The Center for Ethics, Governance, & Accountability

Board membership in a nonprofit organization is a serious job.

It’s not intended to be a resume builder. How many resumes have you seen where a person has pages and pages of boards upon which they have ‘served’ over the years? How many of you have served on boards where a quorum could not even be reached? How many have seen board members arrive with their board packets still sealed in the envelope they were mailed in? What about the board member who has such a strong stake, or bias, in the organization that rationality has been compromised? Or, the board member who is always asking questions about a financial report but does not even know anything about finances?

Sadly, these issues occur every day on nonprofit boards all across America.

Nonprofits that are serious about their futures would be wise to note the reality, deal with it head-on, and create a competitive advantage among their peer group.As the IRS states in its instructions for the new Form 990 and 990-EZ, many people rely solely on the information – which is available to the public – provided by the obligatory IRS annual filing to make decisions about the organizations required to file.

The IRS also notes that beginning with 2009 filings, expectations have been taken to a higher level. This should pose no problem whatsoever for the nonprofit organization that is at the top of its profession and takes its charitable status seriously.

Many funders and grantors are now asking questions about board attendance to determine the activity and involvement of the board. Does your organization maintain such data? It is recommended that every organization have a nominating committee that reviews applications or recommendations for board membership. The work of the nominating committee is very important in making sure that qualified individuals are selected for board membership.

As an observation, many nonprofit boards have a nominating committee and it is chaired by the in-coming chairperson/president. This does not look good. Instead, it comes across as the organization ceding its responsibility to the incoming chair and allowing him/her to select those board members with which they want to surround themselves with. Not a good idea. As an alternative suggestion, why not have the nominating committee chaired by the immediate past chair (or, better still, the past chair twice removed)? Obviously, these folks cared enough about the organization to serve as chair, learned a lot, and their knowledge could be of extraordinary benefit in selecting new board members.

At a minimum, several key questions are suggested:

• Does the prospective board member have experience related to the needs of the organization? For example, if the current board does not have a board member who is an accountant, a CPA applicant may be an important consideration.
• Does the prospective board member have an interest in the mission of the organization? How do you know?
• Has any prospective board member been solicited by a current board member and told, “don’t worry, this won’t take much of your time at all.” How will you know? Do you interview your prospective board members?
• Does the prospective board member serve on any other boards with conflicting missions? Are prospective board members currently serving on any other boards with existing directors of your organization? How do you judge conflict?
• Are any of the prospective board members currently serving as executive directors (key employees) of another nonprofit organization?
• Does the perspective board member currently serve on other nonprofit boards? How will you know if they are serious about serving on this board?

There are some interesting ‘checks and balances’ that can be utilized by nonprofit organizations that are truly serious about seating a first-class board of directors clearly superior to those of their peers. Several guidelines are suggested:

• How large is the board? Is it too large? How would your organization define what is too large?
• Look around the board table. What is the experience of each board member? If you were to look at the board list, would you see diversity – not just racial – but professional? Is there a balance of the various professions that can assist the staff and the board in issues of which the board member is extremely knowledgeable?
• Does the board member serve on boards of other organizations? Do those organizations compete with each other for funding? Does the organization consider this a conflict of interest and how would it know?
• Is the board member aware of the reasons they were selected to serve? Are they willing to provide pro-bono/volunteer counsel to the organization – or – are they willing to assist the organization in procuring those services? (Caution: use very careful judgment before hiring a board member to provide a professional service.) Does your organization have a conflict of interest policy?
• Has the board member expressed a willingness and demonstrated an ability to assist with the fundraising that is required by the organization?

In closing, a very interesting statement was overheard several years ago – specifically regarding a group of local elected officials – but, every bit as applicable to any nonprofit organization: “if this were your business, would you allow the board members (or staff, for that matter) to serve on your board?” Think about it; your answer should guide your decisions as board members are selected.

If you want your nonprofit organization to be the best, then seek to attract the very best board members you can find.

I received an email from a visitor to our web site asking my thoughts on whether or not the founder of their nonprofit – who is also its executive director – could be a voting member of the board. (Note that the question was ‘could’ be…)

Well yes, the executive director ‘could’ be a voting member of the board, but the question allowed me an opportunity to reflect on the perceptions of nonprofits as a competitive advantage for fundraising, as espoused by my own organization The Center for Ethics, Governance, and Accountability. Those three words (ethics, governance, and accountability) have such a strong degree of symbolism and expectations that I must take care to provide my opinions only after pondering what ‘could’ be and what ‘should’ be. (What ‘shall not be’ is always the easiest opinion to offer.)

