Principles for Good Governance and Ethical Practice A Guide for Charities and Foundations REFERENCE EDITION OCTOBER 2007 Panel on the Nonprofit Sector CO-CONVENERS Lorie A. Slutsky, President, New York Community Paul Nelson, Former President, Evangelical Trust, New York, NY Council for Financial Accountability, M. Cass Wheeler, Chief Executive Officer, Winchester, VA American Heart Association, Dallas, TX William D. Novelli, CEO, AARP, Washington, DC PANEL MEMBERS Jon Pratt, Executive Director, Minnesota Council Susan V. Berresford, President, Ford Foundation, of Nonprofits, St. Paul, MN New York, NY John R. Seffrin, President and CEO, American Paul Brest, President, William and Flora Hewlett Cancer Society, Atlanta, GA Foundation, Menlo Park, CA Sam Singh, Former President and CEO, Michigan Linda Perryman Evans, President and CEO, Nonprofit Association, Lansing, MI The Meadows Foundation, Dallas, TX Edward Skloot, Former Executive Director, Jonathan F. Fanton, President, John D. and Surdna Foundation, New York, NY Catherine T. MacArthur Foundation, William E. Trueheart, President and CEO, Chicago, IL The Pittsburgh Foundation, Pittsburgh, PA Brian Gallagher, President and CEO, United Way William S. White, President, Charles Stewart of America, Alexandria, VA Mott Foundation, Flint, MI Robert Greenstein, Executive Director, Center on Timothy E. Wirth, President, United Nations Budget and Policy Priorities, Washington, DC Foundation, Washington, DC Steve Gunderson, President and CEO, Council on Gary L. Yates, President and CEO, The California Foundations, Washington, DC Wellness Foundation, Woodland Hills, CA Stephen B. Heintz, President and CEO, Raul Yzaguirre, Former President and CEO, Rockefeller Brothers Fund, New York, NY National Council of La Raza, Washington, DC Wade Henderson, Executive Director, Leadership Conference on Civil Rights, Washington, DC EXECUTIVE DIRECTOR Dorothy A. Johnson, Trustee, W.K. Kellogg Diana Aviv, President and CEO, Foundation, Grand Haven, MI Independent Sector, Washington, DC Valerie Lies, President and CEO, Donors Forum of Chicago, Chicago, IL Cover photo credits (left to right): ©Mark Godfrey/The Nature Conservancy; Habitat for Humanity International; Ed Kashi/Robert Wood Johnson Foundation; Public Allies. We are delighted to share with you these principles for good governance and ethical prac- tice, which are designed to guide board members and staff leaders of every charitable organization as they work to improve their own operations. The Panel on the Nonprofit Sector has been dedicated to finding ways to strengthen governance, transparency, and ethical standards within the charitable community since its creation in October 2004 at the encour- agement of the U.S. Senate Finance Committee. Over the last three years, we have brought together thousands of people involved with charities and foundations to develop and refine recommendations to Congress, the Internal Revenue Service, and our own community that would achieve those goals. The Panel issued its first report to Congress and the nonprofit sector in June 2005, and a supplement to that report in April 2006. Together, those reports offered over 150 recommendations for actions that Congress and the Internal Revenue Service should take to improve the laws, as well as education and enforcement efforts to prevent unscrupulous individuals from abusing charitable resources for personal gain. It also outlined actions that we in the charitable community needed to take to improve our own practices. Many of those recommendations have been enacted into law through the Pension Protection Act of 2006, and we continue to work with Congress and the IRS to make improvements in the regula- tory framework under which charitable organizations operate. We know that government action cannot-and should not-replace strong, effective governance of individual organizations and constant vigilance by our own community. The Panel has spent the past eighteen months working with an outstanding advisory committee led by Rebecca Rimel, President, Pew Charitable Trusts, and Joel Fleishman, Director, Philanthropic Foundations Research Program, Terry Sanford Institute of Public Policy, Duke University, to examine how we might advance the state of governance and self-regulation throughout our community. It further invited public comment from the charitable community. The result is the 33 principles presented here. We encourage the board and staff leaders of every charitable organization to examine these principles carefully and determine how best they should be applied to their own operations. Many organizations will find that they already follow-or go beyond-these principles. Others may wish to make changes in their current practices over time, and some may conclude that certain practices do not apply to their operations. We hope these principles will help our organizations as we continue to reach for the highest standards of governance and ethical practice that the communities we serve expect and deserve. Lorie Slutsky M. Cass Wheeler President and Director Chief Executive Officer New York Community Trust American Heart Association Co-Conveners, Panel on the Nonprofit Sector Table of Contents 3 Preamble Principles for Good Governance and Ethical Practice 9 Legal Compliance and Public Disclosure 19 Effective Governance 33 Strong Financial Oversight 41 Responsible Fundraising Appendix 50 Self-regulation Systems Studied by the Panel on the Nonprofit Sector's Advisory Commit- tee on Self-Regulation 58 Self-Regulation in the Nonprofit Sector: A Portrait of Current Issues in the Field, Con- ducted for the Panel on the Nonprofit Sector by the FDR Group 75 Study on Models of Self-Regulation in the Nonprofit Sector, Conducted for the Panel on the Nonprofit Sector by the National Center on Philanthropy and the Law 130 Glossary 136 Panel on the Nonprofit Sector Staff Acknowledgements For Further Information 2 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Preamble Nonprofit organizations in the United States improper conduct by an individual organization, -educational, charitable, civic, and religious though rare, can thus jeopardize the human and institutions of every size and mission-represent financial support on which countless other activi- the most widespread organized expression of ties rely. Yet government attempts to prevent such Americans' dedication to the common good. The abuses, if not carefully pursued, can themselves creation of these voluntary, often grassroots orga- diminish the unique value that nonprofits bring nizations to accomplish some public purpose is a to American life. Too heavy a regulatory hand, or distinguishing feature of our national life. Since too uniform and inflexible a set of legal restraints, the 1835 publication of Alexis de Tocqueville's could stifle the very creativity and variety that Democracy in America, they have been recognized makes nonprofit activity worth protecting and internationally as a source of social cohesion, encouraging. Government appropriately sets rules a laboratory of innovation, and a continually for the organizations and activities that are exempt adaptable means of responding to emerging ideas, from taxes and eligible to receive tax-deductible needs, and communal opportunity. Individuals contributions: for example, government has deter- have continued to use their First Amendment mined that such contributions may not be used freedoms of speech and association to create and for partisan political energize organizations that define common needs, activities or the private rally popular support, and pursue innovative benefit of the donor. approaches to public problems. These nonprofits At the same time, N have been a source of national achievement on government has wisely onprofit many fronts. avoided intruding on organizations have The variety of purposes, forms, and motivating how organizations long embraced the beliefs that make up the charitable community pursue their missions, need for standards in the United States is one reason why it has manage their pro- consistently earned widespread support from large grams and structure of ethical practice numbers of Americans. In recent decades, the their operations. that preserve and percentage of survey respondents expressing con- Just as important, strengthen the fidence in the ethics and honesty of U.S. charities nonprofit organiza- public's confidence. and voluntary organizations overall has hovered tions have long around two-thirds.1 For individual charitable orga- embraced the need for nizations, responses are even more favorable, some standards of ethical reaching above 70 percent. In 2006, 20 percent of practice that preserve and strengthen the public's all Americans-more than 61 million of them- confidence. Many such systems in fact already volunteered in some capacity in an assortment of exist, though none have applied to the entire different kinds of nonprofit activity.2 Individual range of American charitable organizations. The donations totaled more than $207 billion, which pages that follow therefore set forth a compre- came on top of the $41 billion given by corpora- hensive set of principles to inform the field. Their tions and foundations created from private money. purpose is to reinforce a common understand- Preserving this diversity, adaptability, and ing of transparency, accountability, and good capacity for innovation depends in large part on governance for the sector as a whole-not only maintaining the public's trust. The public has high to ensure ethical and trustworthy behavior, but expectations for both the ethical standards and equally important, to spotlight strong practices the impact of the country's 1.4 million charitable that contribute to the effectiveness, durability, and organizations, but often has trouble distinguish- broad popular support for charitable organizations ing one nonprofit from another. Unethical or of all kinds. A GUIDE FOR CHARITIES AND FOUNDATIONS 3 TOWARD A BALANCED SYSTEM many of these recommendations into law, and OF LAW AND SELF-GOVERNANCE the Panel is continuing to work with members of Congress and the executive branch on ways of Any approach to preserving the soundness and implementing the remaining ones. integrity of the nonprofit community must strike The Panel has been equally committed to a careful balance between the two essential forms formulating effective, broadly applicable methods of regulation-that is, between prudent legal of self-regulation since its inception in 2004. mandates to ensure that organizations do not Its work has proceeded from a belief-among abuse the privilege of their exempt status, and, lawmakers and their staffs no less than among for all other aspects of sound operations, well- charitable organizations-that the best bulwark informed self-governance and mutual awareness against misconduct will always be a well-informed among nonprofit organizations. Such a balance vigilance by members of the nonprofit commu- is crucial for ensuring that structures of account- nity themselves, including a set of principles they ability and transparency are core strengths of our could adopt, promote sector-wide, and improve nonprofit community, affording organizations the over time. These principles should be clear support they need to enough to be practical and readily implemented pursue their various in a wide variety of organizations, but flexible callings and the flex- enough to allow each organization's governing ibility they need to board and management to adapt them to the The best bulwark adapt to the changing dictates of that organization's scope and mission. needs of their com- against misconduct Widespread use of such principles would enable munities, their fields organizations to improve their operations by will always be a well- of endeavor, and the learning from each other. Critically, it would also informed vigilance times. provide a common yardstick by which members by members of the The Panel on the of the public can evaluate how to direct their nonprofit community Nonprofit Sector has support. worked over the past themselves, including three years to help DEVELOPING SECTOR-WIDE a set of principles they find that balance. PRINCIPLES TO SUPPORT SELF could adopt, promote Created in 2004 at REGULATION sector-wide, and the encouragement of the leaders of Though given fresh impetus by current members improve over time. the Senate Finance of Congress and by the creation of the Panel on Committee, the the Nonprofit Sector, the idea of self-regulation is Panel had addressed far from a recent preoccupation among charitable concerns shared by nonprofit organizations, organizations. Among the earliest such efforts members of the public, Congress, and federal and dates back to 1918, when a coalition of nonprofits state oversight agencies about reports of illegal or established the National Charities Information unethical practices by some charitable organiza- Bureau to help the public learn about the ethical tions and their donors. The Panel's Final and practices and stewardship of organizations that Supplemental Reports, issued in 2005 and 2006 raise money from donations. Many excellent respectively, offered more than 100 recommenda- systems of self-regulation have long been in use in tions for improving government oversight, includ- various subsets of the sector, each tailored to the ing new rules to prevent unscrupulous individuals goals, resources, and challenges of its particular from abusing charitable organizations for personal field and membership. In searching for generally gain. The Pension Protection Act of 2006 enacted applicable standards for the whole sector, the 4 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Panel's first step was therefore to commission cases-is essential to understanding and using this two studies to review, analyze, and find patterns document. In following this approach, the Panel among these existing systems. on the Nonprofit Sector examined a broad con- The Panel then called together 34 leaders from tinuum of different models, reflecting greater and charities, foundations, academia, and oversight lesser degrees of uniformity and means of enforce- agencies to form a special Advisory Committee ment. At one end of this spectrum are systems of on Self-Regulation. Armed with the two studies accreditation, such as those for hospitals and insti- of self-regulation regimens already in use, the tutions of higher education, that carry the force Committee began its work in 2006 with a detailed of law and sanctions for violations. Further along review of principles and standards drawn from on the continuum are standards that members more than 50 such systems, including selections of an association or network of similar organiza- from both the nonprofit and for-profit sectors. tions, such as associations of land trusts or certain After extensive deliberation, the members religious institutions, agree to follow. While developed a comprehensive set of principles failure to meet these standards may not force an drawn from current systems and incorporating organization to close its doors, the advantages to the advice of experts in nonprofit law and being a member in good standing of the umbrella governance. network is usually This first set of draft principles was circulated sufficient to encourage for public comment in early 2007. After careful adherence to considering the resulting feedback, the committee its rules and norms. S and the Panel made revisions and released a Finally, there are stan- elf-regulation second draft for a longer comment period. The dards that nonprofits begins with good wide-ranging reaction to both drafts demonstrated subscribe to on a governance. a broad interest across the nonprofit community purely voluntary basis, in achieving consensus on the elements of without any external transparent, accountable, and ethical conduct. verification, because The resulting guidance and encouragement further they want to strengthen their governance practices strengthened the Panel's final set of principles. and ethical conduct. The first two approaches tend to be effective USING AND ADAPTING THE PRINCIPLES primarily with organizations that are closely affili- FOR YOUR ORGANIZATION ated with one another or belong to a relatively homogeneous group-where practices and profes- In the following pages, the Panel sets forth 33 sional expectations are highly standardized or principles of sound practice that should be con- where social sanctions have a strong impact. For sidered by every charitable organization as a guide a group as broad and diverse as the whole com- for strengthening its effectiveness and account- munity of nonprofits, the third approach is clearly ability. Six of these principles describe actions more appropriate: standards of practice that that all charitable organizations must take because organizations are encouraged, but not required, they are required by law.3 The other 27 describe to meet. Many national and state associations of actions that charitable organizations should charitable organizations with voluntary member- strongly consider following, based on their legal ships have found this approach benefits their and operational structure and their particular member nonprofits. The Panel has followed the charitable purposes. practice, common to many such voluntary This distinction-between firm rules based associations, of describing the reasoning behind on law and more flexible principles that must be each principle and offering guidance on how to interpreted and applied differently in different adapt and apply it. A GUIDE FOR CHARITIES AND FOUNDATIONS 5 To be sure, a significant number of nonprofit bears the primary responsibility for ensuring that organizations already function under one of the the organization lives up to its legal and ethical more prescriptive regimens as a result of their obligations to its donors, consumers, and the pub- participation in some subset of the sector. Yet few lic. For organizations that do have staff, the chief of these systems offer a comprehensive approach staff officer, in partnership with the board, has to good governance and ethical practice. Even responsibility for overseeing or carrying out many organizations that subscribe to the more compre- of the activities implied by these principles. It is hensive systems may well find ideas and practices therefore to the boards and chief executives of in this document that will improve their self-gov- nonprofit organizations that this document is ernance further. particularly, though not exclusively, addressed. Still, given the wide, necessary diversity of organizations, missions, and forms of activity The 33 principles that follow are organized that make up the nonprofit community, it would under four main categories: be unwise, and in many cases impossible, to 1. Legal Compliance and Public Disclosure create a set of universal standards to be applied (principles 1-7)-responsibilities and practices, uniformly to every such as implementing conflict of interest and member. Instead, whistleblower policies, that will assist charitable the Panel commends organizations in complying with their legal S the following set of obligations and providing information to the trengthening principles to every public. ethics and charitable organiza- 2. Effective Governance (principles 8-20)- accountability is tion as guideposts policies and procedures a board of directors an organic process for adopting specific should implement to fulfill its oversight and practices that best fit governance responsibilities effectively. that requires an its particular size and 3. Strong Financial Oversight (principles ongoing commitment charitable purpose. 21-26)-policies and procedures an by boards and Organizations can organization should follow to ensure wise staff of individual use these principles to stewardship of charitable resources. evaluate their current 4. Responsible Fundraising (principles 27- organizations and by standards. 33)-policies and procedures organizations the entire nonprofit Self-regulation that solicit funds from the public should follow community. begins with good to build donor support and confidence. governance. Every charitable organiza- It is advisable that an organization's board con- tion, by federal and state law, must have a board duct a thorough discussion of the complete set of of directors or, if it is established as a charitable principles, and determine how the organization trust, one or more trustees. The board sets the should apply each to its operations. It is possible organization's broad policies and oversees its oper- that after this review, a board may conclude that ations, including its financial policies. The board certain principles do not apply to its organiza- also has a responsibility to create an environment tion. Developing a transparent process for com- in which there is open and robust deliberation municating how the organization has addressed of the issues on which it takes action. Whether the principles, including the reasons that any of or not the organization has paid staff, the board the principles are not relevant, is likely to foster 6 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE a greater appreciation of the diverse nature of the community. Over time, discussion within sector and a deeper respect for the board's good organizations and across the community may stewardship. well result in refinement of the principles The Principles for Good Governance and presented here. Such discussions would provide Ethical Practice: A Guide for Charities and a further demonstration of the value to the whole Foundations is available in an abridged format sector of coming together to improve its work. to share with board and staff members, donors, For organizations whose practices do not and others interested in the work of the currently meet the standards recommended nonprofit community. This reference edition by the Panel, and for existing systems of self- provides additional information, including legal regulation that fall short as well, reaching those background on each principle, a glossary of levels may take some time. Yet even the process terms, the two studies on self-regulation systems of striving toward these standards will strengthen commissioned by the Panel to inform this work, the organization and its ability to serve its and the more than 50 existing self-regulation community. The key is to begin that process systems and standards that the Panel's Advisory today. Committee on Self-Regulation studied during its work. Independent Sector, which convened and 1 Independent Sector, Keeping the Trust:Confidence in supported the Panel, also offers information on Charitable Organizations in an Age of Scrutiny, August 2002, its website, www.independentsector.org, to assist p. 2. organizations in finding tools and other resources 2 Bureau of Labor Statistics, Volunteering in the United States, for applying these principles. 2006, Washington, DC: U.S. Department of Labor, 2007. A PROCESS OF CONTINUING 3 Principles 1, 3, 21, 25, 26 and 27 describe actions that are VIGILANCE AND ADAPTATION required by law of all charitable organizations. Strengthening ethics and accountability is an organic process that requires an ongoing commitment by boards and staff of individual organizations and by the entire nonprofit A GUIDE FOR CHARITIES AND FOUNDATIONS 7 Legal Compliance and Public Disclosure 1 A charitable organization must comply with all applicable federal laws and regulations, as well as applicable laws and regulations of the states and the local jurisdictions in which it is based or operates. If the organization conducts programs outside the United States, it must also abide by applicable international laws, regulations and conventions that are legally binding on the United States. Charitable organizations are subject to a range In order to be exempt from paying federal income of federal, state, and local laws. An organization's taxes and to be eligible to receive tax-deductible governing board is ultimately responsible for over- contributions from the public, organizations (with seeing and ensuring that the organization complies certain exceptions1) must apply for and be rec- with all its legal obligations and for detecting and ognized by the IRS as tax-exempt under section remedying wrongdoing by management. While 501(c)(3) of the tax code. To receive this classifica- board members are not required to have special- tion, an organization must file a formal applica- ized legal knowledge, they should be familiar with tion (Form 1023) with the IRS that describes its the basic rules and requirements with which their current or planned financial and programmatic organization must comply and secure the neces- activities, organizational documents, and gover- sary legal advice and assistance to structure appro- nance structure. Depending on the organization's priate monitoring and oversight mechanisms. sources of support and other key factors, the IRS will determine whether it is recognized as a private There are many resources to help charitable orga- foundation or a public charity. nizations and their boards understand the law. The Internal Revenue Service provides a free online Private foundations derive their primary finan- workshop at www.stayexempt.org, which covers cial support from the contributions of a limited tax compliance issues confronted by small and group of sources, such as an individual, family, mid-sized tax exempt organizations. Some state or corporation. Foundations are subject to sub- attorneys general and other state charity , as well stantially more restrictive rules governing their as many national, state and regional associations of operations, and their donors receive less favorable nonprofit organization, provide online tools and tax treatment for donations. For example, private resources that offer legal guidance. Organizations foundations are prohibited from engaging in most may also find it helpful to consult with state and direct or indirect financial transactions with their local chapters of bar associations for referrals to donors, directors, and businesses and family mem- low-cost or pro bono legal assistance. The Ameri- bers of those donors and directors, except for com- can Bar Association operates an online website, pensation or reimbursement of expenses related to www.findlegalhelp.org., that can also be useful for personal services that are reasonable and necessary locating legal advisors. to fulfilling the foundation's charitable purposes. A private foundation is required to make charitable LEGAL BACKGROUND distributions every year equal to at least 5 percent of the value of its noncharitable assets and must A charitable organization is generally organized pay an annual excise tax generally equivalent to as a corporation or a trust under the laws of the state in which it was created. Some organizations choose to operate as unincorporated associations, 1 Houses of worship, specific related organizations, organiza- although that legal form leaves directors and tions (other than private foundations) whose annual gross members exposed to a higher degree of liability receipts do not normally exceed $5,000, and organizations for financial and other legal responsibilities of the (other than private foundations) subordinate to another organization. Unincorporated associations are tax-exempt organization that are covered by a group exemp- tion letter, are not required to seek formal recognition of still subject to legal requirements for charitable 501(c)(3) status. organizations. 10 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE 2 percent of its net investment income.2 Private stantial part" of the organization's overall activities. foundations are prohibited from engaging in lob- The tax laws permit public charities to elect to fol- bying activities (subject to certain exceptions) and low specific rules for the amounts they can spend are subject to specific rules regarding its holdings on direct and grassroots lobbying activities.5 in for-profit business enterprises and the types of investments it is allowed to make. Private founda- Organizations that solicit charitable contributions tions and their managers may be subject to severe must be knowledgeable of and abide by charitable excise taxes and other penalties for violations of solicitation regulations and reporting requirements these prohibitions. of the states and local jurisdictions in which they operate or raise funds. Thirty-eight states and the Public charities generally derive a substantial por- District of Columbia currently require certain tion of their funding from the general public or charitable organizations to register before solicit- from a governmental unit. Federal tax laws define ing residents or conducting fundraising activities four types of public charities: (1) public institu- within their state. Organizations that hire third tions, such as churches and religious congrega- parties to raise funds on their behalf must also tions, schools and other educational institutions, take steps to ensure that those third parties com- hospitals and medical research institutions, and ply with state and local registration and reporting governmental units; (2) publicly-supported chari- requirements. ties that receive at least one-third of their financial support from qualifying contributions and grants Charitable organizations that conduct specific or from providing program services to a broad types of services, such as nursing homes and other constituency; (3) supporting organizations that are types of residential facilities, providers of health organized and operated exclusively for the benefit care or day care for children or adults, educational of or to carry out the functions of one or more facilities, etc., must also abide by other laws and publicly-supported charities; and (4) public safety regulations that apply to any business, for-profit testing organizations. Public charities are prohib- or nonprofit, that operates in those service areas. ited from engaging in "excess benefit transactions," Charitable organizations that employ staff must that is, transactions with insiders (persons in a abide by federal, state and local labor laws and position to exercise substantial influence over the regulations, and applicable employment tax and organization) that provide economic benefits in income tax withholding requirements. excess of fair market value. There are specific rules for the operation of certain public charities estab- lished as medical research organizations, charities 2 IRC § 4940(a), Reg. §53.4940-1(a). that operate as credit counseling organizations, 3 IRC §4966(d)(2) defines a donor-advised fund as a fund or and certain supporting organizations, as well as account that is owned and controlled by a sponsoring organi- for specific types of funds held by a public charity zation, separately identified by reference to contributions of known as "donor-advised funds."3 a donor or donors, and to which the donor or a designated advisor has or reasonably expects to have advisory privileges Charitable organizations are prohibited from sup- with respect to the distribution or investment of the assets in the fund. The definition specifically excludes a fund or porting or opposing candidates for public office or account that makes distributions only to a single identified intervening in political campaigns, but they may organization or governmental entity or that makes grants for lobby public officials regarding legislation that travel, study or similar purposes provided that certain condi- might affect their existence, powers and duties, tions are met. tax-exempt status, or the deductibility of contribu- 4 Treas. Reg. § 53.4945-2(d)(2)(ii). tions, often referred to as "self-defense lobbying."4 5 IRC §501(h). Public charities (but not private foundations) may also lobby directly or conduct grassroots advocacy efforts to influence the outcome of other legisla- tion so long as such efforts constitute an "insub- A GUIDE FOR CHARITIES AND FOUNDATIONS 11 2 A charitable organization should have a formally adopted, written code of ethics with which all of its directors or trustees, staff and volunteers are familiar and to which they adhere. Adherence to the law provides a minimum stan- The process by which a code of ethics is adopted dard for an organization's behavior. Each organiza- and implemented can be just as important as the tion should also have a code of ethics that outlines code itself. The board and staff should be engaged the practices and behaviors its staff, board, and in developing, drafting, adopting, and implement- volunteers agree to follow. The adoption of such ing a code that fits the organization's characteris- a code, though not required by law, helps dem- tics. It should then be complemented by policies onstrate the organization's commitment to carry and procedures that describe how the principles in out its responsibilities ethically and effectively. the code will be put into practice. Organizations The code should be built on the values that the should include a discussion of the code of ethics in organization embraces, and should highlight orientation sessions for new board and staff mem- expectations of how those who work with the bers and volunteers, and should regularly address organization will conduct themselves in a number adherence to the code in their ongoing work. of areas, such as the confidentiality and respect that should be accorded to clients, consumers, LEGAL BACKGROUND donors, and fellow volunteers and board and staff members. There is no legal requirement to have a code of ethics. 3 A charitable organization should adopt and implement policies and procedures to ensure that all conflicts of interest, or the appearance thereof, within the organization and the board are appropriately managed through disclosure, recusal, or other means. A conflict of interest arises when a board member ability to influence decisions of the organization, or staff person's duty of loyalty to the charitable including board and staff members, and parties organization comes into conflict with a compet- related to them. Some organizations may extend ing financial or personal interest that he or she the policy to substantial contributors as well. (or a relative) may have in a proposed transac- tion. Some such transactions are illegal, some are Board members and staff should be encouraged to unethical, but others may be in the best interest of disclose any interest they have in a transaction or the organization as long as certain clear procedures matter that is before the organization where that are followed. interest could be reasonably viewed by others as affecting the objectivity or independence of the Establishing and enforcing a conflict-of-interest decision maker, even if the interest is not the result policy is an important part of protecting charitable of the staff or board member having a formal organizations from unethical or illegal practices. affiliation with some other party. The practice of The policy need not be complex, but it should be full disclosure should be particularly fostered at consistent with the laws of the state in which the board meetings, and the fact of any conflict and nonprofit is organized and should be tailored to the action taken in response, including abstention, specific organizational needs and characteristics. should be recorded in the minutes. The policy should require full disclosure of all potential conflicts of interest within the organiza- Conflict-of-interest policies should distinguish tion. It should apply to every person who has the between situations that give the appearance of a 12 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE conflict and those that involve a material conflict board members and organization managers are where a board or staff member has a direct or subject to penalties if they are found to have indirect financial interest in transactions with the approved transactions that result in an excessive organization. It is important that there be in place financial benefit to anyone in a position to exercise a transparent process, in which board members substantial influence over the organization's affairs. engage, to understand the nature of the conflict (For a more complete discussion of excess benefit and whether it can be appropriately managed. For transactions, see the Legal Background to prin- example, some foundations and grantmaking pub- ciple #13.) lic charities prohibit grants to organizations for which one of the funder's board or staff members The Internal Revenue Service requires public serves as an uncompensated director or trustee. charities to disclose on their annual information Others require disclosure of this relationship and returns (Forms 990) if any officers, directors, recusal from the decision-making process. Still trustees, key employees, highest compensated others encourage board or staff members to be employees, or highest compensated profession or engaged actively with other charitable organiza- other independent contractors are related through tions, including the charities they may fund, as a family or business relationships6 and whether the way of learning about those organizations and the organization has a conflict of interest policy.7 The fields in which they work. IRS Form 1023, which an organization must file to obtain a determination of federal tax-exemption Once a conflict-of-interest policy is developed, all under section 501(c)(3) of the Internal Revenue board and senior staff members should be required Code, asks the organization to indicate whether to sign it and to disclose any material conflicts it has adopted a conflict of interest policy and, if of interest, both at the time they join the orga- not, how it will handle conflicts of interest. nization and at the beginning of each new board year. Many organizations use an annual question- All states mandate that directors and officers owe naire or disclosure statement for this purpose a duty of loyalty to the organization, and improp- and commonly provide information about board erly benefiting from a transaction involving a members' conflicts to auditors or others reviewing conflict of interest, if improper, more than likely the organization's financial transactions. When violates that duty. Some state statutes specifically senior employees, board members or their family penalize participation in transactions involving members have a material conflict of interest in a conflicts of interests unless the organization fol- matter being considered by the board or the staff, lows certain prescribed procedures. they should refrain from attempting to influence other decision-makers regarding the matter. Board members with a material conflict of interest are 6 IRS 2006 Form 990, Part V-A, line 75b. Family relation- required by law to recuse themselves from board ships include "an individual's spouse, ancestors, children, discussions and votes regarding those matters, grandchildren, great-grandchildren, siblings (whether by other than to respond to information requests. whole or half blood), and the spouses of children, grand- children, great-grandchildren, and siblings. Business relationships are defined as "employment and contractual LEGAL BACKGROUND relationships, and common ownership of a business where any officers, directors, or trustees, individually or together, While there is no federal requirement that an possess more than a 35% ownership interest in common." organization have a conflict of interest policy, 7 2006 Form 990, Part IV-A, line 75d. A GUIDE FOR CHARITIES AND FOUNDATIONS 13 4 A charitable organization should establish and implement policies and procedures that enable individuals to come forward with information on illegal practices or violations of organizational policies. This "whistleblower" policy should specify that the organization will not retaliate against, and will protect the confidentiality of, individuals who make good-faith reports. Every charitable organization, regardless of size, board members and staff may not feel comfortable should have clear policies and procedures that sharing concerns about suspected illegal or unethi- allow staff, volunteers, or clients of the organi- cal practices directly with another family member zation to report suspected wrongdoing within or close associate of the family. Larger organiza- the organization without fear of retribution. tions should encourage employees and volunteers Information on these policies should be widely to share their concerns with a supervisor, the distributed to staff, volunteers, and clients, and president or executive director, and/or the chief should be incorporated both in new employee financial officer of the organization, but should orientations and ongoing training programs for also provide a method of reporting anonymously employees and volunteers. Such policies can help to either a board member or an external entity boards and senior managers become aware of and specified by the organization. Some large organiza- address problems before serious harm is done to tions have set up computerized systems that allow the organization. The policies can also assist in for anonymous reports, and a number of private complying with legal provisions that protect indi- companies offer anonymous reporting services via viduals working in charitable organizations from a toll-free telephone number, email address, or retaliation for engaging in certain whistle-blowing intranet site. activities. Violation of such provisions may subject organizations and the individuals responsible to It is equally important that the organization have civil and criminal sanctions. clear procedures to investigate all reports and take appropriate action. The policy should stipulate that Policies that protect people who report wrong- there will be no retaliation against any individual doing-sometimes known as a "Whistleblower who reports a suspected violation, except in those Protection Policies" or "Policies on Reporting of instances where the organization determines that a Malfeasance or Misconduct"-generally cover sus- false report was made with intent to harm the orga- pected incidents of theft; financial reporting that nization or an individual within the organization. is intentionally misleading; improper or undocu- mented financial transactions; improper destruc- LEGAL BACKGROUND tion of records; improper use of assets; violations of the organization's conflict-of-interest policy; Some states have enacted laws that provide protec- and any other improper occurrences regarding tions for employees who report misconduct under cash, financial procedures, or reporting. specific conditions. Federal law prohibits employ- ment-related retaliation by all entities-including The policy should be tailored to the nonprofit's charitable organizations-against whistleblowers size, structure, and capacity, and it must reflect who provide information on certain financial the laws of the state in which the nonprofit is crimes delineated under federal law.8 Whistleblow- organized or operates. All policies should specify ers who report suspected tax fraud to the IRS are the individuals within the organization (both also protected from retaliation.9 board and staff) or outside parties to whom such information can be reported. Small organizations with few or no paid staff may wish to designate 8 The Sarbanes-Oxley Act of 2002) Pub. L. No. 107-204, 18 an external advisor to whom concerns can be U.S.C. 1513(e). reported without any threat of retaliation. This is 9 Tax Relief and Health Care Act of 2006, § 406, P.L. a particular concern for family foundations whose 109-432 14 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE 5 A charitable organization should establish and implement policies and procedures to protect and preserve the organization's important documents and business records. A written document retention policy, consistently tax forms and contracts-for specified lengths of monitored over time, is essential for protecting time. Failure to maintain such records may subject the organization's records of its governance and the organization and/or individuals to penalties administration, as well as business records that are and fines and may compromise the organization's required to demonstrate legal compliance. Such a position in litigation. policy also helps to protect against allegations of wrongdoing by the organization or its directors The Sarbanes-Oxley Act provides that it is a fed- and managers. Board members, staff and volun- eral crime, punishable by a fine and up to twenty teers should be made thoroughly familiar with the years in prison, for any corporate agent, whether policy and informed of their responsibilities in of a for-profit or nonprofit corporation, know- carrying it out. ingly to alter, destroy, mutilate, conceal, cover up, falsify, or make a false entry in any record with the The policy should address the length of time spe- intent to impede, obstruct, or influence the inves- cific types of documents must be retained, as well tigation or proper administration of any matter as when it is permissible or required to destroy within the jurisdiction of a federal department or specific types of documents. The policy should agency or any bankruptcy case.10 The same penalty provide guidance to staff and volunteers for paper applies to anyone who alters, destroys, mutilates, and electronic documents, files and e-mail mes- or conceals a record, or attempts to do so, with sages. Specific procedures should also ensure that the intent to impair the object's integrity or avail- any document destruction is immediately halted ability for use in an official proceeding, regardless if an official investigation of the organization is of whether such proceeding is pending or about to under way or anticipated. be instituted at the time of the offense.11 Charitable organizations are required to maintain Other federal laws, such as the Privacy Act of permanently their organizational documents, 1974 and the Health Insurance Portability and board minutes and policies, and materials related Accountability Act of 1996 (which affects health to their state and federal tax-exempt status. Other care providers), establish rules for all types of orga- documents related to the governance, administra- nizations for the collection, maintenance, use and tion, fundraising, and programs of the organiza- dissemination of personal information to protect tion must be kept in paper or electronic form for the privacy of individuals. State laws vary consid- specific periods, depending on applicable laws and erably from state to state and may supersede fed- reporting requirements. Federal and some state eral laws where the state law is more restrictive. laws prohibit the destruction, alteration, mutila- tion, or concealment of records related to an offi- cial legal proceeding. 10 Id., § 802 and United States Code Title 18, § 1519. 