• Charitable Boards: Serious Inquiries Only
  • May 4, 2010 | Author: Kimberly J. Decker
  • Law Firm: Barley Snyder LLC - Lancaster Office
  • Being a member of the board of directors or trustees of a non-profit organization can be a very rewarding way to serve the community and aid a good cause. Too often, however, well-meaning people enthusiastically jump onto the board of a non-profit without really understanding their responsibilities to the organization as well as the responsibilities of the organization to the public. Board service on a non-profit is every bit as serious as board service on a for-profit corporation. In addition, the IRS has been taking careful note of the corporate governance developments in the for-profit world and they are, not surprisingly, filtering down to the non-profit world. Non-profit corporate governance practices are under the microscope, and it is more important than ever that a non-profit board member understand the ramifications of how a non-profit is organized and makes decisions.
    In 2008 the IRS revised its Form 990, adding a whole host of new questions about corporate governance, including director independence, handling of conflicts of interest, code of ethics and executive compensation. The Form 990 addresses many of these topics by simply asking whether corporate governance policies exist for various topics or not. On the face of it, such a question seems innocuous enough - but the Form 990 is a publicly available document, and a non-profit answering that it does not have various corporate governance policies in place may be viewed as lacking professional management, financial integrity or accountability.
    Director Independence: Form 990 requires an organization to indicate how many members of its governing body are “independent”. Directors are independent according to the IRS definition if they are not compensated as an officer or employee of the organization or a related entity, receive total compensation or other payments of $10,000 or less from the organization, and neither the board member nor any family member was involved in an “interested person” transaction with the corporation.
    While the IRS does not require a certain proportion of a non-profit’s board members to be independent, it does recommend that a majority of directors be independent when possible. Generally speaking, its a best practice to have at least a majority of independent directors when possible. It is also a best practice to document board and committee meetings in a timely manner and to determine whether directors are independent annually through use of an annual disclosure requirement for directors to disclose events and compensation that could affect independence.
    Conflicts of Interest: Form 990 asks whether a written conflict of interest policy exists. A corporation may not answer yes to this question unless the policy addresses, at a minimum, all of the following four areas: how conflicts are defined, to whom the policy applies, the method for facilitating disclosure of information that may help identify conflicts and the procedures to be followed to manage conflicts. If such a policy exists, the corporation must disclose whether, in fact, officers, directors, trustees and key employees must disclose annually any interest they have that could give rise to conflicts. Also, the corporation must state whether it regularly and consistently monitors and enforces compliance with the policy and how it does so.
    Best practices in this area include:
    • requiring annual disclosure by board members of potential conflicts
    • prior independent board member review and approval of all related party transactions; and
    • establishing and enforcing a written policy on conflicts of interest.

    Code of Conduct: The IRS “encourages” non-profit corporations to adopt and regularly evaluate a code of ethics. Such a code should define acceptable behavior and the organization’s expectations for conduct. Form 990 requires a corporation to state whether a written whistleblower policy exists that encourages reporting, specifies that the organization will protect whistleblowers and identifies those individuals to whom information can be reported.
    Having a code of conduct is, obviously, a best practice. In addition, the code should be in writing and prohibit retaliation against whistleblowers as well as preventing document destruction in the face of an investigation. Another best practice is to designate a board committee or other group comprised of independent persons to receive whistleblower reports.
    Executive Compensation: Comprehensive disclosure is required regarding the compensation paid to:

    • all current officers and directors and trustees who are voting members of the board;
    • current “key employees” (i.e., persons paid over $150,000 in compensation, organization-wide control or influence similar to an officer, director or trustee or had authority over at least 10% of the organization’s activities or was within the group of the organization’s top 20 highest paid employees);
    • the five most highly compensated employees other than officers, directors or trustees with compensation over $100,000;
    • former officers, key employees and highest compensated employees with compensation over $100,000; and former directors and trustees with compensation over $10,000.

    In addition, Form 990 requires a company to disclose its process for determining the compensation for its chief executive officer. Form 990 also requires a company to disclose whether or not its compensation determination process takes into account the IRS’ “reasonable compensation” factors. Compensation is rebuttably presumed to be reasonable where: 

    • it is reviewed and approved by independent persons;
    • the decision makers use data regarding comparable compensation paid to executive in similar positions; and
    • the deliberations and decisions regarding executive compensation are documented contemporaneously (i.e., minutes are taken).

    Best practices in the executive compensation area include forming a compensation committee made up entirely of independent directors or trustees with an established charter that details the committee’s authority, purpose and the company’s compensation philosophy. Another best practice includes complying with the IRS’ rebuttable presumption of reasonableness. The company’s chief executive officer should never be present during deliberations regarding his or her compensation, although the CEO may provide input on other executive officers’ compensation. Finally, best practices also include giving the committee authority to hire outside consultants, as needed.
    One size does not fit all in the non-profit corporate governance arena, and neither do the best practices described above. Best practices are not practices required by law - they reflect the current thinking about the best possible set of procedures, all things being equal. However, each non-profit organization needs to tailor its corporate governance based on factors like its size, industry, resources, business sophistication, nature of its tax exempt status and other unique characteristics of its mission and sponsorship.