Episode 176: Don't Forget About Basic Governance and Supportive Policies
Keeping your foundation legal - A simple yet critical reminder of the basic principles, policies, and procedures you should be reviewing on a regular basis to maintain and build trust with the community, leaders and donors.
Welcome to another edition of Around with Randall, your weekly podcast for making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett. I'm so grateful for you taking a few moments of your time to join me, Randall, on this edition of Around with Randall.
I had an interesting conversation recently with a client and dealer, a group of younger, up and coming, Philanthropic industry professionals, who I think are the most part are going to be really amazing leaders someday. But they asked some really basic questions about the legality of nonprofit work and it caused me to think that I tend to deal with senior development leadership or fundraising foundation leadership. Chief development officers even into legal and compliance, certainly into CEOs of universities, Chancellors Presidents, CEOs of healthcare, hospital and systems, CEOs of, so service agencies. And I sometimes forget that not everybody knows the true basics of how to make a foundation and the execution of the work legal.
So today I want to level set. And just a few minutes talking about some of the broad strokes that I just take for granted that everybody knows. And that's really poor on my part is we all could use a reminder about some of the basic principles about what makes nonprofit work effective when it's done in a legal way. So I want to cover some wide swatches from duty of care, the three principles or the three duties to kind of a very, very high level of 990s. And then we're going to kind of jump into some policies and procedures that can probably be helpful, whether you're big or small that you probably should be looking at on a more regular basis.
So why is this important? Let's start with maybe one of the basic tenants here. The thing that we have in the nonprofit world that we need to realize is our most important asset is actually not our people. They're number two. The thing that gives us the ability to do what we do is trust. Trust with the community. Trust with our donors, community leaders, volunteers, if we are a standalone foundation supporting an organization or a development office in an organization. Everybody who works in the organization doesn't understand what we do.
If we lose trust, we lose all the key elements, aspects of what's truly important. And what we end up with to be candid is a lot of conversation without a lot of money, connection, because people say, "Why would I give to that? I don't trust them." There's an old adage, which I tend to use quite often with leadership to always maybe keep in mind, no money, no mission. And if you lose the trust of your community, of your donors, based on the fact you didn't do some basic legal things, it really sets you back. And I think we all can understand that.
So this conversation today is all about trust and what we have to do to ensure we have it at a baseline level. And not just individually, I mean organizational-wide. So let's start at the top. The primary responsibility of a board member, for sure, of key leadership, and basically anybody inside the organization from a legal perspective. And this probably mostly applies to board members who have a governance responsibility, and certainly an executive team starting with the CEO.
There are three basic duties that in many states are codified, meaning the legislature and the governor of sign, let's say your past, governor of sign laws, that say, "These three things have to be preeminent in everything that you do as a fiduciary, as someone who's ultimately responsible." And the way I put it is, boards are the owners. They're the owner representation, representatives of the community. There are three duties, duty to care, duty to royalty, and duty of obedience. So what are these three things?
And by the way, all too often, you ask a board about these three. They have no clue. But yet, their state may have passed laws that make it important for them to understand what these duties are. The first is duty of care, and that's really deals with the level of competency. That the average ordinary prudent person would do whatever it is that you did or you should do. That when you think about the general thought process of responsibility, that you're doing the basics, and that the standard in law is the ordinary person. What would the ordinary person do in this circumstance?
And so duty of care is about making sure that you're doing the bare minimum, and obviously we'd like a heck of a lot more, when you are a leader or have some type of responsibility. The second is duty of loyalty, and this means that it's an undivided allegiance to that organization. A little more detail here. This is where conflict of interest statements are really important. So many boards have a conflict of interest policy. There's a reason why, because the 1990, first of all, says you should have one at the attitude and one of the sections, hey, you have the policies. Number two is press practice.
But what I find most often is missing is a conflict of interest statement and signature, meaning that every year the board member is signing a document that says, I will have a duty to this organization and not create a conflict of interest. And conflict of interest is this wide term, meaning that something gets in the way of them executing their job. Easy examples include that they own a lawn service and the, let's say the foundation or governance port doesn't make a difference. It's trying to hire someone to cut the lawn and the decision comes before the board, new on the lawn service. It doesn't mean you have to resign from the board. It just means you have to stand up and leave and abstain from involvement in that decision because you have a conflict. And this comes up with kids who are working in the organization. This comes up with contracts being offered. The chair of the board at the Nebraska Medical Center where I worked before going into consulting, the chair of the board was the bank owned the bank that managed all of our retirement.