11 Id., § 1102 and United States Code Title 18, § 1512. LEGAL BACKGROUND Federal, state and local laws and regulations require both for-profit and nonprofit organiza- tions to retain certain business records-such as applications for employment and payroll records, A GUIDE FOR CHARITIES AND FOUNDATIONS 15 6 A charitable organization's board of directors should ensure that the organization has adequate plans to protect its assets-its property, financial and human resources, programmatic content and material, and its integrity and reputation-against damage or loss. The board should review regularly the organization's need for general liability and directors' and officers' liability insurance, as well as take other actions necessary to mitigate risks. The board of a charitable organization is responsi- and financial capacity. Insurance is only one risk ble for understanding the major risks to which the management strategy, however. Other financial organization is exposed, reviewing those risks on strategies should be considered to protect an orga- a periodic basis, and ensuring that systems have nization's assets, such as establishing reserve funds been established to manage them. The level of to absorb minor losses, borrowing from lenders, risk to which the organization is exposed and the and negotiating with third parties to assume cer- extent of the review and risk management process tain losses. The organization should also have poli- will vary considerably based on the size, program- cies and procedures designed to reduce the risk of matic focus, geographic location, and complexity various occurrences, or limit the exposure of the of the organization's operations. organization to certain identified risks. Risk management generally includes a review of Even the smallest organizations should have proce- potential risks to the organization's significant dures in place for backing up and preserving elec- assets, such as its property, its good will, and its tronic and print copies of documents and other key programs and activities, and decisions about information vital to its governance, financial, and the most appropriate ways to protect those assets programmatic operations. Larger organizations from loss. All organizations should consider may require more extensive risk management carefully all of the principles in this report-for programs, including emergency preparedness and governance, financial oversight, and fundraising disaster response plans in case of natural or man- practices-as they develop appropriate policies made disasters or other crises that may disrupt and procedures to protect their assets. significantly its programs and operations. Board members may have personal liability for Organizations that employ staff should have writ- fines and other penalties as a result of certain legal ten personnel policies that conform to federal violations, such as failure to pay required payroll and state laws. They should develop appropriate and other taxes or approval of excess benefit or procedures to protect the health and safety of both self-dealing transactions. Federal and some state employees and volunteers while they are at work. volunteer liability laws provide some safeguards Organizations providing services to vulnerable for board members who are not compensated, individuals should ensure that appropriate screen- other than receiving reimbursement of expenses, ing, training, and supervision procedures are in and who act in good faith. Nonetheless, while it place to minimize safety risks to consumers and is rare for a charitable organization and its board clients, as well as paid and volunteer staff. to be the target of a lawsuit, each organization should still take steps to protect its assets in such LEGAL BACKGROUND an event. The board of directors should consider the appropriateness of including indemnification The federal Volunteer Protection Act and most provisions in the organization's governing docu- state volunteer liability laws do not protect board ments, based on a review of the laws of the states members, regardless of whether they are com- in which it is based or operates. The board should pensated, and other volunteers from liability for also assess periodically the organization's need for "willful or criminal misconduct, gross negligence, insurance coverage based on its program activities reckless misconduct, or a conscious, flagrant indif- 16 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE ference to the rights or safety of the individual The governing documents of a charitable organi- harmed by the volunteer action."12 The federal zation may include "indemnification provisions" Act and most state laws do not prevent individuals that allow the organization to pay the costs of from filing lawsuits against board members and defending or paying settlements or judgments other volunteers, nor do they provide the chari- board members might incur for actions related to table organizations immunity from legal actions, their board service. Federal or state laws prohibit although some states place a dollar limit on the the organization from indemnifying a board mem- organization's liability. ber who acted in bad faith and for other specific types of offenses. 7 A charitable organization should make information about its operations, including its governance, finances, programs, and activities, widely available to the public. Charitable organizations also should consider making information available on the methods they use to evaluate the outcomes of their work and sharing the results of those evaluations. For private foundations and most public charities, Another source of transparency and accountability and a filing an accurate and complete annual informa- key method for communication about the organization's tion return with the IRS is a legal requirement. work is a website, which can be maintained independently Those returns serve as a primary source of infor- or through another organization. A website should feature mation about their finances, governance, opera- the same information recommended for annual reports, tions, and programs for federal regulators, the with links directly to or instructions on how to request public, and many state charity officials. Beyond the organization's most recent IRS Form 990 return and this basic requirement, charitable organizations other financial statements. Useful websites often provide can demonstrate their commitment to account- such essential information as the organization's vision and ability and transparency by offering additional mission statements; lists of board and staff members; state- information about what they do and how they ment of values and code of ethics; and policies on conflicts operate. of interest, whistleblower protection, and travel. A good first step is to provide an annual report Information on an organization's results and how they are that lists the organization's board and staff mem- measured can be an especially valuable means of explain- bers, describes its mission, shares information on ing its work and accounting to donors and the public. program activities, and details financial informa- Such information, and the ability to provide it, will vary tion including, at a minimum, its total income, considerably from one organization to another. To the expenses, and ending net assets. Such reports need extent evaluation or information on outcomes is available, not be elaborate, can be produced in paper or some version of it should be included in annual reports, electronic form, and can direct the reader to other websites, and other forms of communication. More infor- readily available documents (such as the Form mation about program evaluation is provided in principle 990 return or audited financial statements) for #19. further information. If an organization chooses to produce such reports on a less frequent basis, such as every two or three years, it should ensure that 12 The Volunteer Protection Act of 1997, Pub. L. 105-19. any intervening changes in its board and staff or programs and its current financial statements are provided as an attachment or are otherwise made known to readers of the report. A GUIDE FOR CHARITIES AND FOUNDATIONS 17 LEGAL BACKGROUND Beginning in 2008, each public charity that is not otherwise required to file 990 or 990-EZ16 will Federal law requires many public charities, includ- be required to file an annual notice electronically ing all supporting organizations,13 and all private with the IRS that indicates its legal name; mail- foundations to file an annual information return ing address; web site address; taxpayer identifica- (Form 990, 990-EZ, or 990-PF) with the Internal tion number; name and address of a principal Revenue Service that provides accurate informa- officer; evidence of the continuing basis for the tion about its finances and programs. The IRS organization's exemption from filing Form 990; may impose penalties on any organization that and, upon termination, notice of that termination. fails to file timely and accurate returns, and fail- There are no monetary penalties for failure to file ure to file for three consecutive years will result the notice, but failure to file the annual notice for in revocation of tax-exempt status. Charitable three consecutive years will result in revocation of organizations are required to make these forms,14 tax-exempt status. as well as their initial application for recognition of tax exemption, correspondence with the IRS in connection with that application, available for 13 Religious congregations and specific related institutions, free inspection during regular business hours at its specified governmental instrumentalities, and other organiza- principal, regional, and district offices.15 Copies of tions relieved of this requirement by authority of the IRS, these documents must also be provided without are excluded from this requirement. Public charities (other charge, other than a reasonable fee for reproduc- than supporting organizations) with annual gross receipts of $25,000 or less are relieved of this requirement until 2008. tion and postage costs, to any individual who sub- mits such a request in person or in writing. 14 Each annual information return must be made available for a period of three years beginning on the date the return is required to be filed or is actually filed, whichever is later. For A tax-exempt organization may meet the public tax years beginning after August 17, 2006, the requirement inspection requirement by posting those docu- that charitable organizations make their annual IRS returns ments on a widely available internet site main- available for public inspection also includes the requirement tained by the organization or as part of an online to disclose the Form 990-T (report of unrelated business database maintained by another organization that income). contains similar documents of tax-exempt orga- 15 IRC § 6104. Organizations that received tax exemption nizations. In either case, the internet site must prior to 1987 are not required to make their initial applica- clearly inform visitors that the documents are tion for tax-exemption available if they do not have a copy of the application. available and provide instructions for download- ing them. Any individual with access to the inter- 16 Other than houses of worship and specific related institu- net must be able to download, view, and print the tions, specified governmental instrumentalities, and other organizations relieved of this requirement by authority of the document without having to pay a fee or acquire IRS. special computer hardware or software, other than software that is readily available free of charge. 18 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Effective Governance 8 A charitable organization must have a governing body that is responsible for reviewing and approving the organization's mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies. The board of directors bears the primary respon- established requirements for the board of directors sibility for ensuring that a charitable organization of any organization that conducts activities, par- fulfills its obligations to the law, its donors, its ticularly fundraising, within its borders. staff and volunteers, its clients, and the public at large. The board must protect the assets of the The Revised Model Nonprofit Corporation Act, organization and provide oversight to ensure that adopted in 1987 by the American Bar Associ- its financial, human, and material resources are ation's Subcommittee on the Model Nonprofit used appropriately to further the organization's Corporation Law of the Business Law Section, sets mission. The board also sets the vision and mis- forth parameters for the structure and composi- sion for the organization and establishes the broad tion of boards. It also sets forth duties of loyalty policies and strategic direction that enable the and due care by requiring that: "a director shall organization to fulfill its charitable purpose. discharge his or her duties as a director, includ- ing his or her duties as a member of a committee When the board determines that the organization (1) in good faith; (2) with the care an ordinarily is ready to add paid staff, the board is responsible prudent person in a like position would exercise for selecting, overseeing, and, if necessary, termi- under similar circumstances; and (3) in a manner nating the chief staff officer. In smaller, unstaffed the director reasonably believes to be in the best organizations, the board may have a more direct interests of the corporation."17 role in overseeing and sometimes delivering the organization's programs and services. In larger The Revised Act has been adopted in whole or organizations, the board generally works as a in modified form by 23 states18 for regulation of strategic partner to the staff leadership in ensur- nonprofit entities, including charitable organiza- ing that the organization meets its goals and tions. The original Model Act (developed in 1952) commitments. has been adopted in whole or in modified form by six other states and the District of Columbia.19 LEGAL BACKGROUND Federal, state and local laws governing charitable 17 Revised Model Nonprofit Corporation Act § 8.30 corporations and trusts require that each organiza- 18 The Act has been adopted in whole or with modifications tion have a governing body that is entrusted with in Alaska, Arkansas, California, Colorado, Georgia, Hawaii, the power to act on behalf of the beneficiaries of Idaho, Indiana, Maine, Minnesota, Mississippi, Missouri, the organization. Montana, Nebraska, North Carolina, Oregon, South Caro- lina, Tennessee, Utah, Vermont, Washington, West Virginia, The duties and requirements for directors of chari- and Wyoming. table organizations are generally determined by 19 Alabama, New Jersey, North Dakota, Texas, Virginia, and the laws of the state in which the organization was Wisconsin have adopted the original Model Nonprofit Cor- founded or incorporated. Some states also have poration Act as promulgated or modified. 20 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE 9 The board of a charitable organization should meet regularly enough to conduct its business and fulfill its duties. Regular meetings provide the chief venue for assets; electing or removing directors; and altering board members to review the organization's finan- the organization's governing documents. However, cial situation and program activities, establish and committees may investigate and make recommen- monitor compliance with key organizational poli- dations on any of these issues, subject to the full cies and procedures, and address issues that affect board's consideration and decision. the organization's ability to fulfill its charitable mission. While many charitable organizations find it pru- dent to meet at least three times a year to fulfill Charitable organizations should ensure that their basic governance and oversight responsibilities, governing documents satisfy legal requirements some with strong committee structures, including in establishing rules for board activities, such as organizations with widely dispersed board mem- quorum requirements and methods for notifying bership, hold only one or two meetings of the full board members about meetings. The board should board each year. Foundations that make grants establish and implement an attendance policy only once during the year may find that one that requires board members to attend meetings annual meeting is sufficient. regularly. Given the time and expense involved in traveling to meetings, some boards may choose to LEGAL BACKGROUND conduct their business through conference calls or forms of online communication that permit mem- The Revised Model Nonprofit Corporation Act bers to hear and be heard by all other participants. and many state laws stipulate that the rules regard- In such cases, the organization's governing docu- ing meetings of the board, including their fre- ments should specify that such alternative meth- quency, should be established in the bylaws of the ods of holding meetings are permitted. organization. Most state laws allow a charitable organization to stipulate meeting quorum require- Boards often form committees and authorize them ments, that is, the number of board members who to handle some work between full board meetings. must be present before the meeting begins, in The organization's governing documents should its governing documents. In the absence of such specify whether the board may create one or more stipulations in the governing documents, state such committees. In most states, the law prohibits laws generally require that organizations hold at boards from delegating certain responsibilities to least one annual meeting with a majority of board committees, such as dissolving the organization's members present. 10 The board of a charitable organization should establish its own size and structure and review these periodically. The board should have enough members to allow for full deliberation and diversity of thinking on governance and organizational matters. Except for very small organizations, this generally means that the board should have a minimum of five members. The ideal size of a board depends on many factors, end up delegating too much responsibility to an such as the age of the organization, the nature and executive committee or permitting a small group geographic scope of its mission and activities, and of board members to exercise substantial control. its funding needs. Although a larger board may Conversely, smaller boards may elicit more active ensure a wide range of perspectives and expertise, participation from each member, but they should a very large board may become unwieldy and consider whether their members collectively have A GUIDE FOR CHARITIES AND FOUNDATIONS 21 the full range of knowledge and experience neces- State laws in this area vary depending on whether sary to inform their decisions, and, if not, provide the organization is established as a corporation or opportunities for the board to confer with outside a trust. The Revised Model Nonprofit Corporation experts or advisory groups on specific matters. Act stipulates that a board of directors must have a minimum of three members. It sets no maxi- LEGAL BACKGROUND mum number and allows an organization to set and change the number of directors in its bylaws, Federal law currently permits organizations to so long as there are always at least three directors qualify for tax-exempt status with a single director in place. In practice, some states require only one or trustee. The Panel on the Nonprofit Sector has director for nonprofit corporations, and some also recommended that Congress amend the federal permit the formation of a corporation sole.21 One tax code to require that each organization, with state, New Hampshire, requires public charities certain exclusions,20 have a minimum of three to have a minimum of five directors who are not members on its governing board to be recognized related family members.22 Charitable organizations as tax-exempt under section 501(c)(3) of the code. established by trusts are governed by one or more trustees as specified in the trust instrument. 11 The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnic, racial and gender perspectives), experience, and organizational and financial skills necessary to advance the organization's mission. Boards of charitable organizations generally strive sions. This need not entail advanced training in to include members with expertise in budget and accounting or financial management. If the board financial management, investments, personnel, finds itself unable to recruit members with such fundraising, public relations and marketing, gov- skills, it should contract with or seek pro bono ernance, advocacy and leadership, as well as some services of a qualified financial advisor, other members who are knowledgeable about the chari- than its auditor, to assist the board in its financial table organization's area of expertise or programs, responsibilities. or who have a special connection to the organi- zation's constituency. Some organizations seek to Organizations should also consider the require- maintain a board that respects the culture of and ments of current and prospective funding sources reflects the community served by the organization. regarding the composition of the boards of their Boards increasingly are being encouraged to be grantees. For example, in order to be recognized inclusive of and sensitive to diverse backgrounds as a Community Housing Development Organi- when recruiting board members, in addition to purposefully recruiting board members with expertise and professional or personal experiences 20 Excluded would be houses of worship and specific related that will be beneficial to the organization. institutions, specified governmental instrumentalities, and other organizations relieved of this requirement by the IRS. Because the board must ensure that all financial 21 Generally corporation sole pertains to houses of worship matters of the organization are conducted legally, and is a form of religious organization consisting of one per- ethically, and in accordance with proper account- son only, and his or her successors in some particular station, ing rules, it should make every effort to ensure such as the bishop or rector of a church. As a corporation sole, certain legal capacities and rights are granted in perpetuity to that at least one member has "financial literacy" the individual by right of the particular station he or she holds -that is, the ability to understand financial state- 22 ments, to evaluate the bids of accounting firms New Hampshire requires that boards of directors of public charities (certain religious organizations excepted) have at least that may undertake an audit or review, and to five voting members "who are not of the same immediate fam- assist the board in making sound financial deci- ily or related by blood or marriage." N.H. Rev. Stat. § 292:6-a. 22 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE zation, one-third of the board members must be LEGAL BACKGROUND representatives of the low-income community the organization serves.23 Federal laws and regulations generally do not contain requirements for the composition of a Some donors to private foundations wish to charitable organization's board of directors, with involve family members on the boards of their four notable exceptions: 1) health care organiza- foundations to ensure that the donor's philan- tions that must have a community board to satisfy thropic tradition will continue through future the community benefit test;24 2) organizations that generations. If family members do not have the qualify as publicly-supported charities based on a expertise and experience necessary to provide "facts and circumstances" test may need to have a appropriate governance and oversight, the board governing board that is representative of the com- may wish to bring in advisors. The board should munity;25 3) supporting organizations that must also consider the advantages of diversity and the show a close relationship with the organizations perspective offered by representatives from outside they support through specific board positions; and the family. 4) credit counseling organizations which must meet specific rules for board composition.26 12 A substantial majority of the board of a public charity, usually meaning at least two-thirds of the members, should be independent. Independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to (as a spouse, sibling, parent or child), or reside with any individual described above.27 All directors of nonprofit corporations have a 23 Community Housing Development Organizations "duty of loyalty" that requires them to put the (CHDOs) must maintain at least one-third of the governing interests of the organization above their personal board's membership for residents of low-income neighbor- interests and to make decisions they believe are hoods, other low-income community residents, or elected representatives of low-income neighborhood organizations. in the best interest of the nonprofit. Individuals 24 CFR Part 92. who have a personal financial interest in the affairs 24 of a charitable organization may not be as likely Internal Revenue Service Audit Guidelines for Hospitals, 1992. See Fremont-Smith, Marion R., Governing Nonprofit to question the decisions of those who determine Organizations: Federal and State Law and Regulations, The their compensation or fees or to give unbiased Belknap Press of Harvard University Press (2004), page 244. consideration to changes in management or pro- 25 Treas. Reg. §1.170A-9(e)(3). gram activities. 26 IRC § 501, 513; Pension Protection Act § 1220. The founders of a nonprofit corporation some- 27 This principle does not apply to private foundations; times initially turn to family members and busi- medical research institutions recognized under IRC § ness partners to serve on its board of directors, but 170(b)(1)(A)(iii); supporting organizations or subsidiaries interlocking financial relationships can increase that are required by law or by their articles of incorporation to include representatives of the supported or sponsoring chari- the difficulty of exercising the level of independent ties on their board of directors; public charities that are incor- judgment required of all board members. It is porated under the auspices of a religious organization and are therefore important to the long-term success and required under their articles of incorporation to include clergy accountability of the organization that a sizeable and others who are compensated by the parent religious orga- majority of the individuals on the board be free of nization; and public charities that are established as charitable financial conflicts of interest. trusts where the trust instrument specifies that trustees shall be institutions or professional advisors that are expected to pro- vide services beyond general governance, including substantial asset and investment management activities. A GUIDE FOR CHARITIES AND FOUNDATIONS 23 This principle does not apply to private founda- LEGAL BACKGROUND tions and certain medical research institutes that operate under specific legal restrictions regarding Five states have legislative mandates for the inde- self-dealing transactions, and other charitable pendence of nonprofit boards of directors. North organizations whose articles of incorporation or Dakota,28 Maine,29 California,30 and Vermont31 trust instruments include specific stipulations require that no more than 49% of the board may regarding board composition. For example, an be "interested" or "financially interested" per- organization established under the auspices of a sons. While the definitions vary slightly in each religious institution may be required to include state, "financially interested" persons are generally clergy or other paid representatives of that institu- those who have received or are entitled to receive tion on its board. A supporting organization may compensation for personal services rendered to be required to have representatives of its supported the organization (other than compensation for organizations on its board. board service), and/or those who are related family members of compensated persons.32 New Hamp- When a charitable organization determines that shire requires that at least five voting members of having a majority of independent board members the board of a charitable corporation "are not of is not appropriate, the board and staff should the same immediate family or related by blood or evaluate their procedures and meeting formats to marriage."33 The New Hampshire provision does ensure that board members are able to fulfill their not apply to private foundations, and certain reli- responsibilities to provide independent, objec- gious organizations including churches and inte- tive oversight of management and organizational grated auxiliaries of churches. performance. 13 The board should hire, oversee, and annually evaluate the performance of the chief executive officer of the organization, and should conduct such an evaluation prior to any change in that officer's compensation, unless there is a multi-year contract in force or the change consists solely of routine adjustments for inflation or cost of living. Boards of directors have the authority to delegate and performance of the CEO, that committee responsibility for maintaining the daily operations should be required to report its findings and of the organization to a chief executive officer. recommendations to the full board for approval One of the most important responsibilities of the and should provide any board member with board, then, is to select, supervise, and determine details, upon request. The board should then a compensation package that will attract and document the basis for its decision and be retain a qualified chief executive. The organiza- prepared to answer questions about it. tion's governing documents should require the full board to evaluate the performance and approve the compensation of the chief executive annually 28 ND Cent. Code § 10-33-27. and in advance of any change in compensation. 29 Maine Nonprofit Corporation Act, Title 13-B, § 713-A (2). The board may choose to approve a multi-year contract with the CEO that provides for increases 30 Cal. Corp. Code § 5227 (a). in compensation periodically or when the CEO 31 11B VT Stats § 8. meets specific performance measures, but it is 32 Maine and Vermont define related parties as "spouse, important that the board institute some regular brother, sister, parent or child," while California also includes basis for reviewing whether the terms of that ancestor, descendant, brother-in-law, sister-in-law, son-in-law, contract have been met. If the board designates a daughter-in-law, mother-in-law, or father-in-law. separate committee to review the compensation 33 N.H. Rev. Stat. § 292:6-a. 24 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE When determining the reasonableness of the com- LEGAL BACKGROUND pensation package paid to the chief executive, the board should ensure that the individuals involved A charitable organization is permitted under in making the compensation recommendation current law to pay reasonable compensation do not have a conflict of interest with regard to for services provided by its board members, its the executive. The board or its committee should chief executive officer, and other staff. Reason- examine the compensation paid by similarly situ- able compensation is defined as the amount that ated organizations, both taxable and non-taxable, would ordinarily be paid for like services by like for functionally comparable positions. Many enterprises (whether tax-exempt or taxable) under professional associations prepare regular com- like circumstances.34 Charitable organizations are pensation surveys that can be useful in evaluating prohibited from providing excessive compensa- compensation, or the committee may turn to tion or economic benefit to executives and other compensation surveys compiled by independent individuals who have substantial influence over firms or actual written offers from similar orga- the organization's affairs, and to family members nizations competing for the executive's services. of such individuals.35 Private foundations are gen- Some organizations may find it difficult to locate erally prohibited from engaging in any financial salary surveys or other data to establish compa- transactions, other than payment of reasonable rable values for executive compensation within compensation for services deemed necessary to their geographic area or field of operation, but the the foundation's exempt purposes, with such board should still seek objective external data to individuals.36 support its compensation decisions. Federal law specifically encourages public chari- When governing boards use compensation consul- ties to have executive compensation approved in tants to help determine the appropriate salary for advance by members of an "authorized body" of the chief executive, the consultant should report the organization (such as the board or a board- directly to the board or its compensation commit- appointed committee), none of whom has a con- tee and should not be engaged in other business flict of interest with respect to the transaction.37 If with or have any conflicts of interest with regard the authorized body meets certain independence to the chief executive. standards, approves the compensation based on appropriate data that help determine comparability Governing boards are responsible for hiring and or fair market value and documents the basis for its establishing the compensation of the CEO and for determination at the time it makes its decision, the approving the compensation range of other per- regulations confer a rebuttable presumption of the sons in a position to exercise substantial control of reasonableness of the compensation.38 Although the organization's resources. It is the responsibility the IRS may not draw any negative inferences sim- of the CEO to hire and set the compensation of ply because an organization chooses not to follow other staff, consistent with reasonable compensa- these procedures,39 penalties on those who receive, tion guidelines set by the board. If the CEO finds and on charity managers who approve, compen- it necessary to offer compensation that equals or sation that is later found to be excessive, may be surpasses his or her own, in order to attract and avoided if procedures are followed. retain certain highly qualified and experienced staff, the board should review the compensation to ascertain that it does not provide an excess benefit. 34 Treas. Reg. § 53.4958-4(b)(1)(ii). 35 IRC § 4941 and § 4946; § 4958(f). The board or a designated compensation commit- tee should also review the overall compensation pro- 36 IRC § 4941. gram, including salary ranges and benefits provided 37 Treas. Reg. § 53.4958-6(a)(1). for particular types of positions, to assess whether 38 Treas. Reg. § 53.4958-6. the compensation program is fair, reasonable, and 39 sufficient to attract and retain high-quality staff. Treas. Reg. § 53.4958-6(e). A GUIDE FOR CHARITIES AND FOUNDATIONS 25 Federal tax regulations define comparable data reasonable attempts to determine whether the needed to determine the reasonableness of com- transaction was an excess benefit or self-dealing pensation or other transactions with disqualified transaction.43 A board member or other manager persons as including (1) compensation paid by who relies on the advice of legal counsel (or, in similarly situated organizations, both taxable and the case of public charity managers, certain other tax-exempt, for functionally comparable posi- professionals)44 is generally not held responsible tions; (2) the availability of similar services in the for knowing that the transaction was improper.45 geographic area; (3) current compensation surveys In addition, a board member or other manager of compiled by independent firms; (4) actual writ- a public charity is generally not held responsible ten offers from similar organizations competing for knowing that a transaction conferred an excess for the disqualified person; and, if the transaction benefit if an appropriate authorized body has met involves the transfer of property, (5) independent the requirements of the rebuttable presumption appraisals of that property and (6) offers received procedures with respect to the transaction.46 as part of an open and competitive bidding pro- cess. Public charities with gross receipts (including Federal laws do not subject managers of public contributions) of less than $1 million may rely charities to the excess benefit rules when they are on the compensation paid by three comparable setting the compensation for a new chief executive organizations in the same or similar communities officer, chief financial officer, or a chief operat- for similar services when approving compensation ing officer so long as the new employee was not a arrangements.40 board member, key manager, or substantial con- tributor to the organization in the preceding five Board members and other managers of charitable years, there is a written agreement governing the organizations who approve a transaction knowing terms of compensation before the new executive it provides an excess benefit are generally jointly takes office and the compensation is based on a and severally liable for a tax on the transaction fixed amount or formula over single or multiple amount for private foundations or the excess ben- years.47 efit for public charities, unless their participation is not willful and due to reasonable cause.41 For private foundations, an exception to the general 40 Treas. Reg. § 53.4958-6(c)(2). rule provides that if the transaction involves com- 41 IRC § 4941; IRC 4958. pensation, the penalties are based on a percent- age of the excess compensation (not the total 42 IRC §4941(e)(2). compensation).42 43 Treas. Reg. §§ 53.4941(a)-1(b)(3), 53.4958-1(d)(4)(i). 44 Public charity managers may also rely on the professional To impose penalties on public charity or private advice of certified public accountants or accounting firms foundation managers, the IRS must prove that with relevant tax law expertise, and independent appraisers the organization manager's actions in accepting or or compensation consultants who perform such valuation approving an excess benefit or self-dealing transac- services on a regular basis, are qualified to make valuations of tion were conscious, voluntary, and intentional, the particular type of property or services involved, and pro- vide certifications regarding those qualifications. Treas. Reg. § and that the manager had actual knowledge of 4958-1(d)(4)(iii). sufficient facts to determine that the transac- 45 tion would be an excess benefit or self-dealing Treas. Reg. § 53.4958-3(a)(1). transaction, was aware that such a transaction 46 Treas. Reg. § 53.4958-1(d)(4)(iv). would violate federal excess benefit or self-dealing 47 Treas. Reg. §§ 53.4941(a)-1(b)(3), 53.4958-1(d)(4)(i). transaction laws, and negligently failed to make 26 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Charitable organizations, with some exceptions,48 the report to any current or former board mem- are required to report on their Form 990 or 990- ber, officer, and key employee. The instructions PF the name, title, and average hours per week of to the forms specify that all types of compensa- every board member, officer, and key employee. In tion must be reported, including both taxable and addition, the organizations must report the com- nontaxable fringe benefits except for de minimis pensation, contributions to employee benefit plans fringe benefits (for example, property or services and deferred compensation, expense account, and provided to the individual of such a small value as other allowances paid during the year covered by to make accounting for it impractical).49 14 The board of a charitable organization that has paid staff should ensure that the positions of chief executive officer, board chair, and board treasurer are held by separate individuals. Organizations without paid staff should ensure that the positions of board chair and treasurer are held by separate individuals. Concentrating authority for the organization's LEGAL BACKGROUND governance and management practices in one or two people removes valuable checks and balances State laws generally require that a charitable cor- that help ensure that conflicts of interest and other poration have a secretary, and may also require personal concerns do not take precedence over the that the corporation have a president, a treasurer, best interests of the organization. Some state laws and other officers as appointed by the board. require that the offices of president and treasurer Some permit the same individual to hold simulta- be held by different individuals. Both the board neously more than one office in the corporation, chair and the treasurer should be independent while others have restrictions that specify that the of the chief staff executive to provide appropri- offices of president and the treasurer cannot be ate oversight of the executive's performance and held by the same individual. to make fair and impartial judgments about the appropriate compensation of the executive. 48 Excluded from this requirement are organizations, other When the board deems it is in the best interests of than private foundations and supporting organizations, with the charitable organization to have the chief exec- annual gross receipts of $25,000 or less, houses of worship utive officer/executive director serve as the board and specific related institutions, specified governmental instrumentalities, and other organizations relieved of this chair, the board should appoint another board requirement by authority of the IRS. IRC § 6033(a)(2) member (sometimes referred to as the "lead direc- tor") to handle issues that require a separation of 49 IRC § 132(e). duties, such as reviewing the responsibilities, per- formance or compensation of the chief executive. A GUIDE FOR CHARITIES AND FOUNDATIONS 27 15 The board should establish an effective, systematic process for educating and communicating with board members to ensure that they are aware of their legal and ethical responsibilities, are knowledgeable about the programs and activities of the organization, and can carry out their oversight functions effectively. Most people volunteer for boards because of a on legal and financial issues and responsibilities. commitment to the mission of the organization It is also advisable for an attorney or insurance and the value of the organization's work to society. agent who is knowledgeable about board liability Yet they may not have the training or information to explain the legal protections available to board necessary to understand adequately their fiduciary members, as well as the options for insurance. responsibilities or common practices of boards of charitable organizations. The ongoing process of board education includes ensuring that members have received and An effective board orientation process fills this reviewed sufficient information on the issues to need by detailing the broad oversight responsibili- be addressed at each board meeting. Agendas and ties of the board and the specific legal and ethical background materials should be distributed far responsibilities of individual members. Members enough in advance of all board meetings so that all should be made aware of their personal liability members can be expected to read and consider the for the board's actions-or for its failure to take issues prior to attending the meeting. action-and of the protections available to them. All board members should receive oral and written LEGAL BACKGROUND instruction regarding the organization's govern- ing documents, finances, program activities, and There are no specific federal or state legal require- governing policies and practices. Even members ments regarding orientation and ongoing training who have served on the boards of other organiza- of board members. Because the law requires board tions can benefit from a specific orientation to members to exercise reasonable care in making each organization for which they provide board decisions on behalf of the organization, however, service. Charitable organizations, if needed and they must make an effort to obtain adequate if funds permit, should provide opportunities for information to inform their decisions. board members to obtain special training or advice 16 Board members should evaluate their performance as a group and as individuals no less frequently than every three years, and should have clear procedures for removing board members who are unable to fulfill their responsibilities. A regular process of evaluating the board's per- tools, ranging from sample self-assessment ques- formance can help to identify strengths and tionnaires to more complex evaluation procedures, weaknesses of its processes and procedures and to can help an organization design a board evaluation provide insights for strengthening orientation and or self-assessment process that best meets its needs. educational programs, the conduct of board and committee meetings, and interactions with board The board should establish clear guidelines for the and staff leadership. Many boards will find it help- duties and responsibilities of each member, includ- ful to conduct such a self-assessment annually; ing meeting attendance, preparation and partici- others may prefer a schedule that coincides with pation; committee assignments; and the kinds of the terms of board service or regular long-range expertise board members are expected to have or planning cycles. A number of print and online develop in order to provide effective governance. 28 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Many boards assign responsibility for oversight of LEGAL BACKGROUND the board evaluation and development function to their executive committees or to a separate board There are no federal or state laws or regulations development committee. Board members with requiring governing boards of nonprofit organiza- this responsibility should be empowered to discuss tions to evaluate the performance of the board as a problems of attendance or other aspects of board group or as individuals. performance with individual members to ascer- tain whether the problem can be corrected or the The Revised Model Nonprofit Corporation Act individual needs to resign or be removed from the stipulates that directors may be removed through board. Removing a non-performing board mem- judicial proceedings or by a vote of the board if ber generally requires the action of the full board "a director has engaged in fraudulent or dishonest or, if the organization has members, the action of conduct, or gross abuse of authority or discretion, the membership. with respect to the corporation...and removal is in the best interest of the corporation."50 In judicial proceedings, a court may also stipulate that the director who is removed may be barred from serv- ing on the board for a proscribed period of time. 17 The board should establish clear policies and procedures addressing the length of terms and the number of consecutive terms a board member may serve. Every charitable organization should determine off. It is always valuable to find ways in which whether its best interests are served by limiting members who have completed their service can the length of time an individual may serve on its continue to be engaged in the organization's pro- board. Some organizations have found that such grams and services. limits help in bringing fresh energy, ideas and expertise to the board through new members. Organizations that choose not to limit the terms Others have concluded that term limits may of board service should consider establishing a reg- deprive the organization of valuable experience, ular process whereby the board reaffirms its com- continuity and, in some cases, needed support mitment to this approach and members actively provided by board members. They believe organi- indicate their desire to continue serving on the zations should rely solely on rigorous board proce- board. Some organizations create an alumni coun- dures for evaluating board members and removing cil or honorary board to provide an easy option for those who are not able to fulfill their governance board members who feel it is time to leave active responsibilities effectively. Some family founda- service but still wish to be involved in the organi- tions may decide not to limit board terms if their zation. Others specify the age at which a member donors expressed a wish that family members con- must retire from the board. tinue serving as long as they are willing and able. Whether or not the organization establishes board Organizations that do limit the terms of board term limits, it is always helpful to have a process service should consider establishing a staggered for involving prospective board members on com- term process that provides a continual flow of mittees or task forces until there is an appropriate new participants while retaining a cadre of more opening on the board. experienced members. Many organizations find it useful to establish policies making board members eligible for re-election after taking a year or more 50 Revised Model Nonprofit Corporation Act § 8.05 A GUIDE FOR CHARITIES AND FOUNDATIONS 29 LEGAL BACKGROUND of board service if such terms are not specified in the organization's articles of incorporation or There are no federal or state laws or regulations bylaws, but they do not limit the number of terms limiting the length of time an individual may an individual may serve. Trust laws in all states serve on the board of a charitable corporation. permit trustees to serve as appointed without any Some state laws establish the length of a term limitation on the term. 18 The board should review organizational and governing instruments no less frequently than every five years. Regular reviews of the organization's articles of required. In some instances, a charitable organiza- incorporation, bylaws and other governing instru- tion may need court approval to amend its orga- ments help boards ensure that the organization is nizing documents. abiding by the rules it has set for itself and deter- mine whether changes need to be made to those LEGAL BACKGROUND instruments. The board may choose to delegate some of this deliberation to a committee, but Each organization's articles of incorporation and the full board should consider and act upon the governing instruments set forth the requirements committee's recommendations. for its conduct and that of its board of directors. Charitable organizations are required to submit Most state laws permit the state attorney gen- these articles and instruments to the Internal Rev- eral to file suit asking the court to hold a board enue Service when applying for recognition as a accountable for failure to abide by the require- 501(c)(3) exempt organization. If an organization ments set forth in these basic documents. If it amends its governing instruments, it must provide becomes impractical or no longer feasible to carry the revised documents to the appropriate Exempt out the purposes of the organization as outlined Organization office or attach them to the next in its articles of incorporation, the board should annual information return (Form 990, 990-EZ, or take appropriate action to amend the articles and 990-PF) it files with the IRS.51 to file the amended articles with state officials, as 19 The board should establish and review regularly the organization's mission and goals and should evaluate, no less frequently than every five years, the organization's programs, goals and activities to be sure they advance its mission and make prudent use of its resources. As stewards of the public's trust and the resources area in which the organization operates that may invested in the organization, board members have affect future operations. It should also consider the an obligation to ensure that the organization uses financial and human resources that are needed to its resources as effectively as possible to advance its accomplish the organization's goals. Such periodic charitable mission. Every board should therefore performance reviews and assessments are a com- set strategic goals and review them annually, gen- erally as part of the annual budget review process. This review should address current needs and 51 IRS Publication 557, Tax-Exempt Status for Your Organi- anticipated changes in the community or program zation, page 16. 