DOING WELL WHILE AVOIDING WRONG

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DOING WELL WHILE AVOIDING WRONG

• Five Topics for 2005
• Mary E. Probst

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1. Effective Board Governance

• Continued activity and new proposals ripples
  from Sarbanes-Oxley legislation
• Responses to Senate Finance Committee hearings of
  7/2004 and staff proposals
• Philanthropic community Council on Foundations,
  Independent Sector
• American Bar Association

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Board Governance (contd)

• House Ways and Means Oversight Subcommittee
  6/2004 hearings on tax-exempt hospitals
• Independent Sector convenes a national panel
• Internal Revenue Service activity in internal
  governance affairs of nonprofit organizations,
  traditionally left to state law

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State Law Initiatives

• California Nonprofit Integrity Act of 2004 (SB
  1262)
• Governance
• Fundraising
• New York legislative proposals
• Massachusetts legislative proposals
• Delaware health care legislation

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Common Themes

• Board composition
• Independent directors
• Board size
• Competency and qualifications
• Executive Compensation Oversight
• Independent compensation consultants

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Common Themes (contd)

• Board financial oversight
• Certification of financial information
• Required independent audit
• Corporate compliance program
• Increased reporting and disclosure
• Conflicts of interest policies
• Federalization of fiduciary duties (IRS)

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Evaluation Tools for Foundation Boards

• Adherence to fundamental principles of good
  governance
• Best practices recommendations
• Self-evaluation
• Governance audits
• List of Resources

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2. Financial Oversight

• Current proposals -
• Separate Finance, Audit and Investment Committees
  
• Independent and non-conflicted members
• Entire Board shares more information and
  responsibility
• Review and approval of specific accounting
  practices

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Financial Oversight (contd)

• Responsibility for investments
• CEO or CFO certifies 990-PF
• Required audit of financial statements
• Audited financial statements as well as tax
  return made public
• List of Resources

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3. Executive and Board Compensation

• Reasonable compensation (fair market value as
  proxy)
• No pecuniary gain
• No private inurement
• Compensation for personal services paid to
  disqualified person of private foundation or
  public charity must be reasonable

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Compensation (contd)

• Compensation includes all compensation
• Deferred and indirect compensation
• Independent of whether treated as income to
  recipient
• 990-PF disclosure requirements comprehensive and
  may require double reporting
• IRS compensation audits

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Compensation (contd)

• Best practices for compensation
• Approval by independent committee
• Based upon qualified independent information
• Contemporaneous documentation
• Rebuttable presumption procedures for public
  charities
• List of Resources

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4. Conflicts of Interest

• State law requirements Minn. Stat. 317A.255
• Conflicts of Interest Policy or equivalent
  required under new IRS Application (1023)
• New IRS sample policy in Instructions to Form
  1023
• Disclosure of multiple interests (ethical
  conflicts)

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Legislative Activities

• American Jobs Creation Act of 2004
• Administrative expenses exception for
  distribution requirement
• Underreporting of direct charitable activity
• Proposed application of intermediate sanction
  rules to private foundations
• Changes to taxation of charitable contributions