Boardroom basics 3 31 10 compressed (2)

Boardroom Basics

SARAH STEGEMOELLERSENIOR STAFF ATTORNEYCOMMUNITY DEVELOPMENT PROJECTPUBLIC COUNSEL LAW CENTER610 S. ARDMORE STREETLOS ANGELES, CA 90005213 385 2977 EXT [email protected]

Save Our Kids Case Study

Objectives To develop awareness of the internal and external contexts

in which a board operates

To explore larger themes of governance

Take Aways Role of nonprofit in society is changing – expectations are

changing too

Leadership in the organization evolves with its maturation –volunteer and staff/ceo and board

One size will not fit all, but there is a vast amount of common experience from which all nonprofits can draw

Part I Nonprofit Context and Trends

In 2009, public charities filing form 990 reported over $1.4 trillion in total revenues and nearly $1.3 trillion in total expenses. Source: The Urban Institute, National Center for Charitable Statistics, http://nccsdataweb.urban.org/ and Internal Revenue Service, Exempt Organizations Business Master File (July 2009).

Public charities reported nearly $2.6 trillion in total assetsin 2009. Source: The Urban Institute, National Center for Charitable Statistics, http://nccsdataweb.urban.org/ and Internal Revenue Service, Exempt Organizations Business Master File (July 2009).

In 2006, nonprofits—including public charities, privatefoundations, and all other—accounted for 8.11 percent ofthe wages and salaries paid in the United States. (Source: The UrbanInstitute, National Center for Charitable Statistics, Nonprofit Almanac 2008)

Public Charity Finances

1,564,277 tax-exempt organizations areregistered with the IRS. This number includes986,553 public charities and 115,598 privatefoundations. (Source: IRS Master Business File 7/09)

450,151 other types of nonprofit organizations,such as chambers of commerce, fraternalorganizations and civic leagues, are registeredwith the IRS. (Source: IRS Master Business File 7/09)

In addition, 377,640 congregations currentlyserve their communities in the United States.(Source: American Church Lists 2006, http://list.infousa.com/acl.htm)

Nonprofit Organizations Snapshot

11% of all US Reporting Nonprofits Registered in CA

501(c)3 Public

Charities

Reporting

Non-

Reporting

109,528

54,037

55,491

Nonprofit Life Cycle

Overview of CA Tax Exempt Nonprofit Corporation Regulatory Authorities

Internal Revenue Service

California Franchise Tax Board

and Board of Equalization

California Attorney General

California Secretary of

State

Donors may deduct contributions from taxable income.

Must be organized and operated exclusively for exempt purposes.

Must irrevocably dedicate assets to exempt purposes.

Cannot confer excessive financial benefits on „insiders‟ (i.e., directors, officers, members of their families) or other „disqualified persons‟ (i.e., persons in a position to exercise “substantial influence” over organization).

Cannot provide substantial private benefits to ANY individual.

Cannot support or oppose candidates for political office and may not devote a substantial part of its activities to lobbying.

Special Characteristics of §501(c)(3) Organizations

Private Benefit/ Inurement

Organization cannot confer excessive

financial benefits on “insiders.”

Organization cannot provide substantial

private benefits to ANY individual.

Public Disclosure

Inspection – Organization must maintain and makeavailable for public inspection IRS exemption applicationand supporting documentation, most recent 3 years 990tax returns and IRS determination letter.

But, public charities are not required to disclosecontributor‘s names and addresses.

―Widely available‖ – If satisfied, do not have to provide copies of tax returns, exemption application and supporting documents, but still have to make available for public inspection.

What did ―Reporting‖ Mean for Public Charities before Tax Years beginning in 2008?

Charities with gross receipts normally $25,000 or less did not have to file any information return with

the IRS

Gross Receipts greater than $25,000 and

less than $100,00 and

total assets less than $250,000

990-EZ

Gross Receipts greater than or

equal to $100,00 and total assets greater than or

equal to $250,000

Old Form 990

IRS Reporting Responsibilities

2009: Gross receipts normally $25,000 or less2010: Gross receipts normally $50,000 or less