30 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE mon feature of many self-regulation, accreditation increments, such as scientific research or youth- and funding programs in which nonprofit organi- development programs, interim benchmarks can zations participate. be identified to assess whether the work is moving in the right direction. Although discussions of individual program activities and accomplishments are typical of most LEGAL BACKGROUND board meetings, these are not a substitute for a more rigorous periodic evaluation of the organi- Some legal scholars argue that a board member's zation's overall impact and effectiveness in light of duty of loyalty to the beneficiaries of a charitable goals and objectives that the board has approved. organization requires that he or she ensures that the organization's purposes are carried out effec- Because organizations and their purposes differ, tively.52 If it becomes impractical or no longer it is incumbent on each organization to develop feasible to carry out the purposes of the organiza- its own process for evaluating effectiveness. Most tion as outlined in its articles of incorporation, the organizations should have at least an informal board should take appropriate action to amend review of their progress on goals and objec- the articles and to file the amended articles with tives annually, but, because of the time and cost state officials, as required. Changes in the articles involved, may choose to conduct a more rigorous of incorporation or other governing instruments evaluation less frequently. Even for organizations must also be reported to the Internal Revenue whose work is not properly measured in one-year Service. 20 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. Although some charitable organizations reimburse in the capacity of staff of the organization should expenses related to board work, the vast majority be clearly differentiated from any compensation of board members serve without compensation. paid for board service. In fact, board members of public charities often donate both time and funds to the organization, a Board members of charitable organizations are practice that supports the sector's spirit of giving responsible for ascertaining that any compensa- and volunteering. tion they receive does not exceed to a significant degree the compensation provided for positions in When organizations find it appropriate to com- comparable organizations with similar responsi- pensate board members due to the nature, time or bilities and qualifications. Some organizations hire professional competencies involved in the work, compensation consultants to identify comparable they must be prepared to provide detailed docu- compensation levels, some rely on data available mentation of the amount of and reasons for such through national and regional associations or for- compensation, including the responsibilities of profit firms, and some conduct their own surveys board members and the services they provide. Any compensation provided to board members must be reasonable and necessary to support the perfor- 52 Marion Fremont-Smith, Governing Nonprofit Organiza- mance of the organization in its exempt function. tions: Federal and State Law and Regulations, The Belknap Compensation paid to board members for services Press of Harvard University Press (2004), pp. 225-226. A GUIDE FOR CHARITIES AND FOUNDATIONS 31 of compensation paid by similar organizations. and key employee. In addition, the organizations When they establish their own compensation, must report the compensation, contributions to board members generally cannot be considered employee benefit plans and deferred compensa- independent authorizing bodies and therefore gen- tion, expense account, and other allowances paid erally cannot avail themselves of the legal protec- to any board member by the organization and tions accorded to such bodies. its affiliated entities. Public charities must also provide this information for former employees LEGAL BACKGROUND and board members who received any compen- sation or benefit during the reporting year. The Charities and foundations are permitted under instructions to the Forms specify that all types of current law to pay reasonable compensation for compensation must be reported, including both services provided by board members. Reasonable taxable and nontaxable fringe benefits except for compensation is defined as the amount that would de minimis fringe benefits (for example, property ordinarily be paid for like services by like enter- or services provided to the individual of such prises (whether tax-exempt or taxable) under like a small value as to make accounting for it circumstances.53 Federal tax laws prohibit excessive impractical). 56 compensation and transactions that provide exces- sive economic benefit to board members and other disqualified persons.54 The rules and penalties 53 Treas. Reg. § 53.4958-4(b)(1)(ii). regarding excessive compensation of board mem- 54 IRC §§ 4941, 4958. bers are the same as those applied to the com- pensation of the chief executive officer or other 55 Excluded from this requirement are organizations, other than private foundations and supporting organizations, with disqualified persons (see Principle #13). annual gross receipts of $25,000 or less, houses of worship and specific related institutions, specified governmental Charitable organizations, with some excep- instrumentalities and other organizations relieved of this tions,55 are required to report on their Form 990 requirement by authority of the IRS. IRC § 6033(a)(2). or 990-PF the name, title, and average hours of 56 IRC § 132(e). service per week of every board member, officer, 32 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Strong Financial Oversight 21 A charitable organization must keep complete, current, and accurate financial records. Its board should receive and review timely reports of the organization's financial activities and should have a qualified, independent financial expert audit or review these statements annually in a manner appropriate to the organization's size and scale of operations. Complete and accurate financial statements are Legal Background essential for a charitable organization to fulfill its legal responsibilities and for its board of directors Federal law requires many public charities and all to exercise appropriate oversight of the organiza- private foundations to file an annual information tion's financial resources. A board that does not return (Form 990, 990-EZ, or 990-PF) with the have members with financial expertise should Internal Revenue Service with accurate informa- retain a qualified paid or volunteer accounting tion on the organization's finances and programs. professional to establish whether financial sys- IRS regulations permit any authorized officer of tems and reports are organized and implemented the organization57 to sign Form 990 returns cer- appropriately. tifying, under penalty of perjury, that the return and accompanying schedules and statements are Having financial statements prepared and audited true, correct, and complete. The Internal Revenue in accordance with generally accepted account- Code provides for penalties if an organization fails ing principles and auditing standards improves to file a required return or to include required the quality of the information. Each organization information on Form 990 series returns. must ensure that it has its annual financial state- ments audited or reviewed as required by law in For tax years beginning after August 17, 2006, the states in which it operates or raises funds, or as each public charity with annual revenues of required by government or private funders. When $25,000 or less58 is required to file an annual an audit is not legally required, a financial review notice electronically with the IRS that indicates offers a less expensive option that still provides the its legal name; mailing address; web site address; board, regulators and the public with some assur- taxpayer identification number; name and address ance of the accuracy of the organization's financial of a principal officer; evidence of the continuing records. Many smaller organizations that have basis for the organization's exemption from fil- opted to work with an independent accountant ing Form 990; and, upon termination, notice of have noted that the accountant provided invalu- that termination. There are no monetary penal- able guidance. ties for failure to file the notice, but failure to file the annual notice for three consecutive years will Every charitable organization that has its financial result in revocation of tax-exempt status. statements independently audited, whether or not it is legally required to do so, should consider The Revised Model Nonprofit Corporation Act establishing an audit committee composed of requires that a nonprofit corporation with mem- independent board members with appropriate bers (other than religious corporations) must financial expertise. By reducing possible conflicts furnish on request from a member its latest annual of interest between outside auditors and the financial statements with a balance sheet and state- organization's paid staff, an audit committee can provide the board greater assurance that the audit has been conducted appropriately. 57 For a corporation or association, this officer may be the president, vice president, treasurer, assistant treasurer, chief Organizations with small boards of directors or accounting officer or other corporate or association officer, limited organizational structures may not choose such as a tax officer. For a trust, the authorized trustee must sign. to delegate the audit responsibility to a separate committee. Audit committees may also be inap- 58 Other than houses of worship and specific related institu- propriate for charitable organizations that are tions, specified governmental instrumentalities, and other organizations relieved of this requirement by authority of the organized as trusts rather than as corporations. IRS. 34 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE ment of operations. If the statements are prepared OMB Circular No. A-133 for organizations that by a public accountant, they must include the expend $500,000 or more in federal grant funds). accountant's report. Otherwise, the statements Eighteen states require a charitable organization must include a statement from the organization's that solicits contributions in the state to submit president or the individual responsible for the a copy of an independent audit report or a certi- corporation's financial records stating whether the fied review of financial reports annually if it meets statements were prepared on the basis of gener- certain financial criteria. The budget thresholds ally accepted accounting principles or, if not, for audit requirements vary substantially. Califor- the basis of preparation. Some states also require nia requires charitable organizations, other than public charities to file their IRS annual infor- educational organizations and hospitals, to file mation returns with the state and may impose audited financial statements if their gross annual additional penalties for failure to meet their filing revenues are $2 million or more,59 whereas Mary- requirements. land requires organizations soliciting contributions in its state to file audited financial statements if There is currently no federal requirement for annual total contributions to the organization audits of charitable organizations (except under equal or exceed $200,000.60 22 The board of a charitable organization must institute policies and procedures to ensure that the organization (and, if applicable, its subsidiaries) manages and invests its funds responsibly, in accordance with all legal requirements. The full board should review and approve the organization's annual budget and should monitor actual performance against the budget. Sound financial management is among the most the organization adhered to any restrictions placed important responsibilities of the board of direc- on funds by donors or grant programs. tors. The board should establish clear policies to protect the organization's financial assets and Prudent financial oversight requires that the board ensure that no one person bears the sole respon- look beyond monthly or annual financial reports sibility for receiving, depositing, and spending to consider how the organization's current finan- its funds. Day-to-day accounting and financial cial performance compares with that of previous management should be the task of staff or, in the years and how its financial future appears. If the case of organizations with no or one staff member, organization's net assets have been declining over a designated volunteers who have the necessary time period of years, or if future funding seems likely to and skills. The board is responsible for reviewing change significantly, the board may need to take practices and reports to ensure that those staff or steps to achieve or maintain stability. volunteers are adhering to the board-approved policies. Whenever possible, an organization should gener- ate enough income to create cash reserves for its The organization's annual budget should reflect future. When an organization has built sufficient the programs and activities the organization will reserves to allow for investments, the board is undertake in the coming year and the resources responsible for establishing policies to govern how it will need to raise or generate to support those the funds will be invested and what portion of the activities. It is also a key tool for ensuring that the returns, if any, can be used for immediate opera- organization lives within its means. Careful review tional or programs. The boards of organizations of regular financial reports showing both budgeted and actual expenditures and revenues will permit the board to determine whether adjustments must 59 CA Govt. Code § 12585. be made in spending to accommodate changes in 60 Maryland Solicitations Act § 6-402. revenues. Financial reports should also reflect how A GUIDE FOR CHARITIES AND FOUNDATIONS 35 with sizeable reserves or endowments generally expected to supersede UMIFA in many states.64 select one or more independent investment man- UPMIFA applies to both charitable corporations agers to handle the organization's investments. In and charitable trusts and provides more guidance those cases, the board or a committee of the board for boards and others responsible for managing should monitor the outside investment manager(s) the investments of charitable organizations. It regularly. defines the following principles of prudence for those who manage and invest funds of charitable LEGAL BACKGROUND organizations: Federal law generally does not regulate the man- 1. Give primary consideration to donor intent as agement of investment assets by public charities. expressed in a trust instrument; Private foundations and their managers, however, 2. Act in good faith, with the care an ordinarily are subject to penalties under federal tax law if prudent person would exercise; the board approves investments "in such a man- 3. Incur only reasonable costs in investing and ner as to jeopardize the carrying out of any of (the managing charitable funds; organization's) exempt purposes."61 4. Make a reasonable effort to verify relevant facts; 5. Make decisions about each asset in the context Under all state laws, directors must exercise their of the portfolio of investments, as part of an "duty of care" by providing careful oversight of the overall investment strategy; organization's assets and financial transactions in 6. Diversify investments unless, due to special cir- order to protect the interests of the organization cumstances, the purposes of the fund are better and its charitable purposes. Board members must served without diversification; exercise ordinary business care and prudence in 7. Dispose of unsuitable assets; and providing for the short- and long-term needs of 8. In general, develop an investment strategy the organization when evaluating both the overall appropriate for the fund and the charity.65 investment portfolio and individual investment decisions. Under UPMIFA, a charity also has the flexibility to spend or accumulate as much of an endowment Many states have enacted legislation regulating the fund as it deems prudent. investment activities of trustees and directors of charitable organizations. The state standard of care applicable to most nonprofit corporations is the 61 IRC § 4944. Uniform Management of Institutional Funds Act 62 UMIFA was promulgated by the National Conference of (UMIFA),62 which has been adopted in some form Commissioners on Uniform State Laws (NCCUSL) in 1972. by 47 states and the District of Columbia. This It liberalized prior rules that limited the ability of a charity to Act requires board members to exercise ordinary expend from its endowment funds anything other than the business care and prudence under the facts and fund's income circumstances prevailing at the time of an invest- 63 UPIA was promulgated by NCCUSL in 1994 and is based ment decision. Charitable organizations estab- on the General Standard of Prudent Investment set forth lished as trusts are typically subject to the Uniform in the Restatement (Third) of Trusts, which was released Prudent Investor Act (UPIA), which has been in 1992. The Restatement reflects modern portfolio theory which has become universally accepted. The Uniform Trust adopted in more than 40 states and the District of Code promulgated by NCCUSL in 2000, and amended in Columbia.63 Some states also apply UPIA to chari- 2001, 2003 and 2005, incorporates UPIA wholesale as the table corporations or specific types of funds within standard applicable to the investment of trust assets. charitable corporations. 64 As of March 2007, UPMIFA had been adopted by 16 states and was being considered by 14 additional states. In July 2006, the National Conference of Com- 65 Uniform Prudent Management of Institutional Funds Act missioners on Uniform State Laws (NCCUSL) (as approved by the National Conference of Commissioners approved the Uniform Prudent Management on Uniform State Laws, July 2006), Prefatory Note, page 2. of Institutional Funds Act (UPMIFA), which is 36 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE 23 A charitable organization should not provide loans (or the equivalent, such as loan guarantees, purchasing or transferring ownership of a residence or office, or relieving a debt or lease obligation) to directors, officers or trustees. The practice of providing loans to board members cer of the corporation,"67 and most states allow and executives, while infrequent, has created both such only in very limited circumstances real and perceived problems for public charities. While there may be circumstances in which a Charitable organizations must report any loans charitable organization finds it necessary to offer to current and former officers, directors, trustees, loans to staff members, there is no justification key employees, and other "disqualified persons" on for making loans to board members. Federal laws their annual information returns (Form 990 and prohibit private foundations, supporting organiza- 990-PF). For public charities permitted to make tions and donor-advised funds from making loans such loans, the IRS generally scrutinizes the trans- to substantial contributors, board members, orga- actions to determine whether they qualify as a true nization managers and related parties. Many states loan or some other type of payment. In making also forbid such loans or allow them only in very its determination, the IRS examines information limited circumstances. reported on the Form 990, including the maturity date of the loan, repayment terms, the interest rate When a charitable organization deems it necessary charged, any security or collateral provided by the to provide loans to an employee-for example, to borrower, and the purpose of the loan. The IRS enable a new employee of a charity to purchase a also expects that the organization maintain and be residence near the offices of the charitable organi- able to provide written documentation of the loan. zation-the terms of such loans should be clearly The financial benefit of a loan that is provided at understood and approved by the board. Such below-market interest rates must be added to the loans must then be reported on the organization's borrower's other compensation to determine if annual information returns (Form 990 and the total qualifies as an excess benefit transaction. 990-PF). Any payment that is not determined to be a loan may automatically be treated as an excess benefit LEGAL BACKGROUND transaction.68 Federal laws prohibit private foundations, sup- porting organizations, and donor-advised funds 66 IRC §4941(d)(2)(B), § 4958(f)(1)(D), and § 4958(c)(2). from making loans to disqualified persons.66 The 67 The Revised Model Nonprofit Corporation Act § 8.32. Revised Model Nonprofit Corporation Act states that a nonprofit corporation "may not lend money 68 IRS Instructions to 2006 Form 990, page 15. to or guaranty the obligation of a director or offi- A GUIDE FOR CHARITIES AND FOUNDATIONS 37 24 A charitable organization should spend a significant percentage of its annual budget on programs that pursue its mission. The budget should also provide sufficient resources for effective administration of the organization, and, if it solicits contributions, for appropriate fundraising activities. Charitable organizations have an obligation to Some self-regulation systems and "watchdog" devote their resources to carrying out the chari- organizations recommend that public charities table purposes for which they were granted tax spend at least 65 percent of their total expenses exemption, and to spend donated funds on the on program activities. This standard is reasonable programs and activities for which the funds were for most organizations, but there can be extenuat- contributed. At the same time, the successful oper- ing circumstances that require an organization ation of any business or organization-includ- to devote more resources to administrative and ing the responsible pursuit of nearly any kind of fundraising expenditures. The board should review charitable purpose-requires effective manage- the budget and financial reports to determine ment and administration. Administrative activities whether the organization is allocating its funds include financial and investment management, appropriately. personnel services, recordkeeping, soliciting and managing contracts, legal services, and supporting LEGAL BACKGROUND the governing body of the organization. Not only do these elements ensure that the organization Both private foundations and public charities complies with all legal requirements, but they also are permitted to incur reasonable and necessary help provide complete, accurate, and timely infor- "administrative expenses" to further their chari- mation to donors, the public, and government table missions. Congress has never placed a gen- regulators. eral limitation on the amount of administrative expenses public charities can incur. Charitable organizations rely on other supporting services to carry out their missions. Most public Public charities that are required to file Form 990 charities have fundraising operations to encourage must disclose their total expenditures for admin- potential donors to contribute money, materials istration or what the instructions to the form calls and other assets and to ensure that donors receive "management and general" expenses. The IRS necessary reports about how their contributions defines management and general expenses as the were used. Some public charities also rely on organization's expenses for overall function and membership development activities to solicit pro- management, rather than for its direct conduct of spective members, collect membership dues and fundraising activities or program services. Over- ensure that members receive promised benefits. all management usually includes the salaries and Private foundations and some public charities expenses of the chief officer of the organization also have expenses associated with making grants and that officer's staff. If part of a manager's time and contributions to other organizations and is spent directly supervising program services and individuals. fundraising activities, the appropriate portion of his or her salary and expenses should be allocated Qualified personnel are crucial for providing pro- to those functions.69 grams, recruiting and managing volunteers, raising funds, and ensuring proper administration. The costs of compensating personnel, including salaries 69 IRS 2006 Form 990 Instructions, page 28. and benefits, must be allocated to the particular functions they perform for the organization based on appropriate records. 38 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Rental income expenses and program-related instructions to the Form 990-PF. Private founda- income expenses are not included in management tions are permitted to count all "reasonable and and general expenses. Administrative expenses are necessary" administrative expenses against their further distinguished from "indirect expenses" five percent payout requirement.70 Federal law such as rent, reception services, etc. which can be does not permit expenses for ongoing investment allocated to various program cost centers and to management, such as investment consultant fees, management and general. custodial fees, attending investment conferences, etc., to be counted as qualifying distributions. There is no comparable definition of adminis- trative expenses for private foundations in the 25 A charitable organization should establish clear, written policies for paying or reimbursing expenses incurred by anyone conducting business or traveling on behalf of the organization, including the types of expenses that can be paid for or reimbursed and the documentation required. Such policies should require that travel on behalf of the organization is to be undertaken in a cost-effective manner. A charitable organization's travel policies should LEGAL BACKGROUND be unambiguous and easy to follow, and should reflect the organization's principled judgment Public charities and private foundations, like about what it considers "reasonable" expenditures taxable organizations, are permitted to pay for for individuals who must travel to conduct busi- or reimburse ordinary and necessary expenses ness on its behalf. These policies should include incurred in carrying out the organization's activi- procedures for properly documenting expenses ties, including the costs of travel. Under federal tax incurred and their organizational purpose. regulations, expenses for transportation, lodging, and meals must be documented to establish that As a general practice, travel policies should ensure they were incurred in connection with the work of that the business of the organization is carried out the organization and not the personal activities of in a cost-effective manner. Decisions on travel the individual. Federal tax regulations also require expenditures should be based on how best to fur- that these expenses not be "lavish or extravagant ther the organization's charitable purposes, rather under the circumstances," though "lavish" and than on the title or position of the person travel- "extravagant" remain undefined in the tax code or ing. Charitable funds generally should not be used in regulations.71 for premium or first-class travel, but boards should retain the flexibility to permit exceptions when Special rules apply to many types of travel-related they are in the organization's best interest. Such expenses and reimbursement methods, including exceptions, if any, should be explicit, consistently per diem payments, car allowances, employer- applied, and transparent to board members and provided vehicles, security expenses, and travel others associated with the organization. expenses of spouses or other family members.72 Travel expenses also have specific documentation An organization's policies should reflect the requirements; for example, proper receipts and an requirements and restrictions on travel expendi- tures imposed under current law. The detailed guidance provided in IRS Publication 463: Travel, 70 IRC § 4942(g)(1)(A). Entertainment, Gift and Car Expenses should 71 IRC § 162(a)(2); Treas. Reg. §§ 1.162-2, 1.162-17. serve as a guide for managers of charitable organi- zations in avoiding lavish, extravagant or excessive 72 Treas. Reg. §§ 1.162-2, 1.132-5. expenditures. A GUIDE FOR CHARITIES AND FOUNDATIONS 39 indication of the business purpose of the travel ing to treat an expenditure as compensation to or expenditure must be provided.73 Taxable orga- provide contemporaneous written substantiation nizations also have limitations on deductions for by reporting the amounts on a Form W-2, a Form meals, entertainment expenses, and some travel 1099, or a Form 990, or otherwise document- expenses.74 ing such compensation in writing; otherwise, the compensation will be treated automatically as an Travel expenses that are paid or reimbursed but "excess benefit."75 Board members and executives are not properly documented or are "lavish or of charitable organizations who approve or receive extravagant" must be treated as additional taxable excessive travel benefits are subject to penalties compensation to the individual benefiting from under existing law.76 them. The law requires public charities intend- 26 A charitable organization should neither pay for nor reimburse travel expenditures for spouses, dependents or others who are accompanying someone conducting business for the organization unless they, too, are conducting such business. If, in certain circumstances, an organization deems poraneous written substantiation by reporting the it proper to cover expenses for a spouse, depen- amounts on a Form W-2, a Form 1099, or a Form dent, or other person accompanying someone on 990, or otherwise documenting such compensa- business travel, the payment in question generally tion in writing; otherwise, the compensation will must, by law, be treated as compensation to the be treated automatically as an "excess benefit."78 individual traveling on behalf of the organiza- Board members and executives of charitable orga- tion. This principle need not apply to de minimis nizations who approve or receive excessive travel expenses such as the cost of a meal at organization benefits are subject to penalties under existing functions where participants are invited to bring a law.79 guest. LEGAL BACKGROUND 73 IRC § 274(d); Treas. Reg. §§ 1.274-5, 1.274-5T. 74 IRC § 274 and the regulations thereunder. Federal law generally requires that payments of travel expenditures for spouses, family members, 75 IRC § 4958(c)(1)(A); Treas. Reg. § 53.4958-4(c)(1). and others accompanying an individual traveling 76 IRC §§ 4941 on behalf of the organization must be treated as 77 Treas. Reg. §§ 1.162-2, 1.132-5 taxable income to the individual they are accom- panying.77 As with other travel expenses, the law 78 IRC § 4958(c)(1)(A); Treas. Reg. § 53.4958-4(c)(1). requires public charities intending to treat such 79 IRC §§ 4941, 4958. expenditures as compensation to provide contem- 40 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Responsible Fundraising 27 Solicitation materials and other communications addressed to donors and the public must clearly identify the organization and be accurate and truthful. Charitable solicitations-whether in print, via the currently regulating such practices. Most states can Internet, over the phone, or in person-are often also prosecute fraudulent or misleading charitable the only contact a donor has with a charitable orga- solicitations under their anti-fraud and consumer nization. Clear and accurate solicitation materials protection statutes. Many cities and counties have help potential contributors to contact the organiza- enacted their own solicitation ordinances. The tion and obtain information necessary to distin- Federal Trade Commission has jurisdiction over guish an organization with a solid reputation and fraudulent solicitations in interstate commerce history of service to the community from one that by for-profit organizations, including those who may claim a similar name or purpose, but whose solicit on behalf of charitable nonprofits, while the fundraising appeal is deceptive or misleading. Postal Service can prosecute fraudulent or mislead- ing solicitations conveyed via the U.S. mail. A donor has the right to know the name of anyone soliciting contributions, the name and location of Over the years, state and local governments have the organization that will receive the contribution, attempted to prevent fraudulent fundraising, as a clear description of its activities, the intended well as curb what they perceive to be a waste of use of the funds to be raised, a contact for obtain- charitable assets, by limiting the amount that ing additional information, and whether the indi- could be paid for fundraising (including amounts vidual requesting the contribution is acting as a paid to professional fundraisers) or by requiring volunteer, employee of the organization, or hired point-of-solicitation disclosures about the propor- solicitor. (A Donor Bill of Rights, endorsed by tion of the funds that the charity would receive. many organizations, is available at www.nonprofit- The U.S. Supreme Court struck down three of panel.org.) Descriptions of program activities and these efforts on the grounds that they infringed the financial condition of the organization must on charities' First Amendment free speech rights.80 be current and accurate, and any references to past While the Court expressed sympathy for state activities or events should be dated appropriately. regulators' desire to protect their citizens from deceptive practices, it noted that existing anti- If an organization is not eligible to receive tax- fraud statutes were adequate and that there were deductible contributions, it must disclose this much less restrictive tools for combating fraudu- limitation at the time of solicitation. Similarly, a lent solicitations than percentage caps and point- charitable organization that the IRS has recog- of-solicitation disclosures, which it found to be nized as eligible to receive tax-deductible contri- excessive burdens on or unlawful compulsion of butions should clearly indicate in its solicitations speech and thus unconstitutional. However, when how donors may obtain proof of that status. the Court affirmed these precedents in 2003, it The charity may post a copy of its IRS letter of also upheld the Illinois Attorney General's right to determination on its website or offer to provide a pursue an action for fraud against a professional copy of the letter to donors who request it. If the fundraiser that made representations to donors solicitation promises any goods or services to the that a "significant amount" of each dollar donated donor in exchange for contributions, the materi- would be going to the charity, when only 15 per- als should also clearly indicate the portion of the cent actually did.81 contribution (that is, the value of any goods or services provided) that is not tax-deductible. 80 See Village of Schaumburg v. Citizens for a Better Environ- LEGAL BACKGROUND ment, 444 U.S. 620 (1980); Secretary of State of Maryland v. Munson, 467 U.S. 947 (1984); and Riley v. National Overlapping federal, state, and local laws regulate Federation of the Blind of North Carolina, Inc., 487 U.S. 781 (1988). charitable solicitations. States play the leading role, with 38 states and the District of Columbia 81 Illinois ex rel. Lisa Madigan v. Telemarketing Associates, Inc., 538 US 600 (2003). 42 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE 28 Contributions must be used for purposes consistent with the donor's intent, whether as described in the relevant solicitation materials or as specifically directed by the donor. When a donor responds to a charitable solicitation LEGAL BACKGROUND with a contribution, he or she has a right to expect that the funds will be used as promised. Solicita- If a donor provides a clear, written directive about tions should therefore indicate whether the funds how funds are to be used at the time a charitable they generate will be used to further the general gift is made, the board of the recipient organiza- programs and operations of the organization or to tion has a fiduciary obligation to comply with the support specific programs or types of programs. A donor's directive and state attorneys general may donor may also indicate through a letter, a written enforce compliance. In some states, the donor (or note on the solicitation, or a personal conversation his or her heirs) may have legal standing to ask a with the solicitor or another official of the chari- court to enforce those terms. This type of instruc- table organization how they expect their contribu- tion would include a contract or grant agreement tion to be used. between a private or public funder and a chari- table organization. An organization's communica- In some cases, an organization may not receive tions while it is soliciting contributions may also sufficient contributions to proceed with a given create a legally binding restriction that can be project or it may receive more donations than it enforced under state and federal fraudulent solici- needs to carry out the project. If the organization tation prohibitions. is unable or unwilling to use the contribution as stated in its appeal or in the donor's communica- When carrying out a donor's clear, written tion, it has an obligation to contact the donor and directive on how to use a contribution becomes request permission to apply the gift to another impossible, impracticable, or illegal, a charitable purpose or offer to return the gift. Charitable organization or the state Attorney General may organizations should strive to make clear in mate- appeal to a court for authority to alter the original rials that solicit contributions for a specific pro- purposes of the gift or deviate from directions gram how they will handle such circumstances. provided by the donor.82 A charitable organization should carefully review the terms of any contract or grant agreement 82 See Comment to § 413 of The Uniform Trust Code, pro- before accepting a donation. If the organization mulgated by the National Conference of Commissioners on will be unable or unwilling to comply with any of Uniform State Laws (NCCUSL) in 2000, and amended in the terms requested by a donor, it should negoti- 2001, 2003 and 2005, which provides in part: "if a particular charitable purpose becomes unlawful, impracticable, impos- ate any necessary changes prior to concluding the sible to achieve, or wasteful ... the court may apply cy-pres to transaction. Particularly in the case of substantial modify or terminate the trust ... in a manner consistent with contributions, the recipient should develop an the settlor's charitable purposes." UPMIFA, as adopted July agreement that specifies any rights it may have 2006, Comment to Section 6, similarly allows a release of to modify the terms of the gift if circumstances restrictions with donor permission, and permits deviations to warrant. Some charitable organizations include modify or release a restriction, through court order or upon notification to the State Attorney General (or other appli- provisions in their governing documents or board cable charity official). Modifications from the original intent resolutions indicating that the organization retains of the donor must be "in accordance with the donor's prob- "variance powers," the right to modify condi- able intention" for deviation, and "in a manner consistent tions on the use of assets. Such powers should be with the charitable purposes expressed in the gift instrument" clearly communicated to donors through a written for cy pres. agreement. A GUIDE FOR CHARITIES AND FOUNDATIONS 43 29 A charitable organization must provide donors with specific acknowledgments of charitable contributions, in accordance with IRS requirements, as well as information to facilitate the donors' compliance with tax law requirements. Acknowledging donors' contributions is important LEGAL BACKGROUND not only because of IRS requirements; it also helps in building donors' confidence in and support Federal law requires charitable organizations to for the activities they help to fund. Organizations provide a written disclosure statement to donors should establish procedures for acknowledging who contribute more than $75 if the organization contributions in a timely manner and for provid- has provided the donor with goods or services in ing appropriate receipts for cash contributions exchange for the contribution.83 The disclosure if requested. Regular updates to donors on the statement must inform the donor that the amount activities they support is another way to build of the contribution that is deductible for Federal trust and loyalty, as is providing ways for contribu- income tax purposes is limited to the excess of the tors to find more information on their own-say, amount of any money (and the value of property through a website, print publications or visits to other than money) contributed by the donor over the organization's office. the value of the goods or services provided to the donor by the charity, and must provide a good If the organization has provided goods or services faith estimate of the value of the goods or services to the donor in exchange for or recognition of the received by the donor. The IRS indicates on its contribution, the acknowledgement must include website that no disclosure statement is required if a good-faith estimate of the fair market value of "the goods or services given to a donor have insub- those goods or services-that is, the amount the stantial value."84 donor would have to pay to purchase those goods or services independently. The cost of the item to A taxpayer who itemizes deductions on his or the charitable organization does not determine its her annual income tax return is required to have fair market value, although cost may be an impor- a contemporaneous written acknowledgement tant factor. For example, a hotel may donate the from the charitable organization to substantiate food served at a banquet, thus imposing zero cost deductions for contributions of $250 or more.85 on the charitable organization. But the fair mar- The written acknowledgement must include the ket value of a donor's meal at that banquet would amount of cash and a description (but not the not be zero; it would be the price he or she would value) of any property other than cash contrib- have to pay for a similar meal at that hotel. The uted; whether the charity provided any goods charitable organization does not have to include or services in consideration, in whole or in part, information on fair market value in a donor for the contribution; and a description and good acknowledgement if that value is not more than faith estimate of the value of any goods or services 2 percent of the contribution or $89, whichever received by the donor.86 For tax years beginning is less. (These are 2007 amounts; the IRS changes after August 17, 2006, taxpayers are required to them periodically.) have bank records or a written communication from the organization (indicating its name and the It is generally unwise, and may pose a conflict of interest, for a charitable organization to appraise the value of gifts of property from taxpayers seek- 83 IRC §§ 6115, 6714. ing income tax deductions for such contributions. 84 See IRS Publication 1771; www.irs.gov/pub/irs-pdf/p1771. Organizations should, however, alert donors pdf to IRS rules for substantiating such claims and 85 encourage them to seek appropriate tax or legal IRC § 170(f)(8)(A); Treas. Reg. § 1.170A-13(f). counsel when making significant non-cash gifts. 86 IRC § 170(f)(8)(B)(i), (ii) and (iii). 44 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE date and amount of the contribution) to substan- licly-traded stock, the taxpayer must submit Form tiate a deduction for a charitable contribution of 8283 (Noncash Charitable Contributions) with any amount.87 his or her tax return. If the deduction claimed for any single item (other than publicly traded For non-cash contributions, the taxpayer is gen- stock) exceeds $5,000, the taxpayer must have erally allowed to deduct the fair market value the item appraised by a qualified appraiser, then of property donated to a public charity or to a attach to the tax return a copy of the appraisal, a federal, state, or local governmental entity. The signed declaration of the appraiser, and a signed amount that taxpayers may deduct varies depend- acknowledgement from the charitable organiza- ing on the type of property contributed, the type tion that received the donation. If the charity sells of organization to which the property was con- contributed property valued at $5,000 or more tributed, and the taxpayer's income. In the case within three years of the property's receipt, the of tangible personal property (e.g., artwork), the charity must file Form 8282 (Donee Information taxpayer is entitled to a fair market value deduc- Return), which reports that sale to the IRS.88 For tion only if the property is given to a public char- tax years beginning after August, 2006, taxpayers ity that uses the property in its exempt purposes. can only claim deductions for clothing and house- If the taxpayer is claiming a deduction of more hold items donated to charity if the items are in than $500 for any single item other than pub- good used condition or better.89 30 A charitable organization should adopt clear policies, based on its specific exempt purpose, to determine whether accepting a gift would compromise its ethics, financial circumstances, program focus or other interests. Some charitable contributions have the potential is intended for resale or would otherwise produce to create significant problems for an organiza- needed revenue for the organization. It should list tion or a donor. Knowingly or not, contributors any funding sources, types of contributions, or may ask a charity to disburse funds for illegal or conditions that would prevent the organization unethical purposes, and other gifts may subject from accepting a gift. The organization should the organization to liability under environmental also consider establishing rules and procedures protection laws or other rules. Some types of cor- for determining whether a gift is acceptable and porate sponsorships or interests in corporate stock should identify circumstances under which a or assets may result in unrelated business income review by legal counsel or other experts would be for a charitable organization. Donors may also face required before accepting a gift. adverse tax consequences if a charity is unable to use a gift of property in fulfilling its mission and LEGAL BACKGROUND must instead sell or otherwise dispose of the prop- erty soon after the donation is received. Federal law designates certain transactions as prohibited tax-shelter transactions and imposes A gift-acceptance policy provides some protection excise taxes and disclosure rules on certain tax- for the board and staff, as well as for potential exempt entities that are party to such transactions, donors, by outlining the rules and procedures by regardless of whether the transaction was initiated which an organization will evaluate whether it can accept a contribution even before an offer is actually made. The policy should make clear that 87 IRC § 170(f)(17). the organization generally will not accept any 88 IRC § 170(e)(7). non-cash gifts that are counter to or outside the scope of its mission and purpose, unless the item 89 IRC § 170(f). A GUIDE FOR CHARITIES AND FOUNDATIONS 45 by a charitable contribution.90 Recent guidance on income received after August 15, 2006, result- provided by the Internal Revenue Service outlines ing from a transaction in which the charitable the circumstances in which excise taxes may be organization is a party to a prohibited tax shelter imposed pursuant to Internal Revenue Code Sec- transaction.91 tion 4965 on charity managers and organizations 31 A charitable organization should provide appropriate training and supervision of the people soliciting funds on its behalf to ensure that they understand their responsibilities and applicable federal, state and local laws, and do not employ techniques that are coercive, intimidating or intended to harass potential donors. A charitable organization may be legally respon- in which fundraising will be conducted, as well sible when those who solicit on its behalf engage as federal restrictions on telephone, email or fax in illegal or fraudulent practices. Yet even beyond solicitations. The charitable organization should ensuring that fundraising practices are lawful verify that the outside solicitor is registered as and honest, a charitable organization has many required in any state in which the solicitor will be reasons to provide careful training and supervi- seeking contributions. sion to those who solicit donations on its behalf. The most obvious reason is that they are often a In general, those soliciting funds on behalf of potential donor's first, and sometimes only, direct charities should refrain from giving specific legal, contact with the organization. The organization financial and tax advice to individual donors. should therefore ensure that its fundraisers are Rather, when such questions arise, fundraisers respectful of a donor's concerns and do not use should encourage donors to consult their own coercive or abusive language or strategies to secure legal counsel or other professional advisors before contributions, misuse personal information about finalizing a contribution. potential donors, pursue personal relationships that are subject to misinterpretation by poten- LEGAL BACKGROUND tial donors, or mislead potential donors in other ways. All those who solicit contributions on the Most states require charitable organizations and organization's behalf, including volunteers, should professional fundraisers that solicit contributions be provided with clear materials and instructions in their jurisdiction to register and provide reports on what information to provide to prospective on their activities. Many states require a charitable donors, including the organization's name and organization that has paid solicitors or profes- address, how the donor can learn more about the sional consultants working on its behalf to have a organization, the purposes for which donations written contract with those fundraisers that delin- will be used, whether all or part of the donation eates the specific purpose, time, and fees to be may be tax-deductible, and who the donor can paid under the contract; the obligations of both contact for further information. the organization and the paid solicitor or consul- tant; whether the solicitor or consultant will have If a charitable organization decides to use an out- custody or control of contributions at any time side professional fundraising firm or consultant, it should have a clear contract-as required by law and guided by good practice-that outlines 90 The Tax Increase Prevention and Reconciliation Act of the responsibilities of the organization receiv- 2005 P.L. 109-222. ing the funds and of the firm or consultant. The 91 See IRS Notice 2007-18. The IRS has indicated that it will fundraiser must agree to abide by any registration issue further guidance on charitable abusive tax-shelters in and reporting requirements of the jurisdictions late 2007. 