Good Governance of Nonprofit Organizations – a Push in the Right Direction from the IRS
By Jim Lindsay, Catholic Volunteer Network Executive Director
I have been thinking quite a lot lately about policies that facilitate good governance for nonprofit organizations, as I have been drafting policies needed for compliance with new Internal Revenue Service (IRS) Form 990 regulations. Most directors and trustees of nonprofit organizations have not traditionally linked core governance principles of transparency, accountability and compliance with the completion of the organization’s 990, the IRS’ information return that is filed each year by most tax-exempt organizations. It has usually been relegated to the accountants, the chief financial officer and the audit (or budget & finance) committee. But all that has changed with the introduction in 2008 of the IRS’ all-new form 990. The newly-redesigned Form 990 applies to tax-exempt organizations’ 2008 tax year, which is the fiscal year of the organization that begins in 2008. For Catholic Volunteer Network, this was the year that ended on June 30, 2009.
Governance policies inquired about by the IRS include: conflicts of interest, protection of whistleblowers, document retention and destruction, compensation policy and practice, joint ventures, chapters and affiliates, expense payments and reimbursements, gift acceptance, compensation review, and Form 990 review. Throughout the form, questions are asked with regard to whether the organization has various governance policies in place or whether it follows specific “good governance” practices.
Along with our executive committee, I have been drafting conflicts of interest, whistleblower, and document retention policies. Earlier this year, our Board also approved a gift acceptance policy. While I am not an expert on these issues, I wish to share with you some of what I have learned.
With regard to conflicts of interest, it is important that charitable organizations adopt and implement policies that ensure that all such conflicts (or even the appearance of such) within the organization and the Board are adequately managed through disclosure, recusal, or other means. While not all conflicts are illegal or unethical, most are avoidable nonetheless. It is critically important how the Board handles these conflicts. It is a clearly established principle that only independent Board members (i.e., those who are uncompensated and not related to or living with someone who is compensated) should vote when a conflict of interest occurs. In addition, Board members with a material conflict of interest should recuse themselves from Board discussions and votes. A written conflict-of-interest policy and corresponding disclosure form should serve as the guide for addressing conflict situations.
We might be able to think of instances in which an organization was damaged by issues related to a conflict of interest. Conversely, we may know of occasions when a potentially damaging situation was handled well. It is important to consider what types of conflicts of interest might affect your organization. You might ask yourself what steps you are presently taking to ensure that conflicts are dealt with appropriately. Do you have a written conflict-of-interest policy, including an annual disclosure form? If so, when did you last review it? How do you enforce it?
The “whistleblower” policy enables individuals to come forward with information on illegal practices or violations of organizational policies. This policy should make clear that the organization will not retaliate against, and will protect the confidentiality of, individuals who make good-faith reports. Each of our organizations ought to have a confidential process for addressing complaints or reports of suspected illegal or unethical activities. I think we would all agree that staff and volunteers need to feel safe in reporting unacceptable acts. It is important to note that retaliation against whistleblowers can be a criminal act and one that applies to all organizations. If we implement appropriate internal controls, they can alleviate the occurrence of unacceptable acts.
Ask yourselves whether your organization has a process in place whereby individuals can report concerns without fear of retaliation. If you do not, what process should you establish? Do your orientation and training materials include information about the process and to whom reports of suspected wrongdoing should be made?
The issue of document retention and destruction may be an issue we have given some thought to, if only because of our overflowing file cabinets! But the issue is bigger than simply one of space. Charitable organizations should establish and implement policies and procedures to protect and preserve the organization’s important documents and business records. Of course, the Board should distinguish between document destruction during an investigation and document purging as part of a normal management process. It is important to maintain a schedule for document retention to ensure the retention of documents needed for legal or business purposes. And, it goes without saying that an efficient filing system is critical for all of our organizations.
Have you established the necessary processes and procedures for managing and maintaining documents? If so, are these steps currently being followed? How recently have you conducted a “document audit” in order to ascertain that all organizational documents are accessible and accounted for? It is important to verify that your document retention and destruction policies cover both electronic and hard copy documents. It is important to note that documents can provide some protection against allegations of wrongdoing. Have we considered what documents might assist us in managing or minimizing risks that our organization faces?
While not an issue of legal compliance and public disclosure, the gift acceptance policy that Catholic Volunteer Network has adopted is a matter of responsible fundraising. It is important that charitable organizations adopt clear policies, based on their specific exempt purpose, to determine whether accepting a gift would compromise its ethics, financial circumstances, program focus, or other interests.
Simply stated, a gift acceptance policy serves as a guide to accept or refuse charitable contributions. When accepting gifts, the organization should keep in mind the mission, restrictions, and conditions of the gift; liabilities that may come with the gift; and how the gift or the donor may affect the reputation of the organization. Special attention ought to be paid to noncash gifts, such as real estate, motor vehicles, art, and appreciated stock.
Has your organization adopted a comprehensive gift acceptance policy? Are you aware of examples where organizations have encountered problems by accepting gifts?
The above is simply an introduction to matters of good governance, particularly as dictated by IRS Form 990. There is much more information available to you. I encourage all of us to stay abreast of the issues and do what we can to ensure that our organizations are as vital as possible and as risk-free as we can make them. To learn more about what you and your organization can do to enhance your good governance practices, please consider visiting the following sites:
Conflicts of Interest –
(for sample conflict-of-interest policies)
Whistleblower –
(for
sample whistleblower policies)
Document Retention and Destruction –
Gift Acceptance –