For 2009: Gross Receipts greater

than $25,000 and less than $500,00 and

total assets less than $2.5 million

990-EZ

For 2010 and after: Gross

Receipts greater than $50,000 and

less than $200,00 and

total assets less than $1.25

million

990-EZ

New 990 Filing Thresholds

For 2009: Gross Receipts greater than or equal to $500,000 or total assets

greater than or equal to $2.5 million

For 2010 and after: Gross Receipts greater than or

equal to $200,000 or total assets greater than or equal

to $500,000

Who reads the 990 and why should you care?IRS and state tax and corporate regulators have always been interested in the filings for compliance and accountability

In 1999 Guidestar started to post ―as filed‖ 990s; now claims to have data on 1.8 million organizations and 460,000 users per month

In addition to the IRS, the 990 is also of interest to •Foundations and other funders•Individual donors•Salary snoops•Competitors •Whistleblowers•501c3 evaluators/watchdogs like Charity Navigator•Nonprofit academic researchers and trade organizations

Enron and other corporatescandals

United Way, Red Cross, Smithsonian and other nonprofit scandals

What Prompted the Re-Design?

―No longer adequately served the IRS‘s tax compliance interests, or met the transparency needs of the states, the public, and communities served by the organizations‖

―Form failed to reflect changes in the law and in the increasing size, diversity and complexity of the exempt sector‖

―No significant changes to the 990 since 1979 ‖

I am concerned that the Getty Board has

been spending more time watching old

episodes of “Lifestyles of the Rich and

Famous” than doing its job protecting

Getty assets for charitable purposes.

Quotation of Senator Charles Grassley June 2005

http://caseclosedbylewweinstein.files.wordpress.com/2009/05/grassley3.jpg

“…We believe this is an appropriate time to request

that the IRS provide the committee with a new report

on compliance issues involving tax-exempt and

government entities and charitable contributions. This

report should describe each issue, provide a technical

analysis of the IRS’ position on the issue, and what

actions the IRS is taking to mitigate each issue. The

report should also include any recommendations you

might have for how best to address these compliance

issues.”

10. Abuse of Charitable Organizations and Deductions……

Letter to IRS from Senate Finance Committee Chair Max Baucus and previous chair Charles Grassley

Why is the IRS interested in Board Governance?

2002Sarbanes-Oxley Actenacted

2004 California Nonprofit Integrity Act enacted; otherstates passed similarlegislation

2005Pressure from the Senate Finance Committee; Panel on Nonprofit Sector issues report to Congress:Strengthening Transparency, Governance, and Accountability of Charitable Organizations

2007IRS releases new Form 990 after review of lengthy public comment;Panel on Nonprofit Sector issues Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations

2008 IRS releases instructions for the new Form 990 after review of lengthy public comment; first tax year new Form in effectfor large nonprofits

Key Events Informing Form 990 Revision

• Enhancing transparency

• Promoting tax compliance

• Minimizing burden on filing organizations

• Increasing the data-mining ability of the IRS in order to assess risk of noncompliance

• Addressing shortcomings of old Form 990 re operations and governance

• Managing public demand for change in the wake of corporate scandals

What is the IRS thinking behind the redesign?

Part VI: Governance,

Management and Disclosure,

Represents a Huge New

Addition

Section A

11 New Questions about the

board focus on issues of

control, accountability and

independence

Section B

6 New Questions on Policies:

Conflict of interest,

whistleblower, document

retention, executive

compensation, joint venture,

990 review

Section C

2 New Questions on disclosure of

990, exemption application,

governing documents, policies and

financial statements

Source: Grant Thornton 2008 Governance Survey

Viewpoint of the IRS

―I suspect some will continue to say that the IRS is inserting itself into something best left to others,

or that it lacks authority here.

But we have satisfied ourselves that we have jurisdiction to play a role in this area, and that it

is proper and important for us to do so.‖

Source: 4/24/08 Remarks by Stephen T. Miller, Commissioner of the Tax-Exempt and Government Entities of the IRS, before the Georgetown Law Center Seminar

Source: Grant Thornton 2008 Nonprofit Governance Survey

Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

Objectives To Identify the Legal and Ethical Responsibilities of Boards

To Distinguish between Group and Individual Responsibilities

Take Aways Three Key Fiduciary Duties

Dealing with Conflicts

of Interest

Part II Legal Responsibilities

Legal Structure of a Nonprofit Corporation

Statutory Members (Optional)

Board of Directors Includes Chairperson of Board (may also

include 3 statutory officers)

Statutory Officers (must include Chairperson/ President, Secretary and Chief Financial Officer)

Nonprofit Corporation Operations (includes Executive Director and/or CEO who supervises

other employees and volunteers to operate corporation’s day to day activities)

The Purpose of the Board

Directors are usually organizational

governors or overseers.

