New York State
Association of Independent Schools
A Time for Reform:
Issues Draft Principals for Self-Regulation
Mark E. Brossman
Meghan E. Siket
Schulte Roth &
In October 2004, at the request of the U.S. Senate
Finance Committee, the Panel on the Nonprofit Sector (the "Panel")
was created to make recommendations to Congress to improve the oversight and
governance of charitable organizations.
In June 2005, the Panel, which is comprised of 24 nonprofit and
philanthropic leaders, issued its Final Report, entitled "Strengthening
Transparency, Governance, Accountability of Charitable Organizations."
Last year, the Panel supplemented its Final Report. This winter, after examining the
standards and principles of more than 50 self-regulation and accreditation
systems that monitor charitable organizations, and after reviewing more than
125 suggestions it received, the Panel released "Draft Principles
for Effective Practice" (the "Principles").
The goal of the Principles is to offer suggestions for
strengthening self-regulation within the charitable community. The Principles address four areas of
nonprofit oversight and operations:
legal compliance, nonprofit governance, financial oversight, and
fundraising practices. The
Principles suggest significant changes to self-regulation of nonprofit
organizations. The Panel
recommends that all charitable organizations aspire to follow the Principles,
and all major public charities with at least $1 million in annual revenues and
private foundations with at least $25 million in assets should implement the
A summary of the Principles is set forth below.
of Applicable Laws and Regulations and International Conventions: Board members should be familiar with
the basic rules and requirements applicable to their charitable organization.
Body: 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.
of Interest Policy: A conflict
of interest arises when a board member or staff person's duty of loyalty to the
charitable organization comes into conflict with a competing financial or
personal interest that he or she may have in a proposed transaction. Every charitable organizations should
establish a conflict of interest policy that requires full disclosure of all
potential conflicts of interest within the organization and that explains how
the organization will handle conflicts of interest.
Policy: Every charitable
organization should have clear policies and procedures--generally known as a
"Whistleblower Protection Policy"--that that allow staff, volunteers,
or clients of the organization to report suspected wrongdoing within the
organization without fear of retribution.
Record Policy: A charitable
organization must establish and implement policies and procedures regarding
document retention and destruction to protect and preserve the organization's
important documents and business records (for example, applications for
employment, payroll records, tax forms, organizational documents, and board
materials and policies).
6. Transparency: 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. The Panel
recommends not only providing the documents required by law (for example, an
annual information return Form 990, application for recognition of tax
exemption and tax returns), but also offering additional information about its
operations, governance, and finances.
Meetings: The board of a
charitable organization must meet regularly enough to conduct its business and
fulfill its duties. The Panel
recommends that a board of trustees should hold at least three meetings per
and Structure of the Board:
The board of a charitable organization should have a sufficient number
of members to allow for full deliberation of governance matters and for
diversity of thinking in areas such as conflicts of interest and
self-dealing. The Panel recommends
the board should have a minimum of five members.
of the Board: The board of a
charitable organization should include members with diverse skills,
backgrounds, expertise, and experience necessary to advance the organization's
ability to fulfill its mission.
For example, the Panel recommends a board include or have access to
individuals with expertise in budget and financial management, investments,
personnel, fund raising, public relations and marketing, governance, advocacy
and leadership, as well as knowledge about and insights into the charitable
organization's area of expertise or programs, or a special connection to the
of the Board: The Panel
recommends that a substantial majority of the board of a public charity should
be independent, that is, individuals (i) who are not compensated by the
organization as an employee or independent contractor; (ii) whose own
compensation is not determined by individuals who are compensated by the
organization; (iii) 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 (iv) who are not related to (as a spouse,
sibling, parent or child) or do not reside with any individual described above.
and Compensating the Chief Executive Officer: The board is responsible for hiring, supervising, and
evaluating the performance of the chief executive officer of the organization,
as well as approving annually (unless there is a multi-year contract) and in
advance the compensation of the chief executive officer. The board must comply with Internal
Revenue Code rules prohibiting the payment of excessive compensation to
executives and other disqualified persons (i.e., individuals who have
substantial influence over the organization's affairs), and their family
members. For public charities, the
federal "intermediate sanctions" regulations encourage organizations
to follow procedures designed to peg compensation to what is being paid to
individuals in like positions at comparable organizations. Significant penalties apply to both the
disqualified person who receives excessive compensation and to board members
and other managers who approve such excessive compensation.
