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Boardroom basics 3 31 10 compressed (2) Presentation Transcript

  • 1. Boardroom Basics SARAH STEGEMOELLER SENIOR STAFF ATTORNEY COMMUNITY DEVELOPMENT PROJECT PUBLIC COUNSEL LAW CENTER 610 S. ARDMORE STREET LOS ANGELES, CA 90005 213 385 2977 EXT 246 sstegemoeller@publiccounsel.org
  • 2. Save Our Kids Case Study
  • 3. Part I Nonprofit Context and Trends 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
  • 4. Public Charity Finances  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 assets in 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, private foundations, and all other—accounted for 8.11 percent of the wages and salaries paid in the United States. (Source: The Urban Institute, National Center for Charitable Statistics, Nonprofit Almanac 2008)
  • 5. Nonprofit Organizations Snapshot  1,564,277 tax-exempt organizations are registered with the IRS. This number includes 986,553 public charities and 115,598 private foundations. (Source: IRS Master Business File 7/09)  450,151 other types of nonprofit organizations, such as chambers of commerce, fraternal organizations and civic leagues, are registered with the IRS. (Source: IRS Master Business File 7/09)  In addition, 377,640 congregations currently serve their communities in the United States. (Source: American Church Lists 2006, http://list.infousa.com/acl.htm)
  • 6. 11% of all US Reporting Nonprofits Registered in CA 501(c)3 Public Charities 109,528 Reporting 54,037 Non- Reporting 55,491
  • 7. Nonprofit Life Cycle
  • 8. 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
  • 9. Special Characteristics of §501(c)(3) Organizations  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.
  • 10. Private Benefit/ Inurement  Organization cannot confer excessive financial benefits on “insiders.”  Organization cannot provide substantial private benefits to ANY individual.
  • 11. Public Disclosure  Inspection – Organization must maintain and make available for public inspection IRS exemption application and supporting documentation, most recent 3 years 990 tax returns and IRS determination letter.  But, public charities are not required to disclose contributor‘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.
  • 12. 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
  • 13. 990-EZ Gross Receipts greater than $25,000 and less than $100,00 and total assets less than $250,000
  • 14. Old Form 990 Gross Receipts greater than or equal to $100,00 and total assets greater than or equal to $250,000
  • 15. IRS Reporting Responsibilities 2009: Gross receipts normally $25,000 or less 2010: Gross receipts normally $50,000 or less
  • 16. 990-EZ For 2009: Gross Receipts greater than $25,000 and less than $500,00 and total assets less than $2.5 million
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. What Prompted the Re-Design? Enron and United Way, ―No significant ―No longer ―Form failed to other Red Cross, changes to the adequately reflect changes corporate Smithsonian 990 since 1979 ‖ served the IRS‘s in the law and scandals and other tax compliance in the increasing nonprofit interests, or size, diversity scandals met the and complexity transparency of the exempt needs of the sector‖ states, the public, and communities served by the organizations‖
  • 21. 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
  • 22. 10. Abuse of Charitable Organizations and Deductions…… “…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.” Letter to IRS from Senate Finance Committee Chair Max Baucus and previous chair Charles Grassley
  • 23. Why is the IRS interested in Board Governance?
  • 24. Key Events Informing Form 990 Revision 2002 2004 2005 2007 2008 Sarbanes- California Pressure from the IRS releases new IRS releases Oxley Act Nonprofit Senate Finance Form 990 after instructions enacted Integrity Act Committee; Panel review of lengthy for the new enacted; other on Nonprofit public comment; Form 990 states passed Sector issues Panel on after review similar report to Nonprofit Sector of lengthy legislation Congress: issues Principles public Strengthening for Good comment; Transparency, Governance and first tax year Governance, and Ethical Practice: new Form in Accountability of A Guide for effect Charitable Charities and for large Organizations Foundations nonprofits
  • 25. What is the IRS thinking behind the redesign? • 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
  • 26. 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
  • 27. Source: Grant Thornton 2008 Governance Survey
  • 28. 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
  • 29. Source: Grant Thornton 2008 Nonprofit Governance Survey
  • 30. Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 31. Part II Legal Responsibilities 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
  • 32. 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)
  • 33. 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.
  • 34. Assembling a ―Disinterested‖ Board of Directors Wealth Wisdom Work Will  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
  • 35. Bylaws Explain How You Must Operate  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
  • 36. 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.
  • 37. Fiduciary Duties of Board Members
  • 38. Board members are generally insulated from personal liability if they observe the ―duty of care.‖
  • 39. 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.
  • 40. Directors have the duty to make reasonable inquiry when presented with matters of concern.