When an organization has matured to the

point of selecting an executive director:

Boards address policy issues.

Management carries out policy decisions.

However, all volunteer boards of start-up

organizations must manage day-to-day

operations as well as address policy.

In a Public Benefit Corporation, no more than

49% of the board can be “interested” persons!

“Interested” for California nonprofit law purposes

means persons who have been compensated for

services (other than as a director) during the

previous twelve months, and their family members

Slightly different definition of “interested” for IRS

990 and conflict of interest purposes

Assembling a ―Disinterested‖ Board of Directors

Wealth Wisdom Work Will

The Bylaws establish the procedures for

governing and operating the corporation‟s

activities.

Typical Bylaw Provisions: Number of Directors

Time, Place, and Manner of Director

Meetings

Voting Procedures

Director and Officer Duties

Committee Structure

Amendment Procedures

Bylaws Explain How You Must Operate

Board members must ACT AS A GROUP. Individual directors have no power to take actions that bind the corporation without the entire board’s authorization.

Fiduciary Duties of Board Members

Board members are generally insulated from personal liability if they observe the ―duty of care.‖

A good faith act, believed in the best interest of the nonprofit, with the care an ordinary prudent person would

exercise in the same circumstance.

Directors have the duty to make reasonable inquiry when presented with matters of concern.

A Guideline for Meeting The Duty of Care

A director will meet the duty if care if he or she: Reasonably believes that the transaction is in the

corporation‘s best interest;

Is reasonably informed with respect to the subject of the decision; and

Is not interested in the subject matter of the transaction.

Bottom Line: Use Common Sense

Duty of Care Practical Tips

Regularly attend board meetings;

Make informed decisions, based on relevant facts, by full discussion of all issues presented;

Carefully review all material submitted to the board ;

Document all corporate decisions (take minutes!);

Remember the mission!

A transaction can be voided and personal liability attach if a director breaches the ―duty of loyalty.‖

Directors‘ Duty of Loyalty

Basic Rule:Good faith;

Best interests of corporation;

Trustee relationship.

Breaches include self-dealing, taking a business opportunity, disclosing confidences, and

conflicts of interest.

CA Law: Self-Dealing

Self-dealing transactions are generally those to which the nonprofit is a party, and a director has a material financial interest.

Hypo: Nonprofit wants to lease space in a building owned by a director. OK?Yes, but only if the board decides in advance that:1. The deal is fair and reasonable (rent at market value); &2. The corporation could not have gotten a better deal from

someone else (e.g. lower rent with a competitor)

Corporation

Director

$

$

$

CA Law: Self-Dealing

Loans to director and officers are generally prohibited…

unless approved by the Attorney General

in advance.

Board Independence for 990

Part VI - Question 1 How many voting members are on

the governing body?

How many voting members are independent?

Part VI - Question 2 Did any officer, director, trustee or

key employee have a family relationship or business relationship with any other officer, director, trustee or key employee?

An independent director is a person…

Who is not compensated as an officer or employee of the organization or a related organization

Who does not receive payments as an independent contractor of the organization or a related organization exceeding $10,000

Who is not (and whose family members are not) involved in an ―interested person‖ transaction with the organization reportable on Schedule L (or that would be reportable if Schedule L was filed) Excess Benefit Transaction Loans to/from Interested Persons Grants benefiting Interested Persons Business Transactions involving Interested Persons

California‘s 49% Rule

No more than 49% of the board of directors can be ―interested persons‖ (i.e., persons who have been compensated for services (other than as a director) during the previous twelve months and their family members)

Reasonable Effort

The organization need not engage in more than a reasonable effort to obtain the information necessary to determine independence.

Reliance on a questionnaire is strongly encouraged.

A questionnaire is a useful planning tool to identify potential independence issues before they arise.

Sample questionnaires available at www.publiccounsel.org/cdp/annotated990.pdf (Appendix A & B).

Should a Nonprofit Board be Compensated?

“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.”

Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice:

A Guide for Charities and Foundations (2007).

