ethical standards principles guide - synopsis

8/8/2019 Ethical Standards Principles Guide - Synopsis

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OCtObEr 2007

Principles or

Good Governanceand Ethical Practice

A Guide or Charities

and Foundations


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CO-CONvENErSLorie A. Slutsky, President, New York Community

Trust, New York, NY

M. Cass Wheeler, Chie Executive Ofcer,American Heart Association, Dallas, TX

PaNEl MEMbErSSusan V. Berresord, President, Ford Foundation,

New York, NYPaul Brest, President, William and Flora Hewlett

Foundation, Menlo Park, CALinda Perryman Evans, President and CEO,

The Meadows Foundation, Dallas, TXJonathan F. Fanton, President, John D. and

Catherine T. MacArthur Foundation,

Chicago, ILBrian Gallagher, President and CEO, United Way

o America, Alexandria, VARobert Greenstein, Executive Director, Center on

Budget and Policy Priorities, Washington, DCSteve Gunderson, President and CEO, Council on

Foundations, Washington, DCStephen B. Heintz, President and CEO,

Rockeeller Brothers Fund, New York, NYWade Henderson, Executive Director, Leadership

Conerence on Civil Rights, Washington, DCDorothy A. Johnson, Trustee, W.K. Kellogg

Foundation, Grand Haven, MIValerie Lies, President and CEO, Donors

Forum o Chicago, Chicago, IL

Paul Nelson, Former President, EvangelicalCouncil or Financial Accountability,

Winchester, VAWilliam D. Novelli, CEO, AARP,Washington, DC

Jon Pratt, Executive Director, Minnesota Councilo Nonprofts, St. Paul, MN

John R. Serin, President and CEO, AmericanCancer Society, Atlanta, GA

Sam Singh, Former President and CEO, MichiganNonproft Association, Lansing, MI

Edward Skloot, Former Executive Director,Surdna Foundation, New York, NY

William E. Trueheart, President and CEO,

The Pittsburgh Foundation, Pittsburgh, PAWilliam S. White, President, Charles Stewart

Mott Foundation, Flint, MITimothy E. Wirth, President, United Nations

Foundation, Washington, DCGary L. Yates, President and CEO, The CaliorniaWellness Foundation, Woodland Hills, CA

Raul Yzaguirre, Former President and CEO,National Council o La Raza, Washington, DC

ExECutivE DirECtOrDiana Aviv, President and CEO,

Independent Sector, Washington, DC

Panel on the Nonproft Sector

Cover photo credits (let to right): Habitat or Humanity International; Public Allies; Mark Godrey/The Nature Conservancy;Ed Kashi/Robert Wood Johnson Foundation.


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We are delighted to share with you these principles or good governance and ethical prac-

tice, which are designed to guide board members and sta leaders o every charitableorganization as they work to improve their own operations. The Panel on the Nonprot

Sector has been dedicated to nding ways to strengthen governance, transparency, and ethicalstandards within the charitable community since its creation in October 2004 at the encour-agement o the U.S. Senate Finance Committee. Over the last three years, we have brought togetherthousands o people involved with charities and oundations to develop and rene recommendations toCongress, the Internal Revenue Service, and our own community that would achieve those goals.

The Panel issued its rst report to Congress and the nonprot sector in June 2005, and a supplementto that report in April 2006. Together, those reports oered over 150 recommendations or actions thatCongress and the Internal Revenue Service should take to improve the laws, as well as education andenorcement eorts to prevent unscrupulous individuals rom abusing charitable resources or personalgain. It also outlined actions that we in the charitable community needed to take to improve our ownpractices. Many o those recommendations have been enacted into law through the Pension ProtectionAct o 2006, and we continue to work with Congress and the IRS to make improvements in the regula-

tory ramework under which charitable organizations operate.We know that government action cannotand should notreplace strong, eective governance o

individual organizations and constant vigilance by our own community. The Panel has spent the pasteighteen months working with an outstanding advisory committee led by Rebecca Rimel, President,Pew Charitable Trusts, and Joel Fleishman, Director, Philanthropic Foundations Research Program,Terry Sanord Institute o Public Policy, Duke University, to examine how we might advance the state ogovernance and sel-regulation throughout our community. It urther invited public comment rom thecharitable community. The result is the 33 principles presented here.

We encourage the board and sta leaders o every charitable organization to examine these principlescareully and determine how best they should be applied to their own operations. Many organizationswill nd that they already ollowor go beyondthese principles. Others may wish to make changesin 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 or the higheststandards o governance and ethical practice that the communities we serve expect and deserve.

Lorie Slutsky M. Cass WheelerPresident and Director Chie Executive OcerNew York Community Trust American Heart Association

Co-Conveners, Panel on the Nonproft Sector


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PrinciPles or Good Governance and ethical Practice

Nonprot organizations in the United Stateseducational, charitable, civic, and religiousinstitutions o every size and missionrepresent

the most widespread organized expression oAmericans dedication to the common good. Thecreation o these voluntary, oten grassroots orga-nizations to accomplish some public purpose is adistinguishing eature o our national lie. Sincethe 1835 publication o Alexis de TocquevillesDemocracy in America, they have been recognizedinternationally as a source o social cohesion,a laboratory o innovation, and a continuallyadaptable means o responding to emerging ideas,needs, and communal opportunity. Individualshave continued to use their First Amendment

reedoms o speechand association tocreate and energizeorganizations thatdene common needs,rally popular support,and pursue innovativeapproaches to publicproblems. Thesenonprots have beena source o nationalachievement on many

ronts.The variety o

purposes, orms, andmotivating belies

that make up the charitable community in theUnited States is one reason why it has consistentlyearned widespread support rom large numbers oAmericans. In recent decades, the percentage osurvey respondents expressing condence in theethics and honesty o U.S. charities and voluntaryorganizations overall has hovered around two-thirds.1 For individual charitable organizations,responses are even more avorable, some reachingabove 70 percent. In 2006, 20 percent o allAmericansmore than 61 million o themvolunteered in some capacity in an assortment odierent kinds o nonprot activity.2 Individualdonations totaled more than $207 billion, which

Preamble

came on top o the $41 billion given by corpora-tions and oundations created rom private money.

Preserving this diversity, adaptability, and

capacity or innovation depends in large part onmaintaining the publics trust. The public hashigh expectations or both the ethical standardsand the impact o the countrys 1.4 millioncharitable organizations, but oten has troubledistinguishing one nonprot rom another.Unethical or improper conduct by an individualorganization, though rare, can thus jeopardize thehuman and nancial support on which countlessother activities rely. Yet government attempts toprevent such abuses, i not careully pursued, canthemselves diminish the unique value that non-

prots bring to American lie. Too heavy a regula-tory hand, or too uniorm and infexible a set olegal restraints, could stife the very creativity andvariety that makes nonprot activity worth pro-tecting and encouraging. Government appropri-ately sets rules or the organizations and activitiesthat are exempt rom taxes and eligible to receivetax-deductible contributions: or example, govern-ment has determined that such contributions maynot be used or partisan political activities or theprivate benet o the donor. At the same time,government has wisely avoided intruding on how

organizations pursue their missions, manage theirprograms and structure their operations.

Just as important, nonprot organizations havelong embraced the need or standards o ethicalpractice that preserve and strengthen the publicscondence. Many such systems in act alreadyexist, though none have applied to the entirerange o American charitable organizations. Thepages that ollow thereore set orth a compre-hensive set o principles to inorm the eld. Theirpurpose is to reinorce a common understand-ing o transparency, accountability, and goodgovernance or the sector as a wholenot onlyto ensure ethical and trustworthy behavior, butequally important, to spotlight strong practicesthat contribute to the eectiveness, durability, andbroad popular support or charitable organizationso all kinds.

Nonprotorganizations havelong embraced theneed or standardso ethical practicethat preserve andstrengthen thepublics condence.


