organization serves.23 Some donors to private foundations wish to involve family members on the boards of their foundations to ensure that the donor’s philanthropic tradition will continue through future generations. If family members do not have the expertise and experience necessary to provide appropriate governance and oversight, the board may wish to bring in advisors. The board should also consider the advantages of diversity and the perspective offered by representatives from outside the family. Legal Background Federal laws and regulations generally do not contain requirements for the composition of a charitable organization’s board of directors, with four notable exceptions: 1) health care organizations that must have a community board to satisfy the community benefit test;24 2) organizations that qualify as publicly-supported charities based on a “facts and circumstances” test may need to have a governing board that is representative of the community; 25 3) supporting organizations that must show a close relationship with the organizations they support through specific board positions; and 4) credit counseling organizations which must meet specific rules for board composition.26 12 A substantial majority of the board of a public charity, usually meaning at least two-thirds of the members, should be independent. Independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to (as a spouse, sibling, parent or child), or reside with any individual described above.27 All directors of nonprofit corporations have a “duty of loyalty” that requires them to put the interests of the organization above their personal interests and to make decisions they believe are in the best interest of the nonprofit. Individuals who have a personal financial interest in the affairs of a charitable organization may not be as likely to question the decisions of those who determine their compensation or fees or to give unbiased consideration to changes in management or program activities. The founders of a nonprofit corporation sometimes initially turn to family members and business partners to serve on its board of directors, but interlocking financial relationships can increase the difficulty of exercising the level of independent judgment required of all board members. It is therefore important to the long-term success and accountability of the organization that a sizeable majority of the individuals on the board be free of financial conflicts of interest. 23 Community Housing Development Organizations (CHDOs) must maintain at least one-third of the governing board's membership for residents of low-income neighborhoods, other low-income community residents, or elected representatives of low-income neighborhood organizations. 24 CFR Part 92. 24 Internal Revenue Service Audit Guidelines for Hospitals, 1992. See Fremont-Smith, Marion R., Governing Nonprofit Organizations: Federal and State Law and Regulations, The Belknap Press of Harvard University Press (2004), page 244. 25 Treas. Reg. §1.170A-9(e)(3). 26 IRC § 501, 513; Pension Protection Act § 1220. 27 This principle does not apply to private foundations; medical research institutions recognized under IRC § 170(b)(1)(A)(iii); supporting organizations or subsidiaries that are required by law or by their articles of incorporation to include representatives of the supported or sponsoring charities on their board of directors; public charities that are incorporated under the auspices of a religious organization and are required under their articles of incorporation to include clergy and others who are compensated by the parent religious organization; and public charities that are established as charitable trusts where the trust instrument specifies that trustees shall be institutions or professional advisors that are expected to provide services beyond general governance, including substantial asset and investment management activities. 24 Principles for Good Governance and Ethical Practice This principle does not apply to private foundations and certain medical research institutes that operate under specific legal restrictions regarding self-dealing transactions, and other charitable organizations whose articles of incorporation or trust instruments include specific stipulations regarding board composition. For example, an organization established under the auspices of a religious institution may be required to include clergy or other paid representatives of that institution on its board. A supporting organization may be required to have representatives of its supported organizations on its board. When a charitable organization determines that having a majority of independent board members is not appropriate, the board and staff should evaluate their procedures and meeting formats to ensure that board members are able to fulfill their responsibilities to provide independent, objective oversight of management and organizational performance. Legal Background Five states have legislative mandates for the independence of nonprofit boards of directors. North Dakota,28 Maine,29 California,30 and Vermont31 require that no more than 49% of the board may be “interested” or “financially interested” persons. While the definitions vary slightly in each state, “financially interested” persons are generally those who have received or are entitled to receive compensation for personal services rendered to the organization (other than compensation for board service), and/or those who are related family members of compensated persons.32 New Hampshire requires that at least five voting members of the board of a charitable corporation “are not of the same immediate family or related by blood or marriage.”33 The New Hampshire provision does not apply to private foundations, and certain religious organizations including churches and integrated auxiliaries of churches. 