46 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE and how such contributions will be transmitted pose of the call and the name of the organization to the organization; and how information about for whom the call is made promptly and "in a donors and potential donors will be treated by the clear and conspicuous manner," and (2) honor- solicitor during and following completion of the ing requests by the recipient of the call not to contract. Some states impose fines on charitable call again.92 The law also prohibits professional organizations that engage professional fundrais- solicitors from misrepresenting, directly or by ers to solicit contributions on their behalf if those implication, the nature or purpose of the chari- fundraisers fail to register or provide reports as table organization, the purpose for which the required. contribution will be used, the percentage of the contribution that will go to that purpose, and the Federal law requires for-profit firms soliciting organization's or the solicitor's affiliation with or for charitable nonprofits via telephone to follow sponsorship by a specific organization, business, specific rules that include (1) disclosing the pur- individual or government entity. 32 A charitable organization should not compensate internal or external fundraisers based on a commission or a percentage of the amount raised. Compensation for fundraising activities should administrative, or program activities. If so, the cri- reflect the skill, effort, and time expended by teria for such bonuses should be clearly based on the individual or firm on behalf of the charitable the quality of the work performed, rather than on organization. Many professional associations of a percentage of the funds raised. fundraisers prohibit their members from accepting payment for fundraising activities based on a per- LEGAL BACKGROUND centage of the amount of charitable income raised or expected to be raised. Basing compensation on While there are no specific federal or state laws a percentage of the money raised can encourage prohibiting percentage-based compensation, fed- fundraisers to put their own interests ahead of eral law does prohibit charitable organizations those of the organization or the donor and may from providing excessive compensation or eco- lead to inappropriate techniques that jeopardize nomic benefit to executives and other individuals the organization's values and reputation and the who have substantial influence over the organiza- donor's trust in the organization. Percentage- tion's affairs, and to family members of such indi- based compensation may also lead to payments viduals.93 For a more complete discussion of excess that could be regarded by legal authorities or per- compensation rules, see principle #13. ceived by the public as "excessive compensation" compared to the actual work conducted. Percent- age-based compensation may also be skewed by 92 The U.S.A. Patriot Act, P.L. 107-56, 15 U.C.S. §§ 1600 et unexpected or unsolicited gifts received by the seq., brought charitable solicitations by for-profit telemarket- charitable organization through no effort of the ers within the scope of the Telemarketing Sales Rule, (2003) fundraiser. 16 C.F.R. §§ 310 et seq. 93 IRC § 4941 and § 4946; § 4958(f). A similar logic applies to employees. Some chari- table organizations choose to provide bonuses to employees for exceptional work in fundraising, A GUIDE FOR CHARITIES AND FOUNDATIONS 47 33 A charitable organization should respect the privacy of individual donors and, except where disclosure is required by law, should not sell or otherwise make available the names and contact information of its donors without providing them an opportunity at least once a year to opt out of the use of their names. Preserving the trust and support of donors the greater of $5,000 or 2% of the total contribu- requires that donor information be handled with tions received by the organization in the tax year respect and confidentiality to the maximum extent covered by the return. Federal tax laws specifically permitted by law. Charitable organizations should provides that tax-exempt organizations, other disclose to donors whether and how their names than private foundations or political organiza- may be used, and provide all donors, at the time tions described in section 527 of the tax code, a contribution is made, an easy way to indicate are not required to disclose the name and address that they do not wish their names or contact of contributors to the public.94 However, to the information to be shared outside the organiza- extent that donor information is included in a tion. In all solicitation and other promotional public charity's application for tax-exemption, or materials, organizations should also provide a correspondence with the IRS during the applica- means, such as a check-off box or other "opt-out" tion process, such information may be subject to procedure, for donors and others who receive public disclosure. such materials to request that their names be deleted from similar mailings, faxes or electronic Some charitable organizations affiliated with communications in the future. The organization governmental entities, such as supporting organi- should immediately remove a donor's name from zations affiliated with a public higher education any lists upon request and should ensure that all institution, may be subject to state Open Public donors at least once a year are provided informa- Records or Freedom of Information laws that tion about how they may request that their names require disclosure of records that include donor and contact information not be shared outside the information. As a result of court decisions uphold- organization. ing such requirements, the state of Iowa recently passed legislation allowing state-affiliated univer- Organizations that gather personal information sity foundations to preserve the confidentiality of from donors and other visitors to their websites donors' personal financial information. The Iowa should have a privacy policy, easily accessible law also permits the state university foundation to from those websites, that informs visitors to the uphold a donor's request to remain anonymous. site what information, if any, is being collected Eight other states95 have enacted laws protecting about them, how the information will be used, donor information from disclosure. how to inform the organization if the visitor does not wish personal information shared outside the organization, and what security measures the char- 94 IRC § 6104(d)(3)(A). ity has in place to protect personal information. 95 Arizona, Colorado, Georgia, Florida, Louisiana, Minnesota, Nevada and New Jersey. LEGAL BACKGROUND: A charitable organization is required to report on its annual IRS information return (Forms 990) the names and addresses of those who contributed 48 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Appendix A GUIDE FOR CHARITIES AND FOUNDATIONS 49 Self-Regulation Systems Studied by The Panel on the Nonprofit Sector Advisory Committee on Self-Regulation The Advisory Committee on Self-Regulation to observe. AAM's Accreditation Commission, an reviewed more than 50 standards or principles independent body, is responsible for the adminis- that address the conduct of charitable organiza- tration of a separate accreditation program. tions or of individuals who provide services to the nonprofit community, as well as systems that American Bar Association. Standards: Rules of apply to for-profit industries and professions. The Procedures for Approval of Law Schools. systems are listed below, divided into three cat- www.abanet.org egories: those developed by accreditation bodies The Council of the ABA Section of Legal Edu- and professional associations in the United States; cation and Admissions to the Bar is the United those developed by regulatory bodies outside the States Department of Education's recognized United States; and those that apply to for-profit accrediting agency for programs that lead to the organizations. first professional degree in law. The Council has established a process that is designed to provide a The descriptions are drawn from materials pro- careful and comprehensive evaluation of each law duced by the organization. school and its compliance with the Standards for Approval of Law Schools. CHARITABLE REGULATORY SYSTEMS AND STANDARDS American Hospital Association. Professional Standards of Conduct. www.aha.org American Association of Homes and Services The American Hospital Association repre- for the Aging. Quality First Covenant. sents and serves all types of hospitals, health care www.aahsaa.org networks, and their patients and communities. The American Association of Homes and Ser- Nearly 5,000 hospitals, health care systems, net- vices for the Aging's 5,700 member organizations works, other providers of care, as well as 37,000 offer a continuum of aging services: adult day individual members, come together to form the services, home health care, community services, AHA. Its Professional Standards of Conduct are senior housing, assisted living residences, continu- excerpted from Regulations for Certification ing care retirement communities, and nursing Programs Conducted by the AHA Certification homes. Its Quality First program was launched in Center. 2002 in partnership with the Alliance for Quality Nursing Home Care and the American Health American Institute of Philanthropy. Rating Care Association. Guide and Watchdog Report. www.charitywatch.org American Association of Museums. Code of The American Institute of Philanthropy is a Ethics for Museums; AAM Accreditation Program. nonprofit charity watchdog and information ser- www.aam-us.org vice. Created in 1992, AIP evaluates and assigns The American Association of Museums rep- a grade to each of more than 500 organizations resents more than 15,000 individual museum based on the percentage of its budget spent on its professionals and volunteers, 3,000 institutions, charitable purpose, its cost to raise $100, the years and 300 corporate members. Its Code of Eth- of available assets on hand, and whether it shared ics for Museums lays out the ethical principles requested public documents. museums and museum professionals are expected 50 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE ASAE and the Center for Association Leader- tion representing fundraising professionals serving ship. Standards of Conduct. www.asaecenter.org North America's health care systems. All members In 2004, the American Society of Association must comply with the Statement of Professional Executives, the Greater Washington Society of Standards and Conduct. AHP worked with the Association Executives, the ASAE Foundation, Association of Fundraising Professionals and and The Center for Association Leadership joined other organizations in developing the Donor Bill together in two linked organizations known as of Rights. ASAE & The Center for Association Leadership. ASAE (American Society of Association Execu- BBB Wise Giving Alliance. Standards for Charity tives) is a nonprofit membership organization Accountability. www.give.org representing more than 22,000 association CEOs, The BBB Wise Giving Alliance was formed staff professionals, industry partners, and con- in 2001 through the merger of the National sultants. The Center, founded in 2001, provides Charities Information Bureau and the Council learning and knowledge for association profes- of Better Business Bureaus' Foundation (which sionals. Their joint Standards of Conduct outline housed the Philanthropic Advisory Service). The standards of association service and professional Wise Giving Alliance reviews and reports on over conduct which Certified Association Executives 1700 national charities, based on its Standards for (CAEs) and their Association Chief Executive and Charity Accountability. Association Professional Staff members. CARF International. Accreditation Standards. Association of Fundraising Professionals. Code www.carf.org of Ethical Principles and Standards of Professional Founded in 1966 as the Commission on Pratice; The Accountable Nonprofit Organization; Accreditation of Rehabilitation Facilities, CARF and The Donor Bill of Rights. www.afpnet.org International is an independent, nonprofit The Association of Fundraising Profession- accreditor of providers of aging services; behav- als represents nearly 28,000 members in more ioral health; child and youth services; Durable than 190 chapters throughout the world. AFP Medical Equipment, Prosthetics, Orthotics and members must agree to abide by its Code of Supplies; employment and community services; Ethical Principles and Standards of Professional and medical rehabilitation. The CARF family of Practice and are subject to disciplinary sanctions organizations currently accredits more than 5,000 for violations. AFP's board endorsed the state- providers at nearly 18,000 locations in the United ment of principles in The Accountable Nonprofit States, Canada, Western Europe, and South Organization developed by a think tank program America. of the Mandel Center for Nonprofit Organiza- tions which was co-sponsored by the National Center for Nonprofit Excellence. Certification Assembly of Voluntary Health and Social Welfare program. www.nonprofit-excellencepbc.org Organizations and the National Health Council. The Center for Nonprofit Excellence was cre- AFP created the Donor Bill of Rights with the ated by a coalition of public and private funders American Association of Fund Raising Counsel in Palm Beach County, Florida, to strengthen (AAFRC), the Association for Healthcare Philan- the administrative capacity of nonprofit agencies thropy (AHP), and the Council for Advancement and promote best practices in nonprofit admin- and Support of Education (CASE). It has been istration. Working with experts in the field, the endorsed by numerous organizations. funders created a uniform set of standards and a self-assessment program that charitable agen- Association of Healthcare Philanthropy. State- cies must complete to receive funding from ment of Professional Standards and Conduct. United Way, the county government, and other www.ahp.org organizations. The Association for Healthcare Philanthropy is an international nonprofit professional organiza- A GUIDE FOR CHARITIES AND FOUNDATIONS 51 Charities Review Council of Minnesota, Inc. around the world, and more than 22,300 profes- Standards of Accountability. www.smartgivers.org sional members. CASE worked with the Asso- The Charities Review Council, established in ciation of Fundraising Professionals and other 1946 as the Minnesota Community Research organizations in developing the Donor Bill of Council, is a nonprofit organization that reviews Rights. and reports on 285 nonprofit organizations based or operating in Minnesota. Its Account- Council on Accreditation. 8th Edition Standards. ability Wizard is an online tool that helps non- www.coastandards.org profits conduct a self-assessment to determine COA is an international, independent, not- whether they meet the Council's standards of for-profit, child- and family-service, and behav- accountability. ioral healthcare accrediting organization. It was founded in 1977 by the Child Welfare League of Charity Navigator. www.charitynavigator.org America and Family Service America (now the Charity Navigator is a nonprofit charity watch- Alliance for Children and Families). Originally dog and information service created in 2001. It known as an accrediting body for family and chil- evaluates over 5,000 charities based on their orga- dren's agencies, COA currently accredits 38 dif- nizational efficiency and capacity, using financial ferent service areas and over 60 types of programs. ratios and performance categories in a number of Its areas include substance abuse treatment, adult areas, and then assigns an overall rating based on day care, services for the homeless, foster care, "how efficiently we believe a charity will use their and inter-country adoption. support." Council for Higher Education Accreditation. Rec- ognition Standards. www.chea.org Combined Federal Campaign. Requirements for The Council for Higher Education Accredi- participating charities. www.opm.gov/cfc tation (CHEA) is a private, nonprofit national The Combined Federal Campaign is the organization that coordinates accreditation activ- annual workplace giving program for federal ity for higher education institutions and programs employees, and for postal service and military in the United States. It represents more than personnel. Administered by the Office of Per- 3,000 degree-granting colleges and universities sonnel Management, it includes more than 300 and recognizes 60 national, regional and special- CFC campaigns throughout the country and ized institutional and programmatic-accrediting internationally. Charities applying to receive organizations. funds through the CFC are required to submit to extensive review of their financial and governance Council of American Survey Research Organi- practices. zations. Code of Standards and Ethics for Survey Research. www.casro.org Council for the Advancement and Support of The Council of American Survey Research Education. Ethical Standards and Principles of Organizations represents over 300 companies Practice; and Principles of Practice for Fund-Raising and research operations in the United States and Professionals at Educational Institutions. abroad. Its Code of Standards and Ethics for www.case.org Survey Research sets forth agreed upon rules of The Council for Advancement and Sup- ethical conduct for survey research organizations port of Education is a nonprofit organization and acceptance of the code is mandatory for all for advancement professionals of all levels who members. work in alumni relations, communications, and development. Its membership includes more than Council on Foundations. Statement of Ethical 3,300 colleges, universities, and independent Principles; National Standards for U.S. Community elementary and secondary schools in 54 countries Foundations; Stewardship Principles and Effective 52 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Practices for Corporate Foundations; Stewardship to promote the need for professional and ethical Principles and Effective Practices for Family Founda- standards of practice, and to influence the cre- tions; and Stewardship Principles and Practices for ation of laws governing philanthropy. Member Independent Foundations. www.cof.org firms agree to abide by the Institute's Standards of The Council on Foundations is a membership Membership, Standards of Practice, and Profes- organization of more than 2,000 grantmaking sional Code of Ethics. foundations and giving programs worldwide. Its Statement of Ethical Principles defines the ethical Independent Sector. Statement of Values and Code expectations the Council has for its members and of Ethics. www.independentsector.org serves as the basis against which member conduct Independent Sector is a nonprofit, nonpartisan will be considered for purposes of its sanctions coalition of over 600 charities, foundations, and process. COF has also developed statements of corporate philanthropy programs, collectively principles and effective practices to guide the representing tens of thousands of charitable work of community, corporate, family, and inde- groups in every state across the nation. Its State- pendent foundations. ment of Values and Code of Ethics for Nonprofit and Philanthropic Organizations is intended as a Donors Forum of Chicago. Illinois Nonprofit model for use by charities and foundations. Principles and Best Practices. www.donorsforum.org InterAction. Private Voluntary Organization Stan- Established in 1972, the Donors Forum is dards. www.interaction.org a nonprofit membership and service organiza- InterAction is a membership association of tion that works to promote active relationships U.S. voluntary organizations engaged in interna- between grantmakers, nonprofits, and the com- tional humanitarian efforts. It requires its mem- munity at large. It represents more than 200 bers to adhere to the principles of governance, grantmaking Members and Associate Members volunteer involvement, support from the private and 1,210 nonprofit Forum Partners. sector, fundraising, service, and programs out- lined in its PVO Standards. Evangelical Council for Financial Accountabil- ity. Seven Standards of Financial Stewardship. Internal Revenue Service. Good Governance Prac- www.ecfa.org tices for 501(c)(3) Organizations. www.irs.gov ECFA is an accreditation agency dedicated The IRS has posted on its website a prelimi- to helping Christian ministries earn the public's nary staff discussion draft of possible good gover- trust. Founded in 1979, it is comprised of over nance practices for charitable organizations. The 2,000 evangelical Christian organizations that IRS says this "informal draft reflects various ideas qualify for tax-exempt status and receive tax- that have been advanced by others both within deductible contributions. ECFA's Seven Standards and outside the exempt sector who have studied of Responsible Stewardship focus on board gov- nonprofit governance. Because good governance ernance, financial transparency, integrity in fund- practices may promote compliance with tax law, raising, and proper use of charity resources. the IRS will continue to review recent self-regula- tion proposals advanced by others." Giving Institute. Standards of Membership; Stan- dards of Practice; and Professional Code of Ethics. Joint Commission. Joint Commission Require- www.givinginstitute.org ments. www.jointcommission.org Giving Institute, formerly the American Asso- The Joint Commission (formerly the Joint ciation of Fundraising Counsel, is a nonprofit Commission on Accreditation of Healthcare professional association representing 36 profes- Organizations) evaluates and accredits nearly sional fundraising firms. It was founded in 1935 15,000 health care organizations and programs A GUIDE FOR CHARITIES AND FOUNDATIONS 53 in the United States. An independent, nonprofit Middle States Commission on Higher Educa- organization, the Joint Commission's standards tion. Standards for Accreditation. www.msche.org focus on improving the quality and safety of care The Middle States Commission on Higher provided by health care organizations. Its accredi- Education is the unit of the Middle States Asso- tation process evaluates an organization's compli- ciation of Colleges and Schools that accredits ance with these standards and other requirements. degree-granting colleges and universities in Dela- ware, the District of Columbia, Maryland, New Land Trust Alliance. Land Trust Standards and Jersey, New York, Pennsylvania, Puerto Rico, the Practices. www.lta.org U.S. Virgin Islands, as well as in several locations The Land Trust Alliance represents more than internationally. 1,600 land trusts and is dedicated to promoting voluntary private land conservation to benefit Minnesota Council of Nonprofits. Principles and communities and natural systems. Its Land Trust Practices for Nonprofit Excellence. www.mncn.org Accreditation Commission, an independent pro- The Minnesota Council of Nonprofits (MCN) gram, provides verification of land trusts' adher- is a membership organization of more than 1,850 ence to the Land Trust Standards and Practices. nonprofit organizations in the state. Its statement of accountability principles and management Larned A. Waterman Iowa Nonprofit Resource practices was first developed in 1994 and has been Center and Iowa Governor's Nonprofit Task revised to reflect new management and program Force. Iowa Principles and Practices for Charitable issues. MCN's Principles have been widely used Nonprofit Excellence; Iowa Register of Accountability. as an educational tool for nonprofits operating in inrc.continuetolearn.uiowa.edu Minnesota, and many other statewide associations The Larned A. Waterman Iowa Nonprofit have used the Principles to develop appropriate Resource Center is an interdisciplinary col- guidelines for nonprofits in their states. laboration of the University of Iowa that offers educational and service programs focused on National Association of Independent Schools. strengthening the capacity of Iowa nonprofit Principles of Good Practice. www.nais.org organizations. The center worked with the Iowa The National Association of Independent Governor's Nonprofit Task Force and the Iowa Schools is a nonprofit membership organization Secretary of State to create the Iowa Principles representing approximately 1,300 independent and Practices for Charitable Nonprofit Excellence, schools and associations in the United States, and which serves as the basis for the Iowa Register of affiliates with independent schools abroad as well. Accountability. NAIS has adopted its Principles of Good Practice for its own operations and encourages indepen- Michigan Nonprofit Association. Principles dent schools to adopt them as guiding principles. and Practices for Nonprofit Excellence in Michigan. www.mnaonline.org National Catholic Development Conference. The Michigan Nonprofit Association is a state- Code of Stewardship and Ethics; Guide to Preparing wide professional trade organization with more a Statement of Accountability. www.ncdc.org than 1000 members who represent every part of The National Catholic Development Confer- the state. Its Principles and Practices for Non- ence is the largest association of religious phi- profit Excellence in Michigan is designed as a sup- lanthropies in the United States and "affirms the port mechanism for nonprofit management and mission of each of its members by working for governance, providing a framework for nonprofit and with them as fundraisers." NCDC members self-assessment and planning. commit to the Code of Stewardship and Ethics each year. 54 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE National Center for Family Philanthropy. School Improvement (SACS CASI), and National Values and Guiding Principles. www.ncfp.org Study of School Evaluation (NSSE) formed The National Center for Family Philanthropy one unified organization, known as AdvancED, is a nonprofit membership organization that dedicated to advancing excellence in education works to promote philanthropic values, vision, through accreditation, research, and professional and excellence across generations of donors and services. AdvancED represents 23,000 public and donor families. private schools and districts in 30 states and 65 countries and serving close to 15 million students. National Health Council. Standards of Excellence: Good Operating Practices for Voluntary Health Agen- Standards for Excellence Institute. Standards cies. www.nationalhealthcouncil.org for Excellence: An Ethics and Accountability Code The National Health Council's 115 member for the Nonprofit Sector. organizations include voluntary health agencies, www.standardsforexcellenceinstitute.org professional and membership associations, non- The Standards for Excellence Institute is an profit organizations with an interest in health, and operating division of Maryland Association health care businesses. Its voluntary health agency of Nonprofit Organizations. Its Standards for members must comply with all of the Standards Excellence program is "a comprehensive system to remain in good standing. of nonprofit sector self-regulation [designed] to strengthen the ability of nonprofit organiza- New England Association of Schools and Col- tions to act ethically and accountably in their leges. Standards for Accreditation. www.neasc.org management and governance, while enhancing Founded in 1885, the New England Associa- the public's trust in the nonprofit sector." The tion of Schools and Colleges, Inc. establishes and Institute currently has a national replication maintains standards for education from pre-K partner, the National Leadership Roundtable on to the doctoral level. NEASC serves more than Church Management; local replication partners 2,000 public and independent schools, colleges in Colorado, Idaho, Louisiana, Maryland, Ohio, and universities in the states of Connecticut, Oklahoma, Pennsylvania, and West Virginia; and Maine, Massachusetts, New Hampshire, Rhode licensed consultants in 13 jurisdictions. Island, and Vermont, and American/international schools in more than seventy nations. United Way of America. United Way Standards of Excellence. unitedway.org North Central Association Commission on The United Way of America first introduced Accreditation and School Improvement. its standards of excellence in 1973, and issued a AdvencEd Accreditation Standards for Quality substantially revised edition in 2005. The stan- Schools. www.ncacasi.org dards are designed as "aspirational benchmarks Founded in 1895, the North Central Associa- [to] enhance the effectiveness of the 1,350 United tion Commission on Accreditation and School Way affiliates." Improvement is a non-governmental, voluntary organization that accredits 8,500 public and Western Association of Schools and Colleges. private schools and districts. One of six regional WASC Criteria. www.acswasc.org accrediting organizations in the United States, The Western Association of Schools and Col- NCA CASI accredits schools and districts in 19 leges is one of six regional accrediting associa- states, the Navajo Nation, and the Department tions in the United States. It provides assistance of Defense Dependents' Schools worldwide. In to schools located in California, Hawaii, Guam, 2006, NCA CASI, Southern Association of Col- the Commonwealth of the Northern Marianas, leges and Schools Council on Accreditation and American Samoa, the Federated States of Micro- A GUIDE FOR CHARITIES AND FOUNDATIONS 55 nesia, the Republic of the Marshall Islands, Fiji, that "looks into and out for Canada's charities and and East Asia. Its board of directors is composed nonprofits." Agencies that adhere to its Ethical of representatives from the Accrediting Com- Code are entitled to use Imagine Canada's trust- mission for Senior Colleges and Universities; the mark indicating their compliance with its fund- Accrediting Commission for Community and raising and financial accountability standards. Junior Colleges; and the Accrediting Commission for Schools. European Foundation Center. Principles of Good Practice. www.efc.be YMCA of the USA. National Committee on Mem- The European Foundation Centre is an inter- bership Standards: Policies and Procedures Manual. national association of over 200 foundations www.ymcaexchange.org and corporate funders "dedicated to creating an The membership standards outline the specific enabling legal and fiscal environment for founda- qualifications that the 2,663 YMCA organizations tions, documenting the foundation landscape, must meet to be recognized by the board of the strengthening the infrastructure of the sector, YMCA of the USA. The standards are set and and promoting collaboration, both among foun- administered through the National Committee on dations and between foundations and other Membership Standards whose charge is to "sup- actors, to advance the public good in Europe and port, inspire and hold YMCAs responsible and beyond." EFC members must subscribe to the accountable for achieving the highest standards EFC Principles of Good Practice of quality in fulfilling the YMCA mission, the YMCA National Constitution, and not-for-profit International Committee on Fundraising Orga- performance." nizations. ICFO International Standards. www.icfo.de INTERNATIONAL CHARITABLE The International Committee on Fundraising REGULATORY BODIES AND Organizations is an association of national bodies STANDARDS that accredit charitable organizations and fund- raising activities. Its International Standards apply Australian Council for International Develop- to international private, nonprofit organizations ment. Code of Conduct. www.acfid.asn.au that directly, or indirectly through subsidiary bod- The Australian Council for International ies, raise funds from the public for charitable or Development is an independent national associa- public benefit purposes. tion of Australian non-government organizations working in the field of international aid and International Non-Governmental Organisa- development. The ACFID Code of Conduct is tions Accountability Charter. a voluntary, self-regulatory industry Code, but www.ingoaccountabilitycharter.org NGOs wishing to attain Australian Agency for The International Non-Governmental Organi- International Development (AusAID) accredita- sations Accountability Charter was developed as tion are required to formally adopt and become a result of conversations at a 2003 International a signatory to, as well as demonstrate compliance Advocacy Non-Governmental Organisations with, the ACFID Code of Conduct. Workshop. The Accountability Charter is owned by its founding signatories, a group of 11 interna- Imagine Canada. Ethical Fundraising and Finan- tional NGOs. cial Accountability Code. www.imaginecanada.ca Imagine Canada was formed through a union United Kingdom Charity Commission. of the Canadian Centre for Philanthropy (CCP), www.charity-commission.gov.uk and the Coalition of National Voluntary Organi- The Charity Commission, created by the zations (NVO). It is a national registered charity Charities Act 2006, is the independent regulator 56 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE of charities in England and Wales. The Commis- National Association of Securities Dealers. Rules sion is charged with registering, regulating, and and Regulations. www.finra.org educating charitable organizations to improve The National Association of Securities Dealers their effectiveness and increase public confidence merged in July 2007 with the member regula- in their work. tion, enforcement, and arbitration functions of the New York Stock Exchange to create a new BUSINESS STANDARDS AND organization, The Financial Industry Regulatory REGULATORY SYSTEMS Authority (FINRA). FINRA is the largest non- governmental regulator, overseeing nearly 5,100 American Board of Medical Specialties. Certifi- brokerage firms, 173,000 branch offices, and cation Program and Maintenance of Certification of more than 669,000 registered securities repre- Medical Specialties. www.abms.org sentatives doing business with the United States The American Board of Medical Specialties, a public. nonprofit organization, assists 24 approved medi- cal specialty boards in the development and use New York State Bar Association. New York of standards in the evaluation and certification of Lawyers' Code of Professional Responsibility. physicians. www.nysba.org The New York State Bar Association is the Business Roundtable. Principles of Corporate oldest and largest voluntary state bar associa- Governance. www.businessroundtable.org tion in the nation and is a separate entity from The Business Roundtable is an association of the licensing body, the New York State of Court chief executive officers of leading U.S. compa- Administration. nies with $4.5 trillion in annual revenues and more than 10 million employees. Its Principles of Public Company Accounting Oversight Board. Corporate Governance, first issued in 2002 and Standards and Related Rules. www.pcaobus.org updated in 2005, are designed "to assist corpo- The Public Company Accounting Oversight rate management and boards of directors in their Board is a private, nonprofit corporation created individual efforts to implement best practices of by the Sarbanes-Oxley Act of 2002 to "oversee the corporate governance, as well as to serve as guide- auditors of public companies in order to protect posts for the public dialogue on evolving gover- the interests of investors and further the public nance standards." interest in the preparation of informative, fair, and independent audit reports." Council of Institutional Investors. Corporate Governance Policies. www.cii.org State Bar of California. Rules of Professional Con- The Council of Institutional Investors is a not- duct. www.calbar.ca.gov for-profit association of 130 public, labor, and The California State Bar is a public corporation corporate pension funds with assets exceeding within the judicial branch of government, serv- $3 trillion. Its Corporate Governance Policies set ing as an arm of the California Supreme Court. standards or recommend practices that its mem- Membership in the State Bar affords attorneys the bers believe companies and boards of directors right and privilege of practicing law in California. should adopt "to promote accountability, inde- pendence, integrity, rigor and transparency." A GUIDE FOR CHARITIES AND FOUNDATIONS 57 Self-Regulation in the Nonprofit Sector: A Portrait of Current Issues in the Field Conducted for the Panel on the Nonprofit Sector by the FDR Group INTRODUCTION whether to measure program outcomes and effec- tiveness; the degree to which current standards are The nation's charitable institutions would not duplicative or in conflict; and whether "one size flourish if they lost the trust of the public-and fits all" in terms of establishing high standards and sound practices concerning governance and best practices for the sector at large as well as for accountability play a critical role in keeping specific sub-sectors. that trust. The Panel on the Nonprofit Sector is We also include practical advice from practi- interested in fostering self-regulation by encour- tioners-some do's and don'ts about launching aging discussion; disseminating meaningful and successful self-regulation initiatives-and sugges- practical information to guide best practices and tions for improving self-regulation within the sec- principles; and creating a platform for ongoing tor. Finally, we present a discussion of the unique dialogue within the charitable sector. To help in needs of smaller organizations. these efforts, the Panel asked the FDR Group to conduct case study research with standards-setting Research Approach entities and others knowledgeable about self-regu- lation in the nonprofit sector. The study is based on 23 in-depth interviews What follows are the results of the FDR conducted with professionals who have direct, Group's research and analysis. The goals of the firsthand knowledge and experience with self-reg- study are to: ulation in the not-for-profit sector. They worked in sector-wide standards-setting groups (3 orga- * Portray the current state of self-regulation within nizations), sub-sector standards-setting groups (4 the sector-the core issues, the debates, and the organizations), small organizations that participate struggles; in either sector-wide or sub-sector self-regulation * Provide real-life examples and anecdotes from (4 organizations), one organization that adminis- the leading practitioners of self-regulation, ters government-affiliated accreditation, one trade gleaning their insights and lessons learned; association that serves a for-profit community, and * Present practitioners' sense of whether self- one public charity that works on education issues. regulation efforts are working-whether they A detailed methodology can be found at the end improve the practices and behaviors of charitable of this document. organizations; and This report does not cover every self-regulat- * Capture perceptions of approaches that work, ing entity within the nonprofit sector, but it does that don't work, and why. include several paradigms. For example, both vol- untary and mandatory accreditation approaches The Issues are discussed. Sector-wide models and sector-spe- cific models of self-regulation are compared. A The study explores the pros and cons of various variety of systems of measurement are included- business models and systems of measurement, the accreditation, best practices, codes of ethics, seals "must-have" components of a successful standards- of approval, and ratings. Each approach has its setting program, and the incentives that individual own strengths and weaknesses. We do not judge nonprofits have for taking part in self-regulation. which is best or worst, but instead offer the dis- The study also delves into some of the more chal- cussion and insights of our interviewees about the lenging and polarizing issues facing the sector: various options. 58 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE One of the benefits of the case study methodol- Conflicting Standards-Just how widespread is ogy is that it allows one to pick units of analysis the problem of conflicting standards? Are there that illustrate common tendencies and to pick specific sub-sectors where it's more prevalent than others that are unique but instructive. We have others? Is it mainly a result of differences between made no effort to categorize self-regulatory mandatory and voluntary options? Do views dif- organizations but instead look at each as a distinct fer between the regulators and the regulated? entity with important information and lessons to Legally Mandated Accreditation-What are the offer. We have included an appendix with web site unique challenges faced by sub-sectors that are addresses and other basic information for those regulated by force of law, for example, education, interested in learning more about the attributes health care, and human services? and practices that each organization offers. Acknowledgements Questions for Further Discussion The FDR Group would like to thank the 23 This research was framed by broad, far-reach- people who took part in this research for so gener- ing questions, and it is thus not surprising that it ously making the time to meet with us and for raises even more questions and sometimes suggests sharing their knowledge and insights so freely. We that even more research is needed. But the study also are thankful to Diana Aviv and Pat Read of will serve its purpose if it plays the role of a con- Independent Sector for giving us the opportunity versation starter, and if it focuses attention on the to conduct this research on behalf of the Panel on issues the nonprofit field writ large must struggle the Nonprofit Sector. with, engage, and debate. These include: What follows is a rendering of the 10 key issues Needs of the Sector-Is there room for addi- that emerged from the interviews, a discussion of tional self-regulatory and standards-setting orga- implications for the charitable sector, the research nizations, or is the market flooded? If there is a methodology, and descriptions of each of the need, should they be broad-based and national in standards-setting organizations that took part in scope, or would it be more useful to rely on sub- the study. sector or statewide entities? Coverage-Are the right number of not-for- ISSUE NO. 1 profits participating in self-regulation? Is it neces- Self-Regulation within the Charitable Sector sary for each and every charitable organization to be accredited, or should the sector concentrate on The charitable sector has a long tradition of self- where most of the money goes? regulation. Research suggests that the average Measuring Effectiveness-Can effectiveness standards-setting organization has been doing be fairly assessed? How can outcomes that are this kind of work as early as the 1950s.1 Although positive yet intangible be measured? How is the there are no conclusive statistics on the precise effectiveness of an accreditation program affected number of not-for-profits taking part in self-regu- if such things as content, programs, and outcomes lation, a recent study by the Johns Hopkins Cen- are not included? ter for Civil Society Studies reported that almost 2 Sub-sector Specific-To what extent do sub- out of 3 organizations responding to a survey took sector regulatory organizations (both govern- ment-affiliated and not) address such things as governance, management, transparency, or other 1 Woods Bowman, "Accountability Through Self-Regulation ethical considerations, the kinds of issues that in the Nonprofit Sector-A Preliminary Report," December are drawing media and political attention to the 2001 (unpublished). sector today? To what extent is there competi- tion among accrediting agencies within a given sub-sector? A GUIDE FOR CHARITIES AND FOUNDATIONS 59 part in some sort of accreditation program or fol- tices that are applicable to virtually all nonprofits lowed a recognized list of best practices.2 regardless of the services they provide or type of Accreditation programs and standards-based work they do. For the most part they concern initiatives in the nonprofit sector tend to stem themselves with issues of governance and financial from three sources: independent umbrella organi- management rather than program and operational zations that represent a particular sub-sector; gov- matters. Individual not-for-profits choose whether ernment-affiliated organizations that administer or not to seek this type of self-regulation; it is accreditation or certification for a relevant govern- purely voluntary. Examples in the current research ment agency; and sector-wide standards-setting are the Better Business Bureau's Wise Giving Alli- organizations. Others include: national member- ance and the Standards for Excellence. ship-type organizations that set internal standards It makes sense that a sector as diverse as the for its affiliates (for example, the YMCA); govern- charitable one would have a wide array of types of ment agencies; and institutional funding sources self-regulatory agencies. One of the strengths of such as United Way. the sector is its vast diversity, but this also poses The most commonly used sources of self-regu- challenges and new questions. Is it necessary to lation in the nonprofit sector are independent have so many different kinds of self-regulatory umbrella organizations that establish standards organizations? Would the sector benefit from a or offer accreditation for a particular segment of single standards-setting body to ensure that all the nonprofit community. Examples in the cur- nonprofits reach a certain standard of quality and rent research include the Land Trust Alliance and efficiency in agreed-upon areas? Could an exist- the American Association of Museums; there are ing entity fulfill this task, or is there a need for a hundreds of others in operation. For the most brand new one? part, these kinds of accrediting agencies are vol- Another important question that emerges from untary in nature and tend to concern themselves the analysis is this: To what extent do sub-sector with standards related to program operations and regulatory organizations (both government-affili- outcomes. ated and not) address such things as governance, The second type of accrediting body is gov- board and financial management, transparency, or ernment-affiliated; these are organizations that other ethical considerations-the kinds of issues administer the accreditation process for relevant that are drawing media and political attention government agencies. Many sub-sectors of the to the sector today? Further research is needed nonprofit community are required by either state to learn the extent to which governance is being or federal mandate to be accredited in order to addressed at the sub-sector level. In the mean- provide services to the public. Health care, human time, anecdotal evidence suggests that some sub- services, and education are sub-sectors that fall sector regulatory organizations are starting to take into this category. Colleges and other educational note of it. institutions, for instance, must be accredited by their regional accrediting commission in order to receive federal funding. Hospitals must be accred- 2 The survey was based on a sample of nonprofits in five ited by a sanctioned regulatory body to qualify as sub-sectors (children and family services, elderly housing and recipients of Medicaid or Medicare. Most human services, community and economic development, theaters, services organizations fall under this rubric as and museums). Because of small sample size, self-selection, and under-representation of other significant sub-sectors, well; the Council on Accreditation, for example, these findings are not reflective of the nonprofit sector in its is authorized by law to accredit several family and entirety. For full report see: Lester M. Salamon and Stepha- children's services, including inter-country adop- nie L. Gellar, "Nonprofit Governance and Accountability" tion, credit counseling, and substance abuse treat- Communique No. 4. Baltimore: The Johns Hopkins Center ment, among other things.3 for Civil Society Studies, October 2005. The third type of nonprofit accrediting or stan- 3 The Council on Accreditation accredits 38 different service dards-setting entity is sector-wide in scope; these areas and over 60 types of programs. The ones mentioned organizations establish standards and best prac- above are legally mandated, but others are voluntary. 