Nonprofit Law Blog

Advisory Committee Principles - Principles for Effective Governance

Here are the 11 draft principles falling within the category of "Principles for Effective Governance" developed by the Panel on the Nonprofit Sector's Advisory Committee on Self-Regulation of the Charitable Sector:

1. The board of a charitable organization must meet regularly enough to conduct its business and fulfill its duties. The board should hold at least three meetings per year.
2. The board of a charitable organization should establish and review periodically its size and structure to ensure effective governance and to meet the organization’s goals and objectives. The board should have a minimum of five members.
3. The board of a charitable organization should include members with the diverse skills, background, expertise, and experience necessary to advance the organization’s ability to fulfill its mission. The board should include or have access to some individuals with financial literacy.
4. A substantial majority of the board of a public charity should be independent -- that is, individuals (1) who are not compensated by the organization as an employee or independent contractor; (2) whose own compensation is not determined by individuals who are compensated by the organization; (3) who do not receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; and (4) who are not related to (as a spouse, sibling, parent or child) or do not reside with any individual described above.
5. The board must hire, supervise, and evaluate the performance of the chief executive officer of the organization, as well as approve annually and in advance the compensation of the chief executive officer unless there is a multi-year contract in force or there is no change in the compensation except for an inflation or cost-of-living adjustment.
6. The board of a charitable organization that has paid staff should ensure that the positions of chief executive officer, board chair, and treasurer are held by separate individuals.
7. The board should establish an effective, systematic process for educating and communicating with board members to ensure that the board carries out its oversight functions and that individual members are aware of their legal and ethical responsibilities.
8. Board members should evaluate their own performance as a group and as individuals no less frequently than every three years. The board should establish clear policies and procedures on the length of terms and on the removal of board members.
9. The board must review organizational and governing instruments no less frequently than every three years.
10. The board should establish or review goals for implementing the organization’s mission on an annual basis and evaluate programs, goals, and activities to be sure they are consistent with the mission no less frequently than every three years.
11. Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. Charitable organizations that provide compensation to board members must make available to anyone, upon request, relevant information that will assist in evaluations of the reasonableness of such compensation.

Advisory Committee Principles - Facilitating Legal Compliance

Here are the 6 draft principles falling within the category of "Facilitating Legal Compliance" developed by the Panel on the Nonprofit Sector's Advisory Committee on Self-Regulation of the Charitable Sector:

1. A charitable organization should be knowledgeable about and must comply with all applicable laws and regulations and international conventions.
2. A charitable organization must have a governing body that is 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 of the organization.
3. A charitable organization must adopt and implement policies and procedures to ensure that all conflicts of interest, or the appearance thereof, within the organization and the board are avoided or appropriately managed through disclosure, recusal, or other means.
4. A charitable organization must establish and implement policies and procedures that enable individuals to come forward with credible information on illegal practices or violations of organizational policies. This “whistleblower” policy must specify that the organization will not retaliate against individuals who make such reports.
5. A charitable organization must establish and implement policies and procedures to protect and preserve the organization’s important documents and business records.
6. A charitable organization must make information about its operations, including its board members, finances, programs and activities, and methods used to evaluate the outcomes of work, widely available to the public.

While the principles may appear obvious to some and imposing to others, they are sound, if not comprehensive, guidelines for compliance with applicable laws.  Of course, it's easy to simply agree with the principles, but it may be more difficult to put them into practice.  Here are some quick tips:

1. Have a nonprofit/exempt organizations attorney give a presentation to your board members and key staff members about legal compliance.  A good book will supplement such presentation, but it may be unrealistic to assume that all key persons will be reading and or understanding the relevant points.
2. Develop schedules for the review and approval of mission, strategic direction, budgets, annual information returns (e.g., Form 990), executive compensation, etc.  Have board committees review your bylaws and other documents detailing the organization's fiscal and governance policies, particularly if they have not been reviewed for legal compliance within the past few years or if the board doesn't follow the policies contained therein. 
3. If the organization doesn't have a conflict of interest policy as either a stand-alone document or within the bylaws, the board should adopt one.  The Instructions for Form 1023 contain a sample policy.  Note that a transaction that involves a conflict of interest may be appropriate and beneficial to a public charity (e.g., below market rate services) if properly managed.
4. A sample whistleblower policy is available at the National Council of Nonprofit Association's (NCNA's) website here.
5. A sample document destruction policy is available at the NCNA's website here.
6. First, know the public disclosure requirements (e.g., whether you are required to make available your Form 990, 990-EZ or 990-PF and how to do so).  Second, make sure you have ready access to the documents that must be made available, particularly your Form 1023 (application for recognition of federal tax exemption under 501(c)(3)) if you haven't seen that in a while.  Don't forget that Form 1023 contains the bases for your tax-exempt status.  The IRS determination letter only confirms such status.  Third, consider open disclosures of information on your organization's website to build supporter and public confidence.