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a Guide or charities and oundations

against misconduct will always be a well-inormedvigilance by members o the nonprot commu-nity themselves, including a set o principles they

could adopt, promote sector-wide, and improveover time. These principles should be clearenough to be practical and readily implementedin a wide variety o organizations, but fexibleenough to allow each organizations governingboard and management to adapt them to thedictates o that organizations scope and mission.Widespread use o such principles would enableorganizations to improve their operations bylearning rom each other. Critically, it would alsoprovide a common yardstick by which memberso the public can evalu-

ate how to direct theirsupport.

develoPinGsector-widePrinciPles tosuPPort selreGulation

Though given reshimpetus by currentmembers o Congress

and by the creationo the Panel on theNonprot Sector, theidea o sel-regulationis ar rom a recentpreoccupation amongcharitable organiza-tions. Among theearliest such eorts dates back to 1918, when acoalition o nonprots established the NationalCharities Inormation Bureau to help the publiclearn about the ethical practices and stewardshipo organizations that raise money rom donations.Many excellent systems o sel-regulation havelong been in use in various subsets o the sector,each tailored to the goals, resources, and chal-lenges o its particular eld and membership. Insearching or generally applicable standards or the

toward a balanced systemo law and sel-Governance

Any approach to preserving the soundness andintegrity o the nonprot community must strikea careul balance between the two essential ormso regulationthat is, between prudent legalmandates to ensure that organizations do notabuse the privilege o their exempt status, and,or all other aspects o sound operations, well-inormed sel-governance and mutual awarenessamong nonprot organizations. Such a balanceis crucial or ensuring that structures o account-ability and transparency are core strengths o ournonprot community, aording organizations

the support they need to pursue their various call-ings and the fexibility they need to adapt to thechanging needs o their communities, their eldso endeavor, and the times.

The Panel on the Nonprot Sector has workedover the past three years to help nd that balance.Created in 2004 at the encouragement o theleaders o the Senate Finance Committee, thePanel had addressed concerns shared by nonprotorganizations, members o the public, Congress,and ederal and state oversight agencies aboutreports o illegal or unethical practices by some

charitable organizations and their donors. ThePanels Final and Supplemental Reports, issuedin 2005 and 2006 respectively, oered more than100 recommendations or improving govern-ment oversight, including new rules to preventunscrupulous individuals rom abusing charitableorganizations or personal gain. The PensionProtection Act o 2006 enacted many o theserecommendations into law, and the Panel is con-tinuing to work with members o Congress andthe executive branch on ways o implementing theremaining ones.

The Panel has been equally committed toormulating eective, broadly applicable methodso sel-regulation since its inception in 2004.Its work has proceeded rom a belieamonglawmakers and their stas no less than amongcharitable organizationsthat the best bulwark

The best bulwarkagainst misconduct

will always be a well-inormed vigilanceby members o thenonprot community

themselves, includinga set o principles theycould adopt, promotesector-wide, andimprove over time.


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whole sector, the Panels rst step was thereoreto commission two studies to review, analyze,and nd patterns among these existing systems.

The Panel then called together 34 leaders romcharities, oundations, academia, and oversightagencies to orm a special Advisory Committeeon Sel-Regulation. Armed with the two studieso sel-regulation regimens already in use, theCommittee began its work in 2006 with a detailedreview o principles and standards drawn rommore than 50 such systems, including selectionsrom both the nonprot and or-prot sectors.Ater extensive deliberation, the membersdeveloped a comprehensive set o principlesdrawn rom current systems and incorporating

the advice o experts in nonprot law andgovernance.

This rst set odrat principleswas circulated orpublic comment inearly 2007. Aterconsidering theresulting eedback,the committee andthe Panel made

revisions and released a second drat or a longer

comment period. The wide-ranging reaction toboth drats demonstrated a broad interest acrossthe nonprot community in achieving consensuson the elements o transparent, accountable,and ethical conduct. The resulting guidance andencouragement urther strengthened the Panelsnal set o principles.

usinG and adaPtinG the PrinciPlesor your orGanization

In the ollowing pages, the Panel sets orth 33principles o sound practice that should be con-sidered by every charitable organization as a guideor strengthening its eectiveness and account-ability. Six o these principles describe actionsthat all charitable organizations musttake becausethey are required by law.3 The other 27 describeactions that charitable organizations should

strongly consider ollowing, based on their legaland operational structure and their particularcharitable purposes.

This distinctionbetween rm rules basedon law and more fexible principles that must beinterpreted and applied dierently in dierentcasesis essential to understanding and using thisdocument. In ollowing this approach, the Panelon the Nonprot Sector examined a broad con-tinuum o dierent models, refecting greater andlesser degrees o uniormity and means o enorce-ment. At one end o this spectrum are systems oaccreditation, such as those or hospitals and insti-tutions o higher education, that carry the orceo law and sanctions or violations. Further along

on the continuum are standards that memberso an association or network o similar organiza-tions, such as associations o land trusts or certainreligious institutions, agree to ollow. Whileailure to meet these standards may not orce anorganization to close its doors, the advantages tobeing a member in good standing o the umbrellanetwork is usually sucient to encourage careuladherence to its rules and norms. Finally, there arestandards that nonprots subscribe to on a purelyvoluntary basis, without any external verication,because they want to strengthen their governance

practices and ethical conduct.The rst two approaches tend to be eective

primarily with organizations that are closely ali-ated with one another or belong to a relativelyhomogeneous groupwhere practices and proes-sional expectations are highly standardized orwhere social sanctions have a strong impact. Fora group as broad and diverse as the whole com-munity o nonprots, the third approach is clearlymore appropriate: standards o practice thatorganizations are encouraged, but not required,to meet. Many national and state associations ocharitable organizations with voluntary member-ships have ound this approach benets theirmember nonprots. The Panel has ollowed thepractice, common to many such voluntaryassociations, o describing the reasoning behindeach principle and oering guidance on how toadapt and apply it.

Sel-regulationbegins with goodgovernance.


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To be sure, a signicant number o nonprotorganizations already unction under one o themore prescriptive regimens as a result o their

participation in some subset o the sector. Yet ewo these systems oer a comprehensive approachto good governance and ethical practice. Evenorganizations that subscribe to the more compre-hensive systems may well nd ideas and practicesin this document that will improve their sel-gov-ernance urther.

Still, given the wide, necessary diversity oorganizations, missions, and orms o activity thatmake up the nonprot community, it would beunwise, and in many cases impossible, to create aset o universal standards to be applied uniormly

to every member. Instead, the Panel commendsthe ollowing set o principles to every charitableorganization as guideposts or adopting specicpractices that best t its particular size andcharitable purpose. Organizations can use theseprinciples to evaluate their current standards.

Sel-regulation begins with good governance.Every charitable organization, by ederal andstate law, must have a board o directors or, i itis established as a charitable trust, one or moretrustees. The board sets the organizations broadpolicies and oversees its operations, including its

nancial policies. The board also has a respon-sibility to create an environment in which thereis open and robust deliberation o the issues onwhich it takes action. Whether or not the organi-zation has paid sta, the board bears the primaryresponsibility or ensuring that the organizationlives up to its legal and ethical obligations to itsdonors, consumers, and the public. For organiza-tions that do have sta, the chie sta ocer, inpartnership with the board, has responsibility oroverseeing or carrying out many o the activitiesimplied by these principles. It is thereore to theboards and chie executives o nonproft orga-nizations that this document is particularly,though not exclusively, addressed.

The 33 principles that ollow are organizedunder our main categories:1. Legal Compliance and Public Disclosure

(principles 1-7, pages 8-12)responsibilitiesand practices, such as implementing conficto interest and whistleblower policies, that willassist charitable organizations in complyingwith their legal obligations and providing inor-mation to the public.

2. Eective Governance (principles 8-20, page13-19)policies and procedures a board odirectors should implement to ulll its over-sight and governance responsibilities eectively.

3. Strong Financial Oversight(principles 21-26,pages 20-23)policies and procedures an

organization should ollow to ensure wisestewardship ocharitable resources.

4. ResponsibleFundraising(prin-ciples 27-33, pages24-27)policiesand proceduresorganizations thatsolicit unds romthe public shouldollow to build

donor support andcondence.

It is advisable thatan organizations boardconduct a thoroughdiscussion o the com-plete set o principles,and determine how the organization should applyeach to its operations. It is possible that ater thisreview, a board may conclude that certain princi-ples do not apply to its organization. Developinga transparent process or communicating how theorganization has addressed the principles, includ-ing the reasons that any o the principles are not

Strengtheningethics andaccountability isan organic processthat requires anongoing commitment

by boards andsta o individualorganizations and bythe entire nonprotcommunity.


