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

1

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

2

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

4

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

Poor Governance: Unstable – disregard for ethics, lacks discipline, deficient controls, weak employee support system, lack of oversight activities, lassez faire culture

5

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

What are the Drivers of Governance?

• Drivers of the Recent Past
• Key New Drivers

6

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

3

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

7

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

Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations

• Legal Compliance and Public Disclosure

ff

8

• Effective Governance
• Strong Financial Oversight
• Responsible Fundraising

– www.nonprofitpanel.org/

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

9

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
• f institutional funds
• Must use contributions for purposes consistent with donor intent
• Must provide donors with acknowledgements of donations consistent with IRS requirements

4

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

10

p g g p p responsibility and governance

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

11

– Fund purpose – General economic conditions – Effects of inflation/deflation – Expected total return – Other resources of organization – Institutional investment policy

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 h h " b f “

12

those who participate in an "excess benefit transaction“.

• IRS recommended that charities should generally not compensate

persons for service on the board of directors except to reimburse direct expenses.

5

Key New Drivers

• IRS Monitoring Practices
• Economic Landscape

13

Economic Landscape

• State Attorney Generals
• Informed Constituencies

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

IRS Monitoring Practices

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

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,

IRS Monitoring Practices

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

• rganization rests with a single or select few individuals.

15

6

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 dh d t h t l t ti l fli t di l d

IRS Monitoring Practices

was adhered to when actual or potential conflicts were disclosed. 5. Financial Oversight – whether systems or procedures are in place to ensure proper use

• f 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?

17

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?

Economic Environment

• Curtailed lending
• Risk of default of covenants
• Signs of distress on key grantors, contributors

18

• 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

• versight responsibilities, risk management, and compliance activities (GRC)

within the organizational structures.

7

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 li it ti i t ti

19

• State solicitation registration
• Privacy policy

Governance in the 21st 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

• Elements of a Strong Governance Culture
• Fundamental Building Blocks

Practices that Assist You Get Where You Need To Be

• Governance Oversight

21

“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.

8

• Mission and Core Values ‐ measurable and promote an ethical work

environment and aid in achieving business goals and objectives St t i Pl b th h t d l t l li d ith Mi i d

Elements of a Strong Governance Culture

• Strategic Plan – both short and long term goals aligned with Mission and

Core Values

• Code of Ethics and Related Party/Conflict of Interest Policy – reinforce

continuously throughout the organization

• Management evaluation, compensation and succession

22

• Independent Board/Board Dynamics ‐ monitor and evaluate actions of

executive management

• Financial Oversight – internal control and monitoring activities to prevent

/

Elements of a Strong Governance Culture

financial misstatement and/or fraud

• Expense Reimbursement and Gift Acceptance – polices to deter potential

abuses

• Whistleblower Hotline – key element to an effective governance program
• Risk Management/Control Environment – COSO frameworks
• Performance Evaluation

23

Fundamental Building Blocks

Mission Statement

• Mission Statement must clearly define the “purpose” of the organization (What is
• ur business? Why do we exist? What are we trying to accomplish? How will we

accomplish it?) accomplish it?)

• The Mission is not the company slogan
• Organization’s goals, objectives and activities should align directly to the Mission

24

9

Fundamental Building Blocks

Core Values

The guiding principles of an organization, espoused by senior management, and accepted by employees often reflected in the mission statement of the and accepted by employees, often reflected in the mission statement of the

• rganization. Core values often influence the culture of an organization and

are normally long‐standing beliefs. Core values are an increasingly important component in strategic planning because they drive the intent and direction of the organization’s leadership.

25

Fundamental Building Blocks

Strategic Plan – Key Components

• Clearly define the purpose/mission of the organization and establish realistic goals and
• bjectives consistent with that mission
• Board support and approval and an inclusive management‐directed plan
• Board support and approval and an inclusive, management‐directed plan
• Describe the organization’s resources, key priorities, growth initiatives, etc. for both the

short (one year) and long (three‐five years) periods

• Establish mechanisms for quantitatively measuring success and timeframes for achievement

that are realistic (within the organization’s capacity)

• Present plan in a format that is clear and focused
• Board approved policies to guide implementation of activities designed to assist the
• rganization in meeting strategic objectives.