Concentration of Authority:
The Panel cautions against concentrating authority for the
organization's governance and management practices in one or two individuals. It recommends that the positions of
chief executive officer, board chair, and treasurer are held by separate
of the Board: 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.
and Removal of Board Members:
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 a board term of service and the number of terms an individual may
serve, as well as on the removal of board members.
Review of Governing Instruments:
The Panel recommends that the board must review organizational and
governing instruments (e.g., the articles of incorporation and bylaws) no less
frequently than every three years to ensure that they reflect its current practice.
Review of the Organization's Mission:
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.
of Board Members: 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
of Funds: Board members must
exercise their "duty of care" by providing careful oversight of the
organization's assets and financial transactions to protect the interests of
the organization and its charitable purposes. The board must institute policies and procedures to ensure
that the organization and, if applicable, its subsidiaries, managers and
invests its funds responsibly and prudently. The full board must review and approve the organization's
annual budget and should monitor actual performance against the budget.
Audit: A charitable
organization must keep complete and accurate financial records and should have
a qualified, independent financial expert audit or review them annually in a
manner appropriate to the organization's size and scale or operations. The Panel has previously recommended
that Congress revise federal laws, which currently do not require audits of
charitable organizations, to require that exempt organizations with total
annual revenues of $1 million or more have their financial statements audited
by an independent certified public accountant and that exempt organizations
with revenues between $250,000 and $1 million have their financial statements
reviewed by an independent public accountant.
to Board Members: The Panel
recommends that charitable organizations must not provide loans (or the
equivalent) to board members.
Expenses: A charitable
organization must incur reasonable and necessary "administrative
expenses" to further its charitable mission.
of Expenses: A charitable
organization must establish and implement policies that provide clear guidance
on its rules for paying or reimbursing expenses incurred when conducting
business or traveling on behalf of the organization, including the types of
expenses that can be paid for or reimbursed and the documentation
required. Board members and
executives who approve or receive excessive travel benefits are subject to
penalties under existing law.
materials and other communications with donors and the public must clearly
identify the organization and be accurate and truthful.
Contributions must be used for the purpose described in the relevant
solicitation materials, in the way specifically requested by the donor, or in a
manner that reflects the donor's intent.
Acknowledgement of Contributions:
Charitable organizations must provide donors with appropriate and timely
acknowledgements and recognition of all contributions.
of Accepting a Gift:
Charitable organizations should implement clear policies, based on the
organization's exempt purpose, to determine whether accepting a gift is in the
best interests of the organization based on any associated costs or other
of the People Soliciting Funds:
A charitable organization may be legally responsible when those who
solicit on its behalf engage in illegal or fraudulent practices. Thus, the Panel recommends that a
charitable organization should provide appropriate training and supervision of
the people soliciting funds on its behalf to ensure that they understand their
responsibilities and applicable federal, state and local laws, and that they do
not employ techniques that are coercive, intimidating, or intended to harass
of Fundraisers: Organizations
should not compensate internal or external fundraisers based on a commission or
a percentage of the amount raised.
According to the Panel, basing compensation on a percentage of the money
raised can encourage fundraisers to put their own interests ahead of those of
the organization or the donor and may lead to inappropriate techniques that
jeopardize the organization's values and reputation and the donor's trust in
the Privacy of Donors: A
charitable organization must respect the privacy of individual donors and must
not sell or otherwise make available the names and contact information of its
donors without prior permission, except where disclosure is required by law.