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relevant, is likely to oster a greater appreciationo the diverse nature o the sector and a deeperrespect or the boards good stewardship.

A reerence edition o these principlesis available on the Panels website,www.nonprotpanel.org. It includes legalbackground on each principle, a glossary oterms, the two studies on sel-regulation systemscommissioned by the Panel to inorm this work,and the more than 50 existing sel-regulationsystems and standards that the Panels AdvisoryCommittee on Sel-Regulation studied duringits work.

Independent Sector, which convened andsupported the Panel, also oers inormation on

its website, www.independentsector.org, to assistorganizations in nding tools and other resourcesor applying these principles.

a Process o continuinGviGilance and adaPtation

Strengthening ethics and accountability isan organic process that requires an ongoingcommitment by boards and sta o individual

organizations and by the entire nonprotcommunity. Over time, discussion withinorganizations and across the community may

well result in renement o the principlespresented here. Such discussions would providea urther demonstration o the value to the wholesector o coming together to improve its work.

For organizations whose practices do notcurrently meet the standards recommendedby the Panel, and or existing systems o sel-regulation that all short as well, reaching thoselevels may take some time. Yet even the processo striving toward these standards will strengthenthe organization and its ability to serve itscommunity. The key is to begin that process

today.

1 Independent Sector, Keeping the Trust:Confdence inCharitable Organizations in an Age o Scrutiny, August 2002,p. 2.

2 Bureau o Labor Statistics, Volunteering in the United States,2006, Washington, DC: U.S. Department o Labor, 2007.

3 Principles 1, 3, 21, 25, 26 and 27 describe actions that arerequired by law o all charitable organizations.


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Principles orGood Governance

and Ethical Practice

Responsible Fundraising page 24

Legal Compliance and Public Disclosure page 8

Eective Governance page 13

Strong Financial Oversight page 20


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2 a g p, , .

Adherence to the law provides a minimum stan-dard or an organizations behavior. Each organiza-tion should also have a code o ethics that outlinesthe practices and behaviors that its sta, board,and volunteers agree to ollow. The adoption osuch a code, though not required by law, helpsdemonstrate the organizations commitment tocarry out its responsibilities ethically and eec-tively. The code should be built on the values thatthe organization embraces, and should highlightexpectations o how those who work with theorganization will conduct themselves in a numbero areas, such as the condentiality and respectthat should be accorded to clients, consumers,donors, and ellow volunteers and board and stamembers.

The process by which a code o ethics is adoptedand implemented can be just as important as thecode itsel. The board and sta should be engagedin developing, drating, adopting, and implement-ing a code that ts the organizations characteris-tics. It should then be complemented by policiesand procedures that describe how the principles inthe code will be put into practice. Organizationsshould include a discussion o the code o ethics inorientation sessions or new board and sta mem-bers and volunteers, and should regularly addressadherence to the code in their ongoing work.

1 a g p pp g, pp g j

p. i g pg u s, pp , g g g u s.

Charitable organizations are subject to a range oederal, state, and local laws, which are describedin the reerence version o this report available atwww.nonprotpanel.org. An organizations gov-erning board is ultimately responsible or oversee-ing and ensuring that the organization complieswith all its legal obligations and or detecting and

remedying wrongdoing by management. Whileboard members are not required to have special-ized legal knowledge, they should be amiliarwith the basic rules and requirements with whichtheir organization must comply and shouldsecure the necessary legal advice and assistance tostructure appropriate monitoring and oversightmechanisms.

There are many resources to help charitableorganizations and their boards understand thelaw. The Internal Revenue Service provides a reeonline workshop at www.stayexempt.org, whichcovers tax compliance issues relevant to small andmid-sized tax-exempt organizations. Some stateattorneys general and other state charity ocials,

as well as many national, state and regional asso-ciations o nonprot organizations, provide onlinetools and resources that oer legal guidance.Organizations may also nd it helpul to consultwith state and local chapters o bar associations orreerrals to low-cost or pro bono legal assistance.

Legal Compliance and Public Disclosure


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3 a g p p p p , pp , g ppp g g , , .

A confict o interest arises when a board member

or sta persons duty o loyalty to the charitableorganization comes into confict with a compet-ing nancial or personal interest that he or she(or a relative) may have in a proposed transac-tion. Some such transactions are illegal, some areunethical, but others may be in the best interest othe organization as long as certain clear proceduresare ollowed.

Establishing and enorcing a confict-o-interestpolicy is an important part o protecting charitableorganizations rom unethical or illegal practices.

The policy need not be complex, but it must beconsistent with the laws o the state in which thenonprot is organized and should be tailored tospecic organizational needs and characteristics.The policy should require ull disclosure o allpotential conficts o interest within the organiza-tion. It should apply to every person who has theability to infuence decisions o the organization,including board and sta members and partiesrelated to them. Some organizations may extendthe policy to substantial contributors as well.

Board members and sta should be encouraged todisclose any interest they have in a transaction ormatter that is beore the organization where thatinterest could be reasonably viewed by others asaecting the objectivity or independence o thedecision maker, even i the interest is not the resulto the sta or board member having a ormalaliation with some other party. The practice oull disclosure should be ostered particularly atboard meetings, and the act o any confict andthe action taken in response, including abstention,should be recorded in the minutes.

Confict-o-interest policies should distinguish

between situations that give the appearanceo aconfict and those that involve a materialconfictwhere a board or sta member has a direct orindirect nancial interest in transactions with theorganization. It is important that there be in placea transparent process, in which board membersengage, to understand the nature o the confictand whether it can be appropriately managed. Forexample, some oundations and grantmaking pub-lic charities prohibit grants to organizations orwhich one o the unders board or sta membersserves as an uncompensated director or trustee.

Others require disclosure o this relationship andrecusal rom the decision-making process. Stillothers encourage board or sta members to beengaged actively with other charitable organiza-tions, including the charities they may und, as away o learning about those organizations and theelds in which they work.

Once a confict-o-interest policy is developed, allboard and senior sta members should be requiredto sign it and to disclose any material confictso interest, both at the time they join the orga-

nization and at the beginning o each new boardyear. Many organizations use an annual question-naire or disclosure statement or this purposeand commonly provide inormation about boardmembers conficts to auditors or others reviewingthe organizations nancial transactions. Whensenior employees, board members or their amilymembers have a material confict o interest in amatter being considered by the board or the sta,they should rerain rom attempting to infuenceother decision-makers regarding the matter. Boardmembers with a material confict o interest arerequired by law to recuse themselves rom boarddiscussions and votes regarding those matters,other than to respond to inormation requests.


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10 PrinciPles or Good Governance and ethical Practice

4 a g p p p g p gp. t p p g g, p f , k g- p.

organized or operates. All policies should speciythe individuals within the organization (bothboard and sta ) or outside parties to whom suchinormation can be reported. Small organizationswith ew or no paid sta may wish to designatean external advisor to whom concerns can bereported without any threat o retaliation. This isa particular concern or amily oundations whoseboard members and sta may not eel comortablesharing concerns about suspected illegal or unethi-cal practices directly with another amily memberor close associate o the amily. Larger organiza-

tions should encourage employees and volunteersto share their concerns with a supervisor, thepresident or executive director, and/or the chienancial ocer o the organization, but shouldalso provide a method o reporting anonymouslyto either a board member or an external entityspecied by the organization. Some large organiza-tions have set up computerized systems that allowor anonymous reports, and a number o privatecompanies oer anonymous reporting services viaa toll-ree telephone number, email address, orintranet site.

It is equally important that the organization haveclear procedures to investigate all reports and takeappropriate action. The policy should stipulatethat there will be no retaliation against any indi-vidual who reports a suspected violation, exceptin those instances where the organization deter-mines that a alse report was made with intent toharm the organization or an individual within theorganization.