13 The board should hire, oversee, and annually evaluate the performance of the chief executive officer of the organization, and should conduct such an evaluation prior to any change in that officer’s compensation, unless there is a multi-year contract in force or the change consists solely of routine adjustments for inflation or cost of living. Boards of directors have the authority to delegate responsibility for maintaining the daily operations of the organization to a chief executive officer. One of the most important responsibilities of the board, then, is to select, supervise, and determine a compensation package that will attract and retain a qualified chief executive. The organization’s governing documents should require the full board to evaluate the performance and approve the compensation of the chief executive annually and in advance of any change in compensation. The board may choose to approve a multi-year contract with the CEO that provides for increases in compensation periodically or when the CEO meets specific performance measures, but it is important that the board institute some regular basis for reviewing whether the terms of that contract have been met. If the board designates a separate committee to review the compensation and performance of the CEO, that committee should be required to report its findings and recommendations to the full board for approval and should provide any board member with details, upon request. The board should then document the basis for its decision and be prepared to answer questions about it. 28 ND Cent. Code § 10-33-27. 29 Maine Nonprofit Corporation Act, Title 13-B, § 713-A (2). 30 Cal. Corp. Code § 5227 (a). 31 11B VT Stats § 8. 32 Maine and Vermont define related parties as “spouse, brother, sister, parent or child,” while California also includes ancestor, descendant, brother-in-law, sister-in-law, son-in-law, daughter-in-law, mother-in-law, or father-in-law. 33 N.H. Rev. Stat. § 292:6-a. A Guide for Charities and Foundations 25 When determining the reasonableness of the compensation package paid to the chief executive, the board should ensure that the individuals involved in making the compensation recommendation do not have a conflict of interest with regard to the executive. The board or its committee should examine the compensation paid by similarly situated organizations, both taxable and non-taxable, for functionally comparable positions. Many professional associations prepare regular compensation surveys that can be useful in evaluating compensation, or the committee may turn to compensation surveys compiled by independent firms or actual written offers from similar organizations competing for the executive’s services. Some organizations may find it difficult to locate salary surveys or other data to establish comparable values for executive compensation within their geographic area or field of operation, but the board should still seek objective external data to support its compensation decisions. When governing boards use compensation consultants to help determine the appropriate salary for the chief executive, the consultant should report directly to the board or its compensation committee and should not be engaged in other business with or have any conflicts of interest with regard to the chief executive. Governing boards are responsible for hiring and establishing the compensation of the CEO and for approving the compensation range of other persons in a position to exercise substantial control of the organization’s resources. It is the responsibility of the CEO to hire and set the compensation of other staff, consistent with reasonable compensation guidelines set by the board. If the CEO finds it necessary to offer compensation that equals or surpasses his or her own, in order to attract and retain certain highly qualified and experienced staff, the board should review the compensation to ascertain that it does not provide an excess benefit. The board or a designated compensation committee should also review the overall compensation program, including salary ranges and benefits provided for particular types of positions, to assess whether the compensation program is fair, reasonable, and sufficient to attract and retain high-quality staff. Legal Background A charitable organization is permitted under current law to pay reasonable compensation for services provided by its board members, its chief executive officer, and other staff. Reasonable compensation is defined as the amount that would ordinarily be paid for like services by like enterprises (whether tax-exempt or taxable) under like circumstances.34 Charitable organizations are prohibited from providing excessive compensation or economic benefit to executives and other individuals who have substantial influence over the organization’s affairs, and to family members of such individuals.35 Private foundations are generally prohibited from engaging in any financial transactions, other than payment of reasonable compensation for services deemed necessary to the foundation’s exempt purposes, with such individuals.36 Federal law specifically encourages public charities to have executive compensation approved in advance by members of an “authorized body” of the organization (such as the board or a boardappointed committee), none of whom has a conflict of interest with respect to the transaction.37 If the authorized body meets certain independence standards, approves the compensation based on appropriate data that help determine comparability or fair market value and documents the basis for its determination at the time it makes its decision, the regulations confer a rebuttable presumption of the reasonableness of the compensation.38 Although the IRS may not draw any negative inferences simply because an organization chooses not to follow these procedures,39 penalties on those who receive, and on charity managers who approve, compensation that is later found to be excessive, may be avoided if procedures are followed. 