1. Boardroom Basics
SARAH STEGEMOELLER
SENIOR STAFF ATTORNEY
COMMUNITY DEVELOPMENT PROJECT
PUBLIC COUNSEL LAW CENTER
610 S. ARDMORE STREET
LOS ANGELES, CA 90005
213 385 2977 EXT 246
sstegemoeller@publiccounsel.org

2. Save Our Kids Case Study

3. Part I Nonprofit Context and Trends
Objectives
 To develop awareness of the internal and external contexts
in which a board operates
 To explore larger themes of governance
Take Aways
 Role of nonprofit in society is changing – expectations are
changing too
 Leadership in the organization evolves with its maturation –
volunteer and staff/ceo and board
 One size will not fit all, but there is a vast amount of
common experience from which all nonprofits can draw

4. Public Charity Finances
 In 2009, public charities filing form 990 reported over $1.4
trillion in total revenues and nearly $1.3 trillion in total
expenses. Source: The Urban Institute, National Center for Charitable Statistics,
http://nccsdataweb.urban.org/ and Internal Revenue Service, Exempt Organizations Business Master
File (July 2009).
 Public charities reported nearly $2.6 trillion in total assets
in 2009. Source: The Urban Institute, National Center for Charitable Statistics,
http://nccsdataweb.urban.org/ and Internal Revenue Service, Exempt Organizations Business Master
File (July 2009).
 In 2006, nonprofits—including public charities, private
foundations, and all other—accounted for 8.11 percent of
the wages and salaries paid in the United States. (Source: The Urban
Institute, National Center for Charitable Statistics, Nonprofit Almanac 2008)

5. Nonprofit Organizations Snapshot
 1,564,277 tax-exempt organizations are
registered with the IRS. This number includes
986,553 public charities and 115,598 private
foundations. (Source: IRS Master Business File 7/09)
 450,151 other types of nonprofit organizations,
such as chambers of commerce, fraternal
organizations and civic leagues, are registered
with the IRS. (Source: IRS Master Business File 7/09)
 In addition, 377,640 congregations currently
serve their communities in the United States.
(Source: American Church Lists 2006, http://list.infousa.com/acl.htm)

6. 11% of all US Reporting Nonprofits Registered in CA
501(c)3 Public
Charities 109,528
Reporting 54,037
Non-
Reporting 55,491

7. Nonprofit Life Cycle

8. Overview of CA Tax Exempt Nonprofit Corporation
Regulatory Authorities
Internal
Revenue
Service
California
Franchise
Tax Board
and Board of
Equalization
California
Attorney
General
California
Secretary of
State

9. Special Characteristics of
§501(c)(3) Organizations
 Donors may deduct contributions from taxable income.
 Must be organized and operated exclusively for exempt
purposes.
 Must irrevocably dedicate assets to exempt purposes.
 Cannot confer excessive financial benefits on „insiders‟
(i.e., directors, officers, members of their families) or
other „disqualified persons‟ (i.e., persons in a position
to exercise “substantial influence” over organization).
 Cannot provide substantial private benefits to ANY
individual.
 Cannot support or oppose candidates for political
office and may not devote a substantial part of its
activities to lobbying.

10. Private Benefit/ Inurement
 Organization cannot confer excessive
financial benefits on “insiders.”
 Organization cannot provide substantial
private benefits to ANY individual.

11. Public Disclosure
 Inspection – Organization must maintain and make
available for public inspection IRS exemption application
and supporting documentation, most recent 3 years 990
tax returns and IRS determination letter.
 But, public charities are not required to disclose
contributor‘s names and addresses.
 ―Widely available‖ – If satisfied, do not have to provide
copies of tax returns, exemption application and supporting
documents, but still have to make available for public
inspection.

