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The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesorganizations. 88 There also are innumerable situations where a tax-exemptorganization’s affiliation with or membership in another organization requires orencourages the former organization to adopt specific governance and other measures.This can include, for example, organizations affiliated with a college or university,organizations affiliated with a religious order, and local branches of a nationalorganization such as youth groups or health organizations focused on a specificdisease, among others.While this is a cursory review of the voluntary standards available to the thoughtfulnonprofit, several points are worthy of note. First, many organizations have releasedpublications on nonprofit governance. Second, these organizations often bringtremendous expertise to their analyses. 89 Third, while there are common themes, eventhese governance “experts” can disagree. 90 These differences suggest the advisability88See supra notes 12-17.89For example, in developing its set of 33 Principles, the Panel on the Nonprofit Sector convened 34 leaders from charities,foundations, academia and oversight agencies to form a special <strong>Advisory</strong> <strong>Committee</strong> on Self-Regulation, commissioned two studiesof self-regulation regimens already in use, and examined principles and standards drawn from more than 50 such systems,including selections from the nonprofit and for-profit sectors. In addition, the first draft was circulated for public comment and furthermodified as a result. See Panel Principles, supra note 13, at 4. The BBB’s Standards for Charity Accountability were developedwith “professional and technical assistance from representatives of small and large charitable organizations, the accountingprofession, grant making foundations, corporate contributions officers, regulatory agencies, research organizations and the BBBs.The BBB Wise Giving Alliance also commissioned significant independent research on donor expectations to ensure that the viewsof the general public were reflected in the standards.” See supra note 81.90See, e.g., Adam Meyerson, We’re Not Signing It: Our Concerns About Independent Sector’s “Principles for Good Governance andEthical Practice,” Philanthropy Magazine (Dec. 17, 2007),http://www.philanthropyroundtable.org/article.asp?article=1510&paper=1&cat=1, in which the president of the PhilanthropyRoundtable explained why the organization would not be signing on to the Panel’s Principles. It “applauds Independent Sector andthe Panel. . .for their tireless and well-organized work to improve nonprofit governance, board financial oversight, fundraisingpractices, and compliance with the law” and found “most of the 33 principles” to be “quite sensible and offer a helpful guide for selfassessment”but then set forth its three reasons for not recommending the document as a whole:First, a number of the Independent Sector principles take an arbitrary and one-size-fits-all approach to setting standardsfor a very diverse sector.Second, the Independent Sector principles imply improperly that foundations act unethically or practice misgovernanceunless their boards include members from diverse backgrounds.Third, while it is entirely appropriate for Independent Sector to put together standards of conduct for its own members andfor anyone else who wishes to adhere to them, it would be a mistake for the philanthropic community as a whole toendorse the entire document. Despite Independent Sector’s assurance that its principles represent “standards of practicethat organizations are encouraged, but not required to meet,” a number of the more problematic principles could bewritten into law [including by Senators Baucus and Grassley] or regulation [including by the IRS] if it is perceived thatthere is a wide consensus behind them in the nonprofit community.The president’s note provides as examples of principles that “unnecessarily restrict the ability of donors and trustees to use theirbest judgment in carrying out their charitable objectives” Principle 10, which suggests a minimum board size of five in mostsituations, and Principle 20, which includes a strong presumption against compensating governing body members. With respect togoverning body size he argues: “Does anyone really think the Gates or Dell Foundation would be more effective or better governedif they had six or seven board members instead of two or three? And if not, why is this one-size-fits-all rule in there?” In connectionwith compensation, he points to the “long and venerable tradition” of both volunteer board service, which is more common, andcompensated board service, and opines that “philanthropic excellence” and “philanthropic mediocrity” are present in both, and thatone tradition should not be favored over the other. He provides specific circumstances where a foundation might legitimatelyconsider paying board members situations.The president also contends that the Panel’s Principle 11, which speaks to boards including members with diverse backgrounds,including but not limited to ethnic, racial and gender, experience, and organizational and financial skills, misunderstands diversity.He asserts: “The goal should not be to diversify each board--that’s a recipe for sector-wide homogeneity. The goal should be asufficiently vibrant sector with lots of different foundations representing lots of different interests, philosophies, and philanthropicstrategies.” With respect to philosophical outlooks and life experiences, he notes that a grantmaking organization may, in fact, avoidparalysis and “run best where there are common values and a shared sense of mission” and “strong mutual trust among boardmembers, so they can speak more freely with each other. . . .” In connection with varying backgrounds and skills, he argues thatADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 26
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesof deferring to an organization’s governing body and to the danger of too muchprescription, particularly given the dearth of empirical data in the nonprofit sector. 91D. Disclosure and Transparency“Sunlight is said to be the best of disinfectants; electric light the mostefficient of policemen.”Justice Louis D. Brandeis 1914 92Complementing the role played by accreditation systems for certain types oforganizations and voluntary standards and ratings for charities is the role that disclosureand transparency can play. In addition to the legally-mandated public availability ofForms 990 and 1023, significant amounts of information—whether public, released bythe organization itself, or otherwise available—are readily accessible through theInternet. This allows the general public (and its attendant representatives such as themedia and various watchdog groups) to peer into an organization’s operations,programs, and finances. This public access has been enhanced significantly in recentyears with the advent of e-filing and organizations such as Guidestar.Conventional wisdom suggests that this greater disclosure will facilitate enforcement bythose agencies so charged and enable the public (itself and as represented by themedia and watchdog groups) to enhance this enforcement capacity. Additionally, it isreasoned that a nonprofit organization focused on public disclosure will seek to improveits behavior in order to appeal to potential funders and other constituencies, will bedeterred from taking certain actions that cast the organization in a poor light, and mayfeel compelled to meet purported standards of excellence.While we are not denigrating the role that disclosure and transparency play instrengthening the sector, and we respect the value placed on it by Justice Brandeis, theFiler Commission, Congress, the IRS, and others, it is important not to overstate itssignificance in enhancing enforcement or to underestimate the costs involved. AsProfessor Dana Brakman Reiser concluded in an article on the disclosure focus ofrecent legislative proposals, 93 disclosure per se is no panacea. The cost in time andmoney for otherwise compliant organizations to adhere to new requirements must beconsidered, as well as the extent to which they detract from an organization’s focus onwhile a board needs to draw on such perspectives, that does not necessitate a board seat. Finally, he looks to the need for race,gender, and ethnicity diversity as “factually unmerited,” having “the unintended consequence of encouraging philanthropists to focustheir charitable resources only on the communities where they are personally most familiar” and “contrary to principles ofphilanthropic freedom.”For a more thorough assessment of the pros and cons of board compensation, see William A. Schambra, CompensatingFoundation Directors?, Hudson Institute (March 18, 2008),http://www.hudson.org/index.cfm?fuseaction=publication_details&id=5497.91While we appreciate that there are organizations that jeopardize their tax exemptions and act inappropriately, we believenonprofits overwhelmingly want to do the right thing and appreciate the reputational risks, potential loss of resources, and impact ontheir ability to achieve their goals if they act otherwise.92Louis D. Brandeis, Other People’s Money 62 (Richard M. Abrams ed.1967), as cited in Reiser, supra note 19, at 605.93Reiser, supra note 19.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 27
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