1 Governance As it pertains to board officers and directors, there - PDF document

What are the Drivers of Governance? This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter. 2 Governance Governance is the system by which an organization is directed and controlled. It includes the rules and procedures for making decisions on the organization’s affairs to ensure success and protect stakeholders’ interest while maintaining the right balance with the organization’s purpose. 3 1

Governance As it pertains to board officers and directors, there are three fundamental governance duties commonly known as fiduciary responsibilities that apply to all board actions. If board members fail to carry out their responsibilities, they could be held liable for any negative consequences of their actions. 1. Duty of care 2. Duty of loyalty 3. Duty of obedience Governance is Owned by All 4 Poor Governance: Unstable – disregard for ethics, lacks discipline, deficient controls, weak employee support system, lack of oversight activities, lassez faire culture Strong Governance: Structurally sound – clear tone at the top, all staff and management levels embrace good governance practices, employees are empowered, culture is well defined 5 What are the Drivers of Governance? • Drivers of the Recent Past • Key New Drivers y • Practices that Assist You Get Where You Need To Be • Future Drivers The past decade has marshaled in a greater awareness and responsibility for effective governance that has required development and adoption of practices not previously common place in many organizations 6 2

Drivers of the Recent Past Principles for Good Governance and Ethical Practice A Guide for Charities and • Foundations (Panel on the Non ‐ profit Sector ‐ October 2007) Form 990 overhaul Form 990 overhaul • Sarbanes ‐ Oxley Influence (Congress/Security and Exchange Commission) • Uniform Prudent Management of Institutional Funds Act (as of June 11, 50 states • and territories of the US had enacted UPMIFA ; Mississippi, Pennsylvania, and Puerto Rico have not) – laws governing the management and investment of charitable funds IRS compliance questionnaires • 7 Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations Legal Compliance and Public Disclosure • Effective Governance ff • Strong Financial Oversight • Responsible Fundraising • – www.nonprofitpanel.org/ 8 Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations Of the 33 principles, only 6 are legally required: • Must have governing body responsible for reviewing and approving the organization's mission, strategic direction, annual budget, key financial transactions, compensation practices, policies and fiscal and governance policies • Must abide by federal, state and if applicable, international laws and regulations • Must maintain complete, current and accurate financial records • Must institute policies and procedures to ensure the appropriate investment and management of institutional funds • Must use contributions for purposes consistent with donor intent • Must provide donors with acknowledgements of donations consistent with IRS requirements 9 3

Sarbanes ‐ Oxley Act Although it applies to publicly traded companies, the key pillars of the Act have trickled down into the nonprofit sector. Best practices have emerged and are designed to enhance and improve corporate p g g p p • responsibility and governance 10 Uniform Prudent Management of Institutional Funds Act Standard of care with respect to Endowment Funds – Equally high for • both, must affirmatively elect annually and consider the following: Fund duration – Fund purpose – General economic conditions – Effects of inflation/deflation – Expected total return – Other resources of organization – Institutional investment policy – 11 Executive Compensation and Benefits Federal legislation in 2006 required more stringent definitions of • "disqualified persons"—those in a position to exercise substantial influence over an exempt organization—and increased penalties for those who participate in an "excess benefit transaction“. h h " b f “ IRS recommended that charities should generally not compensate • persons for service on the board of directors except to reimburse direct expenses. 12 4

Key New Drivers • IRS Monitoring Practices • Economic Landscape Economic Landscape • State Attorney Generals • Informed Constituencies 13 IRS Monitoring Practices IRS EXEMPT ORGANIZATION DIVISION 2011 WORK PLAN ‐ Using Form 990 as a compliance tool for governance – Increase transparency and enforce compliance with federal tax law Increase transparency and enforce compliance with federal tax law – Identify non ‐ compliant and potentially non ‐ compliant organizations – Use of checklist to track governance practices based upon data submitted in Form 990 14 IRS Monitoring Practices Checklist indicates that the IRS will be examining six areas related to governance: 1. Governing Body and Management – written mission statement of the organization reflecting a 501(c)(3) purpose and current activities; governing board composition, duties and qualifications, frequency of meetings of the board quorum. 2. Compensation – approval procedures, comparability data used, and contemporaneous documentation. 3. Organizational Control – business and family relationships among officers, directors, trustees or key employees; and whether effective control of the organization rests with a single or select few individuals. 15 5

IRS Monitoring Practices Checklist (continued): 4. Conflict of Interest – written conflict of interest policy; whether the policy addresses recusals and requires annual written disclosures of conflicts; and whether the policy was adhered to when actual or potential conflicts were disclosed. dh d t h t l t ti l fli t di l d 5. Financial Oversight – whether systems or procedures are in place to ensure proper use of assets; written financial reports to the board and discussion of such reports; board review of IRS Form 990; and use of an independent accountant, accountant’s report, and management letter. 6. Document Retention – written policy for document retention and destruction; and contemporaneous documentation of board meetings. 16 IRS Monitoring Practices Financial Oversight Questions: How often did the organization provide board members with written reports of • the organization’s financial activities? g Was a management letter prepared by the independent accountant? • Was the management letter reviewed by the full board and/or a designated • committee? Did the organization adopt any of the recommendations contained in the • management letter? 17 Economic Environment Curtailed lending • Risk of default of covenants • Signs of distress on key grantors, contributors • Tightening of lending policies • Credit risk assessment of endowed not ‐ for ‐ profit debt issuers increasingly • driven by analysis of institutional governance and risk management processes. This environment highlights the importance of coordinating governance oversight responsibilities, risk management, and compliance activities (GRC) within the organizational structures. 18 6

Responsible Fund Raising Endowments – 3, 5, and 10 year return on endowments remain below the • level needed for long ‐ term funding and sustained grants St t State solicitation registration li it ti i t ti • Privacy policy • 19 Governance in the 21 st Century Governance ‐ shared responsibility between management and the board • Board’s role is to serve as a check and balance on management who are • involved in the day to day activities of the nonprofit If the board stays true to its function this will help to avoid inefficiencies • and the organization will be more effective Form 990 is another important check on the organization's governance • policies and processes 20 Practices that Assist You Get Where You Need To Be • Elements of a Strong Governance Culture • Fundamental Building Blocks • Governance Oversight “Best practices” are aspirational goals, not legal requirements. Absent a legal mandate, a decision not to adopt is not indicative of a breach of fiduciary duty. 21 7