Good Governance

1. Good Governance Jimmie R. Alford, LL.D., LH.D. October 22 and 23, 2012 University of Notre Dame

2. 6 Challenges Facing theNot-For-Profit Sector • Fiscal Challenge/Liquidity Crisis • Competitive Challenge • Effectiveness Challenge • Infrastructure/Capacity Building/Technology Challenge • Legitimacy or Trustworthiness Challenge • Growth Challenge 2

3. Uncertainty and Public Policy • What is the role of government? • What are we getting for our tax dollars? • What can we afford to do and what should be the funding source? • How many can we afford to serve? • What are individuals entitled to receive? • How do we balance human service needs with competing priorities (e.g. infrastructure, pension underfunding, etc.) 3

4. Effective Governance A Framework for Success 4

5. 6 Characteristics of aHigh Performing Team • Vision • Roles & Responsibilities • Decision Making • Communication • Conflict Management • Accountability 5

6. Responsibilities of Nonprofit Boards • Determine mission and purpose • Ensure effective planning • Monitor and strengthen programs and services • Build a competent Board • Select the chief executive 6

7. Responsibilities of Nonprofit Boards • Support and evaluate the chief executive • Ensure adequate financial resources • Protect assets and provide proper oversight • Ensure legal and ethical standing • Enhance the organization’s public standing 7

8. The 3 Standards of Board Conduct • The Duty of Obedience • The Duty of Care • The Duty of Loyalty 8

9. The Duty of Obedience • Requires board members to be faithful to the organization’s mission; to act in a way that is consistent with the central goals of the organization and applicable federal, state and local laws. 9

10. The Duty of Care • Requires board members to exercise reasonable care by staying informed, participating in decisions, and acting in good faith when they make decisions on behalf of the organization. 10

11. The Duty of Loyalty • Requires board members to put the interests of the organization first when making decisions affecting the organization. 11

12. Conflicts of Interest and Ethics Intermediate Sanctions 12

13. Critical Legislation • July 30, 1996, Taxpayer Bill of Rights added section 4958 to the Internal Revenue Code • January 2002, Treasury Department issued regulations • Designed to stem abuse by nonprofit organizations • Adds intermediate sanctions, excise taxes, as an alternative to revocation of the exempt status of an organization when private persons benefit from transactions with a nonprofit 13

14. Excise Tax • In U.S. constitutional law, an excise tax is essentially an event tax (as opposed to a state of being tax). 14

15. Excess Benefit • These excise taxes are payable by certain insiders or “disqualified persons” who benefit from the excess benefit transaction and by organization managers who knowingly approve or fail to disapprove such transactions. 15

16. Definition • Who is a Disqualified Person?A disqualified person is any person (whether an individual, organization, partnership or unincorporated entity) which, during a five year period ending on the date of the transaction in question, was in a position to exercise substantial influence over the affairs of an exempt organization. • A family member (spouse, siblings and their spouses, ancestors, children, grandchildren, great grandchildren, and spouses of children, grandchildren and great grandchildren) of a disqualified person. A legally adopted child is a child of said individual. 16

17. Definition • An organization (corporation, partnership, trust or estate) owned 35% or more, directly or indirectly, by a disqualified person or his or her family member(s). This does not include voting rights held only as a director, trustee, or other fiduciary, without any stock, profit or other beneficial interest. • Members of the governing board of the organization who are entitled to vote on matters over which the governing body has authority (e.g., directors, elders, trustees, etc.). • Executive officers of the organization, such as the president, chief executive officer, and chief operating officer. 17

18. Definition • The treasurer or chief financial officer. This category includes anyone who has or shares ultimate responsibility for managing the organization's financial assets, regardless of actual title. • If a hospital participates in a provider-sponsored organization, any person who has a material financial interest in the organization (e.g., a person involved in a joint venture with the organization). 18