5 a g p p p p p g p .

required to demonstrate legal compliance. Such apolicy also helps to protect against allegations owrongdoing by the organization or its directorsand managers. Board members, sta and volun-

Every charitable organization, regardless o size,should have clear policies and procedures thatallow sta, volunteers, or clients o the organi-zation to report suspected wrongdoing withinthe organization without ear o retribution.Inormation on these policies should be widelydistributed to sta, volunteers and clients, andshould be incorporated both in new employeeorientations and ongoing training programs oremployees and volunteers. Such policies can helpboards and senior managers become aware o andaddress problems beore serious harm is done to

the organization. The policies can also assist incomplying with legal provisions that protect indi-viduals working in charitable organizations romretaliation or engaging in certain whistle-blowingactivities. Violation o such provisions may subjectorganizations and the individuals responsible orviolations to civil and criminal sanctions.

Policies that protect people who report wrong-doingsometimes known as WhistleblowerProtection Policies or Policies on Reporting oMaleasance or Misconductgenerally cover sus-

pected incidents o thet; nancial reporting thatis intentionally misleading; improper or undocu-mented nancial transactions; improper destruc-tion o records; improper use o assets; violationso the organizations confict-o-interest policy;and any other improper occurrences regardingcash, nancial procedures, or reporting.

The policy should be tailored to the nonprotssize, structure, and capacity, and it must refectthe laws o the state in which the nonprot is

A written document-retention policy, consistentlymonitored over time, is essential or protectingthe organizations records o its governance andadministration, as well as business records that are


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a Guide or charities and oundations 11

6 a g g q p p pp, f , pg , g pg g . t g g g f , k g k.

The board o a charitable organization is respon-sible or understanding the major risks to whichthe organization is exposed, reviewing those riskson a periodic basis, and ensuring that systems havebeen established to manage them. The level orisk to which the organization is exposed and the

extent o the review and risk management processwill vary considerably based on the size, program-matic ocus, geographic location, and complexityo the organizations operations.

Risk management generally includes a review opotential risks to the organizations signicantassets, such as its property, its good will, and its keyprograms and activities, and decisions about themost appropriate ways to protect those assets romloss. All organizations should consider careully allo the principles in this reportor eective gov-ernance, strong nancial oversight, and responsibleundraising practicesas they develop appropriatepolicies and procedures to protect their assets.

Board members may have personal liability ornes and other penalties as a result o certain legalviolations, such as ailure to pay required payrolland other taxes or approval o excess benet or

sel-dealing transactions. Federal and some statevolunteer liability laws provide some saeguards orboard members who are not compensated, otherthan receiving reimbursement o expenses, andwho act in good aith. Nonetheless, while it is rareor a charitable organization and its board to be

the target o a lawsuit, each organization shouldstill take steps to protect its assets in such an event.The board o directors should consider includingindemnication provisions in the organizationsgoverning documents, based on a review o thelaws o the states in which it is based or operates.The board should also assess periodically the orga-nizations need or insurance coverage based on itsprogram activities and nancial capacity. Insuranceis only one risk management strategy, however.Other nancial strategies should also be consideredto protect an organizations assets, such as estab-lishing reserve unds to absorb minor losses, bor-rowing rom lenders, and negotiating with thirdparties to assume certain losses. The organizationshould also have policies and procedures designedto reduce the risk o various occurrences, or limitthe exposure o the organization to certain identi-ed risks.

teers should be made thoroughly amiliar with thepolicy and inormed o their responsibilities incarrying it out.

The policy should address the length o time spe-cic types o documents must be retained, as well

as when it is permissible or required to destroyspecic types o documents. The policy shouldprovide guidance to sta and volunteers or paperand electronic documents, les and e-mail mes-sages. Specic procedures should also ensure thatany document destruction is immediately haltedi an ocial investigation o the organization isunder way or anticipated.

Charitable organizations are required to maintainpermanently their organizational documents,board minutes and policies, and materials relatedto their state and ederal tax-exempt status. Otherdocuments related to the governance, administra-tion, undraising, and programs o the organiza-

tion must be kept in paper or electronic orm orspecic periods, depending on applicable laws andreporting requirements. Federal and some statelaws prohibit the destruction, alteration, mutila-tion, or concealment o records related to an o-cial legal proceeding.


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Even the smallest organizations should have pro-cedures or backing up and preserving electronicand print copies o documents and other inor-mation vital to their governance, nancial, andprogrammatic operations. Larger organizationsmay require more extensive risk management

programs, including emergency preparedness anddisaster response plans in case o natural or man-made disasters or other crises that may disruptsignicantly its programs and operations.

Organizations that employ sta should have writ-ten personnel policies that conorm to ederaland state laws. They should develop appropriateprocedures to protect the health and saety o bothemployees and volunteers while they are at work.Organizations providing services to vulnerable

individuals should ensure that appropriate screen-ing, training and supervision procedures are inplace to minimize saety risks to consumers andclients, as well as to paid and volunteer sta.

7 a g k p, g g, f, pg , p. cg kg k g .

For private oundations and most public chari-ties, ling an accurate and complete annualinormation return with the IRS is a legal require-ment. Those returns serve as a primary sourceo inormation about their nances, governance,operations and programs or ederal regulators, thepublic and many state charity ocials. Beyond thisbasic requirement, charitable organizations candemonstrate their commitment to accountabilityand transparency by oering additional inorma-tion about what they do and how they operate.

A good rst step is to provide an annual reportthat lists the organizations board and sta mem-bers, describes its mission, shares inormation onprogram activities, and details nancial inorma-tion including, at a minimum, its total income,expenses and ending net assets. Such reports neednot be elaborate, can be produced in paper orelectronic orm, and can direct the reader to otherreadily available documents (such as the Form990 return or audited nancial statements) orurther inormation. I an organization chooses toproduce such reports on a less requent basis, suchas every two or three years, it should ensure thatany intervening changes in its board and sta orprograms and its current nancial statements areprovided as an attachment or are otherwise madeknown to readers o the report.

Another source o transparency and accountabil-ity and a key method or communicating aboutthe organizations work is a website, which canbe maintained independently or through anotherorganization. A website should eature the sameinormation recommended or annual reports,with links directly to or instructions on how torequest the organizations most recent IRS Form990 return and other nancial statements. Useulwebsites oten provide such essential inormationas the organizations vision and mission state-

ments; lists o board and sta members; state-ment o values and code o ethics; and policies onconficts o interest, whistleblower protection andtravel policy.

Inormation on an organizations results and howthey are measured can be an especially valuablemeans o explaining its work and accounting todonors and the public. Such inormation, and theability to provide it, will vary considerably romone organization to another. To the extent evalu-ation or inormation on outcomes is available,some version o it should be included in annualreports, websites and other orms o communica-tion. More inormation about program evaluationis provided in principle #19.


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8 a g gg p g ppg g g , g k f

, p p p, f g p.

The board o directors bears the primary respon-sibility or ensuring that a charitable organizationullls its obligations to the law, its donors, itssta and volunteers, its clients, and the publicat large. The board must protect the assets o theorganization and provide oversight to ensurethat its nancial, human and material resourcesare used appropriately to urther the organizationsmission. The board also sets the vision and mis-

sion or the organization and establishes the broadpolicies and strategic direction that enable theorganization to ulll its charitable purpose.

When the board determines that the organizationis ready to add paid sta, the board is responsibleor selecting, overseeing, and, i necessary, termi-nating the chie sta ocer. In smaller, un-staedorganizations, the board may have a more directrole in overseeing and sometimes delivering theorganizations programs and services. In largerorganizations, the board generally works as astrategic partner to the sta leadership in ensur-

ing that the organization meets its goals andcommitments.

9 t g g g f .

Regular meetings provide the chie venue orboard members to review the organizations nan-

cial situation and program activities, establish andmonitor compliance with key organizational poli-cies and procedures, and address issues that aectthe organizations ability to ulll its charitablemission.

Charitable organizations should ensure that theirgoverning documents satisy legal requirementsin establishing rules or board activities, such asquorum requirements and methods or notiyingboard members about meetings. The board shouldestablish and implement an attendance policythat requires board members to attend meetingsregularly. Given the time and expense involved intraveling to meetings, some boards may choose toconduct their business through conerence calls ororms o online communication that permit mem-bers to hear and be heard by all other participants.In such cases, the organizations governing docu-ments should speciy that such alternative meth-ods o holding meetings are permitted.

Boards oten orm committees and authorize themto handle some work between ull board meetings.

