Recently, both Congress and the IRS have perceived a governance vacuum that they believe contributes to certain troublesome issues at some nonprofits. Predictably, the IRS has moved in to fill the vacuum with a barrage of new disclosure requirements regarding board governance, board policies and board procedures. The IRS focus on the importance of the board is clearly evident in the new Form 990 information return for the 2008 tax year.
The new disclosures in Form 990 will be of considerable importance as nonprofits think about their own process of designing board composition. New and improved regulatory vigilance necessarily causes organizations to continue to strive for balance between fundraising and what’s best for the organization from a planning and execution standpoint.
It’s true that many wonderful organizations were, and will be, created and supported by board members who gave their time and money to the cause. However, competence to be part of a group responsible for organizational oversight does not always equate solely to beneficence.
While there’s no specific statute regulating board makeup, the Revised Form 990 for 2008 is a great place for nonprofits to get their bearings in terms of what makes good governance, at least according to the IRS.
When we look at the best mix of benefactors and experts, that is to say people with program, business, tax or governance expertise, there isn’t one recipe that will work for every organization.
While it’s crucial to almost every organization to have effective fundraisers on the board, the protection and proper use and management of the funds that have been raised is equally important.
Basically, all board members, including benefactors, need to have a “follow the money” attitude.
Board members, whether benefactors or experts, should be able to comprehend, and should never ignore, the nuances brought up by their independent advisors that address financial, legal, tax or other reporting issues, and they should be willing to address such issues to protect the organization.
For example, a board that ignores potential reporting or regulatory issues, or worse, switches service providers because there’s a disagreement with management on certain issues, may be telegraphing a problem to donors, the media or others.
The entire board needs to be aware of such issues and be prepared to understand the solution. Experts and benefactors alike need to understand that when there’s a link between the people running an organization and the recipients of charitable monies, a closely monitored conflict-of-interest policy can help avoid problems.
Having experts on the board is one good way of carrying out this critical oversight function.
Thus, with benefactors, it’s not so much whether there is a potential conflict of interest, but whether the benefactor-cum-board member understands his or her ultimate responsibility for organizational integrity.
The board member selection processes should consider whether a benefactor and potential board member is someone who also has expertise and is willing to put aside his or her own interests to ensure good governance.
It’s important for any nonprofit, particularly a small or mid-sized group, not to exclude benefactors from its board. Instead, make sure there’s not a knee-jerk reaction and ensure that being a large benefactor doesn’t automatically equal a seat on the board.
A nonprofit should fully vet all board candidates to ensure they fully understand their duties, will be effective, and will assist in an important way in overseeing the use of charitable assets.
This is a tough act, because if board members are significant donors, then they’re basically overseeing what they might tend to think of as money to fund only certain pet projects.
However, once that philanthropic transaction is completed, everyone needs to understand that the money should be used in the most effective way to help the charity accomplish its mission.
Nancy Murphy, JD, is a tax principal at the public accounting firm of Grant Thornton LLP and is based in Washington, D.C.