12. What did ―Reporting‖ Mean for Public Charities
before Tax Years beginning in 2008?
Charities with gross receipts normally $25,000 or
less did not have to file any information return with
the IRS

13. 990-EZ
Gross Receipts
greater than
$25,000 and
less than
$100,00 and
total assets less
than $250,000

14. Old Form
990
Gross Receipts
greater than or
equal to $100,00
and total assets
greater than or
equal to $250,000

15. IRS Reporting Responsibilities
2009: Gross receipts normally $25,000 or less
2010: Gross receipts normally $50,000 or less

16. 990-EZ
For 2009: Gross
Receipts greater
than $25,000
and less than
$500,00 and
total assets less
than $2.5 million

17. 990-EZ
For 2010 and
after: Gross
Receipts
greater than
$50,000 and
less than
$200,00 and
total assets less
than $1.25
million

18. New 990 Filing
Thresholds
For 2009: Gross Receipts
greater than or equal to
$500,000 or total assets
greater than or equal to $2.5
million
For 2010 and after: Gross
Receipts greater than or
equal to $200,000 or total
assets greater than or equal
to $500,000

19. Who reads the 990 and why should you care?
IRS and state tax and corporate regulators have always been
interested in the filings for compliance and accountability
In 1999 Guidestar started to post ―as filed‖ 990s; now claims
to have data on 1.8 million organizations and 460,000 users per
month
In addition to the IRS, the 990 is also of interest to
•Foundations and other funders
•Individual donors
•Salary snoops
•Competitors
•Whistleblowers
•501c3 evaluators/watchdogs like Charity Navigator
•Nonprofit academic researchers and trade organizations

20. What Prompted the Re-Design?
Enron and United Way, ―No significant ―No longer ―Form failed to
other Red Cross, changes to the adequately reflect changes
corporate Smithsonian 990 since 1979 ‖ served the IRS‘s in the law and
scandals and other tax compliance in the increasing
nonprofit interests, or size, diversity
scandals met the and complexity
transparency of the exempt
needs of the sector‖
states, the
public, and
communities
served by the
organizations‖

21. I am concerned that the Getty Board has
been spending more time watching old
episodes of “Lifestyles of the Rich and
Famous” than doing its job protecting
Getty assets for charitable purposes.
Quotation of Senator Charles Grassley June 2005

22. 10. Abuse of Charitable Organizations and Deductions……
“…We believe this is an appropriate time to request
that the IRS provide the committee with a new report
on compliance issues involving tax-exempt and
government entities and charitable contributions. This
report should describe each issue, provide a technical
analysis of the IRS’ position on the issue, and what
actions the IRS is taking to mitigate each issue. The
report should also include any recommendations you
might have for how best to address these compliance
issues.”
Letter to IRS from Senate Finance Committee Chair Max
Baucus and previous chair Charles Grassley

23. Why is the IRS interested in Board
Governance?

24. Key Events Informing Form 990 Revision
2002 2004 2005 2007 2008
Sarbanes- California Pressure from the IRS releases new IRS releases
Oxley Act Nonprofit Senate Finance Form 990 after instructions
enacted Integrity Act Committee; Panel review of lengthy for the new
enacted; other on Nonprofit public comment; Form 990
states passed Sector issues Panel on after review
similar report to Nonprofit Sector of lengthy
legislation Congress: issues Principles public
Strengthening for Good comment;
Transparency, Governance and first tax year
Governance, and Ethical Practice: new Form in
Accountability of A Guide for effect
Charitable Charities and for large
Organizations Foundations nonprofits

25. What is the IRS thinking behind the redesign?
• Enhancing transparency
• Promoting tax compliance
• Minimizing burden on filing organizations
• Increasing the data-mining ability of the IRS in order to
assess risk of noncompliance
• Addressing shortcomings of old Form 990 re operations
and governance
• Managing public demand for change in the wake of
corporate scandals

26. Part VI: Governance,
Management and Disclosure,
Represents a Huge New
Addition
Section A
11 New Questions about the
board focus on issues of
control, accountability and
independence
Section B
6 New Questions on Policies:
Conflict of interest,
whistleblower, document
retention, executive
compensation, joint venture,
990 review
Section C
2 New Questions on disclosure of
990, exemption application,
governing documents, policies and
financial statements