19. Rebuttal Assumptions • Rebuttal Presumption of Reasonableness: A transaction is presumed to be reasonable, and therefore not an excess benefit, if an authorized body composed of individuals who do not have a conflict of interest (i.e., board of directors) approve the transaction after reviewing and relying on appropriate data as to its comparability. This group must adequately document the basis for its determination. • Reasoned Professional Opinion: Organization managers can avoid excise tax by securing a “reasoned opinion” of certain professionals that compensation does not violate the law. 19

20. Penalty • 25% excise tax on the amount of excess compensation or benefit to individual receiving excess benefit • Individual must repay excess benefit by specific date • 200% excise tax if date is not met • 10% excise tax imposed on manager/Board knowing of excess benefit 20

21. Conflict of Interest Policy • Sample: Appendix A, IRS Form 1023 • Essential to good governance • Form 990 inquiry • Committee on Trusteeship vs. Nominating Committee 21

22. Transparency • Duty to DiscloseIn connection with any actual or possible conflict of interest, an interested person must disclose the existence of the financial interest and be given the opportunity to disclose all material facts to the directors and members of committees with governing board delegated powers considering the proposed transaction or arrangement. (IRS FORM 1023 Appendix A) 22

23. Governance Tool Form 990 23

24. Governance Goals of 990’s • Compliance • Promote Accountability • Increase Transparency 24

25. Two Key Questions • Has the organization become aware during the year of a material diversion of assets? • Has the organization engaged in an excess benefit transaction in a particular year or a prior year with a “disqualified” person? 25

26. Critical Governance Questions • Has the Board “read or reviewed the Form 990”? • The new form demands review and critical analysis of the Governance Policies and Practices that are at the very heart of effective board operations… • Was a copy of the Form 990 provided to the organization’s Governing body before it was filed? 26

27. Sample Job Description For Board Members ROLE Assure the success of _____________ (the organization) in fulfilling its mission and vision by providing strategic oversight, planning, advocacy, leadership and support. 27

28. Sample Job Description RESPONSIBILITIES • Exhibiting knowledge and support of the ________ mission, vision, position statements, policies, goals, and programs. • Demonstrating the ability and willingness to access resources on behalf of the ______ including: • Making a financial gift commensurate with capacity. • Securing philanthropic support from others. • Identifying and accessing 3-5 key relationships for the ____. • Offering talents and expertise to benefit the _____. • Providing leadership and strategic planning for the ____. 28

29. Sample Job Description • Signing a Conflict of Interest statement that specifies that Member will not act in a way that may be perceived as self serving or as a conflict of interest with the ____ or its programs • Participating in orientation and ongoing education. • Hiring, setting expectations for, and evaluating the performance of the CEO. • Stewarding the _____ assets and resources and annually approving an operating budget/capital budget. • Participating actively in fundraising on behalf of the _____. • Advocating for the _____ at events and within personal networks. 29

30. Sample Job Description BOARD MEMBERS COMMIT TO: • Attending and participating in a majority of Board meetings (defined as 75% of meetings or more). • Serving and playing an active role on at least 1 committee. • Responding in a timely manner to all communications. • Meeting with staff as appropriate. • Participating in presentations and discussions with potential funders and external partners as appropriate. 30

31. Structure and Flow of Information BOARD OF DIRECTORS EXECUTIVE COMMITTEE PROGRAM COMMITTEE PERSONNEL COMMITTEE FINANCE & AUDIT COMMITTEE RESOURCE DEVELOPMENT COMMITTEE • Strategic Planning • Program: Policy Evaluation • Staffing Recommendations • Personnel Policies • Performance Evaluation Procedures • Salary Administration Policies • Professional Development • Fiscal Management • Properties • Investments • Insurance • Fundraising: Annual, Capital, Endowment • Volunteer Leadership Development • Communications: Marketing, Public and Community Relations

32. Resource Development Responsibilities

33. Sample Resource Development Organization Chart CEO of Organization Director of Development Development Officer Major and Planned Gifts Development Officer Annual Fund Development Officer Special Events Administrative Infrastructure