The organizations governing documents shouldspeciy whether the board may create one or moresuch committees. In most states, the law prohibitsboards rom delegating certain responsibilities tocommittees, such as dissolving the organizationsassets; electing or removing directors; and alteringthe organizations governing documents. However,committees may investigate and make recommen-dations on any o these issues, subject to the ullboards consideration and decision.

While many charitable organizations nd it pru-dent to meet at least three times a year to ulllbasic governance and oversight responsibilities,some with strong committee structures, includingorganizations with widely dispersed board mem-bership, hold only one or two meetings o the ullboard each year. Foundations that make grantsonly once a year may nd that one annual meet-ing is sucient.

Eective Governance


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10 t g p. t g kg g g . exp g, g f .

The ideal size o a board depends on many actors,such as the age o the organization, the nature andgeographic scope o its mission and activities, andits unding needs. Although a larger board mayensure a wide range o perspectives and expertise,a very large board may become unwieldy andend up delegating too much responsibility to anexecutive committee or permitting a small group

o board members to exercise substantial control.Conversely, smaller boards may elicit more activeparticipation rom each member, but they shouldconsider whether their members collectively havethe ull range o knowledge and experience neces-sary to inorm their decisions, and, i not, provideopportunities or the board to coner with outsideexperts or advisory groups on specic matters.

11 t g kg(g, , , g pp), xp, g f k g .

Boards o charitable organizations generally striveto include members with expertise in budgetand nancial management, investments, person-nel, undraising, public relations and marketing,governance, advocacy, and leadership, as well assome members who are knowledgeable aboutthe charitable organizations area o expertise orprograms, or who have a special connection to its

constituency. Some organizations seek to maintaina board that respects the culture o and refects thecommunity served by the organization. Boardsincreasingly are being encouraged to be inclusiveo and sensitive to diverse backgrounds whenrecruiting board members, in addition to purpose-ully recruiting board members with expertise andproessional or personal experiences that will bebenecial to the organization.

Because the board must ensure that all nancialmatters o the organization are conducted legally,ethically and in accordance with proper account-ing rules, it should make every eort to ensurethat at least one member has nancial literacythat is, the ability to understand nancial state-ments, to evaluate the bids o accounting rms

that may undertake an audit or review and toassist the board in making sound nancial deci-sions. This need not entail advanced training inaccounting or nancial management. I the boardnds itsel unable to recruit members with suchskills, it should contract with or seek pro bonoservices o a qualied nancial advisor, otherthan its auditor, to assist the board in its nancial

responsibilities.

Organizations should also consider the require-ments o current and prospective unding sourcesregarding the composition o the boards o theirgrantees.

Some donors to private oundations wish toinvolve amily members on the boards o theiroundations to ensure that the donors philan-thropic tradition will continue through uturegenerations. I amily members do not have thenecessary expertise and experience, the board maywish to bring in advisors. The board should alsoconsider the advantages o diversity and the per-spective oered by representatives rom outsidethe amily.


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13 t , , p xf g, p g f p, - g j g.

12 a j p , g - , p. ip : (1) p g p p ; (2) p p g; (3) , , f f g xp g; (4) ( p, g, p ), p .

All directors o nonprot corporations have aduty o loyalty that requires them to put theinterests o the organization above their personalinterests and to make decisions they believe arein the best interest o the nonprot. Individualswho have a personal nancial interest in the aairso a charitable organization may not be as likelyto question the decisions o those who determinetheir compensation or ees or to give unbiased

consideration to changes in management or pro-gram activities.

The ounders o a nonprot corporation some-times initially turn to amily members and busi-ness partners to serve on its board o directors, butinterlocking nancial relationships can increasethe diculty o exercising the level o independentjudgment required o all board members. It isthereore important to the long-term success andaccountability o the organization that a sizeablemajority o the individuals on the board be ree o

nancial conficts o interest.

This principle does not apply to private ounda-tions and certain medical research institutions thatoperate under specic legal restrictions regardingsel-dealing transactions, and other charitableorganizations whose articles o incorporationor trust instruments include special stipulationsregarding board composition. For example, anorganization established under the auspices o areligious institution may be required to include

clergy or other paid representatives o that institu-tion on its board. A supporting organization maybe required to have representatives o its supportedorganizations on its board. For a complete listo the types o organizations excluded rom thisprinciple, consult the reerence addition o theseprinciples at www.nonprotpanel.org.

When a charitable organization determines thathaving a majority o independent board membersis not appropriate, the board and sta shouldevaluate their procedures and meeting ormats to

ensure that board members are able to ulll theirresponsibilities to provide independent, objec-tive oversight o management and organizationalperormance.

Boards o directors have the authority to delegateresponsibility or maintaining the daily operationso the organization to a chie executive ocer.One o the most important responsibilities o theboard, then, is to select, supervise, and determinea compensation package that will attract andretain a qualied chie executive. The organiza-tions governing documents should require the ull

board to evaluate the perormance and approvethe compensation o the chie executive annuallyand in advance o any change in compensation.The board may choose to approve a multi-yearcontract with the CEO that provides or increasesin compensation periodically or when the CEOmeets specic perormance measures, but it isimportant that the board institute some regular


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When governing boards use compensation consul-tants to help determine the appropriate salary orthe chie executive, the consultant should reportdirectly to the board or its compensation commit-tee and should not be engaged in other businesswith or have any conficts o interest with regard

to the chie executive.

Governing boards are responsible or hiring andestablishing the compensation o the CEO and orapproving the compensation range o other per-sons in a position to exercise substantial control othe organizations resources. It is the responsibilityo the CEO to hire and set the compensation oother sta, consistent with reasonable compensa-tion guidelines set by the board. I the CEO ndsit necessary to oer compensation that equals orsurpasses his or her own, in order to attract and

retain certain highly qualied and experiencedsta, the board should review the compensationpackage to ascertain that it does not provide anexcess benet.

The board or a designated compensation commit-tee should also review the overall compensation pro-gram, including salary ranges and benets providedor particular types o positions, to assess whetherthe compensation program is air, reasonable, andsucient to attract and retain high-quality sta.

basis or reviewing whether the terms o thatcontract have been met. I the board designatesa separate committee to review the compensationand perormance o the CEO, that committeeshould be required to report its ndings andrecommendations to the ull board or approval

and should provide any board member withdetails, upon request. The board should thendocument the basis or its decision and beprepared to answer questions about it.

When determining the reasonableness o the com-pensation package paid to the chie executive, theboard should ensure that the individuals involvedin making the compensation recommendationdo not have a confict o interest with regard tothe executive. The board or its committee shouldexamine the compensation paid by similarly situ-

ated organizations, both taxable and non-taxable,or unctionally comparable positions. Manyproessional associations prepare regular com-pensation surveys that can be useul in evaluatingcompensation, or the committee may turn tocompensation surveys compiled by independentrms or actual written oers rom similar orga-nizations competing or the executives services.Some organizations may nd it dicult to locatesalary surveys or other data to establish compa-rable values or executive compensation withintheir geographic area or eld o operation, but the

board should still seek objective external data tosupport its compensation decisions.

14 t g p p f, , p .og p p p .

Concentrating authority or the organizationsgovernance and management practices in one ortwo people removes valuable checks and balancesthat help ensure that conficts o interest and otherpersonal concerns do not take precedence over thebest interests o the organization. Some state lawsrequire that the oces o president and treasurerbe held by dierent individuals. Both the boardchair and the treasurer should be independento the chie sta executive to provide appropri-ate oversight o the executives perormance and

to make air and impartial judgments about theappropriate compensation o the executive.

When the board deems it is in the best interestso the charitable organization to have the chieexecutive ocer serve as the board chair, the boardshould appoint another board member (some-times reerred to as the lead director) to handleissues that require a separation o duties, suchas reviewing the responsibilities, perormance orcompensation o the chie executive.


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Most people volunteer or boards because o acommitment to the mission o the organizationand the value o the organizations work to society.Yet they may not have the training or inormationnecessary to understand adequately their duciaryresponsibilities or common practices o boards ocharitable organizations.