60 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE For example, the Commission on Accredita- there are two types of sanctions: 1) those with tion of Residential Facilities (CARF), a nonprofit legal enforceability, imposed by the legal author- accrediting body that accredits thousands of ity of the regulatory body or some other entity, nonprofit programs and organizations in the and 2) those that are more informal and not human services field, recently added a criterion enforced by law. These include things such as on organizational oversight by governing boards fines, loss of membership, and public censure; to each of its accreditation areas.4 Application of most organizations included in this research rely the governance criterion is voluntary, but if the almost exclusively on informal sanctions. individual nonprofit chooses it, the assessment of * Standard operating procedures for handling its performance will be reflected in the accredita- complaints about members. To be effective, a tion decision. Another example is the American self-regulating entity must have a formal pro- Association of Homes and Services for the Aging. cess in place for investigating situations where AAHSA has established a collaborative relation- standards, codes of ethics, or other requirements ship with BoardSource whereby its members of membership have been violated. The rules receive a 50 percent discount off BoardSource and the process for dealing with them should be membership, thus giving them access to practical known to all members. It is through precise and information, best practices, and training on gov- consistent adherence to this process that the self- ernance issues. regulating entity demonstrates that violations are taken seriously and will be investigated in a fair ISSUE NO. 2 and consistent manner. Consensus Areas * Accessible, easy-to-use information. It is in the best interest of all to write standards, codes, and This research captured some compelling areas other information pertinent to self-regulation in of consensus. Research participants shared their plain-speaking language and to avoid legalese. thoughts on the necessary components of a self- Information should be easily accessible to mem- regulatory effort and also some practical advice for bers both in print and via Web site. The system achieving success. of measurement should be fair and consistent, and should be developed with input from those Necessary Components of Self-Regulation who will be measured against it. * Resources to help members. Our interviewees * Effective Web Site. An effective web site has believed that the goal of any effective standards- become an indispensable tool for disseminating setting organization is not only to set the stan- information to the public at large as well as to dards but also to help current and prospective membership. Virtually all of the organizations members meet them. All manner of resources included in this research have capitalized on web should be made available to help members technology; some, such as Charity Navigator implement standards and maintain compliance. and the Wise Giving Alliance, rely on their web These can include things like printed materials, sites for virtually all aspects of collecting and self-assessments (both Web-based and not), and disseminating information. workshops that explain the various standards and guidelines for implementing them. None of Practical Advice from the Research the organizations participating in this research Participants were in the business of "gotcha"-that is, taking * Don't rush the planning process. Take time joy in finding violators whose membership or to consider all of the possible approaches to accreditation can be revoked. Virtually all spoke self-regulation to see which fits best for your about the importance of serving as an active sub-sector's particular needs. resource to members. * Consequences for noncompliance. Self-regulation cannot be effective without sanctions. As Prof. 4 2006 Employment and Community Services Standards Harvey Dale outlined in his report to the Panel, Manual, CARF International. A GUIDE FOR CHARITIES AND FOUNDATIONS 61 * Make a concerted effort to engage your con- right to display a seal of approval-some sign that stituency. You will need buy-in from the field illustrates in a public way that your organization is in order to move forward effectively. The Land among the best or that it reaches high standards- Trust Alliance's recent effort to both inform its lends reassurance, prestige, and a competitive edge members about the need for self-regulation and in fundraising pitches and other types of develop- to gather information about their interest in an ment work. This is one of the more obvious ben- accrediting program offers an excellent example efits that self-regulation provides. of an effective engagement effort. Other benefits accrue to individual charitable * Be prepared for resistance from the field. Resis- organizations for pursuing effective self-regula- tance can be driven by many factors-suspicion tion. It's safe to say that, for most nonprofits, it about your motives; doubt about the need for takes significant effort to establish themselves (more) oversight; concerns about the burdens of as exemplary stewards of the public's trust and paperwork; fears that the standards are unreach- money, and many-especially the smaller orga- able or impractical; and worries about costs, to nizations-have to do this with extremely lim- name but a few. ited resources. So having a shared goal to work * There must be a belief that the playing field is towards is good for staff morale. Several of the level and that the same rules apply to all. This people interviewed for this research shared anec- means standards should be devised with atten- dotes about staff rallying around a new set of tion to the natural tension that exists between standards or principles. A shared commitment to standards that are achievable and standards that explicit standards of governance and quality ser- are meaningful. Any exceptions to the rules vices can help and energize them. detract from the integrity of the standards. Another result of following a system of stan- * Requiring adherence to standards, while fail- dards can be actual improvement in governance, ing to provide ample resources for explaining management, and organizational practices. Going them and for helping members meet them, is through the process of self-evaluation-an impor- "a recipe for disaster," according to one research tant component of many accrediting programs- participant. forces an organization to take a concerted look at * Don't look at accreditation per se as the high- its business practices, identify problem areas, and est level or the ultimate to strive for-it works make changes as needed. for some sectors better than others. It's just one of many options (e.g., licensure, best practices, ISSUE NO. 4 seal of approval, requirement of membership, Voluntary and "Involuntary" Approaches commitment to a code). One size doesn't fit to Self-Regulation-and the Accompanying all-"maturity, mission, capacity, size, needs, Sanctions and aspirations of the people the organization serves-all of these things need to be taken into A key component of self-regulation is to be able account," as stated by one interviewee. to identify and discipline those who behave inap- * Adopt a quality improvement mentality and propriately or who betray the public trust. Prof. always make it a point to measure outcomes. In Harvey Dale's Study on Models of Self-Regulation in the end, several interviewees indicated, this goes the Nonprofit Sector defines self-regulation as "situ- hand in hand with good governance and finan- ations in which one organization (other than a cial accountability as well. government) sets standards for, oversees, accredits, or regulates other organizations." It talks about ISSUE NO. 3 the factors that influence the effectiveness of vari- What Individual Charitable Organizations ous models of self-regulation, and points to legally Gain from Self-Regulation enforceable sanctions as the "single most signifi- cant factor." The people we interviewed spoke about the many positive benefits that individual nonprofits get for participating in self-regulation. Having the 62 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Legally Mandated Self-Regulation If participation is purely voluntary, their line of reasoning went, then bad actors and others Not-for-profits in sub-sectors that require accredi- who don't meet the standards for one reason or tation as a result of state or federal mandate are another simply won't take part. Seals of approval more likely to be heavily and effectively regulated. or certificates of excellence may be an effective The findings from the Center for Civil Society way to spotlight exemplary nonprofits-and per- Studies validate this point of view. For instance, haps they even reflect positively on the sector as a the survey found that approximately 9 out of 10 whole. But they do nothing to weed out truly bad organizations dealing with children and family ser- actors. Effective regulation, according to this line vices or elderly housing and services were accred- of thinking, requires mandatory participation. ited, compared with just 4 out of 10 community Others took the view that voluntary self-regu- development organizations. lation is appropriate and effective, because self- As stated previously, it is mainly the sub-sectors regulation is about commitment to high standards of education, health care, and human services that and continual quality improvement. As they saw fall into the force-of-law category. For these kinds it, the best nonprofits will choose to pursue stan- of organizations, accreditation is often "involun- dards and best practices-and not only will they tary"-without it, they would lose their ability benefit from doing so, but others in the sector to provide services or conduct their line of busi- will follow their lead, thus improving the entire ness. One of our research participants offered a sector. The American Association of Museums, useful illustration about the "involuntary" nature for instance, purposely offers voluntary accredita- of some types of "voluntary" self-regulation: a tion to its members because it believes that an lawyer, for example, may choose to join a state bar organization should choose to seek "the challenge association or not, but without its imprimatur the of excellence" rather than be forced to comply. lawyer cannot practice law in that state. This same Besides, according to several of the participants principle could apply to a hospital, or a nursing who held this point of view, it should be the job home, or a college-any institution that relies on of the IRS, not of the sector, to seek out and pun- federal government money in order to function. ish nonprofits that willingly take part in deceptive If not adhering to a rule or standard deprives an and fraudulent behavior. entity of the ability to conduct business, just how voluntary is it? ISSUE NO. 5 How to Measure, Whether to Judge Voluntary Self-Regulation The Stamp of Approval But for many types of self-regulation in the non- profit sector, participation on the part of individ- The most visible item any self-regulatory entity ual not-for-profits is purely voluntary-and thus offers is its public symbol of approval, and orga- any potential disciplinary measures or sanctions nizations use different symbols to that end. The for violations are more informal. According to the Council on Accreditation offers a certificate of research participants (and validated in Prof. Dale's accreditation, the Wise Giving Alliance and ECFA study), informal methods of enforcement can be use a seal, Charity Navigator uses a star rating. extremely effective. As one research participant Many self-regulatory entities signal their endorse- described, "We don't have to enforce it.... My ment by permitting member organizations to use observation is that the press, public policy mak- their logo in publications. ers, and legal authorities enforce them for us. And Some self-regulatory agencies view donors or certainly the public pressure brought by media consumers as their main constituency (e.g., Char- coverage of the behavior of an organization is ity Navigator); others focus on the not-for-profit enormously powerful in forcing an entity to com- itself as the primary unit of concern (e.g., Stan- ply-take the Red Cross as an example." dards for Excellence); and for several the focus is Several interviewees expressed concern about on a combination of both consumers/clients and the effectiveness of voluntary self-regulation. organizations (e.g., Council on Accreditation). A GUIDE FOR CHARITIES AND FOUNDATIONS 63 Individual not-for-profits, for their part, often Relying on the Honor System seek a seal of approval to strengthen their credibil- ity in the public's eye and to differentiate them- Reliance on the honor system is also prevalent. selves for fundraising purposes. Here, the self-regulating body reviews an applicant But many research participants acknowledged and requires the organization to sign a code of that the general public, to a large degree, has little ethics or covenant that commits it to following the familiarity with charity ratings and seals, where to standards. An example is the American Associa- look for them, or what it means if an organization tion of Homes and Services for the Aging, which has one or not. There was some recognition that strongly recommends that its members sign its a significant amount of work needs to be done to Quality First Covenant. Organizations that sign inform the public about the value of self-regula- on commit to a set of principles and policies and tion. Some talked about the seal or rating as pro- then are expected to do self-assessment and self- viding a useful opening with which to approach monitoring. When asked about the gentle nature potential donors-a conversation starter, some- of this program-it is purely voluntary; it is self- thing they can use to call attention to their own administered-AAHSA explained that most of its commitment to excellence and the recognition member organizations already functioned within they have received among their peers for a job an extensive regulatory environment. Given the well done. amount of paperwork they must deal with, it would have been an excessive and unreasonable Emphasis on Positive Reinforcement burden to require more. The honor system approach is also used by Behind the symbols and the ratings are different for-profit organizations. For instance, the Coun- approaches and assumptions, but the sector seems cil of American Survey Research Organizations, strongly biased toward the carrot, focusing on a trade association that participated in this case reward for positive behavior and shying away from study research, requires member organizations overt public criticism. Even in situations when to annually sign off on its Code of Standards and there is cause for sanction, many self-regulatory Ethics for Survey Research and then trusts member organizations handle it quietly, without a lot of organizations to adhere to it. CASRO itself is a fanfare. Some train the spotlight on excellent orga- not-for-profit organization, but its membership nizations, in effect saying to the sector: "Here is a consists of for-profit companies. CASRO places a role model to aspire to." The assumption, again, is considerable amount of resources and attention to that promulgating good practices and rewarding the application process; its philosophy is that it's effective organizations will lead to emulation by a better to identify organizations that show signs of well-intentioned sector. After all, the government not being capable of meeting the requirements of is there to handle the illegal behavior. the code before they become members. Charity Navigator is an exception. It will pub- licly and provocatively say, "Give to this charity, Measuring Program Outcomes and don't give to that one," and this partly explains Effectiveness its seeming unpopularity in the nonprofit com- munity. People object to what they see as the Beyond governance standards and their ways of unfair comparisons, the lack of subtlety, and the being measured, there is considerable thinking detrimental consequences of receiving a low rat- and struggling in the sector about how-and ing. But it is perhaps no coincidence that in a even whether-to measure program outcomes polarized media environment, the most provoca- and effectiveness. The people we talked with tive self-regulating organization garners a lot of would often broach this subject, and the inher- attention (which in turn triggers more objections ent difficulties and enormous complexities were to it). obvious. Can effectiveness be fairly assessed? How can outcomes that are positive yet intangible be measured? How can you make comparisons across 64 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE sub-sectors or even within them? And then the having a problem with duplicative or conflicting counter-arguments: Just because we can't measure standards? Just how prevalent or troublesome is everything doesn't mean we shouldn't measure this concern? what we can. Similarly, just because something can be counted (e.g., number of clients served) doesn't Sector-Wide Standards, Voluntary in Nature mean a program has been effective (e.g., that cli- ents got the help they needed). As one research When it comes to broad, sector-wide standards- participant said, "It's too easy just to count." setting bodies, there was general consensus that These are important questions and concerns, currently available standards relating to gover- and it will take further research to address them nance, transparency, and accountability were sufficiently. In the meantime, the current research mostly complementary and mutually supportive. does offer some useful illustrations, particularly Standards-setting organizations may differ in the among the sub-sector accrediting bodies. Take number of standards or in emphasis, but, accord- the Council on Accreditation, for example. To be ing to research participants, there was no sense accredited by COA, a not-for-profit must be able of confusion or serious contradiction. As one of to show that its programs are mission driven and our interviewees said: If a group of leaders in the that they are actually making a difference. While nonprofit sector sat around a big table in a room each not-for-profit should have some flexibility and closed the door, they could hammer out a list in determining how to best implement programs of "universal" standards-elements that the vast and measure outcomes, the fact that outcomes majority could agree upon for suitable governance must be measurable is nonnegotiable. COA's pro- and oversight of all quality nonprofits. cess includes a lengthy application, peer review, Concerns about conflicting standards at the site visits, accreditation, and renewal. In addition sector-wide level, where they do exist, were likely to being an accrediting body, COA also serves as to stem from differences in organizational goals. a resource, providing assistance and information For example, Standards for Excellence certifica- to its members to encourage "continuing perfor- tion is designed to highlight the superior mance improvement." operations of the most well-managed and Sector-wide standards-setting bodies, such as responsibly-governed nonprofits. Its standards the Wise Giving Alliance, Charity Navigator, and are set at a high level and are many in number Standards for Excellence, do not establish specific (55, to be exact). On the other hand, the Wise outcomes measures for their members. Both the Giving Alliance's standards were mainly developed Wise Giving Alliance and Standards for Excel- to help individual donors make giving decisions lence do, however, include a standard or principle and to encourage charitable giving. It's possible in their literature that addresses the importance of that a nonprofit organization could meet the measuring whether a nonprofit is actually fulfill- governance standards of the Wise Giving Alliance ing its stated mission. and earn its seal but still not achieve certification from the Standards for Excellence Institute. This ISSUE NO. 6 is simply a difference in emphasis as opposed to a Conflicting Standards substantive conflict in the respective standards. One perceived problem that came up several In the survey of nonprofit organizations con- times in the interviews revolved around con- ducted for the Center for Civil Society Studies, flicting benchmarks for the amount of money a the findings showed that most organizations that nonprofit should have in the bank.5 Here is a case participated in some type of formal self-regula- tion were involved in more than one program. Although the survey included only a limited num- 5 Woods Bowman and Angela Bies also address this issue in ber of types of nonprofits and thus is not represen- their article "Can the Charitable Sector Regulate Itself?" in tative of the entire sector, this finding does raise an The NonProfit Quarterly, Special Issue: Regulatory Landscape important question. To what degree are nonprofits 2005. A GUIDE FOR CHARITIES AND FOUNDATIONS 65 where exemplary practice according to one group's Gap between the Regulators and the standards was considered poor business practice Regulated according to another's. The most-oft heard com- plaint was that a 4* rating from Charity Naviga- To a large extent, this research focuses mainly tor, for example, would inevitably mean failure on the perspectives of the standards-setting bod- in meeting the financial requirements of other ies themselves, with less attention paid to the ratings organizations, for instance, ECFA. Further individual not-for-profits that actually follow a research is needed to determine how widespread standards program, seek a seal of approval, or are this concern is and whether or not it actually has subject to mandatory accreditation. The ques- an impact on the financial reporting decisions of tion thus becomes: To what extent is there a gap individual not-for-profits. between the regulators and those being regulated? Based on this research, many regulators don't seem Sub-Sector Standards, Voluntary to think that conflicting standards are a problem. vs. Mandatory Maryland Nonprofits, for example, reports having several current members that are standards-set- The issue is more complicated, however, when ting bodies within their own sub-sectors, with no it comes to those nonprofits in sub-sectors or reported conflict. But what do those being regu- specific fields that are required by legal statute to lated have to say? Further research is necessary, be accredited. For these not-for-profits, any stan- with a special emphasis on member organizations dards or paperwork required by the state or other that participate in both mandatory and voluntary governing body would obviously take precedence regulation. over any voluntary standards set by another entity. Further research will be necessary to determine Requirements of Grant-Making Foundations the extent to which this is an actual vs. a theoreti- cal problem and the degree to which it may affect A somewhat different issue that occasionally came some sub-sectors more than others. up in the interviews revolved around grant-mak- There was some anecdotal evidence from ing foundations and their preferred formats for this research that potential exists for voluntary receiving grant requests and status reports. Indi- and required standards to work in tandem. The vidual nonprofits may well have a legitimate gripe American Association of Homes and Services for about the burdens of paperwork and the duplica- the Aging was a case in point. Aware that the vast tion of effort they must face to satisfy foundations. majority of its members were already subject to This certainly adds to the "regulatory environ- mandatory accreditation by a third party, AAHSA ment" they deal with, but it should not be con- purposefully devised its standards to be voluntary fused with issues revolving around self-regulation and to focus on quality of care rather than regula- and disparate standards. tion. Anecdotal reports from AAHSA members suggest that committing to Quality First- ISSUE NO. 7 AAHSA's voluntary self-regulation program-not Competition only improved the quality of care and services in their individual agencies, but it also helped them Many of the organizations included in this achieve (mandatory) statewide accreditation. research were keenly aware of one another's work It is possible, though unlikely, to have a dis- and presence in the field. This was true especially parity between the standards of a sub-sector's among the three sector-wide entities-the Stan- national accrediting body and the standards dards for Excellence Institute, BBB Wise Giving of particular fields within that sub-sector, for Alliance, and Charity Navigator-each of which example, between the American Association of is national in scope and believes that it is possible Museums and the Council of American Mari- to apply standards of governance broadly across time Museums. Still, not one research participant shared an anecdote to this effect. 66 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE the charitable sector.6 They did not overtly talk on member fees for survival-that it provides a about each other as "the competition," but they disincentive to deny, revoke, or otherwise limit could speak authoritatively about the details of members. According to several of these research one another's work and could readily point out the participants, this is an understandable concern. strengths of their own approach and the perceived Still, they believed that a history of strict enforce- inadequacies of others. ment and willingness to use sanctions could effec- The extent to which there is competition tively offset it. among self-regulatory agencies within a given The Evangelical Council for Financial sub-sector is not covered in the current research. Accountability provides an example. ECFA Further investigation should address the following acknowledged that it faces criticism about its fee- questions: Are there certain sub-sectors where too based structure, and its response is "just watch many standards-setting organizations exist? Any what we do." ECFA is committed to protecting fields where additional options would help? To the integrity and reputation of its seal, and to that what extent do the sector-wide standards-setting end it takes the application and compliance pro- bodies view the industry-specific ones as competi- cesses very seriously. Termination of membership tors, and vice versa? is not uncommon (relatively speaking) and other sanctions or correctional steps are made use of ISSUE NO. 8 as necessary. For example, after one investigation How Will Self-Regulation Sustain Itself? ECFA recommended to a member under review that it should re-file its tax returns for three With few exceptions, the organizations considered years-a serious and costly repercussion for any in this research fall under the rubric of voluntary organization. The member re-filed the taxes as self-regulation-that is, individual nonprofits requested and remained a member in good stand- choose to pursue their given seal, or membership, ing-a testament to both ECFA's strict adherence or accreditation, or to follow their particular code to its standards and to the value of ECFA's impri- of ethics. This leads to tension for the self-regulat- matur to its members. ing entity: how to set and adhere to high standards ECFA knows its seal works because it has while building and maintaining membership? increasing and continuing membership inter- est, and its internal surveys show that members Business Models believe the seal has credibility and is an effec- tive fundraising tool. According to one anecdote No one has yet figured out the answer to the shared by ECFA, there are some Christian radio question of sustainability. Those lucky enough to station owners who will not air a program unless secure a foundation grant worry about what hap- its sponsoring organization carries the ECFA seal pens when it runs out-there's no guarantee of of approval. successive funding. Those with wealthy donors worry about individual capriciousness. Other self-regulatory endeavors are subsidized by par- 6 There are important distinctions among these standards- ent organizations through annual conference fees setting entities, and we encourage the reader to check out or other internal revenue streams-leaving them their respective Web sites to see what each has to offer. We especially vulnerable when it's time for cost cut- also suggest taking a look at Rating the Raters: An Assessment of Organizations and Publications That Rate/Rank Charitable ting or if there's a change in internal leadership. Nonprofit Organizations (2005), a publication developed The fee-based model-which appears to be by the National Council of Nonprofit Associations and the the most common-is also not immune to prob- National Human Services Assembly that compares the pros lems around sustainability. Research participants and cons of several self-regulating entities. whose organizations were fee-based talked about the criticism they hear from others about relying A GUIDE FOR CHARITIES AND FOUNDATIONS 67 As ECFA sees it, its shared mission and values age often is taken, perhaps mistakenly, as an indi- are what set it apart from other regulatory agen- cator of success. Further research might address cies.7 Because it consists of such a wide diversity the issue of coverage and whether or not going to of types of nonprofits, all of which revolve around scale creates pressure to hurry the work along or a common value (faith), ECFA is a unique orga- to cut corners. nization in the realm of nonprofit self-regulation. Can this successful approach to accreditation be ISSUE NO. 9 duplicated in the sector at large, a diverse com- Genesis of Self-Regulatory Organizations munity where "values" are not exactly shared? As stated earlier, the charitable sector has a long Vacuum of Leadership tradition of self-regulation. Many sub-sectors within the nonprofit community have their own Sprinkled throughout the comments on sustain- accrediting and standards-setting bodies, some ability of funding and effective business models government-affiliated, others independent. Still, in was grumbling about the role foundations play. recent years the sector has experienced a relatively The feeling was that while foundations spend a lot new surge in organizations that rate, rank, and set of time advocating self-regulation for the sector, standards for nonprofits at a broader level. It may few are willing to put up the appropriate level of prove valuable to understand what's triggering funding to make it happen effectively. Founda- the interest in the creation and cultivation of self- tions want individual nonprofits to meet high regulation entities. We identified five motivating standards for governance, accountability, transpar- factors: ency, and the like, but offer insufficient acknowl- * The desire to avoid additional government regu- edgement of the resources and infrastructure it lation and oversight takes to get there. * Qualms about dwindling credibility and trust among the public Lack of Human and Financial Resources * Specific interest in providing useful information to the donating public and protecting donors It became very clear in the interviews that accredi- from fraud tation programs and other forms of self-regulation * The desire to maximize the ethical conduct and are expensive to operate. The American Association effectiveness of nonprofits of Museums, for example, re-accredits its mem- * An entrepreneurial spotting of business bers every 10 years-but if it had the resources it opportunity would do so a lot sooner. The AAM also subsidizes a substantial portion of the cost of its members' Desire to Avoid Additional Government accreditation as a way to keep costs down for Regulation and Oversight individual museums. According to the Land Trust Alliance, its new accreditation program is expected The most obvious motivation is avoidance of new to take 8-to-10 years before it will be self-sustain- or additional government regulation and over- ing from member dues. The Wise Giving Alliance sight of the sector. Recent scandals have caused retains paid staff to monitor inappropriate use of its seal-a necessary though expensive means of ensuring integrity. Lack of human and financial 7 ECFA's first standard of "responsible stewardship" is: "Every resources to verify information on applications, member organization shall subscribe to a written statement monitor compliance of members, and investigate of faith clearly affirming its commitment to the evangeli- and adjudicate conflicts is a formidable obstacle for cal Christian faith, and shall conduct its financial and other many regulatory bodies. operations in a manner which reflects those generally accepted biblical truths and practices." Some also talked about pressure to cover more and more organizations-because increased cover- 68 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE a renewed (and seemingly enduring) interest on third-party organizations that facilitate individuals' the part of the Senate Finance Committee in the decisions about donating their time and money to activities of the nonprofit sector. The resulting charity. attention from the media and politicians provokes a twofold effect: a desire to pre-empt further gov- Desire to Maximize the Ethical Conduct ernment intervention, and self-reflection within and Effectiveness of Nonprofits the sector characterized by a drive to fix what's broken. Wariness of the unintended consequences Another impetus for self-regulatory systems is a that the private sector has faced due to the Sar- desire among individuals in the sector to do the banes-Oxley Act also contributes to the nonprofit right thing. A skeptic might argue that allowing sector's interest in improving and encouraging the sector to oversee itself will result in narrowly self-regulation. focused standards that are easy to comply with. But based on these interviews, this does not Qualms about Dwindling Credibility and appear to be the sector's mind-set. Speaking with Trust among the Public 23 individuals with a variety of experiences with self-regulation, we found a shared bottom line: Concerns about dwindling credibility and trust to improve public trust by improving the sector's among the public inspire self-regulatory efforts as ability to do its work effectively and ethically. well. Americans donate billions of dollars to chari- Research participants believed that the vast major- ties each year, and the sector is acutely aware that ity of nonprofit employees and volunteers want to it needs the goodwill and financial support of the achieve good and to do so in an ethical manner. public in order to continue to do its important Their purpose as regulatory agencies was to create, work. But scandals have a long shelf life. To this instill, and propagate policies and ground rules day, more than 10 years after a scandal involving of behavior to maximize the probability that this improper use of funds by its president, the United would happen. Way still comes up spontaneously when people talk about examples of bad behavior in the non- An Entrepreneurial Spotting of Business profit sector.8 Taking the initiative on self-regula- Opportunity tion is the sector's effort to hold on to the public's trust. Finally, some agencies are motivated by the busi- ness opportunity that self-regulation creates. Interest in Providing Useful Information to Those entities with the appropriate infrastruc- the Donating Public ture and expertise can capitalize on the need for information and guidance that exist among the Related to the above is a civic-minded desire- vast world of nonprofit organizations. By offering characteristic of the nonprofit sector-to provide individual nonprofits the opportunity to achieve a useful information to potential donors. There are stamp of approval, self-regulatory agencies provide tens of thousands of charitable organizations for nonprofits with a means for differentiating them- individual donors to choose from, and providing selves and enhancing credibility. It may be ironic, comparative information about them is a service but the nonprofit field is also a competitive one, the sector can provide. On one level, this is akin and a stamp of approval is a concrete benefit that to protecting the donating public from fraudulent can be monetized. nonprofits. The sector is not so naïve as to believe there are no bad actors, and the people who make up the nonprofit community recognize that the 8 The Charitable Impulse, A Report from Public Agenda for malfeasance-or ignorance-of a few puts the the Kettering Foundation and Independent Sector, 2005. entire sector in a negative light. Thus some lead- ers in the sector are motivated to create credible, A GUIDE FOR CHARITIES AND FOUNDATIONS 69 ISSUE NO. 10 required policies. In some cases, they said, it could The Unique Needs of Small Organizations take as much as several months to several years to complete the original application for accreditation Virtually all of the standards-setting organizations or membership. reviewed for this research faced a similar dilemma: As part of this case study, we had a lengthy how to set standards that are flexible enough to conversation with the director of a small land take into account the special needs of smaller trust who provided some idea of the types of chal- organizations while still providing meaningful reg- lenges a small organization might come across ulation. Small organizations are a big part of the when face to face with self-regulation require- nonprofit community; according to the National ments. On the horizon for this small organiza- Center for Charitable Statistics, 43 percent of tion is the Land Trust Alliance's new Land Trust reporting public charities in 2003 had annual Accreditation Commission. With only two expenses of less than $100,000. These groups typi- full-time and one part-time staffers (including cally have fewer financial and human resources to herself), this director worries that the documenta- spare, and so the requirements of participating in tion requirements for applying for accreditation self-regulation-whether it's in terms of financial will be a hardship. In the past, a general system of costs or staff time or accounting obligations-can understanding worked for implementing board be particularly onerous. decisions, but to meet the new accreditation For their part, small organizations may worry requirements board approval will involve formal that the standards will be created without con- procedures. Similarly, recordkeeping and organi- sideration of their needs. Who sets the criteria zational history has rested mainly in the head of for "excellence," and how do the criteria affect a long-time staff member, but accreditation will frailer or smaller institutions? Small organiza- bring with it official policies and documentation. tions worry that their fundraising, administrative, How can a small land trust do all of these kinds and program costs may fall outside a regulator's of things and still have energy and time to achieve "standard" formula for determining fiscal sound- its goal of "protecting the land"? ness. As one research participant asked, Is it really Despite the difficulties it is sure to encoun- possible-or fair-to expect a foundation with ter, this small land trust supports the idea of a large endowment to meet the same criteria as self-regulation. As the director stated: "It's really a homeless shelter that relies on small donors for important that (land trusts) behave professionally survival? and according to the standards of the industry. Moreover, many small organizations (for Accreditation will help land trusts pay attention example, a neighborhood nursing home or a to making themselves sustainable.... In the long small liberal arts college) are already required by term it's important for the industry to be able to law to be accredited by a third party. As a result, say we have professional standards and we take they may lack the motivation to pursue voluntary them seriously and pay attention to them." regulation and also worry about the possibility of duplicative or conflicting standards and reporting CONCLUSION requirements. Implications for the Charitable Sector The potential for negative impact on small organizations is not lost on the regulators. Virtu- Interview participants suggested several ways ally all of the entities included in this research to improve self-regulation in the nonprofit sec- that charge a fee offer a sliding scale dependent on tor. Here are the ideas that emerged from the size or revenue. Many seemed aware of the drain interviews: on human resources a small organization would * To continue to promote the concept of self-regula- face in making the application and maintaining tion and to actively disseminate best practices. This 70 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE strategy could include sponsoring forums, con- * To protect the diversity of the sector. The wide ferences, and other opportunities for members variety of types of institutions that make up the of the sector to discuss the issue and to build vis- nonprofit sector is a strength. A cookie-cutter, ibility and momentum for it. one-size-fits-all approach to regulation simply * To actively speak out against unethical practices. will not work, according to one research partici- An example is manipulative marketing, where a pant, and steps in the direction of homogeniz- charity lends its name to solicitations knowing ing the nonprofit sector will "stifle its creativity, that most of the donations will not go towards diversity, and breadth." the charity. The philosophy underlying this approach was that the sector has a responsibility Finally, a reverberating theme throughout these to stand up and speak out about what's good for interviews: Creating and maintaining a standards- the public, even if it's not necessarily good for setting agency is a challenging endeavor. Any some members of the sector. organization considering taking on such a task * To recommend that all charitable organizations for the charitable sector should be prepared to that receive public donations participate in self- face resistance. Interviewees also warned about regulation. This could be through accreditation the dangers of instituting regulations too hastily, or membership that requires a commitment to and here they pointed to lessons learned from the a code of ethics or best practices. Alternatively, experience of the private sector. Sarbanes-Oxley is one or two research participants suggested that a case where industry regulation was put together only those organizations accounting for the larg- in the heat of the moment and under a great deal est portion of charitable contributions should of political scrutiny. As a result, there continues be subject to self-regulatory requirements. to be many unintended consequences that haven't Regulating the organizations that receive the been worked out yet in terms of complexity, vast majority of donor dollars would not only resistance, loopholes, and inefficiencies. Again, suffice to protect the sector's integrity, they said, to tread carefully was the cautionary note. Imag- but would be more efficient and cost-effective as ine Canada's Voluntary Codes: A Guide for Their well. Development and Use may be worth quoting here: * To explicitly endorse an existing standards-setting or accrediting body as the sole regulatory agency of For many associations, developing and implementing the charitable sector. Ultimately, what organiza- codes may represent new territory, a step away from tions like Standards for Excellence and the Wise simply promoting a sector's interest toward actually Giving Alliance, for instance, feel they need is supervising and even disciplining member organiza- the endorsement of a powerful membership tions. This can be a fundamental change in orienta- organization such as Independent Sector or tion for the association and it should be undertaken another similarly situated national organization. only with the full cooperation of its members. * To create a list of suitable self-regulatory entities and recommend publicly that donors or founda- tions give only to those charities that carry one 9 Voluntary Codes: A Guide for Their Development and Use of the approved imprimaturs. This approach (March 1998) Office of Consumer Affairs, Industry Canada would also include publicly critiquing those and Regulatory Affairs Division, Treasury Board Secretariat. charities and nonprofits that do not incorporate some form of voluntary accountability. A GUIDE FOR CHARITIES AND FOUNDATIONS 71 APPENDIX A Description of the Research Process Methodology Pat Read, Senior Vice President at Independent Participants Sector, provided the FDR Group with a list of potential organizations and nonprofit leaders to A total of 23 in-depth interviews were conducted include in this research. The one exception was for this case study research. The list below includes the Council of American Survey Research Organi- the name of the key people interviewed for this zations, which was included by the FDR Group to project, their title, and the name of the organiza- provide a for-profit perspective. Obviously, there tion they represent. are many other organizations and nonprofit sector American Association of Homes and Services leaders that could have contributed useful infor- for the Aging mation and different perspectives to this research. William L. (Larry) Minnix, Jr., President and Limited time and busy schedules restricted our CEO ability to include others at this time. Bruce Rosenthal, Director of AAHSA Quality To help broaden the scope of the research and First to perhaps get a fuller picture of an organization's American Association of Museums approach to self-regulation, we asked research par- Edward H. Able, President and CEO ticipants to suggest organizations or people from Beth Merritt, Director, Museum Advancement their own membership who they thought might and Excellence be informative and helpful to us in conducting BBB Wise Giving Alliance this research. Several complied, and we conducted H. Art Taylor, President and CEO an additional four interviews with representa- Bennett M. Weiner, COO tives from small organizations that had either Charity Navigator completed the process for accreditation or were Trent Stamp, President and Executive Director currently undergoing it. In an effort to encourage Council of American Survey Research forthright discussion and to protect their privacy, Organizations the names of these individuals and their organi- Diane K. Bowers, President zational affiliations are not included in this report. Jim Robinson, Board Member and Director Interviews took place between December 2005 Council on Accreditation and March 2006. Most were conducted over the Richard Klarberg, President and CEO telephone; several were face-to-face. Interview Ann Morison, Director of Standards length ranged from 30 minutes to several hours. Evangelical Council for Financial All of the interviews were conducted by Ann Duf- Accountability fett or Steve Farkas of the FDR Group. Paul D. Nelson, President Dan Busby, Vice President About the FDR Group Tim Maxwell, Director of Member Certification Land Trust Alliance Farkas Duffett Research Group, LLC, is a full-ser- Rand Wentworth, President vice opinion research company that uses the tools Tammara Van Ryn, Director, Land Trust of public opinion research to help foundations Accreditation Commission and other nonprofits succeed with their program- Maryland Association of Nonprofit Organiza- matic initiatives and reform efforts. Our expertise tions/Standards for Excellence Institute is in surveys, focus groups, program evaluation, Peter V. Berns, CEO and organizational evaluation. Amy Coates Madsen, Institute Director Southern Education Foundation, Inc. Lynn Huntley, President 72 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE APPENDIX B overall effectiveness. Certified organizations can Descriptions of Participating Organizations pay a fee to use a BBB Wise Giving Alliance logo on their materials to promote that they meet the www.aahsa.org standards. The American Association of Homes and Services for the Aging (AAHSA) is a membership associa- www.charitynavigator.org tion of mission-driven, not-for-profit organiza- Charity Navigator's primary goal is to help chari- tions that offer the continuum of aging services: table givers make intelligent giving decisions by adult day services, home health, community providing information on more than 5,000 chari- services, senior housing, assisted living residences, ties and by evaluating the financial health of each continuing care retirement communities, and of these charities. Charity Navigator evaluations nursing homes. It offers a voluntary, self-guided are devised to be user friendly and are freely avail- program to its members called Quality First, able to the public. which is a framework for earning public trust based on a commitment to continually assess and www.casro.com improve quality in all aspects of operations, gover- The Council of American Survey Research Orga- nance, care, and services. nizations (CASRO) was included in this research to provide a for-profit perspective to the discus- www.aam-us.org sion on self-regulation. CASRO itself is a non- Founded in 1906, the American Association profit entity, but its membership consists mainly of Museums (AAM) is dedicated to promot- of for-profit companies. CASRO is the trade ing excellence within the museum community. association of survey research organizations, rep- Through advocacy, professional education, infor- resenting more than 275 companies and research mation exchange, accreditation, and guidance on operations in the United States and abroad. current professional standards of performance, AAM assists museum staff, boards, and volun- www.coanet.org teers across the country to better serve the public. The Council on Accreditation (COA) is an inter- AAM currently represents more than 16,000 national, independent, not-for-profit, child- and members-11,500 individual museum profes- family-service and behavioral health care accredit- sionals and volunteers, 3,100 institutions, and ing organization. In 2005, COA accredited or was 1,700 corporate members. Every type of museum in the process of accrediting more than 1,500 pri- is represented, including art, history, science, mili- vate and public organizations that serve more that tary and maritime, and youth museums, as well as 7 million individuals and families in the United aquariums, zoos, botanical gardens, arboretums, States, Canada, Bermuda, Puerto Rico, England, historic sites, and science and technology centers. and the Philippines. COA partners with human service organizations worldwide to improve ser- www.give.org vice delivery outcomes by developing, applying, The BBB Wise Giving Alliance (the Alliance) and promoting accreditation standards. arose from the desire for accountability to con- stituents as well as donors, although the work it www.ecfa.org does is aimed at helping donors have informa- ECFA is an accreditation agency dedicated to tion at their disposal when making contribution helping Christian ministries earn the public's trust decisions. The Alliance evaluates an organization through adherence to 7 Standards of Respon- according to a set of 20 standards for critical areas sible Stewardship. The standards focus on such that organizations should promote, such as how things as board governance, financial transpar- its board is organized, truth in solicitation prac- ency, integrity in fundraising, and proper use of tices, donor privacy, financial management, and charity resources. It is comprised of more than A GUIDE FOR CHARITIES AND FOUNDATIONS 73 1,100 charitable, religious, missionary, social, growing public distrust, and gaps between expec- and educational tax-exempt, nonprofit 501(c)(3) tations and performance. The SEI program of 8 organizations. ECFA also serves as a resource to principles and 55 standards is based on a code of its members around current matters of common conduct and is a consensus model for how the concern. most responsible and well managed nonprofit organizations operate. As part of this program, www.lta.org association members are asked to pledge their The Land Trust Alliance (LTA) promotes volun- commitment to the guiding principles. The tary private land conservation to benefit com- intent is not merely to promulgate standards, munities and natural systems. It is the national but also to give members the resources they need convener, strategist, and representative of more to implement recommended practices in their than 1,500 land trusts across America. The LTA organizations. has just established a new voluntary program of accreditation that was designed to help ensure www.sefatl.org public accountability in voluntary land conserva- The Southern Education Foundation, Inc. (SEF) tion and build strong and lasting land conserva- is the only organization in this list that is not tion organizations. directly affiliated with administering accredita- tion or standards. SEF is a public charity that is www.standardsforexcellence.org in the business of advancing creative solutions to The Standards for Excellence Institute (SEI) was ensure fairness and excellence in education for begun as part of the Maryland Association of all. Through a variety of programs and strategies Nonprofit Organizations in response to several involving research, analysis, advocacy, technical scandals in the mid-90s, increased scrutiny from assistance, and outreach, SEF works to improve the media, growth in the number of nonprofits, educational excellence and equity in the South. 