Conflict of Interest Policy

Conflict as defined by IRS for Form 990 purposes:

―For this purpose, a conflict of interest does not include questions involving a person‘s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.‖

Annual disclosure of potential conflicts

The bare minimum—of course ―conflict of interest‖ means more!

Conflict of Interest Policy

Acceptable policy: defines conflicts of interest, identifies the classes of individuals

within the organization covered by the policy, facilitates disclosure of information that may help identify

conflicts of interest, and specifies procedures to be followed in managing conflicts of

interest.

A ‗conflict of interest‘ arises when a person in a position of authority…may benefit financially from a decision he or she could make in such capacity.

General Considerations

Relationship to bylaws and California law

Tailor specifically to your activities

Ongoing monitoring and enforcement of the policy? Often worse to have the policy and not enforce it than to

not have the policy at all!

Sample policies available at www.publiccounsel.org/fame/guide.htm#B

Source: Grant Thornton 2008 Nonprofit Survey

Breach of the ―duty of obedience to mission‖ can threaten an organization‘s tax exempt status.

Responsibilities to Third Parties

Directors should use reasonable care to make sure the nonprofit‘s actions do not harm others!

Basic Rule: Directors are personally liable if they:

Expressly authorized or participated in a corporate action that resulted in harm, or

Knew or should have known about the situation but failed to correct it, AND

Did not act as a reasonable person would.

Objective To explore the respective roles and responsibilities of a

nonprofits board and staff.

Take Away The relationship between the board and the chief executive

is one of the most critical aspects of nonprofit leadership. A clear understanding of the difference between governance and management provides a strong foundation for a productive relationship.

Part III Board/ Staff Partnership

Roles of Nonprofit Staff and Board

BoardPolicy

Planning

Authorizing (at high level, e.g. Budgets)

Oversight & fiduciary

Staff

Executing

Advising

Authorizing (specific)

Operations

Before an organization has the capacity to hire staff, the Board will have to take charge of all of these roles!

The Board must give to its CEO the level of authority necessary to lead and manage the nonprofit.

Directors are charged with policy development and oversight, not micro-management.

The Board should have responsibility for just one employee, the Executive Director.

Board of Directors

Executive Director

Staff of Nonprofit

Part VII: Compensation employs new definitions and thresholds for reporting compensation to TDOKEs and High 5s

Expands requirement to all 990 filers, not just 501(c)(3)s

Utilizes W-2 or 1099 information so that comparison can be made between

organizations regardless of tax year end

Expansive new compensation detail in Schedule J

Executive Compensation Policy

Adopt an executive compensation policy that outlines the process and procedures for reviewing and approving the total compensation paid to senior executives and ―key employees‖

Executive Compensation Policy

Adopt a compensation committee charter that sets out, among other things, the purpose, responsibility and authority of the compensation committee, including the following: Adherence to the compensation policy

Compliance with the rebuttable presumption of reasonableness

Use of an independent compensation consultant to provide comparability data

Adopt an expense reimbursement policy

Excess Benefit Transaction

General Rule: Consideration exceeds FMV/reasonableness

Examples: sales of goods and services; compensation

When excess benefit is provided to a disqualified person, IRS may revoke the organization‘s tax exempt status or impose ―intermediate sanctions‖


Intermediate Sanctions = Tax Recipient must return the

excess benefit + 25% tax; 200% if not corrected

Directors – 10% up to $20k

Rebuttable Presumption: Independent directors

Relying on comparability data E.g., compensation paid by similarly-situated organizations

Properly documenting minutes


Independent Committee Comprised of individuals: Unrelated to and not subject to the control of the disqualified person

With no material financial interest in the transaction

Who do not receive compensation subject to the disqualified person‘s approval

Use of Comparable Organization Data Prior to Decision Compensation ―ordinarily‖ provided by similarly-situated organizations:

Comparable in size, nature and operations, and under like circumstances

Properly documenting minutes Terms of the transaction are in writing and agreed upon prior to the date

payment is made

Recording of the decision-making process and the actions of the Committee members, including those with a potential conflict of interest

Basis for a decision, if outside range of data

Automatic Excess Benefit Transaction

Benefit is not treated as consideration for services because contemporaneous substantiation of intent to do so is lacking

Evidence of Contemporaneous Intent includes: Reporting on 990 by the organization

Disqualified Person reporting on tax return

Described as compensation in contract or Board minutes or other documents indicating it was approved by Board as compensation

Objectives To review the purpose and content of organizational bylaws

To consider the role of board committees

Take Away Bylaws define an organization‘s structure, identify roles and

authority, determine the rights of the parties involved in the structure and identify the procedures by which rights can be exercised.