34 Treas. Reg. § 53.4958-4(b)(1)(ii). 35 IRC § 4941 and § 4946; § 4958(f ). 36 IRC § 4941. 37 Treas. Reg. § 53.4958-6(a)(1). 38 Treas. Reg. § 53.4958-6. 39 Treas. Reg. § 53.4958-6(e). 26 Principles for Good Governance and Ethical Practice Federal tax regulations define comparable data needed to determine the reasonableness of compensation or other transactions with disqualified persons as including (1) compensation paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions; (2) the availability of similar services in the geographic area; (3) current compensation surveys compiled by independent firms; (4) actual written offers from similar organizations competing for the disqualified person; and, if the transaction involves the transfer of property, (5) independent appraisals of that property and (6) offers received as part of an open and competitive bidding process. Public charities with gross receipts (including contributions) of less than $1 million may rely on the compensation paid by three comparable organizations in the same or similar communities for similar services when approving compensation arrangements.40 Board members and other managers of charitable organizations who approve a transaction knowing it provides an excess benefit are generally jointly and severally liable for a tax on the transaction amount for private foundations or the excess benefit for public charities, unless their participation is not willful and due to reasonable cause.41 For private foundations, an exception to the general rule provides that if the transaction involves compensation, the penalties are based on a percentage of the excess compensation (not the total compensation).42 To impose penalties on public charity or private foundation managers, the IRS must prove that the organization manager’s actions in accepting or approving an excess benefit or self-dealing transaction were conscious, voluntary, and intentional, and that the manager had actual knowledge of sufficient facts to determine that the transaction would be an excess benefit or self-dealing transaction, was aware that such a transaction would violate federal excess benefit or self-dealing transaction laws, and negligently failed to make reasonable attempts to determine whether the transaction was an excess benefit or self-dealing transaction.43 A board member or other manager who relies on the advice of legal counsel (or, in the case of public charity managers, certain other professionals)44 is generally not held responsible for knowing that the transaction was improper.45 In addition, a board member or other manager of a public charity is generally not held responsible for knowing that a transaction conferred an excess benefit if an appropriate authorized body has met the requirements of the rebuttable presumption procedures with respect to the transaction.46 Federal laws do not subject managers of public charities to the excess benefit rules when they are setting the compensation for a new chief executive officer, chief financial officer, or a chief operating officer so long as the new employee was not a board member, key manager, or substantial contributor to the organization in the preceding five years, there is a written agreement governing the terms of compensation before the new executive takes office and the compensation is based on a fixed amount or formula over single or multiple years.47 40 Treas. Reg. § 53.4958-6(c)(2). 41 IRC § 4941; IRC 4958. 42 IRC §4941(e)(2). 43 Treas. Reg. §§ 53.4941(a)-1(b)(3), 53.4958-1(d)(4)(i). 44 Public charity managers may also rely on the professional advice of certified public accountants or accounting firms with relevant tax law expertise, and independent appraisers or compensation consultants who perform such valuation services on a regular basis, are qualified to make valuations of the particular type of property or services involved, and provide certifications regarding those qualifications. Treas. Reg. § 4958-1(d)(4)(iii). 45 Treas. Reg. § 53.4958-3(a)(1). 46 Treas. Reg. § 53.4958-1(d)(4)(iv). 47 Treas. Reg. §§ 53.4941(a)-1(b)(3), 53.4958-1(d)(4)(i).
Charitable organizations, with some exceptions,48
are required to report on their Form 990 or 990-
PF the name, title, and average hours per week of
every board member, officer, and key employee. In
addition, the organizations must report the compensation,
contributions to employee benefit plans
and deferred compensation, expense account, and
other allowances paid during the year covered by
48 Excluded from this requirement are organizations, other
than private foundations and supporting organizations, with
annual gross receipts of $25,000 or less, houses of worship
and specific related institutions, specified governmental
instrumentalities, and other organizations relieved of this
requirement by authority of the IRS. IRC § 6033(a)(2)
49 IRC § 132(e).
the report to any current or former board member,
officer, and key employee. The instructions
to the forms specify that all types of compensation
must be reported, including both taxable and
nontaxable fringe benefits except for de minimis
fringe benefits (for example, property or services
provided to the individual of such a small value as
to make accounting for it impractical).49
28 Principles for Good Governance and Ethical Practice
16 Board members should evaluate their performance as a group and as individuals no less
frequently than every three years, and should have clear procedures for removing board
members who are unable to fulfill their responsibilities.