27. Source: Grant Thornton 2008 Governance Survey

28. Viewpoint of the IRS
―I suspect some will continue to say that the IRS is
inserting itself into something best left to others,
or that it lacks authority here.
But we have satisfied ourselves that we have
jurisdiction to play a role in this area, and that it
is proper and important for us to do so.‖
Source: 4/24/08 Remarks by Stephen T. Miller, Commissioner of the Tax-Exempt and Government
Entities of the IRS, before the Georgetown Law Center Seminar

29. Source: Grant Thornton 2008 Nonprofit Governance Survey

30. Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

31. Part II Legal Responsibilities
Objectives
 To Identify the Legal and Ethical Responsibilities of Boards
 To Distinguish between Group and Individual Responsibilities
Take Aways
 Three Key Fiduciary Duties
 Dealing with Conflicts
of Interest

32. Legal Structure of a
Nonprofit Corporation
Statutory Members (Optional)
Board of Directors Includes
Chairperson of Board (may also
include 3 statutory officers)
Statutory Officers (must include Chairperson/
President, Secretary and Chief Financial Officer)
Nonprofit Corporation Operations (includes
Executive Director and/or CEO who supervises
other employees and volunteers to operate
corporation’s day to day activities)

33. The Purpose of the Board
 Directors are usually organizational
governors or overseers.
 When an organization has matured to the
point of selecting an executive director:
 Boards address policy issues.
 Management carries out policy decisions.
 However, all volunteer boards of start-up
organizations must manage day-to-day
operations as well as address policy.

34. Assembling a ―Disinterested‖
Board of Directors
Wealth Wisdom Work Will
 In a Public Benefit Corporation, no more than
49% of the board can be “interested” persons!
 “Interested” for California nonprofit law purposes
means persons who have been compensated for
services (other than as a director) during the
previous twelve months, and their family members
 Slightly different definition of “interested” for IRS
990 and conflict of interest purposes

35. Bylaws Explain How You Must Operate
 The Bylaws establish the procedures for
governing and operating the corporation‟s
activities.
 Typical Bylaw Provisions:
 Number of Directors
 Time, Place, and Manner of Director
Meetings
 Voting Procedures
 Director and Officer Duties
 Committee Structure
 Amendment Procedures

36. Board members must ACT AS A GROUP. Individual
directors have no power to take actions that bind the
corporation without the entire board’s authorization.

37. Fiduciary Duties of Board Members

38. Board members are generally insulated from personal
liability if they observe the ―duty of care.‖

39. A good faith act, believed in the best interest of the
nonprofit, with the care an ordinary prudent person would
exercise in the same circumstance.

40. Directors have the duty to make reasonable
inquiry when presented with matters of concern.

41. A Guideline for Meeting The Duty of Care
A director will meet the duty if care if he or she:
 Reasonably believes that the transaction is in the
corporation‘s best interest;
 Is reasonably informed with respect to the subject of
the decision; and
 Is not interested in the subject matter of the
transaction.
Bottom Line: Use Common Sense

42. Duty of Care Practical Tips
 Regularly attend board meetings;
 Make informed decisions, based on relevant
facts, by full discussion of all issues presented;
 Carefully review all material submitted to
the board ;
 Document all corporate decisions (take
minutes!);
 Remember the mission!

43. A transaction can be voided and personal liability
attach if a director breaches the ―duty of loyalty.‖

44. Directors‘ Duty of Loyalty
Basic Rule:
 Good faith;
 Best interests
of corporation;
 Trustee
relationship.

45. Breaches include self-dealing, taking a
business opportunity, disclosing confidences, and
conflicts of interest.

47. CA Law: Self-Dealing
Corporation $
$
$ Director
Self-dealing transactions are generally those to which
the nonprofit is a party, and a director has a material
financial interest.
Hypo: Nonprofit wants to lease space in a building owned by a
director. OK?
Yes, but only if the board decides in advance that:
1. The deal is fair and reasonable (rent at market value); &
2. The corporation could not have gotten a better deal from
someone else (e.g. lower rent with a competitor)

48. CA Law: Self-Dealing
Loans to director and officers
are generally prohibited…
unless approved by the
Attorney General
in advance.