Part IV Governance Structure

Rights, responsibilities, due process and meeting procedures are built into the structure of bylaws.

How Many Directors Serve on Your Board?


Which of the following Board Committees does your organization have?


Board Committees Board may delegate duties to one or more committees, but the Board still exercises ultimate authority!!

How to Form a Committee:

By bylaws, or by board resolution

Must have at least 2 voting board members on each committee (since the committee may act on the board‟s behalf)

Actions Which Committees Can’t Take:

Filling board vacancies

Fixing board compensation

Adopting or amending bylaws

Appointing committee members

Approving self-dealing transactions

Directors‘ Rights Inspection: Every director has the

absolute right to inspect and copy all books, records and documents of any kind that are maintained by the corporation, and to inspect the physical property of the corporation.

Notice of Meetings: Directors are entitled to notice of meetings in accordance with the bylaws.

Objectives To review the Board Recruitment and Development Cycle

To consider tools that can enhance the likelihood of developing a strong and active board

Take Away Board development is a year-round process that requires

persistent nurturing to be successful.

Part VI Recruitment/Assessment

Board Orientation Survey Response


Board Orientation Survey Response


What is the most important focus of your board today?


Board Training Topics


One characteristic of an effective board is self-assessment.

ObjectiveTo recognize that ―…although board members are sought out for

their position, influence, skills or professional expertise, theyoften are not adequately involved in the work of theorganization to develop the ‗affective knowledge‘ that wouldallow them to apply those ‗cognitive resources.‘…This gapexplains why so many nonprofit boards are often little morethan a collection of high-powered people engaged in low-level activities.‖ Owen Heiserman, Boards Behaving Badly: Observations from theField, The Nonprofit Quarterly (2005)

Take Aways The importance of continuous board education

The value of compliance policies

Part VI When Good Boards Behave Badly

MORE RED FLAGSCEO control of board communications/agenda

No ―executive‖ sessions

No board educationSignificant regulatory and industry developments

―Fooling Around‖Shredding

Altering

Back dating

Withholding information from the government

Build a foundation for compliance with appropriate policies.

Whistleblower Policy

Acceptable policy: encourages staff and volunteers to come forward with

credible information on illegal practices or violations of adopted policies of the organization,

specifies that the organization will protect the individual from retaliation, and

identifies those staff or board members or outside parties to whom such information can be reported.

Records Management Policy

Acceptable policy:

Specifies the record retention

responsibilities of staff, volunteers,

board members, and outsiders for

maintaining and documenting the

storage and destruction of the

organization‘s documents and

records.

Gift Acceptance Policy

Provides guidance to donors

Creates a discipline to prevent

acceptance of gifts that will

cost the nonprofit time, money or reputation

Establishes the gift forms that are acceptable

Defines the nonprofit‘s role in gift administration

Investment Policy

Particularly relevant for reserves and endowment

Establishes the types of investment vehicles in whichthe board is comfortable

Describes the level of acceptable risk

Determines who will be in charge of

investment decisions

Define asset allocation guidelines

The California Nonprofit Integrity Act of 2004 established new compliance thresholds.

Board Audit Committee

Monitors the overall system of internal controls andrisk mitigation

Monitors the integrity of the nonprofit‘s financialstatements

Ensures the independence of the nonprofit‘s auditorand the performance of an independent audit

Reviews and resolves conflicts of interest

Monitors compliance with legal and regulatoryrequirements

Monitors effectiveness of internal controls

The largest risk management issues in operating a nonprofit will be financial.

Internal Control

Objectives of controls

Safeguard assets

Check the accuracy and reliability of its accounting data

Promote operational efficiency and the economical use of resources

Encourage adherence to prescribed managerial policies, as well as laws and regulations

Control Activities

Separation of duties

Reconciliation

Review

Authorization – policies, procedures, documentation, budgets

Safeguards over assets (protections against loss)

Education

Boardroom basics 3 31 10 compressed (2)