15 The board should establish an effective, systematic process for educating and communicating
with board members to ensure that they are aware of their legal and ethical responsibilities,
are knowledgeable about the programs and activities of the organization, and can carry out
their oversight functions effectively.
Most people volunteer for boards because of a
commitment to the mission of the organization
and the value of the organization’s work to society.
Yet they may not have the training or information
necessary to understand adequately their fiduciary
responsibilities or common practices of boards of
charitable organizations.
An effective board orientation process fills this
need by detailing the broad oversight responsibilities
of the board and the specific legal and ethical
responsibilities of individual members. Members
should be made aware of their personal liability
for the board’s actions—or for its failure to take
action—and of the protections available to them.
All board members should receive oral and written
instruction regarding the organization’s governing
documents, finances, program activities, and
governing policies and practices. Even members
who have served on the boards of other organizations
can benefit from a specific orientation to
each organization for which they provide board
service. Charitable organizations, if needed and
if funds permit, should provide opportunities for
board members to obtain special training or advice
on legal and financial issues and responsibilities.
It is also advisable for an attorney or insurance
agent who is knowledgeable about board liability
to explain the legal protections available to board
members, as well as the options for insurance.
The ongoing process of board education includes
ensuring that members have received and
reviewed sufficient information on the issues to
be addressed at each board meeting. Agendas and
background materials should be distributed far
enough in advance of all board meetings so that all
members can be expected to read and consider the
issues prior to attending the meeting.
Legal Background
There are no specific federal or state legal requirements
regarding orientation and ongoing training
of board members. Because the law requires board
members to exercise reasonable care in making
decisions on behalf of the organization, however,
they must make an effort to obtain adequate
information to inform their decisions.
A regular process of evaluating the board’s performance
can help to identify strengths and
weaknesses of its processes and procedures and to
provide insights for strengthening orientation and
educational programs, the conduct of board and
committee meetings, and interactions with board
and staff leadership. Many boards will find it helpful
to conduct such a self-assessment annually;
others may prefer a schedule that coincides with
the terms of board service or regular long-range
planning cycles. A number of print and online
tools, ranging from sample self-assessment questionnaires
to more complex evaluation procedures,
can help an organization design a board evaluation
or self-assessment process that best meets its needs.
The board should establish clear guidelines for the
duties and responsibilities of each member, including
meeting attendance, preparation and participation;
committee assignments; and the kinds of
expertise board members are expected to have or
develop in order to provide effective governance.
A Guide for Charities and Foundations 29
Many boards assign responsibility for oversight of
the board evaluation and development function to
their executive committees or to a separate board
development committee. Board members with
this responsibility should be empowered to discuss
problems of attendance or other aspects of board
performance with individual members to ascertain
whether the problem can be corrected or the
individual needs to resign or be removed from the
board. Removing a non-performing board member
generally requires the action of the full board
or, if the organization has members, the action of
the membership.
Legal Background
There are no federal or state laws or regulations
requiring governing boards of nonprofit organizations
to evaluate the performance of the board as a
group or as individuals.
The Revised Model Nonprofit Corporation Act
stipulates that directors may be removed through
judicial proceedings or by a vote of the board if
“a director has engaged in fraudulent or dishonest
conduct, or gross abuse of authority or discretion,
with respect to the corporation…and removal is in
the best interest of the corporation.”50 In judicial
proceedings, a court may also stipulate that the
director who is removed may be barred from serving
on the board for a proscribed period of time.
17 The board should establish clear policies and procedures addressing the length of terms and
the number of consecutive terms a board member may serve.
Every charitable organization should determine
whether its best interests are served by limiting
the length of time an individual may serve on its
board. Some organizations have found that such
limits help in bringing fresh energy, ideas and
expertise to the board through new members.