51. Board Independence for 990
 Part VI - Question 1
 How many voting members are on
the governing body?
 How many voting members are
independent?
 Part VI - Question 2
 Did any officer, director, trustee or
key employee have a family
relationship or business relationship
with any other officer, director,
trustee or key employee?

52. An independent director is a person…
 Who is not compensated as an officer or employee of the
organization or a related organization
 Who does not receive payments as an independent
contractor of the organization or a related organization
exceeding $10,000
 Who is not (and whose family members are not)
involved in an ―interested person‖ transaction with the
organization reportable on Schedule L (or that would be
reportable if Schedule L was filed)
 Excess Benefit Transaction
 Loans to/from Interested Persons
 Grants benefiting Interested Persons
 Business Transactions involving Interested Persons

53. California‘s 49% Rule
 No more than 49% of the board of directors can be
―interested persons‖ (i.e., persons who have been
compensated for services (other than as a director)
during the previous twelve months and their family
members)

54. Reasonable Effort
 The organization need not engage in more than a
reasonable effort to obtain the information necessary
to determine independence.
 Reliance on a questionnaire is strongly encouraged.
 A questionnaire is a useful planning tool to identify
potential independence issues before they arise.
 Sample questionnaires available at
www.publiccounsel.org/cdp/annotated990.pdf
(Appendix A & B).

55. Should a Nonprofit Board be
Compensated?
“Board members are generally expected to serve without
compensation, other than reimbursement for expenses incurred to
fulfill their board duties.”
“A charitable organization that provides compensation to its board
members should use appropriate comparability data to determine
the amount to be paid, document the decision and provide full
disclosure to anyone, upon request, of the amount and rationale for
the compensation.”
Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice:
A Guide for Charities and Foundations (2007).

56. Conflict of Interest Policy
 Conflict as defined by IRS for Form 990 purposes:
 ―For this purpose, a conflict of interest does not include
questions involving a person‘s competing or respective
duties to the organization and to another organization,
such as by serving on the boards of both organizations,
that do not involve a material financial interest of, or
benefit to, such person.‖
 Annual disclosure of potential conflicts
 The bare minimum—of course ―conflict of interest‖ means
more!

57. Conflict of Interest Policy
 Acceptable policy:
 defines conflicts of interest,
 identifies the classes of individuals
within the organization covered by the policy,
 facilitates disclosure of information that may help identify
conflicts of interest, and
 specifies procedures to be followed in managing conflicts of
interest.
 A ‗conflict of interest‘ arises when a person in a position
of authority…may benefit financially from a decision
he or she could make in such capacity.

58. General Considerations
 Relationship to bylaws and California law
 Tailor specifically to your activities
 Ongoing monitoring and enforcement of the policy?
 Often worse to have the policy and not enforce it than to
not have the policy at all!
 Sample policies available at
www.publiccounsel.org/fame/guide.htm#B

59. Source: Grant Thornton 2008 Nonprofit Survey

60. Breach of the ―duty of obedience to mission‖ can
threaten an organization‘s tax exempt status.

61. Responsibilities to Third Parties
Directors should use reasonable care to make sure the
nonprofit‘s actions do not harm others!
Basic Rule: Directors are personally liable if they:
 Expressly authorized or participated in a corporate
action that resulted in harm, or
 Knew or should have known about the situation
but failed to correct it, AND
 Did not act as a reasonable person would.