You can view the Advisory Committee's Draft Principles on Faciliting Legal Compliance here.

Independent Sector: Draft Principles for Self-Regulation

The Panel on the Nonprofit Sector's Advisory Committee on Self-Regulation of the Charitable Sector has developed a set of 29 principles of effective practice for charitable organizations.  The Committee recommends that all charitable organizations aspire to follow these principles and that all larger public charities (annual revenues of at least $1 million) and private foundations (assets of at least $25 million) implement these practices.

The Draft Principles for Self-Regulation are categorized in the following four areas:

Facilitating Legal Compliance - responsibilities and practices, such as implementing conflict of interest and whistleblower policies, that will assist charitable organizations in complying with their legal obligations.

Effective Governance - policies and procedures a board of directors should implement to fulfill its oversight and governance responsibilities effectively.

Strong Financial Oversight - policies and procedures an organization should follow to ensure wise stewardship of charitable resources.

Responsible Fundraising - policies and procedures organizations that solicit funds from the public should follow to build donor support and confidence.

Until February 2, the Committee will be accepting public comments with respect to the principles before it sends its recommendations to the Panel,  You can view the draft principles here.

Charitable Class

IRS Publication 3833 (Rev. 9-2005) provides the following description of a charitable class:

The group of individuals that may properly receive assistance from a charitable organization is called a charitable class.  A charitable class must be large or indefinite enough that providing aid to members of the class benefits the community as a whole.  Because of this requirement, a tax-exempt disaster relief or emergency hardship organization cannot target and limit its assistance to specific individuals, such as a few persons injured in a particular fire.  Similarly, donors cannot earmark contributions to a charitable organization for a particular individual or family.  When a disaster or emergency hardship occurs, a charitable organization may help individuals who are needy or otherwise distressed because they are part of a general class of charitable beneficiaries, provided the organization who selects who gets the assistance.

Defining an appropriate charitable class is also critical in the Form 1023 exemption application.  Understandably, a new charity may initially benefit only a small number of individuals before it secures additional support to expand its provision of services.  However, the general charitable class to which the initial beneficiaries belong should be defined sufficiently to evidence a large or indefinite class and not a group of selected individuals.

For example, an organization limiting its beneficiaries to the class of 5 firefighters injured in a local disaster would not meet the requirements of a charitable class (because its benefits are limited to certain specific individuals).  In addition, contributions to charities earmarked to specific individuals do not qualify for a charitable deduction.  On the other hand, an organization which benefits local firefighters injured on the job now and in the future may benefit a sufficiently indefinite charitable class (because its benefits are not limited to certain specific individuals since the identities of future injured firefighters are unknown).   

Of course, laws can carve out exceptions to the above restrictions.  For example, on December 21, 2006, President Bush signed into law H.R. 6429 which provides for an exception for payments made on behalf of any firefighter who died as a result of the October 2006 Esperanza incident fire in Southern California to any family member of such firefighter.  Five firefighters tragically died in the Esperanza fire.  Clearly, they would not constitute a charitable class, but Congress and the President gave the charity and its donors a pass (probably in large part because of the intense media coverage and public awareness of the event).

Read Jack Siegel's insightful critique of H.R. 6429 at The Charity Governance Blog by clicking here.

The Pursuit of Happyness

I went to see The Pursuit of Happyness, starring Will Smith, on New Year's Day.  The movie is about Chris Gardner, a father raising his son while struggling to overcome tremendous hardships, including periods of homelessness.

Rotten Tomatoes rates the movie a 68 and provides the following critical consensus:  "Will Smith's heartfelt performance elevates The Pursuit of Happyness above mere melodrama."  Read the full review here.

With respect to featuring a charity and/or charitable giving, I'll give it 2 (**) stars out of 4 for the scenes inside and outside Glide Memorial Church.  In the movie, based on a real-life story, Glide and Rev. Cecil Williams provided needed shelter to Gardner and his 5-year old son when they had no home.  Read more about Glide and Chris Gardner here.

While it would have been nice to see more about how Gardner valued the contribution of Glide and Rev. Williams to his eventual success, it is not surprising that such scenes were not included in the movie.  Hollywood prefers heroes to make it all on their own, maybe with the help of a friend or two, but rarely with the help of a charity.  I'll make a New Year's wish for more stories featuring charities and charitable giving that result in visible successes. 

onPhilanthropy's Top Ten Stories of 2006

Happy New Year!  One of my resolutions for 2007 (yes, I'm one of those people who still make resolutions) is to elevate the frequency of postings on the Nonprofit Law Blog.  My first post of 2007 is the following top ten list.

onPhilanthropy's Top Ten Stories of 2006

1. Warren Buffet.
2. Clinton Global Initiative.
3. Google.
4. Richard Branson.
5. Celebrities.
6. Senator Charles Grassley.
7. Cause Marketing.
8. The Nobel.
9. Blogs and Media.
10. Don't Compete, Collaborate.

You can find the list with several links to associated articles here.