74 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Study on Models of Self-Regulation in the Nonprofit Sector Conducted for the Panel on the Nonprofit Sector by the National Center on Philanthropy and the Law OVERVIEW mathematical ability: new-born infants are not good at analytical geometry or tensor calculus. It This Report analyzes self-regulatory structures, does not follow that stretching feet will contrib- defined for this purpose as situations in which ute to an improvement in mathematical prowess. one organization (other than a government) sets Nevertheless, some of the factors identified in this standards for, oversees, accredits, or regulates other Report may be causally connected to improved organizations. There is another common and cor- self-regulatory functions. In the conclusion to this rect meaning of "self regulation": the adoption by Report, some tentative suggestions will be ten- an organization of standards or procedures for its dered about which factors may so qualify. own activities. This Report does not attempt to The conclusions set forth in this Report derive discuss such single-entity self-regulation, and thus from our analysis of the factors that we selected does not examine recent developments in "best for analysis and represent our best understanding practices" for governance of nonprofit organiza- as to why each system is more or less effective. In tions, despite the importance of those develop- preparing this Report, we did not engage in any ments and the growth of a substantial literature empirical research. Accordingly, our conclusions dealing with them. as to the efficacy of the examined self-regulatory The project undertaken by the NCPL and systems are based on literature searches, conver- reflected in this Report was not intended to pro- sations, and anecdotal evidence-and our own vide a census or enumeration of self-regulatory experience and judgment-rather than on empiri- organizations. Rather, the Report presents a sug- cal analysis. gested approach towards a taxonomy of self-regu- This Report puts forth a taxonomy. Like all tax- latory models. Although the Report does contain onomies, that results in some good news and several examples of specific self-regulatory mod- some bad news. The good news is that taxono- els,1 its focus is on the categorization and analysis mies, if useful, identify important similarities of those aspects of the models that we believe among disparate things and thus help to organize might significantly affect their effectiveness. Based them into distinguishable groups. The bad news on our research, we believe that an analysis of the is that taxonomies tend to reduce attention to the sort reflected in this Report is unique: we have possible significance of differences among things not been able to discover any comparable rigorous that have been grouped together. analytical effort in any of the literature we have Although this Report reflects a careful selection of examined. factors that we believe are significant in influenc- The Report identifies factors or attributes of ing the efficacy of self-regulatory models, certain self-regulatory schemes that, alone or in combina- factors that might be relevant to this determina- tion, may help to describe the critical differences tion are not taken into account because of the dif- among various types or categories of self-regula- ficulty of properly measuring them. For example, tion and that may also assist in analyzing (or pre- the talent of the leadership of a self-regulatory dicting) which types of self-regulation are likely to organization and the logic and comprehensiveness be more effective. Stated another way, this Report of the organization's standards both indisputably seeks to identify factors or attributes of self-regu- impact its effectiveness, but because they are very latory structures that correlate with success. Correlation is not necessarily causation. For example, there is a significant correlation between 1 Some of the examples were suggested by the Panel or by the length of a person's feet and the person's staff at Independent Sector. A GUIDE FOR CHARITIES AND FOUNDATIONS 75 difficult to quantify they have not been analyzed A second factor in assessing the effectiveness in the conclusions reached in this Report. Fur- of particular sanctions is the organization's thermore, because of problems in ascertaining history of enforcement with respect to the pen- relevant data, certain factors discussed in this alty or sanction. This factor is relevant to the Report proved to be not particularly useful in our credibility of the self-regulatory body and the analysis of the efficacy of self-regulatory systems. likelihood that the regulated will abide by For example, the information contained under standards because of a perception of the real- the factors entitled "ratio of regulatory staff to ity of sanctions. Finally, a practice of disclosure organizations and issues regulated" and "ratio of of sanctions or other similar public shaming by budget to organizations and issues regulated" in the regulatory body might make a regulatory most cases reflect aggregate staff and budget for scheme more effective. the overall regulating entity rather than staff and II. Value of Accreditation. Another set of fac- budget specifically allocated to its self-regulatory tors that influences the effectiveness of self- functions. None of the entities that we examined regulatory systems involves accreditations provides the type of precise allocation between controlled or mandated by the self-regulatory regulatory and non-regulatory functions that body. The factors to be considered in assess- would be necessary to undertake a useful com- ing the effectiveness of accreditations include: parison of the impact of those factors. (1) the impact of the accreditation on the Because we found few prior analyses to assist us, regulated organization's ability to market to our taxonomic factors must be viewed as tenta- funders and the ability to market to members tive. We may have overlooked, over-emphasized (i.e., the usefulness of the accreditation issued or under-emphasized, misdescribed, or otherwise by the regulatory body in marketing an distorted relevant factors. We hope our taxonomy organization's products or services to potential is a helpful effort, but we solicit and welcome or current funders or members); (2) Industry comments and criticisms in order to improve its "buy-in"-acceptance of the regulatory body's utility. rules, standards, and accreditation by industry members in their dealings with peers in the FACTORS AFFECTING THE industry; and (3) a regulatory body's monopoly EFFECTIVENESS OF SELF-REGULATORY power, as a gate-keeper, to prevent or signifi- SCHEMES cantly disadvantage non-accredited entities from functioning in the relevant market. The following factors reflected in self-regulatory schemes may have an impact on the effectiveness III. Specificity. Issues of specificity may also affect of the self-regulation:2 the effectiveness of self-regulatory schemes. I. Sanctions. One group of factors that may One type of specificity is specificity of the sector influence the effectiveness of self-regula- or subsector regulated. For example, a self-regu- tory schemes involves sanctions that may be latory scheme might apply to all charitable imposed by the self-regulating organization. organizations, or to all health-care organiza- Sanctions may be subdivided into two cat- tions, or to all hospitals, or to all hospitals in egories: (1) sanctions with legal enforceability New York State, or to all hospitals in New are those that are imposed and enforced by York City. Each successive example is more the legal authority of the regulatory body or specific than its predecessor either by sectoral some other entity; (2) sanctions with other scope or geography. Another sort of specificity enforceability are those that are more informal and not enforced by law. The latter category of sanctions might include, for example, 2 This text should be read in connection with the charts fines, loss of membership, or public censure. attached as Appendix A, Appendix B, and Appendix C. 76 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE is specificity of activity regulated. For example, The immediacy of the threat of government a self-regulatory scheme might address all regulation, i.e., whether the government issues of good governance, or only financial is perceived as poised to adopt regulations issues, or only portfolio management. Of affecting the sector or activity currently self- course, self-regulatory schemes may be specific regulated, is a factor that may influence the both as to subsector regulated and as to activ- effectiveness of a particular regulatory scheme. ity regulated, e.g., the Evangelical Council The source of funding of the regulating entity for Financial Accountability. Because greater (i.e., from those regulated or from unrelated specificity may make possible better "fitting" sources) is another factor to consider. Other and precision of standards, it may increase the relevant factors include whistle blower protec- effectiveness of the self-regulatory scheme. tion (whether the regulatory body encourages whistle blowing by offering effective protec- IV. Transparency. Both dissemination of standards tion against retaliation), investigatory power and disclosure of processes of the regulating (i.e., the authority of the regulatory body to body are relevant in assessing the effectiveness issue subpoenas or otherwise compel disclo- of self-regulatory schemes. The more widely sure of the activities and records of regulated standards are known, the more likely they are entities), robustness of process, and site visits. to be effective. The better the understanding Finally, whether the regulating body does self- of standards-enforcement processes (at least evaluations may be a factor to be considered. if they are then perceived to be both rigorous and fair), the greater should be the acceptance SELECTED SELF-REGULATORY ENTITIES of their outcomes. Set forth below is a description of selected entities and their self-regulatory models.4 As requested by V. Others. Other factors also impact the efficacy the Panel, the selected entities are organized into of self-regulatory schemes. Some of these three groups: (1) entities that regulate organiza- factors reflect the size of the resources of the tions, (2) entities that regulate individuals, and (3) regulating entity as compared to the scope or impact of its standards. For example, the ratio of regulatory staff to organizations and issues 3 As mentioned above, the information contained under the regulated and the ratio of budget to organiza- factors entitled "ratio of regulatory staff to organizations and tions and issues regulated will influence effec- issues regulated" and "ratio of budget to organizations and issues tiveness of the self-regulatory organization.3 regulated" in most cases reflect total staff and budget for the regulating entities rather than staff and budget specifically Another related factor is the focus of the self- allocated to their self-regulatory functions. Because the data regulatory entity, as shown by the importance listed are not specific to the regulatory function of the orga- of its regulatory functions relative to its overall nizations, they are less useful in the analysis of the impact functions. of these factors on the effectiveness of the examined self- A further factor that may impact the effec- regulatory schemes. None of the entities that we examined tiveness of a self-regulatory scheme is the maintain the sort of allocation between regulatory and non- regulatory function expenses and staff hours that would be scope of pre-certification and post-certification necessary to undertake a careful analysis of those factors. processes, i.e., whether the regulatory body requires regulated entities to engage in pre- or 4 Only a small number of entities were selected for this post-certification training or education in Report. Although they were cho-sen as helpful examples, order to retain membership, accreditation, no inference should be made about the effectiveness of any orga-nization by virtue of being included in or excluded from funding, or other privileges. discussion herein. A GUIDE FOR CHARITIES AND FOUNDATIONS 77 entities that regulate both organizations and indi- tive as a self-regulatory model since it lacks viduals. We have grouped the selected entities in (1) monopoly power, (2) funder buy-in, and this manner because we have been requested to do (3) legal enforceability. so. We do not wish to suggest that this tripartite d. Australian Council for International categorization is necessarily the best or most effec- Development: The ACFID is an indepen- tive way of grouping self-regulatory entities.5 dent national association of Australian non- government organizations working in the 1. Entities that Regulate Organizations: The field of international aid and development. It following entities regulate organizations:6 administers a Code of Conduct committing its 80 members to standards of integrity and a. American Association of Museums: The accountability and withdraws membership AAM Museum Accreditation Program sets status from any entity that does not comply standards and best practices through a self- with its standards. It is effective as a self-regu- regulating program of quality assurance and latory entity because membership in ACFID accountability. The AAM's self-regulatory is required for eligibility for government scheme is quite effective based primarily on funds in Australia. (1) the importance of (and in some cases, e. BBB Wise Giving Alliance: The Wise Giv- requirement for) AAM accreditation to ing Alliance reports on nationally-soliciting museum funders and (2) the robustness of charitable organizations that are the subject the accreditation process, which includes site of donor inquiries. These reports include visits and a complex evaluation. an evaluation of the subject charity in rela- b. American Bar Association: The ABA is the tion to voluntary standards. In addition, the largest voluntary professional association Wise Giving Alliance offers national charities in the world. The ABA provides law school that meet its standards the option of apply- accreditation, continuing legal education, ing for a BBB national charity seal that can information about the law, programs to assist be displayed both online and in solicitation lawyers and judges, and initiatives to improve materials. The effectiveness of the Wise Giv- the legal system for the public. This Report ing Alliance is constrained because (1) com- focuses on the ABA law-school-accreditation pliance with its standards is purely voluntary, function, which is an effective self-regula- (2) its standards have no legal enforceability, tory model based primarily on its monopoly (3) a relatively small number of eligible orga- power. A law school that fails to meet ABA nizations have sought a seal (indicating a low standards will lose or be denied accreditation. level of industry buy in), and (4) seals are not Graduates from unaccredited law schools typically required for funding by government cannot practice law in most jurisdictions and or private sources. credits from unaccredited schools generally are not transferable to accredited schools. c. American Board of Medical Specialties: 5 The federal experience leading up to the enactment of The ABMS is the umbrella organization for intermediate sanctions (under sec-tion 4958 of the Internal 24 approved medical specialty boards in the Revenue Code of 1986, as amended) illustrates that limit- United States. The ABMS serves to coordi- ing regu-lation to sanctions against organizations, rather than individuals, in some instances results in enforcement nate the activities of its Member Boards and that may be either insufficiently meaningful or, alternatively, to provide information to the public, the overly harsh. This suggests that self-regulation may be more government, the profession, and its Members effective if it addresses the conduct of both organizations and concerning issues involving specialization individuals. and certification in medicine. Over 180 cer- 6 tifying medical specialty boards, however, are See Appendix A. not members of ABMS, making it less effec- 78 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE f. Council on Foundations: The Council on i. InterAction American Council for Vol- Foundations is a membership organization untary International Action Inc. Child of more than 2,000 grant making founda- Sponsorship Accreditation Program: tions and giving programs worldwide. Each InterAction's Child Sponsorship Accredita- member must subscribe to and follow a set tion Program is a relatively new initiative that of Principles and Practices for Grantmak- uses a formal certification process to accredit ers and, in theory, can lose membership member child sponsorship programs. In its for failing to comply with these guidelines. first year, five members were accredited. This The Council, while a powerful and efficient accreditation is likely to become more effec- source of information and guidance for its tive in the future if it evolves into a prerequi- members, is not a particularly effective self- site for funding for such programs. regulatory model because (1) its guidelines j. Joint Commission on Accreditation of are not legally enforceable, (2) most of its Healthcare Organizations: The Joint members (other than community founda- Commission evaluates and accredits more tions) do not solicit funds and therefore can than 15,000 health care organizations and easily operate without membership, and (3) programs in the United States. In 1965, the sanction of loss of membership is rarely Congress passed the Social Security Amend- invoked. ments of 1965 with a provision that hospitals g. Evangelical Council for Financial accredited by JCAHO are "deemed" to be in Accountability: ECFA is an accreditation compliance with most of the Medicare Con- agency for Christian ministries compris- ditions of Participation for Hospitals and, ing over 1,100 charities. ECFA members therefore, able to participate in the Medi- are required to comply with its Standards care and Medicaid programs. Accordingly, of Responsible Stewardship which focus on JCAHO's accreditations have legal authority, board governance, financial transparency, making the self-regulatory scheme particu- integrity in fund-raising, and proper use of larly effective. In addition, JCAHO is effec- charity resources. ECFA is particularly effec- tive because (1) its accreditation is significant tive as a self-regulatory model within its to funders, members, and the healthcare specific arena because of (1) the value of its industry in general, (2) it discloses serious certification to funders, (2) the robustness of violations of its standards to the government its process, which includes site visits and an or to licensing agencies, and (3) its process, annual recertification process, (3) its history which is quite robust, includes site visits and of enforcement through suspension of mem- integrates extensive analysis of outcome and bers, which lends credibility to its standards, other performance measurements. and (4) its broad disclosure of violations and k. Land Trust Alliance: The LTA requires land sanctions, which makes noncompliance more trust members to adopt the LTA Standards threatening. and Practices and to evidence that adoption h. InterAction American Council for Volun- with a Board resolution. The impact of the tary International Action Inc. Member- LTA as a self-regulatory body rests on the fact ship: InterAction accredits US nonprofits that some public funders require potential involved in international humanitarian work grantees to provide a statement of adoption primarily through a system of self-certifica- of LTA Standards and Practices. However, tion. The organization is somewhat effec- LTA membership is not a mandatory prereq- tive as a self-regulatory body because of the uisite for these grants, which tends to limit value of its accreditation to certain funders, the significance of LTA membership. The although the fact that certification is not gen- effectiveness of the LTA regulatory scheme erally required by funders limits the impact is further limited by (1) the lack of any real of the regulatory system. A GUIDE FOR CHARITIES AND FOUNDATIONS 79 sanctions and (2) the absence of processes for o. Public Company Accounting Oversight determining compliance with the guidelines. Board: The PCAOB is a private-sector, non- l. Maryland Association of Nonprofit profit corporation, created by the Sarbanes- Organizations Standards for Excellence Oxley Act of 2002 to oversee the auditors Institute: Maryland Nonprofits offers a vol- of public companies in order to protect the untary, peer-review, certification program for interests of investors and further the public nonprofit organizations interested in demon- interest in the preparation of informative, strating that they carry out the Standards for fair, and independent audit reports. The Excellence. Certified organizations are given PCAOB is authorized to impose fines, reme- permission to use the Seal of Excellence, dial measures, quality control procedures, which can be denied or revoked for failure to the appointment of an independent monitor, meet all of the Standards. Although the Seal and revocation of registration. The PCAOB may be important to some funders, it gener- self-regulatory scheme is particularly effective ally is not required for funding, which limits because (1) it is created and enforced by law, the effectiveness of the self-regulatory system. (2) its sanctions are real and significant, (3) m. Middle States Association of Colleges and its process is robust, and (4) it has significant Schools Commission on Higher Educa- investigatory powers. tion: The Middle States Commission on p. United Way of America: The UWA certifies Higher Education is a voluntary, non-gov- local United Ways for membership and can ernmental, membership association that revoke or deny membership to organizations accredits schools through a peer-evaluation not meeting its Accountability and Financial program. The Higher Education Act of Standards. This self-regulatory scheme is 1963, Title IV Student Assistance Program, effective because (1) the sanction of revoca- requires schools to be accredited by a certi- tion of membership and the right to use the fied accrediting agency such as the MSCHE "United Way" name is real and enforceable, for school eligibility for federal funding (2) membership is important to funders, and and for student eligibility for federal grants. (3) 59 local United Ways have lost member- This is a particularly effective self-regulatory ship since 2003, creating a genuine threat of scheme because (1) accreditation is legally enforcement. required for certain federal funding, (2) the q. Western Association of Schools and Col- MSCHE is the only regional body for the leges: The WASC is one of six organizations middle state region that accredits entire insti- regional associations that accredit public and tutions, and (3) the accreditation process is private schools, colleges, and universities in quite robust as it requires an extensive appli- the United States. The Higher Education cation process and site visits. Act of 1963, Title IV Student Assistance n. National Council of YMCAs of the USA: Program, requires schools to be accredited The National Council accredits member by a certified accrediting agency such as the YMCAs and can revoke membership of a WASC for school eligibility for federal fund- YMCA that is not in compliance with the ing and for student eligibility for federal YMCA mission and non-discrimination pol- grants. This is a particularly effective self- icy. The effectiveness of this self-regulatory regulatory scheme because (1) accreditation scheme depends on the fact that an unac- is legally required for certain federal funding, credited organization cannot use the YMCA (2) the WASC is the only accrediting body name. Its effectiveness is limited by its lack of for its region, and (3) the accreditation pro- robust process. cess is quite robust as it requires an extensive application process and site visits. 80 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE We conclude, based on our analysis of the selected self-regulatory entities, that certain factors, alone or in combination, were the most significant for creating an effective self-regulatory scheme. Probably the single most significant factor is legal enforceability of sanctions. A second significant set of factors is the authority to accredit organiza- tions coupled with the authority to withdraw the accreditation, particularly when this certification or accreditation is required either (1) to enable to the organization to engage in the activities for which it is formed (monopoly power) or (2) for funding by government and private grant makers (ability to market to funders). These factors may be even more powerful when the self-regulatory entity has a strong history of enforcing its sanc- tions, when the processes of accreditation and required reaccredidation are robust (particularly if site visits are required), and when adequate staff and budget are allocated to the regulatory function. A GUIDE FOR CHARITIES AND FOUNDATIONS 81 American Association of Museums www.aam-us.org EIN Number: 53-0205889 NTEE Code: A03 Factor Description SANCTIONS legal enforceability No. The AAM's members risk losing membership if they fail to pay their dues, for "due cause," or for "use of membership in the Association to work for purposes inconsistent with the mission and objectives of the Association and any standards other enforceability which the board of directors may require." (AAM Constitution Article 3, §2). Reputational considerations associated with loss of accreditation are another sanction. Some donors (including the State of Florida) require accreditation before they will provide funding. The AAM was established in 1906. From Dec. 2002­Dec. 2003, 163 institutions were reviewed. The results were: 42 Accreditations Tabled; 84 Accreditations Awarded; 1 history of enforcement Accreditation Awarded Pending; 21 Interim Approvals Granted; 1 Interim Approval Tabled; 4 Accreditations or Interim Approvals Denied. On average, 5 museums lose accreditation each year for failure to pay dues or for violation of standards. disclosure of sanctions No. The only action that the AAM takes is to remove the sanctioned museum from its List of Accredited Museums. VALUE OF ACCREDITATION ability to market to funders Yes. Some funders (including the State of Florida with respect to state funding) require accreditation for grants. ability to market to members Yes. industry "buy-in" Yes. 743 museums are accredited, and 72 museums are "applicants." monopoly power No. SPECIFICITY specificity of sector or sub-sector All museums in the United States that volunteer to undergo the accreditation regulated process. specificity of activity regulated AAM accreditation concerns all aspects of a museum's operations and programs. 82 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE American Association of Museums, continued Factor Description TRANSPARENCY dissemination of standards Yes. Its Standards and Best Practices are available online, and other standards resources are available from the AAM. disclosure of process Yes. The AAM's accreditation process is outlined in detail online. OTHERS staff ratio to organizations regulated The AAM accreditation staff of 3 is relative to 743 museums and 72 applicants. The AAM's revenue in 2003 was $8,180,777, a significant portion of which is budget ratio to organizations regulated dedicated to the accreditation process. This is relative to a membership of 743 museums and 72 applicants. focus of the entity Accreditation is part of a larger organization that provides other member services such as publications, conferences, etc. pre-certification Pre-accreditation, the museum must be "essentially educational in nature" and "open to the public for at least 2 years." post-certification Reaccredidation is required at least every 10 years, and more often if accreditation was granted with concern. immediacy of the threat of gov't regulation No. source of funding Funding comes from contributions, program services, investments, sales, membership dues and fees. whistle blower protection No. But the AAM requires accredited museums to provide whistle blower protection. investigatory power The AAM requires the applicant museum to allow an AAM investigation. robustness of process The process includes an application with a fee, self-study by the museum, site visits, and a final accreditation decision by the Accreditation Office. site visits Yes. Conducted at the applicant's expense for accreditation and reaccredidation. regulating body does self-evaluations AAM's Code of Ethics requires it to have an annual Independent Auditor's Report, which it posts on its website. A GUIDE FOR CHARITIES AND FOUNDATIONS 83 American Bar Association www.abanet.org/legaled.home.html EIN Number: 36-2384321 NTEE Code: Y30 Factor Description SANCTIONS The Higher Education Act of 1963 (20 U.S.C. 1099b(a)(3)(1994)) states that the legal enforceability Department of Education requires that educational institutions be approved by an established accrediting agency in order to be eligible for federal programs, including funding. If a school does not meet ABA standards, it faces denial or loss of accreditation. other enforceability Graduates from unaccredited law schools cannot practice law in most jurisdictions, and credits from these schools are not always transferable to accredited schools. The ABA was established in 1878; its most recent denial of accreditation (to MA Law School) was upheld by MA District Court in 1997. Mass. Sch. of Law at Andover v. ABA, 846 F. Supp. 374 (E.D. Pa. 1994), aff'd, 107 F.3d 1026 (3d Cir. 1997), cert. denied, 522 U.S. 907 (1997). In 1994, the Department of Justice history of enforcement began investigating the ABA, resulting in the ABA agreeing to the entry of a consent decree, requiring the ABA to modify its accreditation process. Changes included amending the role of the House of Delegates in adopting or amending any rule, allowing appeals on accreditation decisions to go to the House of Delegates, and removing House authority over the Council. disclosure of sanctions Yes; the ABA publishes a list of accredited schools. If a school loses its accreditation, this information is made public. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. The ABA is the only national organization that provides law school accreditation. A few states will accredit law schools not accredited by the ABA monopoly power and accept those graduates for practice in the state. The Department of Justice has investigated the ABA on anti-trust claims, resulting in a consent decree that caused the ABA to change its governance structure. SPECIFICITY specificity of sector or sub-sector regulated All American law schools. specificity of activity regulated The ABA standards cover every aspect of law school operations. TRANSPARENCY dissemination of standards Yes. Detailed standards are available online. disclosure of process Yes. Process details are available online. 84 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE American Bar Association, continued Factor Description OTHERS staff ratio to organizations regulated The ABA accreditation staff of 12 is relative to 189 approved law schools. The annual budget of the ABA is more than $100 million, relative to 189 budget ratio to organizations regulated approved law schools. Only a fraction of this amount is spent on the accreditation process. The regulation of law schools is part of the activities of a larger organization. focus of the entity The ABA is engaged in lobbying, member services and publications, standards for lawyers and the judiciary, continuing education, pro bono work, among other activities. pre-certification Prerequisites for accreditation include being in operation for at least 1 academic year and the completion of a Site Evaluation Questionnaire. post-certification The ABA initially requires renewal of accreditation after 3 years, then subsequently every 7 years. immediacy of the threat of gov't regulation There is no current threat of government regulation. source of funding Member fees and dues provide a majority of ABA funding. whistle blower protection investigatory power The ABA conducts extensive investigations. The accreditation process involves extensive fact-finding by the Accreditation robustness of process Committee including site visits, interviews, self-evaluations, and many stages of approval. The burden to demonstrate full compliance is on the school. site visits The ABA conducts site visits that last several days and involve multiple meetings and interviews. regulating body does self-evaluations No. A GUIDE FOR CHARITIES AND FOUNDATIONS 85 American Board of Medical Specialties www.abms.org EIN Number: 23-7304902 NTEE Code: H99 Factor Description SANCTIONS legal enforceability No. other enforceability Certificates may be inactivated; approval may be denied. history of enforcement The ABMS has approved boards since 1934; 24 are currently approved. 3 certificates were inactivated in 2003. disclosure of sanctions No. One can access lists of approved boards online; to access listings of certified physicians, one must register for the site's services. VALUE OF ACCREDITATION ability to market to funders N/A. ability to market to members Yes. industry "buy-in" No. While there are currently 24 approved boards, 180 boards are not ABMS approved. monopoly power No. SPECIFICITY specificity of sector or sub-sector regulated US medical specialty boards. specificity of activity regulated Broad. The Essentials for Approval of Examining Boards in Medical Specialties cover many areas of board practice. TRANSPARENCY dissemination of standards Yes. Standards are available online or from ABMS publications. disclosure of process Yes. The details of the process are available online. 86 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE American Board of Medical Specialties, continued Factor Description OTHERS staff ratio to organizations regulated The ABMS' 5 full-time staff handles 24 approved boards. budget ratio to organizations regulated Revenue $291,926 (FY 2003) is relative to 24 approved boards. focus of the entity The ABMS publishes a directory and provides Doctor Verification Services, publishes books, and conducts conferences. Prerequisites for approval include presenting a plan for developing graduate pre-certification education in the specialty, evidence of broad professional support for the board, and evidence that there is not already a board for that specialty. post-certification immediacy of the threat of gov't regulation No. source of funding ABMS funding comes from direct public support, interest and program services. whistle blower protection investigatory power No. robustness of process Low. The ABMS accepts proposals, may conduct hearings, and provides for appeals, but its process is not robust. site visits No. regulating body does self-evaluations No. A GUIDE FOR CHARITIES AND FOUNDATIONS 87 Australian Council for International Development www.acfid.asn.au EIN Number: N/A NTEE Code: N/A Factor Description SANCTIONS Member adherence to the ACFID's Code of Conduct for Non Government legal enforceability Development Organizations is required for eligibility for the AusAid matching grant scheme. If a member is not in compliance, ACFID responds by withdrawing the member's other enforceability affiliation status and publishing its name and the nature of its breach. Other sanctions include resolution of the violation through a reconciliation process or notification of AusAid. history of enforcement disclosure of sanctions Yes. Names of organizations in breach of obligations are published by the ACFID. VALUE OF ACCREDITATION ability to market to funders Yes. Access to the AusAid matching grant scheme is attractive to donors. ability to market to members Yes. industry "buy-in" Yes. monopoly power Yes. If the organization wants to be eligible for government funds. SPECIFICITY specificity of sector or sub-sector regulated Non Government Development Organizations in Australia. specificity of activity regulated The Code covers broad areas of organizations' practices. TRANSPARENCY dissemination of standards Yes. Standards are widely available. disclosure of process Yes. The process is detailed online. 88 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Australian Council for International Development, continued Factor Description OTHERS staff ratio to organizations regulated 14 staff is relative to 80 members. budget ratio to organizations regulated In 2004, ACFID's revenue was $1,300,638, relative to 80 members. focus of the entity The ACFID focus is the Code's implementation and enforcement. pre-certification Accreditation application including audited financial statements. post-certification Signatories are required to provide an annual report and annual audited financial statements. immediacy of the threat of gov't regulation The ACFID works in partnership with the government. source of funding Government grants and member fees provide funding for ACFID programs. whistle blower protection Yes. In addition, the Code promulgated for members contains a whistle-blowing protection provision. However, the ACFID does not pursue anonymous complaints. The Guidance Document to the Code outlines the investigatory power of the ACFID. investigatory power This includes the ability to collect information with the consent of the organization being investigated, and only when necessary for the investigation. robustness of process The process is highly robust, including a complaints procedure, outlined penalties, and an appeals process. site visits Yes. Investigations are conducted with the consent of the party being investigated. regulating body does self- evaluations No. A GUIDE FOR CHARITIES AND FOUNDATIONS 89 Better Business Bureau Wise Giving Alliance www.give.org EIN Number: 52-1070270 NTEE Code: S03 Factor Description SANCTIONS legal enforceability No. other enforceability The only enforceability the BBB has is to refuse the BBB seal to noncompliant organizations. The Wise Giving Alliance was formed in 2001 as a result of the BBB Foundation's history of enforcement Philanthropic Advisory Service and National Charities Information Bureau; it performs about 500 national reports each year. disclosure of sanctions If the BBB revokes an organization's seal, the information would be available online. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. monopoly power No. Adherence to the Wise Giving Alliance's standards is entirely voluntary. SPECIFICITY specificity of sector or sub-sector regulated Charities. specificity of activity regulated Broad. TRANSPARENCY dissemination of standards Yes. Standards are available online, and in print by request. disclosure of process Yes. 90 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Better Business Bureau Wise Giving Alliance, continued Factor Description OTHERS staff ratio to organizations 10 Wise Giving Alliance staff, supported by BBB staff, is relative to thousands of regulated nonprofit organizations. budget ratio to organizations The Wise Giving Alliance's revenue in 2003 was $1,593,513 relative to thousands of regulated nonprofit organizations. focus of the entity The focus is on reporting and the BBB Seal only. pre-certification No. post-certification No. immediacy of the threat of gov't regulation No. source of funding Funding comes from public support, program service revenue, and interest on savings and investments. whistle blower protection investigatory power No. The Wise Giving Alliance will request information from organizations that are the subject of donor inquiries. robustness of process Low. Investigations are based on information provided by the nonprofit organization. site visits No. regulating body does self- evaluations Yes. The Wise Giving Alliance adheres to all of its own standards. A GUIDE FOR CHARITIES AND FOUNDATIONS 91 Council on Foundations www.cof.org EIN Number: 13-6068327 NTEE Code: T50 Factor Description SANCTIONS legal enforceability No. In egregious situations, the COF will inform government agencies of member misconduct. other enforceability The COF can revoke membership for non-compliance with their Principles and Practices for Grantmakers. Community foundations must meet separate standards to have access to certain benefits, such as marketing materials. The COF has over 50 years of history in the field. They have required corrections history of enforcement of violations by private foundations and community foundations, but none have lost membership. disclosure of sanctions Yes. If a member is on probation or membership is revoked, that action is not private. The decision of whether to publish the results of a review is made on a case-by-case basis. VALUE OF ACCREDITATION ability to market to funders Yes. Community foundations can market to funders. Private foundations do not fundraise. ability to market to members Yes. industry "buy-in" Yes. monopoly power No. Membership is not mandatory. SPECIFICITY specificity of sector or sub- The COF regulates all member foundations. Private foundations and community sector regulated foundations are members; the accreditation process is more stringent for community foundations. specificity of activity regulated Regulations concern all aspects of the sector's activities. TRANSPARENCY dissemination of standards Yes. disclosure of process Yes. 92 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Council on Foundations, continued Factor Description OTHERS staff ratio to organizations regulated 87 COF staff is relative to 1,921 member foundations. budget ratio to organizations regulated In 2003, COF revenue was $14,681,062, relative to 1,921 member foundations. focus of the entity The COF's focus is member services, including lobbying on behalf of its members, as well as regulation with compliance with Standards. To apply, an organization must certify that it has complied with all appropriate state pre-certification registration and reporting requirements. It also must state that it subscribes to the recommended Principle and Practices for Effective Grantmaking of the Council on Foundations. It must submit the Form 990 or Form 990PF at the time of application. While the COF offers educational conferences and online resources, there are no post- post-certification certification requirements. There is no regular review of members unless a problem is brought to the attention of the COF. immediacy of the threat of gov't regulation No. source of funding The COF's funding come from dues, grants and contributions, professional development, publications and investments. whistle blower protection No. However, they are in the process of establishing a policy. investigatory power Yes. This investigation consists of an examination of publicly available information or information provided by the foundation in question. Low. The COF inquires into reports brought to its attention by any source, including the robustness of process media and the general public. It relies on information provided by the foundation for its investigation. site visits No. The COF does not conduct site visits. regulating body does self- Yes. The COF makes an Independent Auditor's Report available online but does not evaluations otherwise self-evaluate. A GUIDE FOR CHARITIES AND FOUNDATIONS 93 Evangelical Council for Financial Accountability www.ecfa.org EIN Number: 93-0744698 NTEE Code: X21 Factor Description SANCTIONS legal enforceability No. If the member is cooperative, there is generally an opportunity for correction. other enforceability Otherwise, there may be a resignation, suspension, or termination of membership and accreditation. The ECFA has been in operation for 26 years. In the last 10 years, there has been a high history of enforcement of 11 annual terminations and a low of 1 annual termination. Requests for correction are more common. The threat of expulsion is a serious possibility. disclosure of sanctions Yes. The ECFA discloses sanctions on its website and on the annual membership list. In particularly egregious situations, the ECFA will issue a press release. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. monopoly power No. Membership is not mandatory. SPECIFICITY specificity of sector or sub-sector regulated Christianity-based charity organizations are eligible for membership in the ECFA. specificity of activity regulated Narrow. The ECFA focuses on financial accountability. TRANSPARENCY dissemination of standards Yes. Standards are widely available. disclosure of process Yes. The process is disclosed online. 94 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Evangelical Council for Financial Accountability, continued Factor Description OTHERS staff ratio to organizations A staff of 4 full-time and 6 part-time regulators is joined by a Standards Committee with regulated 10 pro bono members. This is relative to 1,150 member organizations. budget ratio to organizations regulated The budget for regulation is about $1.3 to $1.5 million, relative to 1,150 members. focus of the entity The focus of the entity is regulation and accreditation. pre-certification Pre-certification includes an application and a statement of faith. post-certification Every fiscal year, members must submit audited financials. 35-40% of members do not get recertified each year without some additional required compliance. immediacy of the threat of gov't regulation No. source of funding Funding derives primarily from dues, which range from $300 to $8,000, depending on the size of the organization. whistle blower protection Yes. The ECFA will not disclose the identity of any whistle blower. But, the ECFA cannot protect any whistle blower within his or her own organization. investigatory power Yes. robustness of process The robustness of process is high. site visits Yes. The ECFA conducts mandatory site visits; timing is at the discretion of the ECFA. regulating body does self- evaluations No. A GUIDE FOR CHARITIES AND FOUNDATIONS 95 InterAction American Council for Voluntary International Action Inc. Membership www.interaction.org EIN Number: 13-3287064 NTEE Code: Q03 Factor Description SANCTIONS legal enforceability No. If a member does not complete its annual self-certification, it is suspended from other enforceability membership. If there is another violation, the member has a year to correct the violation. If it does not do so, it is suspended from membership. Since InterAction allows for correction in the case of a violation, it is rarely required to history of enforcement suspend a member. Suspension has only occurred once since InterAction was formed in 1984. disclosure of sanctions No. The only disclosure is that InterAction removes the suspended organization from its membership list. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. InterAction has more than 160 members, and coalitions in Japan and China have used the standards as a model for their own standards. monopoly power No. Membership with InterAction is not mandatory. SPECIFICITY InterAction members are US nonprofits involved in international humanitarian work. specificity of sector or sub-sector InterAction regulates their international operations only. The sector includes child regulated sponsorship organizations, health care agencies, and both faith-based and secular organizations. specificity of activity regulated InterAction standards cover a broad array of activities performed by its members, including financial management, fundraising, governance, and program performance. TRANSPARENCY dissemination of standards Yes. The standards are widely available. disclosure of process Yes. The process is disclosed online. 96 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE InterAction American Council for Voluntary International Action Inc. Membership, continued Factor Description OTHERS staff ratio to organizations InterAction has 35 staff, 2 of whom are dedicated to member certification. This is regulated relative to its more than 160 members. budget ratio to organizations From revenue of $5,067,694 in FY 2003, about $500,000 was dedicated to the regulated certification of its more than 160 members. focus of the entity The focus of the entity is member services and standard-setting. pre-certification The only required pre-certification is that the entity certifies compliance with InterAction standards. post-certification Member organizations must self-certify annually. immediacy of the threat of gov't regulation There is no immediate threat of government regulation. source of funding InterAction funding comes from contributions, government grants, program services, investments, dues, and fees. whistle blower protection Yes. InterAction has a whistle blower protection policy. investigatory power InterAction's investigatory power is only applicable in cases on known non compliance. The self-regulation process is not robust. The InterAction website states that the robustness of process Standards are "best understood as statements of principles and, as such, are not requirements." site visits No. Site visits are not performed. regulating body does self- evaluations Yes. InterAction self-evaluates. A GUIDE FOR CHARITIES AND FOUNDATIONS 97 InterAction American Council for Voluntary International Action Inc. Child Sponsorship Accreditation Program www.interaction.org EIN Number: 13-3287064 NTEE Code: Q03 Factor Description SANCTIONS legal enforceability No. other enforceability If a program is found to be in violation, it will lose its certification. history of enforcement This is a new program; there have not been any enforcement actions to date. disclosure of sanctions No. The only "sanction" is that InterAction removes the suspended organization from its accredited organization list. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. Though new, this program has enjoyed industry "buy-in." monopoly power No. Accreditation through InterAction is not mandatory. SPECIFICITY specificity of sector or sub-sector InterAction members and child sponsorship organizations are able to be accredited regulated through this program. specificity of activity regulated InterAction accreditation covers a broad array of activities performed by agencies, including financial management, fundraising, governance, and program performance. TRANSPARENCY dissemination of standards Yes. The standards are widely available. disclosure of process Yes. The process is disclosed online. 98 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE InterAction American Council for Voluntary International Action Inc. Child Sponsorship Accreditation Program, continued Factor Description OTHERS One in-house staff member is assisted by Social Accountability International. This group staff ratio to organizations is under contract to accredit the child sponsorship agencies and examine them for regulated compliance. This is relative to its 5 accredited entities in addition to new applicants for accreditation. budget ratio to organizations regulated The agency being accredited pays all of its accreditation costs. focus of the entity Accreditation is part of the work of the larger InterAction organization. This program is distinct from InterAction's general membership certification program. pre-certification Pre-certification requirements include applications, document review, and site visits. post-certification After certification, site visits at international sites are made twice annually. In addition, the organization must be re-accredited every 4 years. immediacy of the threat of gov't regulation There is no immediate threat of government regulation. source of funding The organizations being accredited are the exclusive source of funding for the accreditation program. whistle blower protection Yes. InterAction has a whistle blower protection policy. The investigatory power is primarily in the hands of sub-contractor Social Accountability investigatory power International, which conducts site visits at international sites and monitors agencies for compliance. robustness of process The self-regulation process is robust. Accredited agencies are required to provide substantial documentation and permit frequent site visits. site visits Yes. Site visits are performed. regulating body does self- Yes. InterAction self-evaluates and this self-evaluation process involves this program as evaluations well. A GUIDE FOR CHARITIES AND FOUNDATIONS 99 Joint Commission on Accreditation of Healthcare Organizations www.jcaho.org EIN Number: 36-2229255 NTEE Code: E03 Factor Description SANCTIONS Accreditation "deems organization qualified as a Medicaid/Medicare recipient." Also, legal enforceability serious violations of standards that may jeopardize the health or safety of the public are reported to the government or to licensing agencies. other enforceability A list of accredited organizations and their survey results are posted on the JCAHO website. history of enforcement The JCAHO has been accrediting healthcare organizations for more than 50 years. Yes. The "Quality Check" section of the JCAHO's website provides a search engine to determine what, if any, disciplinary actions have been taken against accredited disclosure of sanctions organizations. Other information, such as how the organization best suits the inquirer's needs and how the organization meets safety goals, is also provided. Quality Check is updated daily. It also lists "Special Quality Distinction Awards" to high-performing organizations. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. monopoly power Yes. SPECIFICITY specificity of sector or sub-sector The JCAHO accredits a range of health care organizations (hospitals, healthcare regulated networks, nursing homes, etc.). specificity of activity regulated The JCAHO regulates a broad array of activities performed by healthcare organizations. TRANSPARENCY dissemination of standards Yes. Standards are widely available. disclosure of process Yes. The process is available online or in print upon request. 100 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Joint Commission on Accreditation of Healthcare Organizations, continued Factor Description OTHERS staff ratio to organizations The JCAHO has more than 1,000 staff, relative to its more than 15,000 accredited regulated organizations. budget ratio to organizations With revenue of $85,292,219 in 2003 relative to its more than 15,000 accredited regulated organizations. focus of the entity The JCAHO is focused on accreditation only. pre-certification Pre-certification requirements include allowing unannounced site visits, called "surveys." Organizations complete an application. post-certification Accredited organizations must undergo on-site, extensive reviews at least once every 3 years. Laboratories are accredited every 2 years. immediacy of the threat of gov't regulation Yes. source of funding The JCAHO receives its funding from program services, such as survey fees, and investment income. whistle blower protection Yes. The JCAHO provides whistle blower protection. investigatory power Yes. The JCAHO has strong investigatory power. The robustness of this accreditation process is quite high. One method used is to track a particular patient through his or her entire interaction with an organization robustness of process and measure the organization's performance. In February 1997, the Joint Commission launched its ORYX® initiative, which integrates outcomes and other performance measurement data into the accreditation process. site visits Yes. The JCAHO does conduct site visits, including unannounced visits in the event of a complaint. If an organization refuses to allow this visit, it will lose its accreditation. regulating body does self- evaluations Yes. The JCAHO self-evaluates. A GUIDE FOR CHARITIES AND FOUNDATIONS 101 Land Trust Alliance www.lta.org EIN Number: 04-2751357 NTEE Code: C34 Factor Description SANCTIONS legal enforceability No. Some public funders ask for a statement of adoption of LTA Standards and Practices; this allows local land trust alliances access to greater funding. Also, if a local land trust other enforceability alliance is not a member of the national organization, it is not eligible for certain matching grants from the LTA. In 2003, the LTA gave $973,000 in matching grants to help build organizational capacity and conserve land; it also distributed $59,400 in scholarships to help train the boards of small land trusts. history of enforcement disclosure of sanctions No. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. The number of land trusts is growing rapidly, having increased 26% from 1998 to 2003. Of the more than 1,500 national land trusts, 1,085 were members in 2003. monopoly power No. SPECIFICITY - specificity of sector or sub- Local land trusts are regulated. However, individuals, nonprofit organizations, and sector regulated professionals may become members as well. - specificity of activity regulated Broad. The Standards cover all aspects of operating and managing a land trust. TRANSPARENCY dissemination of standards Yes. The Standards and Practices, including the 2004 revisions, are available online or in print, upon request. disclosure of process No. The process for enforcement of these standards is not publicly disclosed. 102 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Land Trust Alliance, continued Factors Description OTHERS staff ratio to organizations regulated The 40-person staff is responsible for more than 1,000 nonprofit land trusts. budget ratio to organizations The LTA's revenue of $4,825,974 in 2003 is relative to more than 1,000 nonprofit land regulated trusts. Member services are the focus of the LTA, including political activity on the behalf focus of the entity of members, maintaining an online library for their use, publishing materials, holding conferences, and providing matching grants and scholarships to its members. Prerequisites for land trust membership include certification of 501(c) (3), local/ pre-certification municipal land trust status, certification of adoption of Standards and Practices, and payment of dues. post-certification All local land trust must certify adoption of the revised 2004 standards, which will go into effect in mid-2005. immediacy of the threat of gov't regulation No. source of funding Funding comes from contributions, government grants, program services, investments, and publication sales. whistle blower protection investigatory power No. Local land trusts self-certify. robustness of process The membership maintenance process is not robust. site visits No. regulating body does self- No. The LTA follows its own Standards and Practices but does not conduct formal self- evaluations evaluations. A GUIDE FOR CHARITIES AND FOUNDATIONS 103 Maryland Association of Nonprofit Organizations Standards for Excellence Institute www.marylandnonprofits.org EIN Number: N/A NTEE Code: N/A Factor Description SANCTIONS legal enforceability No. other enforceability If a certified organization does not comply with Standards for Excellence, it would lose that seal or be placed on probation. history of enforcement One seal was revoked for failure to meet all standards; one organization was ineligible for recertification, but was given a time frame to achieve recertification. Yes. A list of certified organizations is published, and if an organization loses certification, disclosure of sanctions the seal is removed. Loss of certification is announced publicly, though failure to be certified upon application is not announced publicly. The above-mentioned seal revocation was reported and commented on in the Wall Street Journal. (Aug. 18, 2004). VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. Yes. Of the 1,458 members of the Maryland Association of Nonprofit Organizations, 90 industry "buy-in" already have been certified since the Standards for Excellence was launched in Maryland in 1998. (The Standards for Excellence Institute only has been in existence since June, 2004). monopoly power No. SPECIFICITY The Maryland Association of Nonprofit Organizations (Maryland Nonprofits) has specificity of sector or sub- a membership consisting of Maryland nonprofit organizations. The Standards for sector regulated Excellence Institute has partnerships with nonprofit associations in Pennsylvania, Louisiana, Georgia, North Carolina, and Ohio, and hopes to make its standards national. specificity of activity regulated Broad. The Standards cover all aspects of operating and managing a nonprofit organization. TRANSPARENCY dissemination of standards Yes. The Standards are available online and in print. No. The process for enforcement of these standards is not disclosed publicly. Certified disclosure of process organizations receive a license agreement and materials concerning process when they apply for certification. 104 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Maryland Association of Nonprofit Organizations, continued Factor Description OTHERS staff ratio to organizations The 3-person Standards of Excellence Institute staff is relative to the 90 certified regulated organizations. There is also a staff member at each location that has entered into replication agreements. budget ratio to organizations Maryland Nonprofit's revenue in 2003 was $3,303,693, relative to its 1,458 members. regulated The Standards for Excellence Institute's work is funded by those organizations seeking certification. The Standards for Excellence Institute's focus is on certification and replication of the Standards in other jurisdictions. The Institute is part of the larger Maryland Nonprofits, focus of the entity which is focused on certification of its members in addition to member services. These services include training and technical assistance, cooperative buying programs for the purchase of employee benefits, office equipment and supplies, information sharing and networking, public policy advocacy, research, public education, and public relations. pre-certification Prerequisites for certification include attendance at a training clinic offered by Maryland Nonprofits, an application, and an application fee. Continuing education is offered, but is not required. Recertification takes place initially post-certification after 3 years, and every 5 years thereafter. Seal holders may be requested to provide updated information and documentation. immediacy of the threat of gov't regulation No. source of funding The Standards for Excellence Institute's major fundraising sources are philanthropic grants and earned income. whistle blower protection Certified organizations are required to incorporate whistle blower protections as a prerequisite to earning certification. Yes. The License Agreement signed by members grants investigatory power to the investigatory power Institute. Investigations and follow-up activity are overseen by the Ethics and Standards Committee. robustness of process The certification process is robust, including site visits, a complaints procedure, etc. site visits Yes, the License Agreement gives the Institute authority to conduct site visits if they are deemed to be necessary. regulating body does self- Yes. Maryland Nonprofits conducts Annual Member Satisfaction Surveys and follows its evaluations own Standards. The Standards for Excellence program is independently examined by evaluators from Brandeis University. A GUIDE FOR CHARITIES AND FOUNDATIONS 105 Middle States Association of Colleges and Schools Commission on Higher Education www.msche.org EIN Number: 23-2786118 NTEE Code: B90 Factor Description SANCTIONS The Higher Education Act of 1963, Title IV Student Assistance Program, requires schools legal enforceability to be accredited by a certified accrediting agency in order to be eligible for federal funding. An unaccredited school faces many difficulties, apart from not being mentioned on the other enforceability Association's list of accredited schools. Students are not eligible for federal grants, and may not be able to transfer academic credits to other, accredited schools. Between November of 2004 and March 2005, the Commission reported that accreditation had been granted to 2 institutions, initial accreditation was granted to 2 institutions, warning removed and accreditation was reaffirmed in the case of 1 history of enforcement institution, substantive change was reported in 16 institutions, and 41 follow-up reports/ candidate reports/visits/developments were reported. Loss or denial of accreditation is rare since the application process is long and most "weak" candidates drop out before they face sanctions by the Association. disclosure of sanctions Yes. If a school loses its accreditation or has intermediate action taken against it, that information will be made public. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. Yes. The MSCHE is the only regional body that accredits entire institutions. However, monopoly power there are national and specialized accreditors that can and do accredit entire institutions and/or programs within the institution. SPECIFICITY specificity of sector or sub- Institutions of higher education in Washington D.C., Delaware, Maryland, New Jersey, sector regulated New York, Pennsylvania, Puerto Rico, and the US Virgin Islands are regulated by the Middle States Association. specificity of activity regulated The Association regulates all aspects of the operation of colleges and universities. TRANSPARENCY dissemination of standards Yes. Standards are widely available. disclosure of process Yes. The process is described in detail online. 106 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Middle States Association of Colleges and Schools, continued Factor Description OTHERS A staff of 17 is relative to more than 500 institutions of higher education in Delaware, Washington D.C., Maryland, New Jersey, New York, Pennsylvania, Puerto Rico, and the staff ratio to organizations U.S. Virgin Islands. Also, 10 to 15 institutions may be at varying stages in the application regulated process at any time. This is possible because the Association is able to draw on the free services of approximately 3,000 experts who volunteer to participate in the accreditation process. The accreditation budget is approximately $3.3 million, which is relative to more than budget ratio to organizations 500 institutions of higher education in Delaware, Washington D.C., Maryland, New regulated Jersey, New York, Pennsylvania, Puerto Rico, and the U.S. Virgin Islands, as well as 10 to15 applicant schools. focus of the entity Accreditation activities are a part of the work of a larger organization. pre-certification Institutions must file an application and prove that they meet "Characteristics of Excellence" standards. post-certification Post-certification requirements include site visits and requests for documentation, a self- study report, and re-accreditation after 10 years, then again after 5. immediacy of the threat of gov't regulation No. source of funding Funding comes from dues, fees, government grants, and investments. whistle blower protection Yes. A complainant's identity is not disclosed to the institution without his or her consent. investigatory power Yes. The Association has investigatory power. robustness of process The accreditation process is very robust. site visits Yes. The Association conducts site visits. regulating body does self- evaluations Yes. The Association must meet Department of Education standards. A GUIDE FOR CHARITIES AND FOUNDATIONS 107 National Council of YMCAs of the USA www.ymca.net EIN Number: 36-3258696 NTEE Code: P27 Factor Description SANCTIONS legal enforceability No. Sanctions include loss of membership or probation if not in compliance with Y mission other enforceability and non-discrimination policy, or for failure to pay dues. Failure to pay dues is the most common cause for sanctions. history of enforcement The Y was established in 1851. In 2003, 132 Y branches had "conditional" membership and 6 were on probation. disclosure of sanctions Yes. These disciplinary actions are listed on a members-only website. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. monopoly power Yes. If an organization wants to use the "YMCA" name. SPECIFICITY specificity of sector or sub-sector regulated The YMCA of the USA regulates local YMCAs. specificity of activity regulated Broad. The national organization's standards include all aspects of Y operation, including funding, facilities, recreation provided, etc. TRANSPARENCY dissemination of standards Yes. The Y standards are available online or in print upon request. disclosure of process Yes. The process is available online. 108 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE National Council of YMCAs of the USA, continued Factor Description OTHERS staff ratio to organizations The YMCA of the USA's 241 staff is relative to its 974 member YMCAs and 1,601 regulated branches. budget ratio to organizations regulated Revenue of $78,770,024 in 2003 is relative to 974 member YMCAs and 1,601 branches. focus of the entity The Y provides member services, including publications, products, research, and training. Prerequisites for membership include basic guidelines such as having a service area pre-certification of more than 25,000 people within a 7-mile radius, a "start­up fund" of $200,000 to $300,000, and an experienced YMCA senior director on staff. post-certification Post-certification, the YMCA of the USA requires an annual report and IRS 990 forms. It also offers continuing education. immediacy of the threat of gov't regulation No. source of funding The YMCA of the USA's funding comes from public support, government grants, fees and contracts, membership dues, and interest. whistle blower protection investigatory power No. The YMCA of the USA relies on submissions by local YMCAs to ensure compliance. robustness of process This process is not robust. site visits No. The YMCA of the USA does not perform site visits. regulating body does self- Yes. The YMCA of the USA is continually audited and monitored to ensure that its evaluations services in support of local YMCA associations are effective. A GUIDE FOR CHARITIES AND FOUNDATIONS 109 Public Company Accounting Oversight Board www.pcaobus.org EIN Number: 74-3073065 NTEE Code: N/A Factor Description SANCTIONS legal enforceability Sarbanes-Oxley §105 (2002) empowers the PCAOB to oversee all registered public accounting firms. The PCAOB is authorized to impose fines, remedial measures such as training, new other enforceability quality control procedures, or the appointment of an independent monitor, and revocation of registration. history of enforcement This is a new agency which was founded in early January 2003; there have been no public disciplinary actions yet. disclosure of sanctions If and when disciplinary actions are taken in the future, that information will be made public. VALUE OF ACCREDITATION ability to market to funders N/A. The government funds the PCAOB. ability to market to members N/A. The PCAOB does not have members. industry "buy-in" Yes. Compliance with the PCAOB is required. monopoly power Yes. The PCAOB has monopoly power. SPECIFICITY specificity of sector or sub-sector regulated All registered public accounting firms are regulated by the PCAOB. The regulated activity is broad. The PCAOB monitors compliance with its own rules, with any provisions of the securities laws relating to the preparation and issuance of specificity of activity regulated audit reports, and with professional standards. PCAOB rules concern auditing and related attestation, quality control, ethics, and independence standards in preparation and issuance of audit reports. TRANSPARENCY dissemination of standards Yes. The standards are available online. disclosure of process Yes. The process is described online. 110 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Public Company Accounting Oversight Board, continued Factor Description OTHERS staff ratio to organizations With 262 employees at the beginning of 2005, the PCAOB expects to increase to 450 regulated by the end of the year. This is relative to the 893 firms in the US and 76 internationally that are regulated by the PCAOB. budget ratio to organizations The PCAOB had revenue of $101,247,000 in 2004, relative to 893 firms in the US and regulated 76 internationally. focus of the entity The PCAOB is involved in registration, inspection, enforcement, and investigation. pre-certification Registration process including a 19 page application form and payment of fees. post-certification Annual or triennial inspections are conducted on registered firms. immediacy of the threat of gov't regulation The government has created and authorized the PCAOB to do this work. source of funding The government is the source of funding for the PCAOB. whistle blower protection Yes. The PCAOB recommends that anyone who has complained make a report to OSHA (Occupational Safety and Health Administration) in case of retaliation. Yes. The PCAOB has power both to "inspect" and to "investigate." It has a continuing program of inspections of registered public accounting firms, as is required by Section 104 of the Sarbanes-Oxley Act of 2002. These inspections are conducted annually for large firms, and triennially for smaller firms. Investigations may be made concerning any investigatory power acts or practices, or omissions to act, by firms or persons associated with those firms who may have violated any relevant rules. Firms and associated persons are required to cooperate with the PCAOB, including producing documents and testimony. The PCAOB is also permitted to seek information from other persons, including the clients of registered firms. robustness of process The process is very robust, including inspection, investigation, hearings, and sanctions. site visits Yes. Site visits are conducted. regulating body does self- Yes. The PCAOB self-evaluates. It also hires an independent auditor to complete an evaluations audit each year. A GUIDE FOR CHARITIES AND FOUNDATIONS 111 United Way of America http://national.unitedway.org EIN Number: 13-1635294 NTEE Code: T70 Factor Description SANCTIONS legal enforceability No. other enforceability The UWA may terminate membership of local United Ways or put local organizations on probation. history of enforcement Since the new Accountability and Financial Standards were put in place in 2003, 59 local United Ways have been disaffirmed. disclosure of sanctions No. Sanctions are not publicly disclosed. However, upon termination, a local United Way may no longer use the United Way logo or be listed on the UWA website. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. monopoly power Yes. If a local organization wants to use the name "United Way," it must be part of the larger national organization. SPECIFICITY specificity of sector or sub-sector regulated Local United Way organizations are regulated. specificity of activity regulated All aspects of local United Way management and activities are regulated. TRANSPARENCY dissemination of standards Yes. The standards are available online or in print. disclosure of process Yes. The process is disclosed. The Membership Status Review Procedures for Current Members, adopted on September 10, 2002, are available upon request. 112 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE United Way of America, continued Factor Description OTHERS staff ratio to organizations regulated The UWA's 10 Membership Accountability staff is relative to 1,348 local United Ways. budget ratio to organizations regulated The UWA's revenue of $28,597,444 in 2003 is relative to 1,348 local United Ways. focus of the entity Membership accountability is one activity of the UWA's, which is involved in national leadership, public policy, research, and membership support. pre-certification Membership requirements include training, submitting IRS form 990, paying dues, and agreeing to the Standards of Excellence. post-certification Local United Ways are required to submit annual independent financial audits and self- evaluations triennially. immediacy of the threat of gov't regulation No. source of funding United Way's funding comes from contributions, government grants, program services, dues, interest, dividends and rental income. whistle blower protection No. The UWA does not have whistle blower protection, but local United Ways are required to have whistle blower policies. UWA does not handle anonymous complaints. investigatory power Yes, the UWA Member Services Committee has investigatory authority when it finds that a member may be in breach. robustness of process The process, while it does include an appeals process, is not robust. site visits No, site visits are performed. regulating body does self- evaluations Yes, the UWA self-evaluates and holds itself to its own Standards. A GUIDE FOR CHARITIES AND FOUNDATIONS 113 Western Association of Schools and Colleges www.wascweb.org/senior/ EIN Number: NTEE Code: Factor Description SANCTIONS legal enforceability The Higher Education Act of 1963, Title IV, requires accreditation of institutions of higher education in order to be eligible for government funding. If a school fails to receive accreditation, or loses accreditation, this will be made public. other enforceability The Association also may issue warnings. In addition, students at non-accredited schools may not be able to transfer credit to other institutions of higher education. history of enforcement The Association issued 3 warnings in 2004-2005. disclosure of sanctions Yes. All disciplinary actions except for a "Notice of Concern" are made public. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. industry "buy-in" Yes. monopoly power Yes. No other accrediting body exists in that region. While accreditation is not mandatory, all schools seek it because of its benefits. SPECIFICITY specificity of sector or sub- The Association regulates all institutions of higher education in California, Hawaii, and sector regulated the Pacific Basin. specificity of activity regulated This regulation is broad. It covers all aspect of operation of institutions of higher education in its region. TRANSPARENCY dissemination of standards Yes. Standards are available online and in print. disclosure of process Yes. The process is disclosed online and in handbooks, available upon request. 114 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Western Association of Schools and Colleges, continued Factor Description OTHERS staff ratio to organizations The Association has 25 members of the accreditation commission and 5 staff, relative to regulated 151 accredited institutions. budget ratio to organizations In 2003, the entire association had revenue of $6,262,565, relative to 151 accredited regulated institutions. focus of the entity Accreditation is the primary activity of the organization. pre-certification Prerequisites for accreditation, such as having been in operation for a specified period of time, self-evaluation, etc., and an application process. Each school must file annual reports, will be visited at least every ten years, and post-certification undergoes comprehensive self-evaluation every 10 years. It also must report any substantive changes, such as opening a satellite branch, to the Association. immediacy of the threat of gov't regulation source of funding The source of Association funding is dues and fees, government grants, investments, program services, and sales. whistle blower protection Yes. investigatory power Yes. The investigatory power is quite broad. robustness of process The process is very robust, with a detailed complaints procedure, investigation procedure, and appeals procedure. site visits Yes. Site visits are conducted. regulating body does self- Yes. The Association must meet Department of Education standards and is reviewed evaluations periodically by the US Department of Accreditation. In addition, the Association self- evaluates. A GUIDE FOR CHARITIES AND FOUNDATIONS 115 2. Entities that Regulate Individuals: The follow- limited by the NYSBA's lack of sanctions, ing entities regulate individuals:7 particularly the authority to disbar attorneys. d. State Bar of California: Created by the state a. American Society of Association Execu- legislature in 1927, the State Bar is a public tives: The ASAE accredits interested mem- corporation within the judicial branch of bers pursuant to a Certified Association government, serving as an arm of the Cali- Executive Program. The program does not fornia Supreme Court. Membership in the reflect an effective self-regulatory scheme State Bar is a requirement for practicing law because (1) certification is completely volun- in California. Although only the courts can tary and not required for ASAE membership, disbar attorneys in California, the State Bar (2) the program lacks any sort of sanctions does have several enforceable sanctions avail- for failure to qualify for certification, and able to it, including temporary suspension (3) only 21.5 percent of ASAE's members of attorneys. The State Bar is an effective are certified, indicating very limited industry model of self-regulation based on (1) man- buy-in and marketability to members. datory membership (monopoly power) and b. Association of Fundraising Profession- (2) enforceable sanctions for noncompliance als: The AFP is a professional association of with standards. fundraisers, with 26,000 members and 171 chapters worldwide. The AFP requires its Our analysis of the selected self-regulatory members to comply with a Code of Ethi- entities that regulate individuals concluded that cal Principles and Standards of Professional certain factors, alone or in combination, were Practice that is designed to provide guide- the most significant for creating an effective self- lines for fundraising professionals. Penalties regulatory scheme. Probably the single most sig- for violation of the Code include a letter of nificant factor contributing to the effectiveness of reprimand, censure and prohibition against self-regulatory models that regulate organizations holding association and chapter office in AFP is legal enforceability of sanctions. A second sig- for one year, and suspension or permanent nificant set of factors contributing to the efficacy expulsion from AFP membership, including of self-regulatory schemes that regulate individu- withdrawal of any AFP sanctioned credential. als is the authority to accredit individuals coupled Although the AFP process for certification with the authority to withdraw the accreditation, and suspension is robust, the effectiveness particularly when this certification or accredita- of the AFP as a model of self-regulation is tion is required to enable to the regulated indi- somewhat limited because membership is not viduals to engage in the activities for which he or required for fundraisers, so the organization she is being regulated (monopoly power). These lacks monopoly power. factors may be even more powerful where (1) the c. New York State Bar Association: The organization has a strong history of enforcing its NYSBA, with more than 70,000 members, sanctions, (2) where the processes of accredita- is the nation's largest voluntary statewide tion and required reaccredidation are robust, par- association of lawyers. It disseminates the ticularly if site visits are required, and (3) where Lawyer's Code of Professional Responsibil- sufficient staff and budget are allocated to the ity and makes recommendations to the regulatory function of the self-regulatory body. courts regarding disciplinary actions against attorneys, but all disciplinary actions and disbarments are handled by the courts. The 7 See Appendix B. effectiveness of this regulatory scheme is 116 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE American Society of Association Executives Certified Association Executive Program www.asaenet.org EIN Number: 53-0026940 NTEE Code: Z99 Factor Description SANCTIONS legal enforceability No. other enforceability An executive faces revocation of membership "for cause," such as non-payment of dues. history of enforcement disclosure of sanctions No. VALUE OF ACCREDITATION ability to market to funders No. ability to market to members No. industry "buy-in" No. Of members, only 21.5% are part of the Certified Association Executive Program. monopoly power No. Certification by the ASAE, while widely recognized, is entirely voluntary. SPECIFICITY specificity of sector or sub- sector regulated Association executives in the US. specificity of activity regulated Narrow. Association management and ethics. TRANSPARENCY dissemination of standards Yes. Standards are available online. disclosure of process Yes. The certification process is detailed online. A GUIDE FOR CHARITIES AND FOUNDATIONS 117 American Society of Association Executives, continued Factor Description OTHERS staff ratio to organizations 134 total staff with 7 staff in membership department relative to 25,000 individual regulated members, and 10,000 association members. 21.5% of individual members take part in the CAE Program. budget ratio to organizations In 2003, ASAE revenue was $913,108, compared to 25,000 individual members, and regulated 10,000 association members. focus of the entity The ASAE performs member services and certification programs. pre-certification The ASAE has prerequisites for certification application, including length of experience requirements and the passing of a stringent examination in association management. post-certification Certification requires fulfilling continuing education requirements and applying for renewal every 3 years. immediacy of the threat of gov't regulation No. source of funding ASAE's funding comes from contributions, program services and special events. whistle blower protection investigatory power No. The ASAE may revoke membership "for cause," but does not conduct investigations. robustness of process Low. site visits No. The ASAE does not conduct site visits. regulating body does self- The ASAE conducts annual internal audits by a CPA recommended by the ASAE evaluations president or CEO. The ASAE does not generally self-evaluate. 118 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Association of Fundraising Professionals www.afpnet.org EIN Number: NTEE Code: Factor Description SANCTIONS legal enforceability No. Penalties for violation of the a Code of Ethical Principles and Standards of Professional Practice include a letter of reprimand; censure and prohibition against holding association other enforceability and chapter office in AFP for one year; suspension of membership in AFP for a stated period; and, permanent expulsion from AFP membership, including withdrawal of any AFP sanctioned credential. The AFP was started in 1960 and adopted the Code of Ethics in 1964. In 1992, it adopted history of enforcement its current Procedures for Enforcement of the Code of Ethical Principles and Standards of Professional Practice. There have been approximately 10-15 memberships revoked in the past 7 years. Yes. The AFP sends out an AFP-wide publication stating all the disciplinary actions taken by the AFP during the previous period. It will not disclose the name of the organizations disclosure of sanctions involved, however, and is intended for educational purposes only. In the case of membership revocation, information stating the name of the organization involved will be posted on the AFP website and will be included in AFP newsletters. VALUE OF ACCREDITATION ability to market to funders No. ability to market to members Yes. Funders and members are the same; all funding comes from membership and programming dues. industry "buy-in" Yes. The AFP has 26,000 individual members and 171 chapters throughout the United States, Canada, Mexico, and China. monopoly power No. SPECIFICITY specificity of sector or sub- All fundraising professionals in the United States, Canada, Mexico, and China that want to sector regulated join. specificity of activity regulated The Code covers broad areas of fundraisers' practices. TRANSPARENCY dissemination of standards Yes. Standards are available online. disclosure of process Yes. The process is detailed online. A GUIDE FOR CHARITIES AND FOUNDATIONS 119 Association of Fundraising Professionals, continued Factor Description OTHERS staff ratio to organizations regulated 11 sitting committee members for 26,000 individual members. budget ratio to organizations regulated $10 million total budget as compared to 26,000 current members. The AFP works to advance philanthropy through advocacy, research, education, and certification programs, primarily through setting and enforcing high ethical standards and focus of the entity principles for members of the fundraising community as set forth in its Code of Ethical Principles and Standards of Professional Practice in order to maintain public trust for every AFP member. AFP provides a self-governed process for addressing ethical concerns. Yes. There are three different categories of membership based on years of experience in pre-certification the field. The AFP does not question the type of membership of its applicants and instead relies on the integrity of its members to self-regulate. post-certification Yes. Every member organization must reaffirm their adherence to the Code of Ethics each year. immediacy of the threat of gov't regulation No. source of funding Membership and educational programming fees. whistle blower protection No. investigatory power The AFP has investigatory power. robustness of process The disciplinary process is robust. site visits Yes, the AFP's investigation may include site visits. regulating body does self- The AFP's Board of Directors evaluates itself and the organization annually through an evaluations internal formal process. 120 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE New York State Bar Association www.nysba.org EIN Number: N/A NTEE Code: N/A Factor Description SANCTIONS No. The NY courts handle all disciplinary actions against lawyers. The State Bar is able to legal enforceability make recommendations to the courts about the rules or about individual cases, but its judgments are not final or legally enforceable. The State Bar may impose loss of membership, but this has never been reported except other enforceability in the case of a lawyer having been disbarred by the courts first. In addition, it issues letters of caution, admonition, or reprimand. history of enforcement No. No. Formal ethics opinions issued by the Committee on Professional Ethics can disclosure of sanctions be purchased. These opinions are presented to the Court for its consideration in disciplinary procedures. Letters of caution, admonition, or reprimand are not made public but are retained as part of the attorney's record. VALUE OF ACCREDITATION ability to market to funders No. ability to market to members Yes. Yes. New York has the largest number of members (70,000) of any state with a voluntary industry "buy-in" bar. However, many lawyers belong to their local city or county bars instead of the state- wide organization. monopoly power No. New York has a voluntary bar. SPECIFICITY specificity of sector or sub- sector regulated The New York State Bar Association is concerned with legal practice in New York. specificity of activity regulated Broad. The Bar is concerned with all aspects of legal practice. TRANSPARENCY dissemination of standards Yes. The Lawyer's Code of Professional Responsibility is widely available. disclosure of process Yes. The process is available online. A GUIDE FOR CHARITIES AND FOUNDATIONS 121 New York State Bar Association, continued Factor Description OTHERS staff ratio to organizations regulated The NYSBA's staff of 118 is relative to its 70,000 members. budget ratio to organizations regulated The NYSBA's budget of $21 million is relative to its 70,000 members. Regulation of lawyers is one activity of the organization. It is also involved in influencing focus of the entity legislation, raising judicial standards, advocating voluntary pro bono legal services for the poor, and providing continuing education. pre-certification Prerequisites for membership include having passed the bar exam. post-certification Continuing education is required by the NY courts to maintain one's license, and continuing membership in the State Bar depends on not being disbarred by the courts. immediacy of the threat of gov't regulation No. source of funding Dues and fees from members provide the NYSBA's funding. whistle blower protection Yes. investigatory power Yes. The committee will investigate complaints. The robustness of the disciplinary process is medium. While the Committee on robustness of process Standards of Attorney Conduct investigates violations, it has no enforcement capability. The most it can do is to make a recommendation to the courts. site visits No. regulating body does self- evaluations Yes. The State Bar self-evaluates. 