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Archive for the ‘Sarbanes-Oxley’ Category

board1Anyone who has read my blog for any period of time or has been a nonprofit grad student of mine knows how I feel about nonprofit boards. Most are just deplorable – wasting precious staff energies and bringing nothing to the board table.

We need a “Jack Kevorkian” for nonprofit boards – cutting the oxygen and giving a merciful death since beheading is so “old world”.

While Sarbanes-Oxley (SOX) has minimal requirements for nonprofits, the fact is that most organizations have no agreed upon metric for evaluating board performance.

I do like the Junior League’s motto, “give, get, or get off.” Whitman-Walker Clinic, Metropolitan Washington DC’s AIDS-service organization, requires an annual $10,000 donation from each of its board members whether through a personal gift, an arranged contribution of money or services, or a combination of both.

But a board’s responsibility doesn’t even start – let alone stop – with financial support. In principle, nonprofit boards are the “eyes and ears” of the community. They’re there to make certain that the organization is true to its stated mission.

In a recent email from the Nonprofit Times, there is a blurb about a few board groundrules stated as questions:

  • Does the adoption of good governance practices lead to the desired outcome? What is that outcome? How is performance measured?
  • If you assume a practice is a “best practice,” how do you deal with offenders? How do you establish those practices across a diverse nonprofit sector that includes grantmakers, such as private foundations, social service organizations, educational organizations, hospitals and others? How can you establish the predictive ability of “best practices?”
  • Does a nonprofit with high marks provide any assurance that the nonprofit is, in fact, a good organization?
  • Will good governance practices, over time, assure superior performance based on operating measures or other characteristics?

The email states that the Internal Revenue Service (IRS) tells us “a well-governed charity is more likely to obey tax laws, safeguard charitable assets, and serve charitable interests.” This reminds me of the opening line made by an IRS auditor to a minority business owner: “I’m from the IRS and I’m here to help you.”

What do you think?

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Philanthropy is based on voluntary action for the common good. It is a tradition of giving and sharing that is primary to the quality of life. To assure that philanthropy merits the respect and trust of the general public, and that donors and prospective donors can have full confidence in the not-for-profit organizations and causes they are asked to support, we declare that all donors have these rights:

  1. To be informed of the organization’s mission, of the way the organization intends to use donated resources, and of its capacity to use donations effectively for their intended purposes.
  2. To be informed of the identity of those serving on the organization’s governing board, and to expect the board to exercise prudent judgment in their stewardship responsibilities.
  3. To have access to the organization’s more recent financial statements.
  4. To be assured their gifts will be used for the purposes for which they are given.
  5. To receive appropriate acknowledgement and recognition.
  6. To be assured that information about their donations is handled with respect and with confidentiality to the extent provided by law.
  7. To expect that all relationships with individuals representing organizations of interest to their donor will be professional in nature.
  8. To be informed whether those seeking donations are volunteers, employees of the organization or hired solicitors.
  9. To have the opportunity for their names to be deleted from mailing lists that an organization may intend to share.
  10. To be free to ask questions when making a donation and to receive prompt, truthful and forthright answers.

Developed by: American Association of Fund Raising Counsel, Association of Healthcare Philanthropy, Council for Advancement and Support of Education, and Association of Fundraising Professionals

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In the November 8, 2006 issue of The Chronicle of Philanthropy, Leslie Lenkowsky, professor of public affairs and philanthropy at Indiana University highlights the election’s impact for people in the nonprofit world. Some bode well for charities:

  • Improving financial aid programs for college students
  • Support for immigration overhaul
  • Cleaning up the campaign finance system

But don’t expect any change in efforts by the Senate Finance Committee to tighten laws and regulations regarding nonprofit accountability and political involvement.

I wholeheartedly support federal legislation, similar to Sarbanes-Oxley, for nonprofit groups. While some argue that this type of requirement would place an undue and onerous burden on financially strapped nonprofits, I’m not convinced. I strongly believe that any reporting challenge will only be offset by an increase in the public’s confidence in our work. I would exempt charities with revenues under $100,000. According to the Urban League’s 2007 Nonprofits Facts and Figures, this would exempt 40% of nonprofits from this new standard.

Opponents of federal legislation for the sector argue that this requirement is an additional budget on already strapped organizations. This concern cannot be offhandedly dismissed; many organizations are facing intense pressure to provide services amide an ever shrinking funding base. But there is another perspective. According to the Brookings Institute’s Paul Light in Sustaining Nonprofit Performance (2004), 60% of Americans said nonprofits waste a great deal or a fair amount of money; 46% said that nonprofit leaders were overpaid, and an alarming 70% said that nonprofits had the right programs but were inefficient. Translate: bloated and ineffective.

I believe the real challenge is one of public confidence. And in our current scandal-ridden climate where nonprofits are “guilt-until-proven-innocent,” a rigorous federal reporting requirement could go a long way in rebuilding the public’s confidence in our work. Some, maybe many, will find this Judas-like recommendation untenable; I believe that it is the cost of doing mission-based business in the 21st Century.

Tell me what you think.

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You’d have to live in a cave not to have heard of the Sarbanes-Oxley Act passed in 2002 in response to a tidal wave of corporate misdeeds. The law requires that publicly traded companies adhere to significant new governance standards that broaden board members’ roles in overseeing financial practice and auditing procedures.

While it is true that the much of the Act pertains only to publicly traded companies, there are two provisions that apply to all organizations – and this includes nonprofits . Let’s look at them:

Whistle-Blower Protection: Each organization must develop procedures for handling employee and volunteer complains, including the establishment of a confidential and anonymous mechanism to encourage people to report any actions deemed inappropriate. No punishment for reporting problems is allowed – including firing, demotion, suspension, harassment, failure to consider the employee for promotion, or any other kind of retaliation. And this protection goes further – even if the claims are unfounded the organization cannot reprimand the person.

Recommended Action: Nonprofits must develop and adopt a process to deal with complaints and prevent retaliations. Ideally, this would involve allowing a person to report a concern to an independent, third party either through a confidential online process or an toll-free telephone number. Concerns and issues would then be forwarded to the executive committee of the board of directors for investigation.

Document Destruction: The Act addresses the destruction of litigation-related documents. The law makes it a crime to “alter, cover up, falsify, or destroy any document to prevent its use in an official proceedings.” Further it specifies retention periods for particular document categories.

Recommended Action: It is only practical that in the course of business, an organization would discard (or delete) unnecessary or out-of-date materials. Nonprofit managers need to decide, with the help of outside expertise, what documents need to be maintained and for how long. Examples of documents that must be retained include financial records, significant contracts, real estate and other major transactions, employment files, and donor records. This process should be in writing and the board leadership should periodically monitor the adherence.

For further information:

Jackson, P. and Fogarty, T. (2005). Sarbanes-Oxley for nonprofits: A guide to building competitive advantage. Hoboken, NJ: John Wiley & Sons.

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