- A Guide for Charities and Foundations
- A Guide for Charities and Foundations
- A Guide for Charities and Foundations
- A Guide for Charities and Foundations
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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.
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.” 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 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.
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 the necessary experience.
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.
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, 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. One state, New Hampshire, requires public charities to have a minimum of five directors who are not related family members.
Charitable organizations established by trusts are governed by one or more trustees as specified in the trust instrument.
A Guide for Charities and Foundations
One-third of the board members must be representatives of the low-income community the organization serves.
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.
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;
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;
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.
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.
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.
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. CFR Part 92. 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. Treas. Reg. §1.170A-9(e)(3). IRC § 501, 513; Pension Protection Act § 1220.
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.
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.
Five states have legislative mandates for the independence of nonprofit boards of directors. North Dakota, Maine, California, and Vermont 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.
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.”The New Hampshire provision does not apply to private foundations, and certain religious organizations including churches and integrated auxiliaries of churches. 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. ND Cent. Code § 10-33-27. Maine Nonprofit Corporation Act, Title 13-B, § 713-A (2). 30 Cal. Corp. Code § 5227 (a). 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. N.H. Rev. Stat. § 292:6-a.
A Guide for Charities and Foundations
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.
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.
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.
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.
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.
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.
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.
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). Treas. Reg. § 53.4958-6. Treas. Reg. § 53.4958-6(e).
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.
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.
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).
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.
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)
is generally not held responsible for knowing that the transaction was improper.
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.
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.
Treas. Reg. § 53.4958-6(c)(2). IRC § 4941; IRC 4958. IRC §4941(e)(2). Treas. Reg. §§ 53.4941(a)-1(b)(3), 53.4958-1(d)(4)(i).
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). Treas. Reg. § 53.4958-3(a)(1). Treas. Reg. § 53.4958-1(d)(4)(iv). Treas. Reg. §§ 53.4941(a)-1(b)(3), 53.4958-1(d)(4)(i).
Charitable organizations, with some exceptions, 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.
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.
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
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.
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.
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.
Revised Model Nonprofit Corporation Act § 8.05
Principles for Good Governance and Ethical Practice
The board should review organizational and governing instruments no less frequently than every five years. In some instances, a charitable organization may need court approval to amend its organizing documents.
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.
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
increments, such as scientific research or youthdevelopment programs, interim benchmarks can be identified to assess whether the work is moving in the right direction.
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.
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.
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.
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). Treas. Reg. § 53.4958-4(b)(1)(ii). 54 IRC §§ 4941, 4958.
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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If your nonprofit is going to become more strategic and financially sustainable, you have to start from the beginning (or the top, as it were). In my last blog post I discussed how to overcome excuses for why a board member can’t bring money in the door. But the fact remains that a majority of people don’t like to (or simply won’t) ask for money.
The good news is that there are lots of other things board members can do to bring money in the door. And remember, if you are financing not fundraising your organization, your definition of “bringing money in the door” should be very broad.
Here are 9 things you could ask your fundraising-shy board members to do:
- Help create or evaluate a business plan for an earned income venture. If you have business leaders or entrepreneurs on your board this would be a great use of their time and add tremendous value to your organization. If they can help you create a more profitable business, they are directly contributing to your organization’s bottom-line.
- Advocate for government money. You may have a board member that can’t stand the idea of asking their friends for money, but they are well connected in city, county, state or federal government and could open doors to you for government contracts, grants, fee-for-service or other government monies.
- Provide intelligence on prospects. If you have a board member that seems to know everyone in town, but for whatever reason refuses to ask any of them for money, they can still be incredibly useful. You may be getting ready to ask a prospective donor for $1,000, and this board member can tell you what that person has already given to, at what level, who else might know them and so on. When you make an ask, the more information you have going into it, the more successful you will be.
- Set up a meeting with a prospective customer. If your nonprofit is engaged in an earned income venture, you probably always need help with new sales. If you have a board member who is part of, or connected to, the target customer(s) of your business, they could open doors to new customers. Or at the very least, they could help you think through your sales and marketing strategies and make them more effective so that you can attract more customers.
- Email, call or visit a donor just to say thanks. The stewardship of a gift is an often forgotten, but incredibly critical, part of the fundraising process. According to Penelope Burk’s annual donor survey, 84% of donors would give again if they were thanked in a timely way. And being thanked by a board member is a bonus. A donor who renews their gift to a nonprofit is providing more money for the organization.
- Explain to a prospect why you serve. A board of directors is a group of volunteers who care so much about the mission of the organization that they are willing to donate their time (a precious resource) to the cause. As a donor, it is affirming to see that a volunteer is contributing time, but it is even more motivating to hear, in the board member’s own words, why they feel compelled to serve this organization. That story can be enough to convince someone to give.
- Host a small gathering at your home. Over the course of a year, most people invite a gathering of friends and/or family into their home at least once. A board member could take a few minutes at their next dinner party, birthday celebration or Super Bowl feast to talk about something that is near and dear to their heart: the nonprofit on whose board they serve. They don’t have to ask people for money, but they could simply say, “If you’re interested in learning more, let me know.” And then the nonprofit’s staff could take it from there with those who are interested.
- Recruit an in-kind service. If a board member could remove an expense line item from a nonprofit’s budget that would directly contribute to a stronger bottom-line. For example, if a board member works at an ad agency, could they convince their company to provide some pro-bono marketing services to their nonprofit? But keep in mind, these in-kind donations must be of value to the nonprofit and provide an offset to a direct cost that the nonprofit would otherwise have to bear.
- Negotiate a lower price from a vendor. Do you have a board member with great negotiating skills (think of all of those lawyers on your board). Could they negotiate with your insurance providers, office space rental company, or printers, for a lower price? If so, that’s more money in the bank.
If you think of a board member’s “get” responsibilities in these much broader terms, then I find it difficult to imagine a board member who cannot bring money in the door. You just have to get strategic about how each individual board member can best contribute to the organization’s bottom-line.
Photo Credit: DeeganMarie
- 7 Things Board Members Can Do To Raise More Money
- Financing Not Fundraising: Jump Start Your Board
- Overcoming Board Fundraising Excuses
- Ways to Raise Money in a Recession
- Financing Not Fundraising E-Book
About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.