So this was a non-fill and the topic conflict of interest. Every year when there was a conversation about do we continue with the different investment opportunities for employees, 401(k)s, Roth 401(k)s, all of that? He literally would handup the gavel to the vice chair. He'd go out in the hallway. He'd have no idea what's going on in the room. It's about no personal gain. It's about you can't benefit from a decision the organization makes. And you should have this conversation every year with not only boards but leaders that haven't signed something saying, I will make sure that I understand the conflict interest and if it arises, I will abstain and remove myself from the conversations. Duty of loyalty. The last is duty of obedience, which is faithfulness to the true mission of the organization. You're not going to allow the organization either as a leader, a volunteer or an employee, executive leader, push the organization in the places it shouldn't go based on its mission and/or. Change the mission to meet where you want to go and be honest about it.
So duty of care, duty of loyalty, and duty of obedience are all about these basic essence that in many ways we all should have as leaders. There should be a policy and a statement and a signature that fully defines what these things are. And if you're doing that, you'd be surprised how simple governance gets in terms of operating the organization illegal sense. So that is the broad.
Because we begin to move down into the specific, I want to spend just a minute talking about the IRS form 990. When 990s began, many decades ago, they were kind of afterthoughts and it wasn't until the tax reforms really coming out of Sarbingen's Oxley in 2008 and 9 that the 990 began to grow in the non-profits pace to match their requirements really run by Barney Frank, the senator from Massachusetts said, I'm willing to keep politically non-profits out of Sarbingen's Oxley, which is the more profit version of requirements for reporting for companies. But they're going to have to step their game up. And that's when the new 990 forms came out in 2009, 10, and 11 and we've kind of morphed. More and more people know about it.
I am not going to spend a lot of time on this podcast going section by section, although I do sometimes talk about it. But the big things are, and I'll stay away from section one and two, which is the kind of the reporting and finances. Certainly, three is about statement of programs. Really is about four, five, six, and seven. So section four is all about the required schedules. There are all of these schedules A through, I think, is it N or O anymore? It's not even P that only have to be filled out depending on the type of non-profit you are. That's only important from the perspective of clarifying what you shouldn't fill out and what has to be disclosed. But I can't believe how many times I say these things and they go, we fill them on. I'm like, you don't have to. You only fill out the ones that you're required to.
The part five is where we talk about IRS filings and tax complaints. More and more, there's a discussion going on about the fact that nonprofits don't pay taxes. Most of the time, not at the local or state level. For sure, they don't play income tax through the Fed or IRS. But with that grace comes responsibility and in health care, it's being pushed more heavily probably anywhere else, particularly if you have services that get you get reimbursed for or you charge for tuition for university or a school, health care in terms of insurance and Medicare is this idea of community benefit.
This is where we have the discussion about in the compliance side, what are you doing to be worthy of not paying income tax or corporate tax on the entity? That means you have responsibility to help the community. This is where we begin to see this. More and more, this is becoming an important discussion because governmental agencies are saying, look, we're giving you, particularly as these health care and education primarily driving the size and scope of a concern, they're getting so big that they're like, by the way, systematized, more distant from their local execution of their mission, hospitals, education. That are you actually delivering community benefit? Are you helping the community in various ways that you are required to do if you don't have to pay taxes? And this is a conversation we need to have more often.
The 990 drives the reporting of that. And then the community benefit reports that are required that come out of that. And so you might want to have more conversations, discussions with your board about this because it's being pushed. Part 7, I just want to spend a second about, or sorry, Part 6 is government management and disclosure, who's managing, who's leading, who you have all the policies, do you do the right things, do you meet, do you keep copies of minutes, things of that nature. And then Part 7 is compensation and connection to independent contractors as well as donors.
We are seeing more and more pressure by the IRS to disclose more facts about the people working in the organization, the people that you're paying, and the real one that we're just kind of pushing into. There is a requirement, which has been kind of nebulous about reporting your largest donors. Of course, if you sign a gift agreement that there's anonymity, then that becomes really hard. Section 7 is all about this. There's a connection or conflict depending on this issue in reporting out about who gets paid, how do they get paid and who's giving to you?
You might want to pay more attention to this because we're seeing more and more pressure from the IRS to be more open. They want, they don't have a police force per se, although they're hiring a ton of agents over the next 10 years. They want the community to be the community-based policing agency to reporting when they see something that's odd or different. That's why they're saying there has to be more disclosure.
