Not-For-Profit/Exempt Organizations Blog : Non-Profit Lawyers & Attorneys : Proskauer Rose Law Firm : Tax & Corporate Law for 501(c), 501(3) Organizations

Below are some important drafting tips for governance policies to help a not-for-profit organization survive and thrive in this new regulatory environment.

1.)                Introduce Your Organization

            Governance policies are the face of the board to the CEO, staff, and the general public.  From the outset, before addressing the substance of the policies, governance policies should contain introductions that address an organization’s vision, mission, desired outcomes, and internal and external values that define its character.  This introduction should also address an organization’s functions, the percentage of its time devoted to each function, its strategies, and its goals. 

2.)                Describe the Role of the Board

            The most important part of governance policies deals with board structure and policies; specifically, these provisions address the “job description” of the board; disciplinary action against board members; accountability, self-monitoring, and evaluation; and how policy changes may be initiated. The board’s responsibilities should include:

§ Maintaining, reviewing, and updating the governance policies as times change;

§ Ensuring the financial solvency and integrity of the organization, which requires regular external audits and internal checks and balances; and

§  Selecting the CEO and reviewing his or her performance. 

3.)                Who Is Responsible for CEO Oversight?

            Board policies should address the selection and evaluation process and compensation of a CEO (whether the CEO is to be compensated and, if so, how compensation levels are determined).  The board should provide regular performance reviews and an annual performance report to the CEO based on his or her performance, and the governance policies should address precisely how such evaluation is carried out and delivered.

4.)                What Every Candidate Should Know Before Joining Your Board

            Governance policies should detail what can be expected of board members – including the criteria to become a member of the board and training for new and seasoned members.  These provisions should provide enough information to serve as a self-explanatory “orientation” for new board members who inquire about their responsibilities. The role of the chairman of the board should also be detailed, as should meeting rules, agenda-setting, and the evaluation process for determining if meetings are actually effective. The policies should outline a code of conduct so that board members are fully aware of what is expected of them, and what kind of behavior warrants discipline.  Included in a code of conduct should be a comprehensive conflict of interest policy.

5.)                How All the Moving Pieces Fit Together

            Policies should also address how the board, the CEO, and staff – and their varying responsibilities – are interrelated.  To avoid confusion, duplication of efforts, and finger-pointing, responsibilities should be clearly assigned among the various parties.  Policies should also include the CEO’s job description and how the CEO and the board should communicate with each other.  Staff hiring, termination, treatment, and compensation should be documented, and a whistleblower policy should also be adopted.  Including a whistleblower policy indicates that an organization is committed to complying with the law, and encourages a culture of transparency.

6.)                Establish Standing Committees

            Governance policies should provide for subgroups of the board, which are tasked with more specific agendas, depending on an organization’s needs.  The typical standing committees include committees focused on governance, finance, audit and compliance, advancement, programming, and executive responsibilities.  Advisory groups and task forces, consisting of both board members and outsiders, may be created to assist with particular projects that require more specialized knowledge and expertise.

7.)                Budgeting and Finances

            Policies should address budgeting and financial controls, as well as asset protection and investment principles, since every organization that plans to be fiscally healthy must develop a comprehensive, long-term plan to achieve and maintain good fiscal health. 

8.)                Programming and Fundraising

            A comprehensive policy includes a description of the programs an organization will offer, and how new programs will be developed.  It should also include advancement parameters, such as fundraising principles and a donor bill of rights, which ensure prospective donors that an organization is trustworthy, and that donors can have full confidence in the organization and the causes it asks donors to support. 

9.)                Handling the Media

            A provision should be included detailing how public affairs and communications will be managed, as well as the role and responsibilities of spokespersons.

10.)                        Develop a Theme

            Overarching themes in any well-respected governance document should be transparency and accountability.  Accordingly, provisions should be included which specifically address audit and compliance parameters and document retention.  Most importantly, information about operations and methods of self and outside evaluation should be widely available to the public.  

Developing effective governance policies will take time and require full commitment at the highest level of an organization.  A coordinator should be assigned to oversee the adopting and implementation of the various policies.  Many governance policy models are available, and can be tailored for each organization.  And they can implemented after a vote by the board.  In most cases, the board should seek legal review of these policies to ensure that they are both sound in their governance structure and tax compliant.  Because a governance policy is meant to be the voice of the board, it must reflect the board members’ vast differences in experience and perspectives and help make the organization's infrastructure stronger. 

The Governance Check Sheet is a two page document (IRS Form 14114), which is to be used by IRS exempt organization revenue agents in their examination of public charities.  The Check Sheet provides questions to be considered by the agent concerning six specific aspects of the organization’s corporate governance structure: (a) “Governing Body and Governance Topics;” (b) “Compensation;” (c) “Organizational Control;” (d) “Conflict of Interest;” (e) “Financial Oversight;” and (f) “Document Retention.”  The Check Sheet is designed to be completed by the agent on-line, with drop-down menus of possible responses and very little opportunity for narrative or description. 

In addition to the governance questions included in the revised Form 990, the Check Sheet addresses the following points:

·         certain organizational document issues (e.g., whether they include an articulation of a charitable purpose, and information about the composition, duties, qualifications and voting rights of board members);

·         whether board members have received copies of the organization’s articles and bylaws;

·         whether the organization’s articles and bylaws are available to the public, and if so, whether they are generally available or only on request;

·         the frequency of board meetings as compared to bylaw requirements;

·         whether there is a single individual or small group of individuals to whom the board typically defers;

·         the frequency with which the conflicts of interest policy is actually adhered to (e.g., how often have conflicted members actually recused themselves from the corresponding decision making process?);

·         the extent to which board members are provided with information concerning the organization’s financial condition and discusses those reports and related financial activities; and

·         whether the Revenue Agent’s examination was hindered by a lack of necessary documentation.

Ultimately, the Check Sheet data will be included in a long-term study the IRS is undertaking to set forth a greaterunderstanding of the connection between charities’ tax compliance and corporate governance practices.

At this point, the IRS is not expected to make poor governance practices alone an exemption level issue, but it is conceivable that evidence of problematic governance may contribute to the consideration of penalties where evidence of more severe organizational abuse exists.