We live in the Post-Enron world, where regulatory oversight of corporate governance is a significant legal issue. The IRS oversees section 501(c)(3) public charities, along with each state’s Attorney General office. Apart from its recent tax scandal, the IRS’s Exempt Organizations Division has increasingly focused on public charities’ corporate governance and related business practices, as a reflection of their likely compliance with directly applicable legal requirements. (See for example, the IRS’ ACT Report (June 2008)). Since a nonprofit’s proverbial buck stops with its board, the IRS thus wants to see good governance evidenced within nonprofit boards.
While one may question the validity of certain IRS’ viewpoints as to what defines “good governance,” the issue of governance itself is not only here to stay. Indeed, it is growing to be one of the most significant legal areas for a public charity to address. A cursory review of the news media supports demonstrates the significance. Rarely does a week pass without a new story of a public charity’s business practices and governance being critically questioned by the media. Rutgers, Penn State, Ohio State University, the Hershey Trust, and the Central Asia Institute (Three Cups of Tea) are just a few of the most notorious national news stories calling charitable governance practices into question – along with the reputations of these organizations and their leaders.
The growing theme in all of these stories was that the charity’s board lacked, or allegedly lacked, the necessary oversight of the operations, leaving the state regulators and the public to question, “Where was the board?” While in many of these cases, the individual directors were not held personally liable, the reputations of the organization and the individual directors were all certainly negatively affected by this adverse publicity.
Whether newsworthy or not, the potential for challenging governance situations raise the question, “How good is your board?” Are they consistently attentive or do they rarely attend meetings? Do they take proper ownership and oversight of the nonprofit’s operations and staff, as trustees should? Or do they rubber-stamp what the founder or key employees ask? Do they have a thorough knowledge of the nonprofit’s bylaws, operations, fundraising and donor relations, and programmatic objectives? Do they understand their legal duties as directors? This includes a wide range of issues, often particular to the specific organization but generally the duties of loyalty, care, obedience, properly handling conflicts of interest, overseeing tax collection and reporting, etc.
If the answers to these questions cause concern, take the time to invest and address corporate governance matters for your nonprofit with legal counsel and other qualified professionals. Failure to do so may not only jeopardize your nonprofit and its mission, it may give rise to personal liability for its volunteer directors as well.