I'm going to stop with the 990. What I am going to say is, it's really, really important that you are reviewing this 990 as an executive or a leader about your organization. If you're on the board, it should be discussed and brought out and having expert brought in to talk about it. Usually, it's an auditor of some sort to talk only about the finances, but about what we're reporting and what's in there. That's the time I think it's become almost second nature. We did a 990. Do you know what's in it? No? How can you be a fiduciary or an executive leader and not have an idea of what's in the 990? So a little more push into that would be a good thing for all of us.
Now we begin to move, once we've talked about the duties, we've talked about the reporting that's required by IRS to the 990 is now into kind of the policies. The first policy that I always think that's most important is your gift and acceptance policy. I've written a number of these for clients. It's not the easy things that are the problem. Really the gift acceptance policy is, how do we take money in? What do we do when we take it in? It may not be actually money. It's gifts. The easy things are cash or stocks.
A stock gift, we all know, you value by the high of the low of the day and what you received it. I mean, or cash has a certain value. That's all easy. Really what gift acceptance policies, when they're done correctly, are all about are dealing with unacceptable gifts or the things you don't take care that you don't take. Or what are the more complicated gifts? I.e. Things like real estate. And how do you do that? Because I don't want the CEO or the chief development officer being the sole decision-maker about real estate. There's some real estate you shouldn't take.
And by the way, out of that comes reporting of 82 81 forms, 82 82 forms, those things become more complicated. And we're going to see more land gifts as people's land, houses, farms, businesses becomes more valuable. And we're going to see more of those things that are more important than the real estate. And we're going to see something that might be problematic, whether that's harassment or financial misdoing or any kind of other act that doesn't meet basic humanistic standards when we think about what we want and employees.
They have to have a place to be able to go and say, I see a problem and they have to feel safe in doing that. And if you're a foundation at a hospital or foundation, let's say, and maybe smaller, like in a school district, you're supporting the school district or a separate foundation from a university. You can use the universities or the high school districts or the hospitals with some more policies because they have very established ones almost every time. So you don't have to recreate the will.
You just have to know how to allow your employees or your board or volunteers a place to be concerned. The other thing I will comment on is that things like document destruction policies, investment policies, travel and expense policies are critical. And yet most of the time I think organizations have them, but what they don't do is review them and nobody knows what they say and what the process is. All of these things are done from 990s to take duties of care to these policies because they're there to do one thing that has two parts that has two parts.
Number one is to protect the organization. Number two, it's to protect the staff. If staff in the board follow the policies, generally there's not a lot of problems where the problems arise is when we tend to take a leap of faith and go somewhere else. If you don't know some of the things I'm talking about, go ask someone and say, where is our investment policy and read it or I don't know what's in our gift acceptance policy. Go find it and read it.
Most of the time I think organizations have the broad parameters. People don't know what the heck they are. And I think the key here is to ensure you know what policies are required and know what's in them to make sure you're doing the right things. And by the way, to protect yourself. That's what I told gift officers. These policies, particularly gift acceptance are not there to hurt you. They're here to help you so you don't get yourself in trouble. Truly believe that.
And that's how we build trust with our community back to where we started. Because we don't have trust. We have a tough time existing and getting acquiring, partnering to find that all-important dollar or lots of them to make our missions possible to help other people. They seem basic, but you'd be surprised to start asking questions, what you don't know.
Don't forget, check out the blogs 90-second reads, get them at Hallettphilanthropy.com and RSS feed right to your inbox. And if you'd like to reach out to me, it's podcast at Hallettphilanthropy.com. Don't forget what you do is important. And today we talked about some of the foundational things that are required to do what you're doing to build trust. That basic governance policy principles processes that are so important.
I just brought up a few of the bigger ones. But when we have those things, it doesn't mean it automatically happens. It takes you as a volunteer as a leader as a staff member to really do what is my all-time favorite saying. Some people make things happen. Some people watch things happen. And then there are those who wondered what happened. And at the end of the day, even with the best policies, procedures and everything else and all the trust in the world.
If you're not someone who's making things happen, making phone calls, going to see people building relationships, talking about the value of what your organization does and listening to what the community wants and finding that connection. You're not doing that. Then you're not helping the people who are wondering what happened. That's the mission of what nonprofit works all about love of mankind helping others.
Lean into that. Go take that little extra step in being someone who makes things happen. Because in doing so, you'll cause a lot of positive outcome impact for the people in the things we want the most and believe in the most. Those people in entities that are wondering what happened. That connection is fleeing through P.O. to its finest. Appreciate your time today and I'll certainly look forward to you joining me again next time right here on a round with Randall. Don't forget, make it a great day.