My response? While the IRS is the regulator of nonprofits, the corporations of the nonprofits are governed by state law. So, answer number one was to check the laws of the state in question.

Answer number two: why does the executive director need to be on the board? Or, does the executive director just want to be on the board? How many board members are currently on the board and would the executive director help or hinder the voting of the board? Presumably, the executive director is the key employee of the board and is tasked with running the organization and attending board meetings anyway. But, I never did determine the answer to the basic question of why?

In my years of experience as a board member, it has not been unusual for the executive director to also serve as the corporate secretary and either ex-officio board member, non-voting board member, or voting board member.

Ultimately, my answer to the above question was to make the executive director an ex-officio (non-voting) member of the board holding the office of corporate secretary. This approach, assuming there is no conflict with state law pertaining to corporate governance, seems reasonable because it is highly likely that the board has tasked its executive director with maintaining all corporate records (minutes, resolutions, policies, etc.) anyway.

In addition, the articles of incorporation and the bylaws may, or may not, speak to the specific issue of board governance. It the bylaws do not spell out, specifically, how the board is to be structured, then I would highly recommend that appropriate revisions take place at the very next board meeting.

Remembering that it is my strong belief that ethics, governance, and accountability are the key measures of any nonprofit, the perception about these issues is every bit as important as the reality; the decisions of donors/grantors and contributions to the organization rest upon the 'good name' of the organization, its staff, and its board . Accordingly, it continues to be my strong recommendation that nonprofits avoid any possible misperception so as to maintain that competitive edge within their peer group.

There are two related issues that deserve discussion in future articles. One is the challenges of the founder of the non-profit serving as executive director or board member; the other is the increased scrutiny by the IRS on board members of nonprofits. In short, as a board member, you will be held personally liable for the affairs of the corporation. This responsibility is entirely appropriate: nonprofit board membership is not a ‘resume builder’ but it is a serious responsibility that IRS regulators have rightly decided to address. Nonprofit boards should take notice.

Every effort should be made by every nonprofit board to task either its executive director or, perhaps, a special committee chair, with a thorough review of the policies of the organization. The new IRS Form 990 is an excellent place to start – especially if your nonprofit is a number of years old --  it would be good to see the issues with which you will be required to attest at your next annual filing.

By now, news of the changes by the IRS to its Form 990 for non-profits has surely reached many executive directors and nonprofit boards. This article will focus on an issue that is easy to inadvertently misconstrue: the classification of a worker as an independent contractor versus an employee.

Making the correct determination between whether a worker is classified as an independent contractor or an employee can be a bit tricky, which is why so many non-profits make mistakes is this specific area. In fact, in past non-profit audits, this is cited as one of the largest areas of non-compliance, resulting in millions of dollars of penalties and interest on back taxes owed by the non-profit. Although this issue is not on the new ‘hot list’ of topics the IRS will scrutinize, it is likely to continue to be an ongoing area of interest during future audits.

What is an independent contractor and how is the classification different for employees?

Per readily available information published by the IRS: “The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.”

The IRS further states:

In determining whether the person providing the service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be an independent contractor, a common law employee, a statutory employee, or a statutory non-employee.

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work. The behavioral control factors fall into the categories of:

·         Type of instructions given

·         Degree of instruction

·         Evaluation systems

·         Training

1. Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. The financial control factors fall into the categories of:

·         Significant investment

·         Unreimbursed expenses

·         Opportunity for profit or loss

·         Services available to the market

·         Method of payment

1. Type of relationship refers to facts that show how the worker and business perceive their relationship to each other. The factors, for the type of relationship between two parties, generally fall into the categories of:

·         Written contracts

·         Employee benefits

·         Permanency of the relationship

·         Services provided as key activity of the businessThese rules and regulations may appear to be complicated, but reasonableness tests by a seasoned executive director, together with reading further information available on the IRS web site should enable the organization to make the correct decision.

If questions remain, the executive director should contact legal counsel, an accountant, or a seasoned consultant.

An easy example of an independent contractor that has been incorrectly classified includes: a worker that receives employee benefits, receives evaluations, is on the job for a long time, does not offer services to other employers, receives a paycheck and a W-2 instead of submitting an invoice and receiving a 1099, receives training provided to other employees in the organization, follows regular work hours, and receives daily supervision from the employer.

You can contrast this with an independent contractor that has been correctly classified and operates as follows: the work is actually a response to an RFP, with a specific scope and deadline, but for which the contractor is responsible; the contractor has several clients for whom services are being provided; does not attend employee meetings or receive any benefits; bills for his or her time through the contractor company, and received payment on those invoices and a 1099 at the end of the year.

Another good sign would be an incorporated entity, with its own FIN, making it obvious that the contractor is actually in the contracting business for the services provided.

