Non-Profit Governance: The Independence of the Board of Directors

Posted by Matthew Thomas

Recently, I read an article on Cnn.com entitled Above the law: America's worst charities.

There were several charities described in the article that were out-and-out frauds. For the rest, they all seemed to be missing one vital piece of good corporate governance: independent directors.

Independent directors, in a nutshell, are not part of the management side of the organization: the executive team, managers and staff. These directors have both the will and the capacity to say "no" to the CEO and define and determine what reports they will receive, and from whom, about the activities and life of the organization.

This does not mean that "independence" equals a permission-denying board, a micromanagerial board, or a board that bullies the CEO and staff. Those things aren't healthy either. Independence merely means that there is enough distance between the directors and the management (and managers) of the organization that the board can take a more objective view of the goings-on in the organization.

Many boards who have clear legal independence from management often still do not have the emotional or leadership capacity to maintain good governance because it creates dissonance in the personal relationships between board members and staff. This is especially true in strong founder-driven organizations, particularly where the founder is the CEO/Executive Director, or an E.F. Hutton type on the board. ("When E.F. Hutton speaks, people listen.")

Lesley Rosenthal, a contributor to the Harvard Law School Forum on Corporate Governance and Financial Regulation, puts it this way:

Board independence and board attention are of paramount importance in good nonprofit governance.  The independence of the board is key because of the non-distribution constraint – nonprofits exist to serve the public interest, not to benefit owners or other private parties.  Business or family relationships between the organization or its executives and a board member or her firm are frowned upon and should be strictly scrutinized under a conflict of interest policy administered by independent directors.  Even absent outright business or family relationships, a common shortcoming of nonprofit boards is that they are too small, too insular, or too deferential to the founder or chief executive.

(Full Article Here)

In short, non-profits (and churches fall into this category) must be careful to work toward a greater good than merely promoting a sectarian or special interest agenda, and a greater good than merely fulfilling their own vision for what they want. Churches and non-profits are always in the public eye - and often for the wrong reasons. Solid governance will help non-profits and churches become more known for the good they do than for the money, power, relationships and vision they waste. Steward leaders have hearts for doing that kind of good to move their organizations forward.

[See Also: Independent Voting Members of the Board | Corporate Governance and the Nonprofit Board of Directors]

At Design Group International, we are committed to helping organizations and their leaders transform for a vibrant future. Good governance is an essential piece of that transformation for many organizations. Click the link below to continue the conversation with us about how we might work together to help establish healthy, solid, independent governance in your organization.

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Topics: Matthew Thomas, Design Group International, Non-Profit Governance, Independence of board of directors, independent board, charity, steward leader

Non-Profit Governance: Your Non-Profit Can Make A Profit

Posted by Matthew Thomas

... as long as the profits do not inure to the benefit of any private shareholder or individual.

This is a great confusion among non-profits and churches. Charities are so accustomed to being cash-strapped and short on funds that it has become normative for them to operate at deficits or at break-even levels.

Actually, your non-profit or church can collect more in revenues than it expends in any given accounting period. (That, by the way, is the definition of "profit.")

The trick is that it cannot use that profit to benefit private individuals.

In reality, healthy, growing organizations regularly bring in more money than they expend. They build a base of assets (real property, moveable property, cash and other investments), with which they can further leverage activities that fulfill their mission and promote their cause.

Moreover, fiscally healthy organizations that have a view toward the long term will work hard to maintain a surplus in their budgets so that they have funds available for more than just this fiscal year or budget cycle. They then have the capacity to meet challenges, obstacles and opportunities with more grace than the more paycheck-to-paycheck type of management.

Steward leaders make every effort to make sure their organization can fulfill its mission over the period of time required to bring that mission to completion. For many organizations, this means building revenues and accrued assets over time so as to leverage those assets and revenues for long-term impact.

Design Group International offers objective financial health assessments to organizations looking to establish sound fiscal footing and steward their resources faithfully. Click the link below to start yours today!

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Topics: Matthew Thomas, Design Group International, Non-Profit Governance, Profit, Fiscal Health, Financial Planning, Financial Reporting

Non-Profit Leadership: Difference between Non-Profit and Tax-Exempt

Posted by Matthew Thomas

Most non-profit organizations are also tax-exempt. However, these tax exemptions do not typically free non-profits from paying all taxes. There is a vast amount of utter confusion surrounding the distinction between "non-profit" and "tax exempt". Let's take a look.

Non-Profit means that a business entity is incorporated such that "no part of its net earnings" (the money left after all of its expenses have been subtracted from its revenues, including the sale or trade of the entity's assets) "inures to the benefit of any private shareholder or individual." (26 USC 501(c)) (See http://www.law.cornell.edu/uscode/text/26/501)

There are a wide variety of organizations that fit this definition under the law, and state law governs what kinds of groups are allowed "corporation not-for-profit" status. Churches are often specified as a special type of corporation not-for-profit, but state laws differ.

Tax Exempt organizations are organizations that meet the requirements of the various taxing bodies with jurisdiction over the organization. Most famous in the United States is the Federal 501(c)(3) designation, referring to the third sub-paragraph of subsection (c) of Section 501 of Title 26 of the United States Code.

Nevertheless, there are other taxing bodies involved:

  • States - income taxes, sales taxes, certain excise taxes
  • Local Governments and Municipalities - income taxes, sales taxes, property taxes, other levies

Organizations that are tax-exempt may not be tax-exempt from all of these various taxes. It all depends on how the tax laws are written for each taxing entity. For instance, some churches are allowed a property tax exemption, while religiously-based non-profits for whom there is no worship service on the property may be required to pay property taxes, even though they are otherwise tax-exempt. In addition, tax-exempt organizations may still be subject to tax for income on trade or business unrelated to their charitable, tax-exempt purpose. 

Organizations, then, should take care to make sure they have complied with laws affecting corporations not-for-profit AND the laws (at various levels) regarding tax exemption. Note, too, that no matter what, almost every organization in the United States must still collect and pay payroll taxes for their employees.

We can assist you as you work with your board, executive team, attorneys and accountants to pursue your mission. Click the button below to continue the conversation!

 

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Topics: Matthew Thomas, Design Group International, Non-Profit Governance, Tax-Exempt