62. Part III Board/ Staff Partnership
Objective
 To explore the respective roles and responsibilities of a
nonprofits board and staff.
Take Away
 The relationship between the board and the chief executive
is one of the most critical aspects of nonprofit leadership. A
clear understanding of the difference between governance
and management provides a strong foundation for a
productive relationship.

63. Roles of Nonprofit Staff and Board
Board Staff
 Policy Executing
Planning Advising
Authorizing (at high Authorizing
level, e.g. Budgets) (specific)
Oversight &
fiduciary  Operations
Before an organization has the capacity to hire staff, the Board
will have to take charge of all of these roles!

64. The Board must give to its CEO the level of authority
necessary to lead and manage the nonprofit.

65. Directors are charged with policy development
and oversight, not micro-management.

66. The Board should have responsibility for just
one employee, the Executive Director.
Board of
Directors
Executive
Director
Staff of
Nonprofit

67. Part VII: Compensation employs new
definitions and thresholds for reporting
compensation to TDOKEs and High 5s
Expands requirement to all 990 filers, not
just 501(c)(3)s
Utilizes W-2 or 1099 information so that
comparison can be made between
organizations regardless of tax year end
Expansive new compensation detail in
Schedule J

68. Executive Compensation Policy
 Adopt an executive compensation policy that
outlines the process and procedures for reviewing
and approving the total compensation paid to
senior executives and ―key employees‖

69. Executive Compensation Policy
 Adopt a compensation committee charter that sets
out, among other things, the purpose, responsibility
and authority of the compensation committee,
including the following:
 Adherence to the compensation policy
 Compliance with the rebuttable presumption of
reasonableness
 Use of an independent compensation consultant to
provide comparability data
 Adopt an expense reimbursement policy

70. Excess Benefit Transaction
 General Rule: Consideration exceeds
FMV/reasonableness
 Examples: sales of goods and services;
compensation
 When excess benefit is provided to a
disqualified person, IRS may revoke the
organization‘s tax exempt status or impose
―intermediate sanctions‖

71. Excess Benefit Transaction
 Intermediate Sanctions = Tax
 Recipient must return the
excess benefit + 25% tax;
200% if not corrected
 Directors – 10% up to $20k
 Rebuttable Presumption:
 Independent directors
 Relying on comparability data
 E.g., compensation paid by similarly-situated organizations
 Properly documenting minutes

72. Excess Benefit Transaction
 Independent Committee Comprised of individuals:
 Unrelated to and not subject to the control of the disqualified person
 With no material financial interest in the transaction
 Who do not receive compensation subject to the disqualified person‘s approval
 Use of Comparable Organization Data Prior to Decision
 Compensation ―ordinarily‖ provided by similarly-situated organizations:
 Comparable in size, nature and operations, and under like circumstances
 Properly documenting minutes
 Terms of the transaction are in writing and agreed upon prior to the date
payment is made
 Recording of the decision-making process and the actions of the Committee
members, including those with a potential conflict of interest
 Basis for a decision, if outside range of data

73. Automatic Excess Benefit Transaction
 Benefit is not treated as consideration for services
because contemporaneous substantiation of intent
to do so is lacking
 Evidence of Contemporaneous Intent includes:
 Reporting on 990 by the organization
 Disqualified Person reporting on tax return
 Described as compensation in contract or Board minutes or
other documents indicating it was approved by Board as
compensation

74. Part IV Governance Structure
Objectives
 To review the purpose and content of organizational bylaws
 To consider the role of board committees
Take Away
 Bylaws define an organization‘s structure, identify roles and
authority, determine the rights of the parties involved in the
structure and identify the procedures by which rights can be
exercised.

