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Wednesday, January 6, 2010
Mosaic

 

Guest Article

Nonprofit Corporate Governance — An Overview

By Chris Farrell, Cohen & Grigsby, PC

Today, individuals serving as directors of nonprofit organizations find themselves at the center of a very significant confluence. Whereas, in years past, membership on nonprofit boards entailed the good faith exercise of personal judgment so as to foster the best interests of the organization, such conduct now represents the minimum performance expected of all board members. Modern crosscurrents of increased corporate compliance and regulatory oversight have led to a heightened expectancy as to overall board performance which, in the words of the International Revenue Service, now requires each board member to be "active, engaged and independent."

One of the primary crosscurrents now at work in the nonprofit world is the impact of Sarbanes–Oxley principles on general corporate governance. Although the focus of Sarbanes–Oxley is predominately the for–profit world, some of its provisions are expressly applicable to nonprofit organizations. More importantly, even the clearly for–profit parameters of Sarbanes–Oxley are now being extended by analogy to non–profit organizations based on the assumption that charitable organizations, and the public interests that they serve, are best fostered by the application of good governance practices.

The other primary crosscurrent now at work in the nonprofit world is increased oversight of charitable organizations by the Internal Revenue Service. This increased oversight now manifests itself in the new Form 990 that public charitable organizations are required to file. This increased attention is of particular concern to members of nonprofit boards because certain areas now being scrutinized by the Internal Revenue Service, such as executive compensation, are expressly subject to powers granted to the Service to impose direct financial penalties on board members.

While in years past nonprofit boards were judged more on the substance of their actions than on their adherence to corporate formalities, this is no longer the case. Today, the Internal Revenue Service is likely to conduct "audits" of nonprofit organizations by correspondence – frequently submitting a long list of requested documents to determine whether the organization has implemented written policies and procedures that mirror the Service's recommended practices. To the extent that the organization is able to provide the Service with the requisite policies and procedures, the audit frequently ends with no further action by the Service. To the extent that the written documentation is either deficient or totally absent, the audit continues and may ultimately lead to a full scale field audit of the organization. Accordingly, corporate formalities and written policies now matter.

With regard to actual recommendations for governance improvement, the following initiatives should be considered:

  1. Implementation of an executive compensation system that will enable the organization to qualify for the rebuttable presumption of reasonableness under the Tax Code.  This would entail:
    • Establishment of a fully independent compensation committee;
    • Utilization of compensation surveys and possibly professional comparative analyses in formulating executive compensation packages; and
    • Adequate documentation of the bases for all compensation decisions.

  2. Creation of a comprehensive documentary retention and destruction policy.

  3. Establishment of a system–wide whistleblower policy, together with the specific assignment of responsibilities thereunder.

  4. Formulation of a new conflicts of interest policy that is updated to reflect current IRS standards.

  5. Proper staffing of corporate committees, including, in particular, the Audit Committee, Nominating Committee and Compensation Committees, to ensure independence and objectivity.

  6. Institution of formal channels of information to the Board so as to consistently apprise the Board of Directors of all operational results and performance standards.  This would include pre–submission of the organization's annual Form 990 to the Board for approval.

  7. Evaluation of board capabilities and size through periodic self–evaluation surveys, coupled with constant educational programs highlighting issues within the organization's areas of interest.

Please feel free to call me at 412.297.4841 if you have questions or seek out the assistance of Dewey & Kaye if you need help further developing your board.

Chris Farrell has been practicing law for nearly 33 years and specializes in nonprofit corporations, personal taxation, corporate law, and estates and trusts administration. He is a director of the firm and the head of the firm's Nonprofit Group as well as a member of the Estates and Trusts Group.

Dewey & Kaye