122 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE The State Bar of California www.calbar.ca.gov EIN Number: 94-6001385 NTEE Code: N/A Factor Description SANCTIONS The State Bar is an administrative arm of the California Supreme Court. Also, Chapter legal enforceability 342, Statutes of 1999, restored the Bar's authority to collect fees from California lawyers at an average rate of $395/year for the year 2000. The independent State Bar Court recommends to the California Supreme Court whether to suspend or disbar lawyers. The State Bar may temporarily remove lawyers other enforceability from practice ("involuntary inactive status") when they are deemed to pose a substantial threat of harm to clients or to the public. For lesser offenses, the State Bar may issue public or private reprovals. Suspension or disbarring of lawyers must be approved by the California Supreme Court. California was one of the first unified bars in the US, having unified in 1927. In 2002, it received 12,051 complaints. It resolved 4,852 situations. In 2002, the Office of the Chief history of enforcement Trial Counsel issued 69 warning letters, 98 resource letters, 39 agreements in lieu of discipline, 2,867 dismissals, 587 terminations; in 88 cases resignations were tendered with charges pending; 146 stipulated disciplines were filed; and 402 notices of disciplinary charges were filed. disclosure of sanctions Yes. Public reprovals may be issued. The public also may check an attorney's bar membership record online. VALUE OF ACCREDITATION ability to market to funders Yes. ability to market to members Yes. Funders and members are the same; all funding comes from membership fees and dues. industry "buy-in" Yes. There is mandatory membership. monopoly power Yes. California has a unified Bar and therefore membership is mandatory. SPECIFICITY specificity of sector or sub- sector regulated The legal practice in CA is regulated by the State Bar. specificity of activity regulated Broad. The California State Bar regulates all aspects of legal practice. TRANSPARENCY dissemination of standards Yes. Standards are available online or in print. disclosure of process Yes. The process is detailed online. A GUIDE FOR CHARITIES AND FOUNDATIONS 123 The State Bar of California, continued Factor Description OTHERS staff ratio to organizations With 200,321 lawyers in April 2005, California is the largest integrated bar in the nation. regulated The State Bar Court has 10 judges. budget ratio to organizations In 2002, the California's State Bar's general fund budget was $50.8 million, about 80% regulated of which funded the Bar's attorney disciplinary activities. This is relative to California's 200,321 lawyers. Regulation of lawyers, while a major activity of the Bar, is part of the organization's larger focus of the entity work. The Bar also provides continuing education, public services, aid in the development of pro bono programs, etc. pre-certification Upon passing the bar in California and paying dues, a lawyer becomes a member. post-certification The Bar requires 25 hours of continuing education every 3 years. The Bar offers "Ethics School" for attorneys found to be in need of remedial measures. immediacy of the threat of gov't regulation No. source of funding The state bar relies on dues and fees for its funding. whistle blower protection Yes. Complaints can be made anonymously. investigatory power Yes. The State Bar Court has investigatory power. robustness of process The disciplinary process is robust. site visits Yes. The State Bar Court's investigation may include site visits. regulating body does self- evaluations Yes. The State Bar self-evaluates. 124 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE 3. Entities that regulate both organizations and The NASD has authority to fine, suspend, or individuals: The following entity regulates both expel any brokerage firm or registered securi- organizations and individuals: ties representative that violates its standards. The NASD is quite powerful as a regulator a. National Association of Securities Deal- because (1) its sanctions are legally enforce- ers: The NASD is the primary private-sector able, (2) its sanctions, including suspensions regulator of America's securities industry. It and fines, are comprehensible and effective, is empowered as a regulator by the Malo- (3) it has a strong history of enforcing its ney Act (15 USCS §780-3). The NASD sanctions, (4) its sanctions are publicly dis- licenses individuals and admits firms to the closed, and (5) its investigatory powers, guar- securities industry, writes rules to govern anteed by law, are quite broad. their behavior, examines them for regulatory compliance, and disciplines those who fail Our analysis of the selected self-regulatory to comply. The NASD oversees and regu- entity that regulates both organizations and indi- lates trading in equities, corporate bonds, viduals concluded that the single most significant securities futures, and options, and provides factor contributing to the effectiveness of this education and qualification examinations self-regulatory model is legal enforceability of to industry professionals while supporting sanctions. securities firms in their compliance activities. National Association of Securities Dealers www.nasd.com EIN Number: 53-0088710 NTEE Code: Z99 Factor Description SANCTIONS legal enforceability 15 USCS §780-3 (2004) (the "Maloney Act") empowers the NASD to regulate the securities industry. other enforceability The NASD has authority to fine, suspend, or expel any brokerage firm or registered securities representative that violates its standards. The NASD was established in 1945; in 2003, 1,410 disciplinary actions were reported, history of enforcement 827 individuals were suspended or expelled from industry, and $3 million in fines were collected. disclosure of sanctions Yes. These sanctions are made public, and you can "Check Your Broker's Background" on the NASD website. Also, monthly reports of disciplinary actions are posted online. VALUE OF ACCREDITATION ability to market to funders N/A. The government funds the NASD. ability to market to members N/A. The NASD does not have members. industry "buy-in" Yes. NASD oversight is mandatory. monopoly power Yes. A GUIDE FOR CHARITIES AND FOUNDATIONS 125 National Association of Securities Dealers, continued Factor Description SPECIFICITY specificity of sector or sub- sector regulated The NASD regulates the securities industry. specificity of activity regulated Broad. The NASD regulations affect all aspects of the operations of its constituents in the securities industry. TRANSPARENCY dissemination of standards Yes. The regulations are readily available. disclosure of process Yes. The process is detailed online. OTHERS staff ratio to organizations The NASD's 2,000 member staff is relative to the 5,100 firms and 659,000 securities regulated representatives that it regulates. budget ratio to organizations The NASD's annual budget of more than $500 million is relative to the 5,100 firms and regulated 659,000 securities representatives that it regulates. The NASD is involved in licensing and admission to the industry, writing rules to govern their behavior, examination for regulatory compliance, and discipline of those not in compliance with the regulations. It also provides education and qualification exams focus of the entity to industry professionals; oversees and regulates trading in equities, corporate bonds, securities futures, and options; and operates the largest securities dispute resolution forum in the world. It enforces not only its own rules, but also federal securities laws, rules, and regulations, and the rules of the Municipal Securities Rulemaking Board. pre-certification The NASD issues licenses for entrance to industry. post-certification The NASD examines for regulatory compliance. immediacy of the threat of gov't regulation The government already has threatened to regulate, which is why the NASD was formed. source of funding The federal government provides the NASD's funding. Yes. The NASD makes the process as confidential as possible, and has tools for filing tips whistle blower protection on its website. However, it does not guarantee that the complainant's identity will not be discovered in the course of an investigation. investigatory power Yes. The NASD has broad investigatory power. robustness of process The robustness of the enforcement process is very high. site visits Yes. The NASD conducts site visits. regulating body does self- evaluations Yes. The NASD does self-evaluations. 126 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE CONCLUSIONS vibrant and vigorous self-regulatory initiatives, will prevent all nonprofit fraud, misfeasance, or Self-regulatory structures are frequently important ineffectiveness. If the virtues of self-regulation contributors to the integrity, efficiency, and overall are trumpeted with too much enthusiasm, disap- health of various economic sectors in our country. pointment is inevitable when scandals eventu- They are not merely important but are absolutely ally occur. Protecting and promoting the luster critical to the nonprofit sector, and most crucially of the sector is important, but that will best be to charities and social welfare organizations within accomplished by moderate, rather than hyper- it. Charities and social welfare organizations are, bolic, predictions of the benefits that accrue from of course, subject to governmental oversight on self-regulation. both the federal and state levels. The resources Probably the single most significant factor con- dedicated to this vital task are vastly insufficient, tributing to the effectiveness of any self-regula- however. On the federal level, Internal Revenue tory model is legal enforceability of its standards. Service staffing has increasingly fallen behind the This may at first appear to be an oxymoron: if growth of the organizations it oversees. On the self-regulation is, by definition, regulation by state level, there are only a handful of states where organizations other than governments, how can the Attorney General's charity office operates legal enforceability be an attribute of self-regula- meaningfully. tion? There are instances, however, in which non- In the resulting partial vacuum of governmen- governmental organizations have been allowed tal oversight, self-regulation is an indispensable to establish their own standards (not designed or tool for setting standards, identifying malfeasance dictated by government) for regulating a sector, and misfeasance, and improving the integrity and but with sanctions for non-compliance imposed efficiency of the nation's charities and social wel- by laws adopted by the government. For example, fare organizations. Even if the current Congressio- the National Association of Securities Dealers nal focus results in new legislation, self-regulation ("NASD") is not a governmental organization, will continue to be a centrally important contrib- but its standards and procedures for regulating utor not only to the improvement of nonprofit brokers and dealers in the securities markets are performance but also to the perception that the sanctioned by federal law. The Public Company sector generally is performing properly. Because Accounting Oversight Board ("PCAOB") is simi- the nonprofit sector depends on public support, larly effective based on the legal enforceability of it must not only be, but be seen to be, subject to its sanctions. careful and vigilant oversight. Government over- There is a subtle line to observe here: if gov- sight alone never has been and never will be suf- ernment, in addition to providing legal sanc- ficient to accomplish that task. tions, intrudes unduly into either the substance It follows that improving self-regulation is an of self-regulatory standards or the processes by extremely important goal for the nonprofit sector. which they are applied, the so-called self-regula- To advance towards this goal, it will be helpful tory organization may become a mere agent of to identify organizations that have done it well, the government. In this report, it is assumed that tease out the reasons why they have succeeded self-regulatory standards and procedures, even where others have not, and ascertain the factors if subject to legal sanctions, will be established or attributes that most significantly contribute to and implemented without undue influence from their effectiveness. Those insights, in turn, have government. While it is not possible to state any the potential to contribute to improved self-regu- precise delimitation of permissible governmental lation by existing organizations and to the design participation, if government moves too far from and implementation of better new self-regulatory respectful observer to participating standard set- systems when and where appropriate. ter, the resulting model will not be and should Expectations, however, should remain nuanced. not be considered to be self-regulation. In a free society, no amount of governmental Short of legally enforceable sanctions, a regulation and oversight, even coupled with self-regulatory system with other meaningful A GUIDE FOR CHARITIES AND FOUNDATIONS 127 sanctions may also be quite powerful. The best individuals from a career or profession or line of example is the authority to accredit organiza- business by revoking accreditation. This is a severe tions coupled with the authority to withdraw the sanction and thus sustains substantial compliance accreditation, when the accreditation is required with the standards of practice established by those either (1) to enable to the organization to engage organizations. In order for this factor to be strong, in the activities for which it is formed (monopoly however, the self-regulatory body must control power) or (2) for funding by government and pri- or significantly influence access to a meaningful vate grant makers (ability to market to funders). area of activity or employment, and it must have The Middle States Association of Colleges and the necessary staff, budget, powers, and processes Schools and the Western Association of Schools to make the risk of expulsion for noncompliance and Colleges, like several other similar bodies substantial. The organization's history of enforce- charged with accrediting U.S. colleges and uni- ment is also material. versities, are not governmental organizations, set The specificity of standards is also a factor their own standards and criteria for evaluating ter- influencing self-regulatory effectiveness. Stan- tiary institutions, and perform their own accredi- dards designed for the regulation of the financial tations. Their findings, however, are relied on by affairs of religious organizations may be more government in granting or withholding funding focused and admit of more clarity and precision of the institutions subject to such accreditation. than standards covering the ethical or manage- The Middle States Association of Colleges and rial behavior generally of all organizations in the Schools and the Western Association of Schools nonprofit sector. The tighter the focus-either and Colleges thus represent two of the most of the nature of the regulated conduct or of the potent examples of self-regulatory schemes based members of the regulated class-the more likely it primarily on the impact of their accreditations on is that the self-regulatory standards will be clearly major funders. understood by those subject to them, viewed by Other examples of effective self-regulatory them as relevant and appropriate, and embraced schemes, although lacking both legal enforceabil- in practice. Conversely, the broader the coverage ity and monopoly power, are the American Asso- of the standards-in substance or applicability ciation of Museums and the Evangelical Council -the greater the risk that they may be seen as for Financial Accountability. Although member- overly general, perceived as "soft" and perhaps ship in both organizations is purely voluntary, even irrelevant, and given merely lip service. This funding for regulated organizations is often would be true in any area of self-regulation, but predicated on membership and accreditation. because of the vast diversity within and scope of Both organizations have strong histories of revok- the nonprofit sector, it is particularly true, there, ing accreditations when appropriate, precipitat- that one size may not easily fit all. ing a meaningful impact on access to necessary If one were to structure a model of self-regula- funds. Both organizations also employ robust and tion that could effectively impact the integrity, complex processes for attaining and maintaining efficiency, and overall health of a sector or sub- accreditation, including substantial application sector, legally-enforceable sanctions would be requirements, recertification, and site visits. the single most compelling factor that one could Effective monopoly power without legal offer. In many realms, however, legal enforce- enforceability is illustrated by the Australian ability is either unattainable or undesirable. In Council for International Development, the Joint those areas, an effective self-regulatory scheme Commission on Accreditation of Healthcare may still be achieved by a combination of some of Organizations, the National Council of YMCAs the more significant other factors of self-regula- of the USA, the State Bar of California, and the tion analyzed in this Report. These factors would United Way of America. These self-regulatory include the authority to accredit organizations bodies are quite effective because they have coupled with the authority to withdraw the enforceable authority to preclude organizations or accreditation, particularly when this certification 128 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE or accreditation is required either (1) to enable ACKNOWLEDGEMENTS to the organization to engage in the activities for which it is formed (monopoly power) or (2) for The information set forth in this Report was funding by government and private grantmakers gathered through research, literature searches, (ability to market to funders). The impact of a networking with experts in the field of self-regula- self-regulatory scheme manifesting these factors tion, and a conference convened by the NCPL at could be augmented if the scheme also reflects the New York University School of Law on January following: (1) a strong history of enforcement, 31, 2005. (2) a robust process for accreditation and required This Report could not have been prepared reaccredidation, preferably including site visits, without the assistance of Prof. Jill Manny, and (3) sufficient staff and budget dedicated to Executive Director of the National Center on the self-regulatory function to implement the Philanthropy and the Law; our research assis- scheme in an effective manner. tant, Lindsay Manning; the Bibliographer of the Finally, the analysis in this Report will benefit National Center on Philanthropy and the Law, from the hoped-for critical engagement of others, Susan Belkin; the Program Coordinator of the whose ideas, insights, agreements, and disagree- National Center on Philanthropy and the Law, ments are likely to advance understanding of what Ingrid Hang; and Peter Shiras and Pat Read at makes self-regulatory models effective or inef- Independent Sector. It benefited significantly fective. We look forward to those thoughts and from the comments and contributions of those contributions. who participated in the Jan. 31, 2005, conference at New York University on "Improving Self-Regu- Respectfully submitted, The National Center on lation in the Nonprofit Sector: Factors and Mod- Philanthropy and the Law els," and the many individuals-too numerous by Harvey P. Dale to mention individually by name-with whom Director, and University Professor of we spoke and whom we interrogated over the Philanthropy and the Law past several months, all of whom were unfailingly New York University School of Law helpful and generous with their time. May 27, 2005 A GUIDE FOR CHARITIES AND FOUNDATIONS 129 Glossary of Terms 501(c)(3). See Section 501(c)(3) or transactions treated as compensation (for exam- ple: personal vehicle, meals, housing, personal and Annual Information Return. See Form 990, family educational benefits, low-interest loans, Form 990-EZ, and Form 990-PF. payment of personal or spousal travel, entertain- ment, or other expenses, and personal use of the Appraisal. An assessment of the value of any type organization's property). of property (clothing, household goods, art, land) by an authorized person. Compensation Committee. A committee autho- rized by the governing board to review and make Audit. See Financial Audit. recommendations regarding the compensation of the chief executive officer and the compensation CEO or Chief Executive Officer. The highest range for other persons in a position to exercise ranking staff member or volunteer of the organi- substantial control of the organization's resources. zation. Some organizations refer to this position as the executive director or the president. This Conflict of Interest Policy. A conflict of interest report also uses "chief staff officer" to refer to the arises when a board member or staff person's duty highest ranking paid employee. of loyalty to the charitable organization overlaps with a competing personal interest he or she may Charitable Organization. Any tax-exempt orga- have in a proposed transaction. Some such trans- nization recognized under section 501(c)(3) of the actions are illegal, some are unethical, and oth- Internal Revenue Code. In this report, charitable ers may be undertaken in the best interest of the organization refers to both public charities and charitable organization as long as certain clear pro- private foundations. cedures are followed. A conflict of interest policy helps protect the organization by defining conflict Community Foundation. A tax-exempt organi- of interest, identifying the classes of individuals zation that generally holds a number of perma- within the organization covered by the policy, nent funds created by many separate donors, all facilitating disclosure of information that may dedicated to the long-term charitable benefit of a help identify conflicts of interest, and specifying specific community or region. A community foun- procedures to be followed in managing conflicts of dation is generally recognized as a public charity, interest. and is therefore not subject to the more stringent rules that apply to private foundations. Typically, a Corporate Foundation. A private foundation community foundation provides grants and other that receives its primary funding from a profit- services to assist other charitable organizations making business. The foundation is a separate, in meeting local needs, and also offers services to legal charitable organization even though it often help donors establish endowed funds for specific maintains close ties with the founding company, charitable purposes. and it must abide by the same rules and regula- tions as other private foundations. Also known as Compensation. All forms of cash and non-cash a company-sponsored foundation. payment provided in exchange for services or products. In reporting compensation paid to a Disqualified Person. For public charities, a dis- board member or employee, organizations are qualified person is someone who, at any time expected to include salary or wages, bonuses, during the five-year period ending on the date of severance payments, and deferred payments; the transaction in question, was "in a position to retirement benefits, such as pensions or annuities; exercise substantial influence over the affairs of fringe benefits; and other financial arrangements the organization." Any member of a disqualified 130 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE person's family falls into this category, as does any Excise Tax. A tax that applies to a specific type of entity in which one or more disqualified persons income, activity, good, or service. For example, together own, directly or indirectly, more than a private foundations are subject to an excise tax 35 percent interest. Disqualified persons of public on net investment income. An excise tax may charities recognized as "supporting organizations" also be imposed on charitable organizations, and also include substantial contributors and their their managers and other disqualified persons that family members. Disqualified persons of donor- engage in certain prohibited activities or approve advised funds held by public charities include of prohibited transactions, such as excess benefit donors, investment advisors, and their family transactions.. members. For private foundations, the definition of a disqualified person includes all of the above Fair Market Value. The IRS defines fair mar- as well as substantial donors, owners of more than ket value as "the price that would be agreed on 20 percent of a corporation, trust, or partnership between a willing buyer and a willing seller, with that is a substantial contributor to the foundation, neither being required to act, and both having rea- and the family members of any of these persons. sonable knowledge of the relevant facts. If there is Certain government officials are also considered a restriction on the use of the property (such as a disqualified persons of private foundations. See conservation easement), the fair market value price also Substantial contributor. should reflect that restriction." (IRS Publication 561, Determining the Value of Donated Property.) Donor-Advised Fund. Section 4966(d)(2) of the federal tax code defines a donor-advised fund as a Fiduciary Duty. The legal responsibility for fund or account that is owned and controlled by investing money or acting wisely on behalf of a sponsoring charitable organization, is separately another. Members of the governing board of a identified by reference to contributions of a donor charitable organization have a fiduciary duty to act or donors, and to which the donor (or an advisor in the best interests of the organization. designated by the donor) has or reasonably expects to have advisory privileges regarding the distribu- Financial Accounting Standards Board (FASB). tion or investment of the assets in the fund. The A professional standards board created by accoun- tax code specifically excludes a fund or account tants to establish standards of financial account- that makes distributions only to a single identified ing-known as Generally Accepted Accounting organization or governmental entity or that makes Principles or GAAP-and reporting in the private grants for travel, study or similar purposes pro- sector, including charitable organizations. FASB is vided that certain conditions are met. The Pension officially recognized as authoritative by the Securi- Protection Act of 2006 (P.L. 109-280) enacted ties and Exchange Commission and the American new restrictions on the administration of donor- Institute of Certified Public Accountants. FASB advised funds. operates under the auspices of the Financial Accounting Foundation, a public charity, and its Due Diligence. The degree of prudence that a work is primarily funded by mandatory fees paid reasonable person is expected to exercise in review- by issuers of securities. ing a particular transaction or investment oppor- tunity before deciding to act. See also Fiduciary Financial Audit. A formal examination of an Duty. organization's financial records and practices by an independent, certified public accountant with the Excess Benefit Transaction. An economic benefit objective of assessing the accuracy and reliability provided by a public charity to a disqualified per- of the organization's financial statements. An audit son that is determined to be in excess of the value must follow standards set forth by the American of the services or property received in exchange Institute of Certified Public Accountants to be by the public charity. See also Disqualified Person, accepted universally. Intermediate Sanctions. A GUIDE FOR CHARITIES AND FOUNDATIONS 131 Financial Review. An examination of an organi- tion 501(c)(3) of the Internal Revenue Code. Its zation's financial records and practices by an inde- filing is mandatory for all charitable organizations pendent accountant with the objective of assessing that want to be tax-exempt, except for religious whether the financial statements are plausible. A congregations, certain organizations affiliated with financial review does not involve the extensive religious congregations, and charitable organiza- testing and external validation procedures of an tions that have gross receipts in each taxable year audit and generally provides less credibility than of normally not more than $5,000. an audit. A review offers a lower-cost method of providing some assurance to board members Form 8282. The IRS form that charitable organi- and other managers of an organization that the zations must file if they sell or dispose of donated financial systems and statements are in reasonable property valued at $5,000 or more (based on the order. value claimed by the donor on Form 8283) within two years of receiving the donation. Form 990 Series. Used in this report to refer to the three forms (Form 990, Form 990-EZ and Form 8283. The IRS form that taxpayers must Form 990-PF) filed annually with the Internal file with their annual tax return if they claim Revenue Service by charitable organizations. deductions for non-cash contributions with a By law, a charitable organization must make its total value of $500 or more. If the value of any forms (with required schedules attached) publicly single donated item or collection of items exceeds available. $5,000, the taxpayer must have the Form signed by the appraiser who certified the value of the Form 990. The IRS form that tax-exempt orga- property and the charitable organization that nizations (other than private foundations) that received the donation. have annual revenues of $100,000 or more or total assets above $250,000 must file annually to Generally Accepted Accounting Principles report on their financial and program operations. (GAAP). The accounting principles set forth Religious congregations and specific related insti- by the Financial Accounting Standards Board tutions, specified government agencies, and other (FASB) and the American Institute of Certified organizations identified by the IRS are exempt Public Accountants (AICPA) that guide the work from this filing requirement. of accountants in reporting financial information and preparing audited financial statements for Form 990-EZ. The IRS form that tax-exempt organizations. organizations (other than private foundations) that have annual revenues of $25,000 up to $100,000 Intermediate Sanctions. The name given to or total assets between $100,000 and $250,000 Section 4958 of the Internal Revenue Code that must file annually to report on their financial and allows the IRS to impose penalties on the individ- program operations. Religious congregations and uals who benefit from or approve an excess benefit specific related institutions, specified government transaction, rather than penalizing the organiza- agencies, and other organizations identified by the tion. Prior to the passage of this law in 1996, the IRS are exempt from this filing requirement. IRS's only penalty for such transactions was to revoke the tax-exempt status of the organization, Form 990-PF. The IRS form that all private foun- thus these "intermediate sanctions" offer penal- dations are required to file annually to report on ties that stop short of this severe sanction on the their financial and program operations. organization. Intermediate sanctions rules apply to all 501(c)(3) organizations (except private foun- Form 1023 Application for Recognition of dations) and to organizations exempt from taxes Exemption Under Section 501(c)(3). The IRS under section 501(c)(4) of the Internal Revenue form filed by organizations to obtain recognition Code. See also Excess Benefit Transactions; Rebut- of exemption from federal income tax under sec- table Presumption. 132 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Lead Director. A board member appointed by the tributions and grants, it is generally reclassified as board to serve as chair during a particular board a private foundation. See also Public Charity. discussion or meeting to handle issues in which the chairperson has a conflict of interest. Public Charity. A charitable organization, recog- nized under IRS Section 501(c)(3), that generally Nonprofit Organization. See Tax-exempt receives at least one-third of its support from a organization. broad segment of the general public or from a governmental unit. Federal tax laws define four Non-Operating Foundation. A private founda- types of public charities: (1) public institutions, tion that furthers its charitable purposes primarily such as churches and religious congregations, by making grants to support charitable programs schools and other educational institutions, hospi- conducted by other organizations. See also Operat- tals and medical research institutions, and govern- ing Foundation. mental units; (2) publicly-supported charities that receive at least one-third of their financial support Office of Management and Budget (OMB) from qualifying contributions and grants or from Circular A-133. The instructions provided by providing program services to a broad constitu- the Office of Management and Budget (OMB) ency; (3) supporting organizations that are orga- regarding audits of states, local governments, and nized and operated exclusively for the benefit of or nonprofit organizations that receive federal fund- to carry out the functions of one or more publicly- ing. Under OMB Circular A-133, nonprofit orga- supported charities; and (4) public safety testing nizations that receive $500,000 or more in federal organizations. There are specific federal rules for funds grants per year must have their financial the operation of certain public charities estab- statements audited. lished as medical research organizations, charities that operate as credit counseling organizations, Operating Foundation. A private foundation and certain supporting organizations, as well as for that uses the bulk of its income, usually earned donor advised funds held by a public charity. from assets contributed by a single individual, family, or company, to provide charitable ser- Rebuttable Presumption. A rule under inter- vices or to run charitable programs of its own, as mediate sanctions law that delineates procedures opposed to making grants to other organizations. a public charity must follow in order for the IRS See also Non-Operating Foundation, Private Foun- to presume that the compensation the charity dation, Public Charity. provided to a disqualified person(s) in return for services or property is reasonable. The IRS may Premium Travel. According to federal regulations, "rebut" this presumption by presenting evidence premium travel is any class of accommodation showing the compensation was excessive. The above coach or economy class, such as first or rules call for compensation to be approved in business class. advance by the board (or other authorized com- mittee) and further specifies that the members Private Foundation. A charitable organization must not have a conflict of interest with respect to under IRS Section 501(c)(3), typically established the transaction. The board must use information by a single individual, family, or company, that such as salary surveys, appraisals, or other appro- receives more than two-thirds of its support from priate data to help determine comparability or fair its founders or from investment income earned market value of the compensation, and it must by an endowment. Private foundations are subject also document the basis for its decision. to substantially more restrictive rules than public charities governing their operations, and their Revised Model Nonprofit Corporation Act. The donors receive less favorable tax treatment for Revised Model Nonprofit Corporation Act was contributions. If a public charity fails to meet its adopted in 1987 by the American Bar Association "public support test" of receiving at least one-third to encourage all states to modernize and harmo- of its income from the public in the form of con- nize their laws governing nonprofit corporations. A GUIDE FOR CHARITIES AND FOUNDATIONS 133 The model act lays out requirements for the for- Substantial Contributor. A substantial con- mation and dissolution of a nonprofit corporation, tributor is generally defined as any person who as well as for multiple aspects of corporate gov- contributed or bequeathed the greater of $5,000 ernance, including the duties of board members. or 2 percent of the total contributions received States may adapt or use the model act when draft- by a charitable organization in a given tax year. A ing their own laws. It has been adopted in whole substantial contributor also includes the original or modified form by 23 states. The original Model donor or creator of a private foundation, donor- Nonprofit Corporation Act (issued in 1952) has advised fund, or supporting organization. A been adopted in whole or in modified form by six substantial contributor to a private foundation, other states and the District of Columbia. donor-advised fund, or supporting organization is deemed a disqualified person. See also Disqualified Sarbanes-Oxley Act of 2002. Signed into law Person. in July 2002 in response to corporate scandals, the Sarbanes-Oxley Act imposes obligations and Supporting Organization. A public charity that penalties on corporate officers and directors of is organized and operated to support other speci- publicly traded companies and mandates increased fied public charities, and is therefore not required disclosure by corporations to the Securities and to demonstrate that it receives at least one-third Exchange Commission. of its support from a number of unrelated donors (as do most other public charities). There are three Section 501(c)(3). The section of the Internal categories of supporting organizations, Type I, Revenue Code that defines tax-exempt organiza- Type II and Type III. Each of these organizations tions eligible to receive tax-deductible contribu- must meet a specific legal test designed to ensure tions. To qualify, an organization must be operated that the organization(s) being supported has exclusively for charitable, religious, educational, some influence over the actions of the supporting scientific, or literary purpose, to name a few organization. examples. 501(c)(3) charities are further defined as public charities or private foundations. See also Tax-Exempt Organizations. Organizations that Private Foundation; Public Charity. meet an approved tax-exempt purpose and thus do not have to pay federal and/or state income taxes, Section 509(a). The section of the Internal Rev- except with respect to income earned by a trade or enue Code that defines the rules for determining business that is unrelated to the purpose for which that an organization is a public charity (as opposed the organization was granted tax-exemption. The to a private foundation) and thereby eligible to Internal Revenue Code defines more than 25 receive tax-deductible contributions on more categories of organizations that are exempt from favorable terms. federal income taxes, including charities, business associations, labor unions, fraternal organizations, Self-Dealing. Any financial transaction between and many others. Whereas other types of non- a private foundation and its disqualified persons, profit organizations benefit the private, social or other than reasonable compensation for services. economic interests of their members, charitable Such self-dealing transactions, even those that pro- organizations must benefit the broad public inter- vide a below-market rate benefit to a disqualified est and Congress has therefore provided, with person, are prohibited under Section 4941 of the very limited exceptions, that only those charities Internal Revenue Code. See also Disqualified Per- organized under section 501(c)(3) are eligible sons, Excess Benefit Transaction. to receive tax-deductible contributions. See also Charitable Organization, Private Foundation, Sponsoring Organization. A sponsoring orga- Public Charity. nization is a public charity that maintains, owns, and controls one or more donor-advised funds. See Uniform Management of Institutional Funds also Donor-advised fund; Public Charity. Act (UMIFA). Model legislation put forward in 1972 by the National Conference of Com- 134 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE missioners on Uniform State Laws to govern the Volunteer Protection Act of 1997, P.L. 105-19. management and expenditure of investment assets Federal legislation that limits liability of uncom- held by charitable organizations. UMIFA has been pensated volunteers, including board members, adopted in some form by most states and the Dis- for injuries caused by negligent conduct of the trict of Columbia. Generally, UMIFA is not appli- volunteer while acting within the scope of author- cable to charitable trusts. ity provided to him/her as a volunteer of a govern- mental agency or a charitable organization. The Uniform Prudent Management of Institu- Act does not provide protection from claims of tional Funds Act (UPMIFA). Model legislation gross negligence, willful or criminal misconduct, approved in July, 2006 by the National Confer- reckless misconduct, or conscious, flagrant indif- ence of Commissioners on Uniform State Laws ference to the rights or safety of the individual to govern the management and expenditure of harmed by the volunteer. investment assets held by charitable organizations. UPMIFA has been adopted by 16 states and is Whistleblower Protection Policy. A policy to under consideration in another 14 states. encourage staff and volunteers to come forward with credible information on illegal practices or Uniform Prudent Investor Act (UPIA). Model violations of adopted policies of the organization. legislation approved in 1994 by the National Con- The policy specifies that the organization will pro- ference of Commissioners on Uniform State Laws tect the individual from retaliation. It also identi- to govern the investment practices of fiduciaries. fies those staff or board members or outside parties UPIA is based on the General Standard of Prudent to whom such information can be reported. Such Investment set forth in the Restatement (Third) policies may be known by another name, such as a of Trusts, which was released in 1992 and reflects policy on reporting malfeasance or misconduct. modern portfolio theory, which has become uni- versally accepted. The Uniform Trust Code pro- mulgated by NCCUSL in 2000, and amended in 2001, 2003 and 2005, incorporates UPIA whole- sale as the standard applicable to the investment of trust assets. UPIA has been adopted in more than 40 states and the District of Columbia. . A GUIDE FOR CHARITIES AND FOUNDATIONS 135 Panel on the Nonprofit Sector Staff Executive Director Development Staff Diana Aviv Sherry Rockey Deborah Briggs Project Director Patricia Read Administrative Support Gina Catedrilla Assistant Project Director Staci Morgan Jennifer Chandler Hauge Communications Staff Patricia Nash Christel Bill Wright Additional support provided by Jennifer Frias and Gudrun Hofmeister Acknowledgements The Panel thanks the many charities, private foundations, community foundations, corporate funders, and individuals that have provided support for our work since its inception in 2004. A complete list of funders is available on our website at www.nonprofitpanel.org. Publication and dissemination of this report was made possible through the generous support of The Ford Foundation, the W.K. Kellogg Foundation, and the Charles Stewart Mott Foundation. We also extend our sincere appreciation to Celia Roady, Partner, Morgan, Lewis & Bockius, LLP, and Marion Fremont-Smith, Senior Research Fellow, Hauser Center for Nonprofit Organizations, Kennedy School of Government, Harvard University, for the countless hours they contributed in reviewing documents that led to the publication of this volume. Finally, we thank all of the organizations that provided comments on these principles and all of the Panel's work through our website, our town hall meetings, and other communications. For Further Information Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations is also available in an abridged format without the legal background and appendices included in this reference edition. Ordering information is available at www.nonprofitpanel.org. Independent Sector, which provided leadership in convening and supporting the Panel on the Nonprofit Sector, will continue to offer resources through its programs and website (www.independentsector.org) to facilitate putting these principles into practice. 136 PRINCIPLES FOR GOOD GOVERNANCE AND ETHICAL PRACTICE Advisory Committee on Self-Regulation of the Charitable Sector CO-CHAIRS Richard Klarberg, President and CEO, Council Joel L. Fleishman, Director, Samuel and Ronnie on Accreditation, New York, NY Heyman Center for Ethics, Public Policy and Colin Lacon, President and CEO, Northern the Professions, Terry Sanford Institute of Public California Grantmakers, San Francisco, CA Policy, Duke University, Durham, NC Carol Larson, President and CEO, David and Rebecca W. Rimel, President and CEO, Lucile Packard Foundation, Los Altos, CA Pew Charitable Trusts, Philadelphia, PA Richard Legon, President, Association of Governing Boards of Universities and Colleges, MEMBERS Washington, DC Stephen M. Ahnen, Senior Vice President, Jennifer Leonard, President and Executive American Hospital Association, Washington, Director, Rochester Area Community DC Foundation, Rochester, NY Willard Boyd, Professor of Law and President William L. Minnix, Jr., President and Chief Emeritus, College of Law, University of Iowa, Executive Officer, American Association of Iowa City, IA Homes and Services for the Aging, Washington, J. Todd Chasteen, Vice President of DC Administration, Human Resources and General David Ormstedt, Counsel, Wiggin and Dana LLP, Counsel, Samaritan's Purse, Boone, NC Hartford, CT Harvey Dale, Director, National Center on Michael Piraino, Chief Executive Officer, National Philanthropy & the Law, and University CASA, Seattle, WA Professor of Philanthropy and Law, New York Mark Sidel, Professor of Law, University of Iowa, University School of Law, New York, NY Iowa City, IA Charles M. Elson, Director, John L. Weinberg Bruce Sievers, Visiting Scholar and Lecturer, Center for Corporate Governance, University of Stanford University, Stanford, CA Delaware, Newark, DE Rev. Larry Snyder, President, Catholic Charities Virginia Esposito, President, The National Center USA, Alexandria, VA for Family Philanthropy, Washington, DC Sterling Speirn, President and CEO, W.K. Kellogg Marion R. Fremont-Smith, Senior Research Foundation, Battle Creek, MI Fellow, Hauser Center for Nonprofit Eugene R. Tempel, Executive Director, Center Organizations, Kennedy School of Government, on Philanthropy at Indiana University, Harvard University, Cambridge, MA Indianapolis, IN Janne Gallagher, Vice President and General David Ward, President, American Council on Counsel, Council on Foundations, Washington, Education , Washington, DC DC David L. Warren, President, National Association Merrill Gappmayer, Chairman of the Board, of Independent Colleges and Universities, Intermountain Health Care, Salt Lake City, UT Washington, DC Joyce Godwin, Chair, Board Governance Michael D. Weekes, President and CEO, Committee, Presbyterian Health Care Services, Massachusetts Council of Human Service Albuquerque, NM Providers, Boston, MA Donald Haider, Professor, Management and Myrl Weinberg, President, National Health Strategy, Kellogg School of Management, Council, Washington, DC Northwestern University, Evanston, IL Rand Wentworth, President, Land Trust Alliance, Scott Harshbarger, Senior Counsel, Proskauer Washington, DC Rose LLP , Boston, MA Sister Carol Keehan, President and CEO, Catholic Health Association of the United States, Washington, DC 1200 Eighteenth Street, NW Suite 200 Washington, DC 20036 www.nonprofitpanel.org www.independentsector.org 202-467-6100 202-467-6101 fax