75. Rights, responsibilities, due process and meeting
procedures are built into the structure of bylaws.

76. How Many Directors Serve on Your Board?
Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

77. Which of the following Board Committees
does your organization have?
Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

78. Board Committees
Board may delegate duties to one or more committees, but the
Board still exercises ultimate authority!!
How to Form a Actions Which Committees
Committee: Can’t Take:
 By bylaws, or by  Filling board vacancies
board resolution  Fixing board
 Must have at least 2 compensation
voting board  Adopting or amending
members on each bylaws
committee (since the  Appointing committee
committee may act members
on the board‟s
 Approving self-dealing
behalf)
transactions

79. Directors‘ Rights
 Inspection: Every director has the
absolute right to inspect and copy
all books, records and documents
of any kind that are maintained
by the corporation, and to inspect
the physical property of the
corporation.
 Notice of Meetings: Directors are
entitled to notice of meetings in
accordance with the bylaws.

80. Part VI Recruitment/Assessment
Objectives
 To review the Board Recruitment and Development Cycle
 To consider tools that can enhance the likelihood of
developing a strong and active board
Take Away
 Board development is a year-round process that requires
persistent nurturing to be successful.

81. Board Orientation Survey Response
Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

82. Board Orientation Survey Response
Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

83. What is the most important focus of
your board today?
Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

84. Board Training Topics
Grant Thornton 2009 National Board Governance Survey for Not-for-Profit Organizations

85. One characteristic of an effective
board is self-assessment.

86. Part VI
When Good Boards Behave Badly
Objective
To recognize that ―…although board members are sought out for
their position, influence, skills or professional expertise, they
often are not adequately involved in the work of the
organization to develop the ‗affective knowledge‘ that would
allow them to apply those ‗cognitive resources.‘…This gap
explains why so many nonprofit boards are often little more
than a collection of high-powered people engaged in low-
level activities.‖ Owen Heiserman, Boards Behaving Badly: Observations from the
Field, The Nonprofit Quarterly (2005)
Take Aways
 The importance of continuous board education
 The value of compliance policies

88. MORE RED FLAGS
CEO control of board communications/agenda
No ―executive‖ sessions
No board education
Significant regulatory and industry developments
―Fooling Around‖
Shredding
Altering
Back dating
Withholding information from the government

89. Build a foundation for compliance
with appropriate policies.

90. Whistleblower Policy
 Acceptable policy:
 encourages staff and volunteers to come forward with
credible information on illegal practices or violations of
adopted policies of the organization,
 specifies that the organization will protect the individual
from retaliation, and
 identifies those staff or board members or outside parties
to whom such information can be reported.

91. Records Management Policy
 Acceptable policy:
 Specifies the record retention
responsibilities of staff, volunteers,
board members, and outsiders for
maintaining and documenting the
storage and destruction of the
organization‘s documents and
records.

92. Gift Acceptance Policy
 Provides guidance to donors
 Creates a discipline to prevent
acceptance of gifts that will
cost the nonprofit time, money or reputation
 Establishes the gift forms that are acceptable
 Defines the nonprofit‘s role in gift administration

93. Investment Policy
 Particularly relevant for reserves and endowment
 Establishes the types of investment vehicles in which
the board is comfortable
 Describes the level of acceptable risk
 Determines who will be in charge of
investment decisions
 Define asset allocation guidelines

94. The California Nonprofit Integrity Act of 2004
established new compliance thresholds.

95. Board Audit Committee
 Monitors the overall system of internal controls and
risk mitigation
 Monitors the integrity of the nonprofit‘s financial
statements
 Ensures the independence of the nonprofit‘s auditor
and the performance of an independent audit
 Reviews and resolves conflicts of interest
 Monitors compliance with legal and regulatory
requirements
 Monitors effectiveness of internal controls

96. The largest risk management issues in
operating a nonprofit will be financial.

97. Internal Control
 Objectives of controls
 Safeguard assets
 Check the accuracy and reliability of its
accounting data
 Promote operational efficiency and the
economical use of resources
 Encourage adherence to prescribed
managerial policies, as well as laws and
regulations

98. Control Activities
 Separation of duties
 Reconciliation
 Review
 Authorization – policies, procedures,
documentation, budgets
 Safeguards over assets (protections
against loss)