Focus on Foundations: Nonprofit Sector Panel Issues Best Practices Manual for Nonprofits

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Title:
Focus on Foundations: Nonprofit Sector Panel Issues Best Practices Manual for Nonprofits
Date:
November 26, 2007
Publication:
From the December 2007 Riker Danzig Tax and Trusts & Estates Update
Author(s):
Area(s) of Practice:
Estate Planning & Administration, Tax Law

The Panel on the Nonprofit Sector, with the encouragement of the Senate Finance Committee, recently published a “best practices” manual for nonprofit organizations, which is designed to help nonprofit organizations avoid ethical and legal improprieties.1 The manual sets forth a comprehensive set of principles whose purpose is to reinforce a common understanding of transparency, accountability, and good governance for the nonprofit sector as a whole – not only to ensure ethical and trustworthy behavior, but also to spotlight strong practices that contribute to the effectiveness, durability, and broad popular support for charitable organizations of all kinds.

The 33 principles are organized under four main categories:

(1) Legal Compliance and Public Disclosure – responsibilities and practices (such as implementing conflict of interest and whistleblower policies).

(2) Effective Governance – policies and procedures a board of trustees should implement to fulfill its oversight and governance responsibilities effectively.

(3) Strong Financial Oversight – policies and procedures an organization should follow to ensure wise stewardship of charitable resources.

(4) Responsible Fundraising – policies and procedures to build donor support and confidence.

Some of these principles describe actions that all charitable organizations must take because they are required by law. Others describe actions that charitable organizations should strongly consider following. Among the noteworthy recommendations are the following:

  • Charitable organizations should not pay travel expenses for spouses and others not conducting charitable business.
  • Boards should set clear guidelines as to the length of board terms and the number of consecutive terms a member can serve.
  • A substantial majority (two-thirds) of the board of a public charity should be independent, meaning the members should not (a) be compensated by the organization as employees or independent contractors, (b) have their compensation determined by individuals who are compensated by the organization, (c) receive material financial benefits from the organization, or (d) be related to or reside with a board member.
  • The board should establish an effective, systematic process for educating and communicating with board members to ensure that they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities (including financial activities) of the organization and can carry out their oversight functions effectively.

It would be prudent for every charitable organization’s board to conduct a thorough discussion of the complete set of principles, and to determine how the organization should apply the principles.

In addition to aiding good governance practices generally, implementing these principles now will better prepare a nonprofit organization for the additional compliance inquiries reflected in the new IRS Forms 990 and 990PF.

 

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1. Principles for Good Governance and Ethical Practice – A Guide for Charities and Foundations, Panel on the Nonprofit Sector Convened by Independent Sector, October 2007. It can be located at www.nonprofitpanel.org.