Governance Overkill Syndrome

by Michael E. Batts

It’s all about good governance now. The root problem in all of the scandals that have plagued non­­profits is, and has been, an abject failure in board governance. Nonprofit board members were not adequately engaged, the experts tell us. The IRS is performing a study to prove it. Countless leaders have weighed in claiming it, including many on Capitol Hill. Yes, the verdict is solidly in. Good board governance is the solution, and America’s nonprofits need to get it as fast as they can.

So the pendulum is swinging hard and fast. Nonprofit organizations are on a quest to seek out and attain good governance. Countless books and media articles have been published offering the latest innovative ideas for “best practices” in governance and board leadership. The IRS has published a list of best practices, and has incorporated its views about nonprofit board governance into the annual federal return that most nonprofits must file (Form 990). And now the IRS is telling its agents to ask about board governance during their examinations of nonprofits. (Never mind the fact that there are no federal tax laws addressing the questions agents are asking.) The Treasury Department has published its own list of “Voluntary Best Practices” separate from that of the IRS, even though the IRS is part of the Treasury Department. Additionally, a host of other high-profile, well-regarded organi­zations have published variously labeled lists of best practices. And then there is the misleading, if not deceptive, governance information being spread by many otherwise reputable organizations and authors that strikes unwarranted fear in the minds of nonprofit leaders. A classic example is the implication that the Sarbanes-Oxley law passed to regulate the financial affairs of publicly-traded companies also applies in similar fashion to nonprofits. (It doesn’t.)

Nonprofit board members are listening. In their race to good governance, nonprofit boards together with their army of consultants are changing the structure, operation, and focus of nonprofit boards across the country. Unfortunately, the current climate of hyper-emphasis on board governance may be too much of a good thing. In adopting their various versions of best practices, many nonprofit boards are now causing their board members to be unnecessarily burdened, guilt-ridden, and fatigued. We have board governance committees to make sure the board is doing its job, self-evaluations to make sure the board is doing its job, audit committees (separate from finance committees) to make sure the board is doing its job, complex compensation-setting policies and committee structures to make sure the board is doing its job, whistleblower policies, record retention policies, and a variety of other policies and obligations.

Plus there is the constant reminder that nonprofit board members can be held personally liable for their actions if they are not sufficiently careful. It is a wonder that there are still good people wanting to serve as nonprofit board members.

The current obsession with board governance practices is not, in my opinion, good for America’s nonprofits. I believe it is quite true that failures in board governance have been central factors in virtually every major financial scandal involving nonprofit organizations in America over the last few decades. I readily concede that point. But the failure of a relatively small number of boards to do their jobs should not cause every nonprofit board in America to engage in remedial action that is unduly burdensome, unproductive, and that distracts board members from their true obligation—that of overseeing the effective carrying out of the mission of the organization itself. The current trend is toward overkill.

Nonprofit boards can have good governance without unnecessary complexity or guilt. Simplicity is, after all, a virtue. Rather than allowing themselves to be caught up in the pendulum swing of the moment, nonprofit boards should just use good common sense that will result in good governance.

Let’s stop and think about this for a moment. What have virtually all of the financial scandals in nonprofit organizations been about? Executive compensation, executive perks, lavish or extravagant expenditures, business transactions with related parties, and how donor-restricted gifts are spent, right? So what are some effective but simple safeguards that can be put in place by nonprofit boards to ensure that they don’t fall victim to scandals in these areas? For starters, we can make sure that the entire board is fully aware of the entire compensation package (including benefits and perks) for the organization’s CEO and any family members of the CEO. The board should also take steps to ensure that the total compensation is reasonable compared to what similar organizations pay similarly qualified people to perform similar duties. The board can do the comparability analysis itself or through a board-authorized committee. Under the advice of good tax counsel, the board can avail itself of a “rebuttable presumption” under federal tax law that the compensation package is reasonable. Similarly, the board can utilize a well-written conflicts-of-interest policy to address related-party transactions. In adopting and applying such a policy, the board should also apply good common sense. While the organization may get the best price for office supplies from the CEO’s brother’s company, buying $3 million worth of supplies from that company may not appear to be above reproach.

The board should also have a process in place to ensure that it would be made aware if the organization were to incur expenditures for travel, meals, hospitality, or other similar activities that may be considered lavish or extravagant. While a policy can be helpful in this area, simple and effective communication and oversight of expenditures in this area can be helpful as well.

Further, nonprofit boards should have appropriate oversight measures in place to ensure that donor-restricted gifts are spent in a manner that conforms to donor expectations. Basic policies and expenditure oversight can accomplish the objective. An organization’s auditing firm can provide insights on effective means of doing so.

Additionally, requiring that every board meeting include standing agenda items to discuss “sensitive” topics can help dramatically reduce risk in these areas. For example, a standing agenda item may be a report of expenditures or activities in which the organization’s management has engaged that could possibly be construed by others to be lavish, extravagant or providing some personal benefit.

If nonprofit boards will simply button up their risk in these areas, the vast majority of the issues that have given rise to the current pendulum swing will have been addressed without unnecessary complexity. Having done that, together with applying reasonable and sound policies for oversight in other areas, boards can focus on their true calling—the effective mission of their organization.

Michael E. Batts. CPA, is managing partner with Batts Morrison Wales & Lee, P.A., in Orlando, FL. He may be reached at batts@nonprofitcpa.com.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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