  • 41. 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
  • 42. 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!
  • 43. A transaction can be voided and personal liability attach if a director breaches the ―duty of loyalty.‖
  • 44. Directors‘ Duty of Loyalty Basic Rule:  Good faith;  Best interests of corporation;  Trustee relationship.
  • 45. Breaches include self-dealing, taking a business opportunity, disclosing confidences, and conflicts of interest.
  • 46. CA Law: Self-Dealing Corporation $ $ $ Director 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)
  • 47. CA Law: Self-Dealing Loans to director and officers are generally prohibited… unless approved by the Attorney General in advance.
  • 48. 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?
  • 49. 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
  • 50. 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)
  • 51. 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).
  • 52. 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).
  • 53. 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!
  • 54. 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.
  • 55. 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
  • 56. Source: Grant Thornton 2008 Nonprofit Survey
  • 57. Breach of the ―duty of obedience to mission‖ can threaten an organization‘s tax exempt status.
  • 58. 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.
  • 59. Part III Board/ Staff Partnership 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.
  • 60. Roles of Nonprofit Staff and Board Board Staff  Policy Executing Planning Advising Authorizing (at high Authorizing level, e.g. Budgets) (specific) Oversight & fiduciary  Operations Before an organization has the capacity to hire staff, the Board will have to take charge of all of these roles!
  • 61. The Board must give to its CEO the level of authority necessary to lead and manage the nonprofit.
  • 62. Directors are charged with policy development and oversight, not micro-management.
  • 63. The Board should have responsibility for just one employee, the Executive Director. Board of Directors Executive Director Staff of Nonprofit
  • 64. 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
  • 65. 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‖
  • 66. 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
  • 67. 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‖
  • 68. Excess Benefit Transaction  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
  • 69. Excess Benefit Transaction  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
  • 70. 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
  • 71. Part IV Governance Structure 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.
  • 72. Rights, responsibilities, due process and meeting procedures are built into the structure of bylaws.
  • 73. How Many Directors Serve on Your Board? Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 74. Which of the following Board Committees does your organization have? Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 75. Board Committees Board may delegate duties to one or more committees, but the Board still exercises ultimate authority!! How to Form a Actions Which Committees Committee: Can’t Take:  By bylaws, or by  Filling board vacancies board resolution  Fixing board  Must have at least 2 compensation voting board  Adopting or amending members on each bylaws committee (since the  Appointing committee committee may act members on the board‟s  Approving self-dealing behalf) transactions
  • 76. 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.
  • 77. Part VI Recruitment/Assessment 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.
  • 78. Board Orientation Survey Response Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 79. Board Orientation Survey Response Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 80. What is the most important focus of your board today? Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 81. Board Training Topics Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations
  • 82. One characteristic of an effective board is self-assessment.
  • 83. Part VI When Good Boards Behave Badly Objective To recognize that ―…although board members are sought out for their position, influence, skills or professional expertise, they often are not adequately involved in the work of the organization to develop the ‗affective knowledge‘ that would allow them to apply those ‗cognitive resources.‘…This gap explains why so many nonprofit boards are often little more than a collection of high-powered people engaged in low- level activities.‖ Owen Heiserman, Boards Behaving Badly: Observations from the Field, The Nonprofit Quarterly (2005) Take Aways  The importance of continuous board education  The value of compliance policies
  • 84. MORE RED FLAGS CEO control of board communications/agenda No ―executive‖ sessions No board education Significant regulatory and industry developments ―Fooling Around‖ Shredding Altering Back dating Withholding information from the government
  • 85. Build a foundation for compliance with appropriate policies.
  • 86. 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.
  • 87. 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.
  • 88. 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
  • 89. Investment Policy  Particularly relevant for reserves and endowment  Establishes the types of investment vehicles in which the board is comfortable  Describes the level of acceptable risk  Determines who will be in charge of investment decisions  Define asset allocation guidelines
  • 90. The California Nonprofit Integrity Act of 2004 established new compliance thresholds.
  • 91. Board Audit Committee  Monitors the overall system of internal controls and risk mitigation  Monitors the integrity of the nonprofit‘s financial statements  Ensures the independence of the nonprofit‘s auditor and the performance of an independent audit  Reviews and resolves conflicts of interest  Monitors compliance with legal and regulatory requirements  Monitors effectiveness of internal controls
  • 92. The largest risk management issues in operating a nonprofit will be financial.
  • 93. 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
  • 94. Control Activities  Separation of duties  Reconciliation  Review  Authorization – policies, procedures, documentation, budgets  Safeguards over assets (protections against loss)