An eective board orientation process lls thisneed by detailing the broad oversight responsibili-ties o the board and the specic legal and ethicalresponsibilities o individual members. Members

should be made aware o their personal liabilityor the boards actionsor or its ailure to takeactionand o the protections available to them.All board members should receive oral and writteninstruction regarding the organizations govern-ing documents, nances, program activities, andgoverning policies and practices. Even members

15 t , p g g g p, kg pg g, g .

who have served on the boards o other organizations canbenet rom a specic orientation to each organization orwhich they provide board service. Charitable organizations,i needed and i unds permit, should provide opportuni-ties or board members to obtain special training or adviceon legal and nancial issues and responsibilities. It is alsoadvisable or an attorney or insurance agent who isknowledgeable about board liability to explain the legalprotections available to board members, as well as theoptions or insurance.

The ongoing process o board education includes ensur-

ing that members have received and reviewed sucientinormation on the issues to be addressed at each boardmeeting. Agendas and background materials should bedistributed ar enough in advance o all board meetings sothat all members can be expected to read and consider theissues prior to attending the meeting.

16 b p gp q , p g

f p.

A regular process o evaluating the boards per-ormance can help to identiy strengths andweaknesses o its processes and procedures and toprovide insights or strengthening orientation andeducational programs, the conduct o board andcommittee meetings, and interactions with boardand sta leadership. Many boards will nd it help-ul to conduct such a sel-assessment annually;others may preer a schedule that coincides withthe terms o board service or regular long-rangeplanning cycles. A number o print and onlinetools, ranging rom sample sel-assessment ques-tionnaires to more complex evaluation procedures,can help an organization design a board evaluationor sel-assessment process that best meets its needs.

The board should establish clear guidelines or the dutiesand responsibilities o each member, including meetingattendance, preparation and participation; committeeassignments; and the kinds o expertise board members areexpected to have or develop in order to provide eectivegovernance. Many boards assign responsibility or oversighto the board evaluation and development unction to theirexecutive committees or to a separate board developmentcommittee. Board members with this responsibility shouldbe empowered to discuss problems o attendance or otheraspects o board perormance with individual membersto ascertain whether the problem can be corrected or theindividual needs to resign or be removed rom the board.Removing a non-perorming board member generallyrequires the action o the ull board or, i the organizationhas members, the action o the membership.


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17 t p p g g .

Every charitable organization should determinewhether its best interests are served by limitingthe length o time an individual may serve on its

board. Some organizations have ound that suchlimits help in bringing resh energy, ideas andexpertise to the board through new members.Others have concluded that term limits maydeprive the organization o valuable experience,continuity and, in some cases, needed supportprovided by board members. They believe organi-zations should rely solely on rigorous board proce-dures or evaluating board members and removingthose who are not able to ulll their governanceresponsibilities eectively. Some amily ounda-tions may decide not to limit board terms i their

donors expressed a wish that amily members con-tinue serving as long as they are willing and able.

Organizations that do limit the terms o boardservice should consider establishing a staggeredterm process that provides a continual fow onew participants while retaining a cadre o more

18 t g gg q f .

Regular reviews o the organizations articles oincorporation, bylaws and other governing instru-ments help boards ensure that the organization isabiding by the rules it has set or itsel and deter-mine whether changes need to be made to thoseinstruments. The board may choose to delegatesome o this deliberation to a committee, butthe ull board should consider and act upon thecommittees recommendations.

Most state laws permit the state attorney gen-eral to le suit asking the court to hold a boardaccountable or ailure to abide by the require-ments set orth in these basic documents. I itbecomes impractical or no longer easible to carryout the purposes o the organization as outlinedin its articles o incorporation, the board shouldtake appropriate action to amend the articles andto le the amended articles with state ocials, asrequired. In some instances, a charitable organiza-tion may need court approval to amend its orga-nizing documents.

experienced members. Many organizations nd it useulto establish policies making board members eligible or re-election ater taking a year or more o. It is always valuable

to nd ways in which members who have completed theirservice can continue to be engaged in the organizationsprograms and services.

Organizations that choose not to limit the terms oboard service should consider establishing a regular pro-cess whereby the board rearms its commitment to thisapproach and members actively indicate their desire tocontinue serving on the board. Some organizations cre-ate an alumni council or honorary board to provide aneasy option or board members who eel it is time to leaveactive service but still wish to be involved in the organiza-

tion. Others speciy the age at which a member must retirerom the board.

Whether or not the organization establishes board termlimits, it is always helpul to have a process or involvingprospective board members on committees or task orcesuntil there is an appropriate opening on the board.


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20 b g xp p, xp f . a g p p ppp p p, p , p q, p.

19 t g g g , q f , g pg, g k p .

As stewards o the publics trust and the resourcesinvested in the organization, board members have

an obligation to ensure that the organization usesits resources as eectively as possible to advance itscharitable mission. Every board should thereoreset strategic goals and review them annually, gen-erally as part o the annual budget review process.This review should address current needs andanticipated changes in the community or programarea in which the organization operates that mayaect uture operations. It should also consider thenancial and human resources that are needed toaccomplish the organizations goals. Such periodicperormance reviews and assessments are a

common eature o many sel-regulation,accreditation and unding programs in whichnonprot organizations participate.

Although some charitable organizations reimburseexpenses related to board work, the vast majorityo board members serve without compensation.In act, board members o public charities otendonate both time and unds to the organization, apractice that supports the sectors spirit o givingand volunteering.

When organizations nd it appropriate to com-pensate board members due to the nature, time orproessional competencies involved in the work,they must be prepared to provide detailed docu-mentation o the amount o and reasons or suchcompensation, including the responsibilities oboard members and the services they provide. Anycompensation provided to board members mustbe reasonable and necessary to support the peror-mance o the organization in its exempt unction.Compensation paid to board members or servicesin the capacity o sta o the organization should

be clearly dierentiated rom any compensationpaid or board service.

Board members o charitable organizations areresponsible or ascertaining that any compensa-tion they receive does not exceed to a signicantdegree the compensation provided or positions incomparable organizations with similar responsi-bilities and qualications. Some organizations hirecompensation consultants to identiy comparablecompensation levels, some rely on data availablethrough national and regional associations or or-prot rms, and some conduct their own surveyso compensation paid by similar organizations.When they establish their own compensation,board members generally cannot be consideredindependent authorizing bodies and thereoregenerally cannot avail themselves o the legalprotections accorded to such bodies.

Although discussions o individual program activities andaccomplishments are typical o most board meetings, these

are not a substitute or a more rigorous periodic evaluationo the organizations overall impact and eectiveness inlight o goals and objectives that the board has approved.

Because organizations and their purposes dier, it isincumbent on each organization to develop its own processor evaluating eectiveness. Most organizations shouldhave at least an inormal review o their progress on goalsand objectives annually, but, because o the time and costinvolved, they may choose to conduct a more rigorousevaluation less requently. Even or organizations whosework is not properly measured in one-year increments,

such as scientic research or youth-development programs,interim benchmarks can be identied to assess whether thework is moving in the right direction.


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Strong Financial Oversight

21 a g kp p, , f . i p g f

qf, p f xp ppp g p.

Complete and accurate nancial statements areessential or a charitable organization to ulll itslegal responsibilities and or its board o directorsto exercise appropriate oversight o the organiza-tions nancial resources. A board that does nothave members with nancial expertise shouldretain a qualied paid or volunteer accountingproessional to establish whether nancial sys-

tems and reports are organized and implementedappropriately.

Having nancial statements prepared and auditedin accordance with generally accepted account-ing principles and auditing standards improvesthe quality o the inormation. Each organizationmust ensure that it has its annual nancial state-ments audited or reviewed as required by law inthe states in which it operates or raises unds or asrequired by government or private unders. Whenan audit is not legally required, a nancial review

oers a less expensive option that still provides theboard, regulators and the public with some assur-ance o the accuracy o the organizations nancialrecords. Many smaller organizations that have

opted to work with an independent accountanthave noted that the accountant provided invalu-able guidance.

Every charitable organization that has its nancialstatements independently audited, whether ornot it is legally required to do so, should considerestablishing an audit committee composed o

independent board members with appropriatenancial expertise. By reducing possible confictso interest between outside auditors and theorganizations paid sta, an audit committee canprovide the board greater assurance that the audithas been conducted appropriately. I state lawpermits, the board may appoint non-voting, non-sta advisors rather than board members to theaudit committee.