Others have concluded that term limits may
deprive the organization of valuable experience,
continuity and, in some cases, needed support
provided by board members. They believe organizations
should rely solely on rigorous board procedures
for evaluating board members and removing
those who are not able to fulfill their governance
responsibilities effectively. Some family foundations
may decide not to limit board terms if their
donors expressed a wish that family members continue
serving as long as they are willing and able.
Organizations that do limit the terms of board
service should consider establishing a staggered
term process that provides a continual flow of
new participants while retaining a cadre of more
experienced members. Many organizations find it
useful to establish policies making board members
eligible for re-election after taking a year or more
off. It is always valuable to find ways in which
members who have completed their service can
continue to be engaged in the organization’s programs
and services.
Organizations that choose not to limit the terms
of board service should consider establishing a regular
process whereby the board reaffirms its commitment
to this approach and members actively
indicate their desire to continue serving on the
board. Some organizations create an alumni council
or honorary board to provide an easy option for
board members who feel it is time to leave active
service but still wish to be involved in the organization.
Others specify the age at which a member
must retire from the board.
Whether or not the organization establishes board
term limits, it is always helpful to have a process
for involving prospective board members on committees
or task forces until there is an appropriate
opening on the board.
50 Revised Model Nonprofit Corporation Act § 8.05
30 Principles for Good Governance and Ethical Practice
18 The board should review organizational and governing instruments no less frequently than
every five years.
required. In some instances, a charitable organization
may need court approval to amend its organizing
documents.
Legal Background
Each organization’s articles of incorporation and
governing instruments set forth the requirements
for its conduct and that of its board of directors.
Charitable organizations are required to submit
these articles and instruments to the Internal Revenue
Service when applying for recognition as a
501(c)(3) exempt organization. If an organization
amends its governing instruments, it must provide
the revised documents to the appropriate Exempt
Organization office or attach them to the next
annual information return (Form 990, 990-EZ, or
990-PF) it files with the IRS.51
Legal Background
There are no federal or state laws or regulations
limiting the length of time an individual may
serve on the board of a charitable corporation.
Some state laws establish the length of a term
of board service if such terms are not specified
in the organization’s articles of incorporation or
bylaws, but they do not limit the number of terms
an individual may serve. Trust laws in all states
permit trustees to serve as appointed without any
limitation on the term.
Regular reviews of the organization’s articles of
incorporation, bylaws and other governing instruments
help boards ensure that the organization is
abiding by the rules it has set for itself and determine
whether changes need to be made to those
instruments. The board may choose to delegate
some of this deliberation to a committee, but
the full board should consider and act upon the
committee’s recommendations.
Most state laws permit the state attorney general
to file suit asking the court to hold a board
accountable for failure to abide by the requirements
set forth in these basic documents. If it
becomes impractical or no longer feasible to carry
out the purposes of the organization as outlined
in its articles of incorporation, the board should
take appropriate action to amend the articles and
to file the amended articles with state officials, as
As stewards of the public’s trust and the resources
invested in the organization, board members have
an obligation to ensure that the organization uses
its resources as effectively as possible to advance its
charitable mission. Every board should therefore
set strategic goals and review them annually, generally
as part of the annual budget review process.
This review should address current needs and
anticipated changes in the community or program
area in which the organization operates that may
affect future operations. It should also consider the
financial and human resources that are needed to
accomplish the organization’s goals. Such periodic
performance reviews and assessments are a com-
19 The board should establish and review regularly the organization’s mission and goals and
should evaluate, no less frequently than every five years, the organization’s programs, goals and
activities to be sure they advance its mission and make prudent use of its resources.
51 IRS Publication 557, Tax-Exempt Status for Your Organization,
page 16.
A Guide for Charities and Foundations 31
increments, such as scientific research or youthdevelopment
programs, interim benchmarks can
be identified to assess whether the work is moving
in the right direction.
Legal Background
Some legal scholars argue that a board member’s
duty of loyalty to the beneficiaries of a charitable
organization requires that he or she ensures that
the organization’s purposes are carried out effectively.
