Advisory Committee on Tax Exempt and Government Entities (ACT ...

The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesresponsibility and accountability by nonprofit boards that good governance entails in aworld of innumerable and unpredictable challenges.Some of the indicators that have become proxies for good governance concern thecomposition and structure of nonprofit boards and their committees, while others focuson board and committee responsibilities and operations. 35 The factors, varying withsource, can include: board size (focusing both on boards that are too small to provideproper oversight 36 and too large for meaningful participation); qualifications of directors,including their independence and whether they collectively bring the requisite talentsand resources; written expectations for directors, including board and committeeattendance requirements; agenda setting; executive board and committee sessions;board and committee orientation and continuing education programs; board committeeoversight of finance, audit, investment management, legal compliance, compensationand governance, and whether committees operate pursuant to written charters thatdelineate roles and responsibilities; 37 long-range strategic planning, with attention tomission statements, community or constituent needs assessments, and performancemetrics; periodic performance assessment of the organization, board, and individualdirectors; evaluation of CEO and determination of CEO compensation; approval of otherexecutive compensation; succession planning relating to the board and its leadership,as well as the CEO and key senior managers; selection and oversight of outsideauditors, auditor independence, and lead auditor rotation; supervision of internal auditprocesses; oversight of financial controls; setting parameters for acceptable investmentallocations and practices; development and implementation of various policies, includingconflict of interest policies, whistleblower policies, document retention and destructionpolicies, fundraising and gift acceptance policies, and codes of ethics; and practicesdesigned to promote transparency, including making publicly and readily available (suchas by posting on the organization’s website) an annual report, information aboutactivities, finances, structure and principals (officers, directors and senior managers),and disclosure of committee charters, policies, and documents reflecting governancepractices.Most of these proxies for a well-governed organization are not even indirectly rooted instate statutory obligations, let alone in the Internal Revenue Code, but rather derive atbest imprecisely from the duties of care and loyalty. While this collection of indicators,to a greater or lesser degree, may all appear to be reasonably related to the prudentand purposeful conduct of the affairs of nonprofit boards, as discussed immediately35No list intending to encompass every practice signifying superior governance can be complete, inasmuch as standards for goodgovernance evolve with the nonprofit sector. See, e.g., the 33 standards set forth in the Panel’s Principles, supra note 13. Althoughresponsibility for governance is typically discussed as a board function, many of the behaviors associated with superior governanceare, in fact, management functions; ultimate responsibility for ensuring implementation of those behaviors, however, rests with theboard. See, e.g., ALI Draft Nonprofit Principles, supra note 17, § 320 (Board Responsibilities, Functions and Composition).36Some state laws provide for a minimum number of directors, (see, e.g., New York Not-for-Profit Corporation Law § 702), whileothers set no minimum (see, e.g., Delaware General Corporation Law § 141(b)). State laws may impose other requirements foreligibility for board service, such as a minimum number of directors who are independent of family ties. See, e.g., New HampshireVoluntary Corporations and Associations § 292:6-a (“In the interests of encouraging diversity of discussion, connection with thepublic, and public confidence, the board of directors of a charitable nonprofit corporation shall have at least 5 voting members, whoare not of the same immediate family or related by blood or marriage.”).37See, e.g., ALI Draft Nonprofit Principles, supra note 17, § 325 (<strong>Committee</strong>s and Delegation).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 14