Organizations with small boards o directors orlimited organizational structures may not choose

to delegate the audit responsibility to a separatecommittee. Audit committees may also be inap-propriate or charitable organizations that areorganized as trusts rather than as corporations.

22 t g p p g (, pp, ) g p, g q. t pp g g p g g.

Sound nancial management is among the mostimportant responsibilities o the board o direc-tors. The board should establish clear policiesto protect the organizations nancial assets andensure that no one person bears the sole respon-sibility or receiving, depositing, and spendingits unds. Day-to-day accounting and nancial

management should be the task o sta or, inthe case o organizations with no or one stamember, designated volunteers who have thenecessary time and skills. The board is respon-sible or reviewing practices and reports to ensurethat those sta or volunteers are adhering to theboard-approved policies.


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The organizations annual budget should refectthe programs and activities the organization willundertake in the coming year and the resourcesit will need to raise or generate to support thoseactivities. Careul review o regular nancialreports showing both budgeted and actual expen-

ditures and revenues will permit the board todetermine whether adjustments must be made inspending to accommodate changes in revenues.Financial reports should also refect how the orga-nization has adhered to any restrictions placed onunds by donors or grant programs.

Prudent nancial oversight requires that the boardlook beyond monthly or annual nancial reportsto consider how the organizations current nan-cial perormance compares with that o previousyears and how its nancial uture appears. I the

organizations net assets have been declining over aperiod o years, or i uture unding seems likely tochange signicantly, the board may need to takesteps to achieve or maintain stability.

Whenever possible, an organization should generate

enough income to create cash reserves or its uture.When an organization has built sucient reservesto allow or investments, the board is responsible orestablishing policies that govern how the unds willbe invested and what portion o the returns, i any,can be used or immediate operations or programs.The boards o organizations with sizeable reservesor endowments generally select one or more inde-pendent investment managers to handle the organi-zations investments. In those cases, the board or acommittee o the board should monitor the outsideinvestment manager(s) regularly.

23 a g p ( q, g,pg g p f, g g) , f, .

The practice o providing loans to board membersand executives, while inrequent, has created bothreal and perceived problems or public charities.While there may be circumstances in which acharitable organization nds it necessary to oer

loans to sta members, there is no justicationor making loans to board members. Federal lawsprohibit private oundations, supporting organiza-tions and donor-advised unds rom making loansto substantial contributors, board members, orga-nization managers and related parties. Many states

also orbid such loans or allow them only in verylimited circumstances.

When a charitable organization deems it necessaryto provide loans to an employeeor example, to

enable a new employee o a charity to purchasea residence near the organizations ocestheterms o such loans should be clearly understoodand approved by the board. Such loans then mustbe reported on the organizations annual inorma-tion returns (Forms 990 and 990-PF).


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24 a g p gf pg g pg p . t g p f g, , , pppg .

Charitable organizations have an obligation todevote their resources to the charitable purposesor which they were granted tax exemption, andto spend donated unds on the programs andactivities or which the unds were contributed.At the same time, the successul operation o anybusiness or organizationincluding the respon-sible pursuit o nearly any kind o charitablepurposerequires eective management andadministration. Administrative activities includenancial and investment management, personnelservices, recordkeeping, soliciting and manag-

ing contracts, legal services, and supporting thegoverning body o the organization. Not onlydo these elements ensure that the organizationcomplies with all legal requirements, but they alsohelp provide complete, accurate, and timely inor-mation to donors, the public, and governmentregulators.

Charitable organizations rely on other supportingservices to carry out their missions. Most publiccharities have undraising operations to encouragepotential donors to contribute money, materials

and other assets and to ensure that donors receivenecessary reports about how their contributionswere used. Some public charities also rely onmembership development activities to solicit pro-

spective members, collect membership dues, andensure that members receive promised benets.Private oundations and some public charitiesalso have expenses associated with making grantsand contributions to other organizations andindividuals.

Qualied personnel are crucial or providing pro-grams, recruiting and managing volunteers, raisingunds, and ensuring proper administration. Thecosts o compensating personnel, including salariesand benets, must be allocated to the particular

unctions they perorm or the organization basedon appropriate records.

Some sel-regulation systems and watchdogorganizations recommend that public charitiesspend at least 65 percent o their total expenseson program activities. This standard is reasonableor most organizations, but there can be extenuat-ing circumstances that require an organizationto devote more resources to administrative andundraising activities. The board should reviewthe budget and nancial reports to determine

whether the organization is allocating its undsappropriately.


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25 a g , p pg gxp g g g,g p xp p q. s p q g k - .

A charitable organizations travel policies shouldbe unambiguous and easy to ollow, and shouldrefect the organizations principled judgmentabout what it considers reasonable expendituresor individuals who must travel to conduct busi-ness on its behal. These policies should includeprocedures or properly documenting expensesincurred and their organizational purpose.

As a general practice, travel policies should ensurethat the business o the organization is carried out

in a cost-eective manner. Decisions on travelexpenditures should be based on how best to ur-ther the organizations charitable purposes, ratherthan on the title or position o the person travel-ing. Charitable unds generally should not be used

or premium or rst-class travel, but boards shouldretain the fexibility to permit exceptions whenthey are in the organizations best interest. Suchexceptions, i any, should be explicit, consistentlyapplied and transparent to board members andothers associated with the organization.

An organizations policies should refect therequirements and restrictions on travel expendi-tures imposed under current law. The detailedguidance provided in IRS Publication 463: Travel,

Entertainment, Git and Car Expenses shouldserve as a guide or managers o charitable organi-zations in avoiding lavish, extravagant or excessiveexpenditures.

26 a g p xp p, p pg g g , , g .

traveling on behal o the organization. This prin-ciple need not apply to de minimis expenses suchas the cost o a meal at organization unctionswhere participants are invited to bring a guest.

I, in certain circumstances, an organization deemsit proper to cover expenses or a spouse, depen-dent, or other person accompanying someone onbusiness travel, the payment generally must, bylaw, be treated as compensation to the individual


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27 s p g .

Charitable solicitationswhether in print, viathe Internet, over the phone, or in personareoten the only contact a donor has with a chari-table organization. Clear and accurate solicitationmaterials help potential contributors to contactthe organization and obtain inormation necessaryto distinguish an organization with a solid historyo service to the community rom one that mayclaim a similar name or purpose, but whose und-raising appeal is misleading.

A donor has the right to know the name o anyonesoliciting contributions, the name and location othe organization that will receive the contribution,a clear description o its activities, the intendeduse o the unds to be raised, a contact or obtain-ing additional inormation, and whether theindividual requesting the contribution is actingas a volunteer, employee o the organization, orhired solicitor. (A Donor Bill o Rights, endorsedby many organizations, is available at

www.nonprotpanel.org.) Descriptions oprogram activities and the nancial condition othe organization must be current and accurate,and any reerences to past activities or eventsshould be dated appropriately.

I an organization is not eligible to receive tax-deductible contributions, it must disclose thislimitation at the time o solicitation. Similarly, acharitable organization that the IRS has recog-nized as eligible to receive tax-deductible contri-

butions should clearly indicate in its solicitationshow donors may obtain proo o that status.The charity may post a copy o its IRS letter odetermination on its website or oer to provide acopy o the letter to donors who request it. I thesolicitation promises any goods or services to thedonor in exchange or contributions, the materi-als should also clearly indicate the portion o thecontribution (that is, the value o any goods orservices provided) that is not tax-deductible.

28 c pp , pf .

When a donor responds to a charitable solicitationwith a contribution, he or she has a right to expectthat the unds will be used as promised. Solicita-tions should thereore indicate whether the undsthey generate will be used to urther the generalprograms and operations o the organization or tosupport specic programs or types o programs. Adonor may also indicate through a letter, a writtennote on the solicitation, or a personal conversa-tion with the solicitor or another ocial o thecharitable organization how he or she expects thecontribution to be used.