26

Fundamental Building Blocks

Code of Ethics

• Adopt a written Code of Ethics

– Designed to deter wrongdoing and to promote honest and ethical conduct – Outlines the activities that are appropriate and inappropriate and the consequences for violation violation

• Directors, trustees, and staff should be familiar and abide by the Code and periodically

educated as to the importance of compliance

• Obtain written acknowledgement of adherence to code annually

Related Party/Conflict of Interest

• Establish strict policies on approving and conducting business with related parties

(family members, business affiliations, etc.)

• Relationships should be at arms‐length
• All conflicts or the appearance of conflicts should be reviewed and approved

independent of the employee involved

27

10

Fundamental Building Blocks

Independent Board

• Responsible for reviewing and approving the organization’s mission and

strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies

• Responsible for the organization’s compliance with laws and regulations and

provisions of gift agreements

• Oversees the hiring and annually evaluates the performance of the CEO and
• ther executive management and monitor his/her progress towards

meeting strategic objectives

• Board recruitment and succession planning

28

Fundamental Building Blocks

Board Education

• Establish an effective, systematic process for educating and communicating to board

members their legal and ethical responsibilities and ensure they are knowledgeable about the programs and activities of the organization and can carry out their oversight functions effectively and responsibly

• Orientation program

Board Self‐Assessments

• Board members should evaluate their performance as a group and as individuals
• Clear procedures for removing board members who are unable to fulfill their

responsibilities should be in place

29

Fundamental Building Blocks

Financial Oversight

• Providing adequate information to the Board
• Board/Committee with financial expertise to review financials
• Comprehensive budgeting and forecasting model
• Key Performance Metrics – Primary measures used to monitor the success of the
• rganization against mission and strategic plan that provide early warning to

potential issues within a process

• Investment Policies
• Capital Allocation Policies
• Document Retention policies
• Independent Annual Audit

30

11

Fundamental Building Blocks

Expense Reimbursement Policy

• Should establish clear, written policies for reimbursing expenses incurred by

anyone conducting business or traveling on behalf of the organization including anyone conducting business or traveling on behalf of the organization, including the types of expenses that can be reimbursed and the supporting documentation required

• Such policies should require that travel on behalf of the organization be

undertaken in a cost effective manner

• Organizations should neither pay for nor reimburse travel expenditures for

spouses, dependents, or others who are accompanying them unless they to are conducting business on behalf of the organization

31

Fundamental Building Blocks

Gift Acceptance Policy

• Adopt restrictions on accepting gifts of a nature that could

compromise ethics influence decisions or be perceived to influence compromise ethics, influence decisions or be perceived to influence

• All gifts should be reported

32

Fundamental Building Blocks

Whistleblower Hotline

• Anonymous submission of concerns by employees or external third parties

i iti l is critical

• Documented procedures for the receipt, retention and treatment of

complaints in a confidential nature

• Reward system for those providing critical information (encourage don’t

discourage)

33

12

Fundamental Building Blocks

Control Environment

Adopt a framework (COSO elements)

– Risk Assessment – Control Environment – Control Activities – Information and Communication – Monitoring

34

What is a control ‐ Mechanisms in place to mitigate risks to acceptable levels/within defined risk tolerances

Governance Oversight

Independent Board Human Resources (tuned into personnel concerns) Internal Audit/Compliance Office Legal Counsel External Audit Third Parties (examiners, regulators, etc.) Donors IRS

35

For Governance to Be Successful

• Clear Mission and Core Values aligned to Strategic Plan
• Strong Tone ‐ Top to Bottom and vice versa
• Guiding Policies and Procedures
• Guiding Policies and Procedures
• Management strict adherence to mission, values and policies
• Adoption and management of formal internal control framework
• Formalized oversight activities – internal audit, external audit,

independent board

36

13

Resources

• www.boardsource.org
• www.irs.gov/charities/index.html

b

• www.nacubo.org
• www.nonprofitrisk.org
• www.pcaob.org
• www.independentsector.org
• www.nonprofitpanel.org

37

As one

• ne of
• f the

the largest largest certified public accounting and business advisory firms in the region, Schneider Downs serves clients throughout the country and around the world. By integrating high high‐quality quality resources, resources, systems systems and and personnel personnel, Schneider Downs has built a reputation reputation of

• f delivering

delivering individualized individualized services services built on insight insight, innovation innovation, and experience experience to meet each client’s specific needs.

For more information, visit us at For more information, visit us at

www.schneiderdowns.com

38

Thank you for your time today.

Contact: Don R. Owens i Director (614) 586.7257 dowens@schneiderdowns.com

Visit us online at www.schneiderdowns.com and sign up to receive our Insights – timely updates that keep your business connected to the information it needs.

39