34. Putting it Into Practice Tools & Technology for Managing Donor Relationships

35. Acquisition • Board members’ contacts • Events • Similar organizations’ donor lists • Open houses

36. Acquisition • Maintain an effective website • Current, useful, rich information — not an e-brochure! • Explain how people can support you • Make the ask, and make it easy! (Donate Now button) • Viral marketing, social networking • “Tell a friend” function on website, e-mail communications

37. Acquisition • Use your website to provide value • Content, news • Relationships • Connection to mission: opportunity for action, impact • Be an e-mail pack-rat

38. The Fundraising Cycle Identify Acquire Cultivate ConstituentRelationshipManagement Steward Solicit 38

39. Board Engagement Critical to Success 39

40. 3 Key Cultures • Fiduciary • Strategic • Generative 40

41. Governance As Leadership Adapted, with permission, from the book of the same name by: Chait, Ryan and Taylor (2005), BoardSource, Inc. and John Wiley & Sons, Inc. 41

42. Core Concepts of Governance as Leadership • Emphasize modes, not tasks, of governance. • Think and work in three different modes. • Each emphasizes different facets of governance. • All three serve important purposes. • The value added by a board will increase as board: • Becomes more proficient in more modes; • Does more work in third mode; • Chooses appropriate mode(s) of work. 42

43. Governance as Leadership Strategic: Type II Generative: Type III Fiduciary: Type I The Governance Triangle 43

44. Type I: Fiduciary Mode • Board’s central purpose: • Stewardship of tangible assets • Board’s principal role: • Sentinel • Board’s core work: • Ensure efficient and appropriate use of resources • Ensure legal compliance and fiscal responsibility • Ensure accountability • Oversee operations • Select and evaluate CEO 44

45. Type I: Fiduciary Mode • Organization of work: • Fixed structure mirrors administrative functions • Agendas and meetings: • Operational, standardized, staff-dominated, report-driven, ritualized • Deliberative style: • Parliamentary, orderly, deferential • Performance metrics: • Audits, budgets, staff reports, facts and figures 45

46. Value-Added Fiduciary Work Oversight • Due diligence? • Scandal free? • In compliance? • Can we afford it? • Clean audit? • Budget balanced? • Do we manage risk? • New program meets market? • Is it legal? • Can we get the gifts? • Staff turnover manageable? Inquiry • Hold what in trust for whom? • Safeguards in place? • Voluntary measures to earn trust? • What the opportunity cost? • Insights from audit? • Budget matches priorities? • Do we take sensible risks? • New program serves mission? • Is it ethical? • Do donors expect too much control? • Are staff treated fairly? 46

47. Why not just Type I Board? • Do Type I work but don’t become a Type I board. • Stewardship is essential but not sufficient. • Narrow roles and tedious work do not motivate trustees. • Governance extends beyond internal operations. 47

48. Type II: Strategic Mode • Board’s central purpose: • Strategic partnership with senior management • Board’s principal role: • Strategist • Board’s core work: • Scan internal and external environments • Resolve priorities • Review and modify strategic plan • Monitor performance 48

49. Strategic Mode: Design Elements • Organization of work: • Fluid work groups mirror strategic priorities • Agendas and meetings: • Thematic, strategic, variable, participative • Deliberative style: • Empirical, analytical, congenial • Performance metrics: • Scorecards, benchmarks, dashboards 49

50. Value-Added Strategic Work Planning • Money, space, personnel? • Compensation plan? • Build on strengths? • Size of market? • What is? [extrapolation] • Valid assumptions? • Can we see the future? • Traditional competitors? • Internal preferences? • Management must do what? Thinking • Business model viable? • Great place to work? • Victim of our virtues? • New markets? • What could be? [invention] • Make new rules? • Do we understand the past? • Nontraditional competitors? • Customer value propositions? • Board must do what? 50