In some cases, an organization may not receivesucient contributions to proceed with a givenproject or it may receive more donations than it

needs to carry out that project. I the organizationis unable or unwilling to use the contribution asstated in its appeal or in the donors communica-tion, it has an obligation to contact the donor andrequest permission to apply the git to anotherpurpose or oer to return the git. Charitableorganizations should strive to make clear in mate-rials that solicit contributions or a specic pro-gram how they will handle such circumstances,

A charitable organization should careully reviewthe terms o any contract or grant agreementbeore accepting a donation. I the organizationwill be unable or unwilling to comply with any othe terms requested by a donor, it should negoti-ate any necessary changes prior to concluding the

Responsible Fundraising


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transaction. Particularly in the case o substantialcontributions, the recipient should develop anagreement that species any rights it may haveto modiy the terms o the git i circumstanceswarrant. Some charitable organizations includeprovisions in their governing documents or board

resolutions indicating that the organization retainsvariance powers, the right to modiy condi-tions on the use o assets. Such powers should beclearly communicated to donors through a writtenagreement.

29 a g p pf kg , irs q, p x q.

Acknowledging donors contributions is importantnot only because o IRS requirements, it also helpsin building donors condence in and supportor the activities they help to und. Organizations

should establish procedures or acknowledgingcontributions in a timely manner and or provid-ing appropriate receipts or cash contributionsi requested. Regular updates to donors on theactivities they support is another way to buildtrust and loyalty, as is providing ways or contribu-tors to nd more inormation on their ownsay,through a website, print publications or visits tothe organizations oce.

I the organization has provided goods or servicesto the donor in exchange or or recognition o the

contribution, an acknowledgement must includea good-aith estimate o the air market value othose goods or servicesthat is, the amount thedonor would have to pay to purchase those goodsor services independently. The cost o the item tothe charitable organization does not determine its

air market value, although cost may be an impor-tant actor. For example, a hotel may donate theood served at a banquet, thus imposing zero coston the charitable organization. But the air mar-

ket value o a donors meal at that banquet wouldnot be zero; it would be the price he or she wouldhave to pay or a similar meal at that hotel. Thecharitable organization does not have to includeinormation on air market value in a donoracknowledgement i that value is not more than2 percent o the contribution or $89, whicheveris less. (These are 2007 amounts; the IRS changesthem periodically.)

It is generally unwise, and may pose a confict ointerest, or a charitable organization to appraise

the value o gits o property rom taxpayers seek-ing income tax deductions or such contributions.Organizations should, however, alert donorsto IRS rules or substantiating such claims andencourage them to seek appropriate tax or legalcounsel when making signicant non-cash gits.

30 a g p p, pf xp pp, pg g p , f ,

pg .

Some charitable contributions have the potentialto create signicant problems or an organiza-tion or a donor. Knowingly or not, contributorsmay ask a charity to disburse unds or illegal orunethical purposes, and other gits may subjectthe organization to liability under environmental

protection laws or other rules. Some types o cor-porate sponsorships or interests in corporate stockor assets may result in unrelated business incomeor a charitable organization. Donors may also aceadverse tax consequences i a charity is unable touse a git o property in ullling its mission and


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must instead sell or otherwise dispose o theproperty soon ater the donation is received.

A git-acceptance policy provides some protectionor the board and sta, as well as or potentialdonors, by outlining the rules and procedures by

which an organization will evaluate whether itcan accept a contribution even beore an oer isactually made. The policy should make clear thatthe organization generally will not accept anynon-cash gits that are counter to or outside the

scope o its mission and purpose, unless the itemis intended or resale or would otherwise produceneeded revenue or the organization. It should listany unding sources, types o contributions, orconditions that would prevent the organizationrom accepting a git. The organization should

also consider establishing rules and proceduresor determining whether a git is acceptable andshould identiy circumstances under which areview by legal counsel or other experts would berequired beore accepting a git.

31 a g p ppp g p ppg p pp, , p q , g, p .

A charitable organization may be legally respon-sible when those who solicit on its behal engagein illegal or raudulent practices. Yet even beyondensuring that undraising practices are lawuland honest, a charitable organization has manyreasons to provide careul training and supervi-sion to those who solicit donations on its behal.The most obvious reason is that they are oten apotential donors rst, and sometimes only, directcontact with the organization. The organization

should thereore ensure that its undraisers arerespectul o a donors concerns and do not usecoercive or abusive language or strategies to securecontributions, misuse personal inormation aboutpotential donors, pursue personal relationshipsthat are subject to misinterpretation by poten-tial donors, or mislead potential donors in otherways. All those who solicit contributions on theorganizations behal, including volunteers, shouldbe provided with clear materials and instructionson what inormation to provide to prospectivedonors, including the organizations name andaddress, how the donor can learn more about theorganization, the purposes or which donationswill be used, whether all or part o the donation

may be tax-deductible, and who the donor cancontact or urther inormation.

I a charitable organization decides to use an out-side proessional undraising rm or consultant,it should have a clear contractas required bylaw and guided by good practicethat outlinesthe responsibilities o the organization receiv-ing the unds and o the rm or consultant. Theundraiser must agree to abide by any registration

and reporting requirements o the jurisdictionsin which undraising will be conducted, as wellas ederal restrictions on telephone, email, or axsolicitations. The charitable organization shouldveriy that the outside solicitor is registered asrequired in any state in which the solicitor will beseeking contributions.

In general, those soliciting unds on behal ocharities should rerain rom giving specic legal,nancial and tax advice to individual donors.Rather, when such questions arise, undraisersshould encourage donors to consult their ownlegal counsel or other proessional advisors beorenalizing a contribution.


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32 a g p x pg .

that could be regarded by legal authorities or per-ceived by the public as excessive compensationcompared to the actual work conducted. Percent-

age-based compensation may also be skewed byunexpected or unsolicited gits received by thecharitable organization through no eort o theundraiser.

A similar logic applies to employees. Some chari-table organizations choose to provide bonuses toemployees or exceptional work in undraising,administrative, or program activities. I so, thecriteria or such bonuses should be clearly basedon the quality o the work perormed, rather thanon a percentage o the unds raised.

Compensation or undraising activities shouldrefect the skill, eort, and time expended bythe individual or rm on behal o the charitable

organization. Many proessional associations oundraisers prohibit their members rom acceptingpayment or undraising activities based on a per-centage o the amount o charitable income raisedor expected to be raised. Basing compensation ona percentage o the money raised can encourageundraisers to put their own interests ahead othose o the organization or the donor and maylead to inappropriate techniques that jeopardizethe organizations values and reputation and thedonors trust in the organization. Percentage-based compensation may also lead to payments

33 a g p p , xp q , k pg pp p .

Preserving the trust and support o donorsrequires that donor inormation be handled withrespect and condentiality to the maximum extent

permitted by law. Charitable organizations shoulddisclose to donors whether and how their namesmay be used, and provide all donors, at the timea contribution is made, an easy way to indicatethat they do not wish their names or contactinormation to be shared outside the organiza-tion. In all solicitation and other promotionalmaterials, organizations should also provide ameans, such as a check-o box or other opt-outprocedure, or donors and others who receivesuch materials to request that their names bedeleted rom similar mailings, axes or electroniccommunications in the uture. The organizationshould immediately remove a donors name rom

any lists upon request and should ensure that alldonors at least once a year are provided inorma-tion about how they may request that their names

and contact inormation not be shared outside theorganization.

Organizations that gather personal inormationrom donors and other visitors to their websitesshould have a privacy policy, easily accessiblerom those websites, that inorms visitors to thesite what inormation, i any, is being collectedabout them, how the inormation will be used,how to inorm the organization i the visitor doesnot wish personal inormation shared outside theorganization, and what security measures the char-ity has in place to protect personal inormation.


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Acknowledgements

Executive DirectorDiana Aviv

Project Director

Patricia Read

Assistant Project DirectorJennier Chandler Hauge

Communications StaPatricia Nash ChristelBill WrightAdditional support provided by

Jennier Frias and Gudrun Homeister

Panel on the Nonprot Sector StaDevelopment StaSherry RockeyDeborah Briggs

Administrative SupportGina CatedrillaStaci Morgan

The Panel thanks the many charities, private oundations, community oundations, corporate unders,and individuals that have provided support or our work since its inception in 2004. A complete list ounders is available on our website at www.nonprotpanel.org.

Publication and dissemination o this report was made possible through the generous support oThe Ford Foundation, the W.K. Kellogg Foundation, and the Charles Stewart Mott Foundation.

We also extend our sincere appreciation to Celia Roady, Pa

ethical standards principles guide - synopsis

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