We again point out that the IRS is the regulatory body for non-profit entities. Compliance with the laws and regulations is not optional, but neither do we believe that the typical nonprofit is adequately focused on the importance of IRS compliance. Accordingly, we continue to believe that excellence in compliance provides a tangible competitive advantage when individuals or foundations are making decisions on a nonprofit fundraising or grant request.

As all non-profits will ultimately come to know, the IRS has revised its Form 990 for 2008. The process has been open and inclusive, over the past several years, leading to the actual revisions. Take a look at the attached link and see how we got from where we were to where we are:

http://www.irs.gov/charities/charitable/article/0,,id=185892,00.html

There’s no question about it:  we are seeing the most challenging economic times since the Great Depression. Every day, we read about lost jobs at this company or that, but when was the last time you heard about lost jobs and closing doors at a non-profit organization?

Well, it’s true; it’s actually happening. The non-profit sector is struggling in a big way. The timing could not be worse: we rely on so many non-profits to provide their services – from soup kitchens to health care – and the prospect of scaling back (or closing their doors) is happening when they are more desperately needed than ever in communities, both large and small, all over the country. As a point of reference, we must remember that an organization receives its IRS non-profit status only after proving its charitable benefit to the constituency it serves.

If we review the series of key events over the past months, several specific issues have combined to form that so-called ‘perfect storm’ – we have just completed the most expensive presidential campaign in the history of our country (and, before Obama could deliver his acceptance speech on election night in Chicago, many people were already very seriously concerned about the economy), state budgets have been squeezed, many of the failing private-sector organizations (even Freddie and Fannie) were large contributors to the non-profit sector, and individual donors have seen their savings drop more than any other time in their lifetime.

Let’s face it; the magnitude of the current financial situation – and its effects on the non-profit sector – is huge.

But, the purpose of this article is to provide some positive steps to help proactive non-profits achieve success (survival?) even during difficult times. True, just as in the for-profit sector, not all non-profits will survive. We cannot change that fact in a capitalistic society. However, we can encourage non-profits to exude excellence and compete successfully among their peers for precious funding dollars.

I received an email on March 26, 2009 from a group, whose information I try to follow, known as “IT Solution Journal.” The subject line read as follows: “Compliance Rules: Tools, Policies and Best Practices That Are Cost Effective”

Wow! That’s the subject near and dear to my heart: non-profit compliance in the areas of ethics, governance, and accountability. As I have stated in previous articles, I believe that pro-active compliance is a sure way for a non-profit, charitable organization to signal its commitment to excellence.

So, in part, here is what that email had to say:

“Organizations of all types and sizes, industries and professions have long been mindful of the need for legal and regulatory compliance. In the current economic environment, however, forward-thinking organizations now are shifting their focus somewhat. Mere adherence to laws and regulations is no longer enough. Thanks to tight economic conditions and a fiercely competitive business environment, proactive managers and executives are committed to implementing strategic email and Hosted Service management…”  

The good news: My experience has been that non-profit organizations have been extremely resilient over the years. And, my belief is that non-profit organizations are better-suited to address a number of our most pressing problems than either the government-sector or the private-sector organizations.  

And, the bad news: I am concerned that most non-profits have not been as diligent as they should with their regulatory compliance. To date, the critical document for a non-profit, charitable organization has been the IRS Form 990, filed annually. It is my opinion that this will begin to change more and more (as I have mentioned in previous articles) regarding the focus that Congress has placed on non-profit compliance and the increased scrutiny it has mandated to the IRS. Foundations are watching their endowments drop, thereby making the case for less grant funding and their boards struggle with eroding investment portfolios. The same is true with individual donors.

So, how does a struggling non-profit gain an edge?

I have five suggestions:

1.     Don’t panic. Now is the time for calm, cool, collected thinking.

2.     Make necessary changes. If there are board members or staff members who are not serving the organization adequately, replace them. Now is the time to rally your best and brightest minds and your most ardent supporters.

3.     Review your IRS compliance requirements. Make sure you have your policies in place – and, make sure you are following them. Ethics, governance, and accountability measures will speak volumes.

4.     If you are fortunate to have an endowment, use it. Avoid watching the stock market numbers every day. Keep your mind focused on the future.

5.     Talk to your donor base, membership base, and continue to seek grant funds. This time, however, do it from a position of excellence. Don’t be reluctant to tout the professionalism of your organization over your peers.

In conclusion, this is a time of tremendous challenge; however, it is also a time of exciting opportunities. It’s time for non-profits to compete like never before (not in petty terms) but in all things that exude excellence, confidence, and strong business acumen.