52 If it becomes impractical or no longer
feasible to carry out the purposes of the organization
as outlined in its articles of incorporation, the
board should take appropriate action to amend
the articles and to file the amended articles with
state officials, as required. Changes in the articles
of incorporation or other governing instruments
must also be reported to the Internal Revenue
Service.
mon feature of many self-regulation, accreditation
and funding programs in which nonprofit organizations
participate.
Although discussions of individual program
activities and accomplishments are typical of most
board meetings, these are not a substitute for a
more rigorous periodic evaluation of the organization’s
overall impact and effectiveness in light of
goals and objectives that the board has approved.
Because organizations and their purposes differ,
it is incumbent on each organization to develop
its own process for evaluating effectiveness. Most
organizations should have at least an informal
review of their progress on goals and objectives
annually, but, because of the time and cost
involved, may choose to conduct a more rigorous
evaluation less frequently. Even for organizations
whose work is not properly measured in one-year
20 Board members are generally expected to serve without compensation, other than
reimbursement for expenses incurred to fulfill their board duties. A charitable organization
that provides compensation to its board members should use appropriate comparability data
to determine the amount to be paid, document the decision and provide full disclosure to
anyone, upon request, of the amount and rationale for the compensation.
Although some charitable organizations reimburse
expenses related to board work, the vast majority
of board members serve without compensation.
In fact, board members of public charities often
donate both time and funds to the organization, a
practice that supports the sector’s spirit of giving
and volunteering.
When organizations find it appropriate to compensate
board members due to the nature, time or
professional competencies involved in the work,
they must be prepared to provide detailed documentation
of the amount of and reasons for such
compensation, including the responsibilities of
board members and the services they provide. Any
compensation provided to board members must
be reasonable and necessary to support the performance
of the organization in its exempt function.
Compensation paid to board members for services
in the capacity of staff of the organization should
be clearly differentiated from any compensation
paid for board service.
Board members of charitable organizations are
responsible for ascertaining that any compensation
they receive does not exceed to a significant
degree the compensation provided for positions in
comparable organizations with similar responsibilities
and qualifications. Some organizations hire
compensation consultants to identify comparable
compensation levels, some rely on data available
through national and regional associations or forprofit
firms, and some conduct their own surveys
52 Marion Fremont-Smith, Governing Nonprofit Organizations:
Federal and State Law and Regulations, The Belknap
Press of Harvard University Press (2004), pp. 225-226.
of compensation paid by similar organizations.
When they establish their own compensation,
board members generally cannot be considered
independent authorizing bodies and therefore generally
cannot avail themselves of the legal protections
accorded to such bodies.
Legal Background
Charities and foundations are permitted under
current law to pay reasonable compensation for
services provided by board members. Reasonable
compensation is defined as the amount that would
ordinarily be paid for like services by like enterprises
(whether tax-exempt or taxable) under like
circumstances.53 Federal tax laws prohibit excessive
compensation and transactions that provide excessive
economic benefit to board members and other
disqualified persons.54 The rules and penalties
regarding excessive compensation of board members
are the same as those applied to the compensation
of the chief executive officer or other
disqualified persons (see Principle #13).
Charitable organizations, with some exceptions,
55 are required to report on their Form 990
or 990-PF the name, title, and average hours of
service per week of every board member, officer,
and key employee. In addition, the organizations
must report the compensation, contributions to
employee benefit plans and deferred compensation,
expense account, and other allowances paid
to any board member by the organization and
its affiliated entities. Public charities must also
provide this information for former employees
and board members who received any compensation
or benefit during the reporting year. The
instructions to the Forms specify that all types of
compensation must be reported, including both
taxable and nontaxable fringe benefits except for
de minimis fringe benefits (for example, property
or services provided to the individual of such
a small value as to make accounting for it
impractical). 56
53 Treas. Reg. § 53.4958-4(b)(1)(ii).
54 IRC §§ 4941, 4958.
55 Excluded from this requirement are organizations, other
than private foundations and supporting organizations, with
annual gross receipts of $25,000 or less, houses of worship
and specific related institutions, specified governmental
instrumentalities and other organizations relieved of this
requirement by authority of the IRS. IRC § 6033(a)(2).
56 IRC § 132(e).
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