A Simple Way to Help Nonprofit Boards

Recent press exposés of misbehavior by executives and board members of charitable organizations have underscored why good governance at both foundations and charities is so important. Many of the abuses reported by the news media were caused by board members who did not understand, and in some cases ignored, their responsibilities — including some who received personal financial benefit through their roles as directors, and others who paid too little attention to organizational and leadership performance.

As the failings of boards have attracted public attention, the Senate Finance Committee has begun debating how best to prevent board members from abusing their positions. A recent “discussion draft” released by the committee for comment focuses on ways to strengthen the laws governing tax-exempt groups.

Among the myriad proposals are a number that establish new requirements and duties for trustees of charitable organizations under federal law and set new penalties for violations. There’s no doubt that something has to be done, but a far simpler solution is available — one that could be put in place quickly, with little cost to the nonprofit world or the government.

Taking a cue from U.S. Supreme Court Justice Louis Brandeis’s oft-quoted comment that “sunlight is the best disinfectant,” the Internal Revenue Service should develop an annual governance disclosure form for boards of charitable organizations. Requiring board members to fill out a disclosure form encourages better behavior without creating unintended consequences that jeopardize board performance or discourage people from serving on nonprofit boards.

The form would serve much the same purpose as the 990 and 990-PF informational returns that charities and foundations now must submit to the public each year. Since the board-governance reports would be available for public inspection just as are charities’ informational returns, donors, watchdog groups, and the news media would have a new tool to use to monitor nonprofit organizations, decide which organizations are worthy of support, and determine whether board members are acting responsibly.

Moreover, Congress should require that the form be signed by the chair of the governing board. That would send a direct message to the boards of charitable organizations that they are accountable to the public for the activities that occur inside a boardroom.

Such a disclosure form should be designed in a way that is simple for boards to fill out. Some possible questions to include:

• How many times did the board meet this year?
• How many times did the board meet in executive session?
• Was the chief executive officer present at all executive sessions?
• Does the board have term limits for trustees?
• Does the board have a rotation policy for board officers?
• How long has the current board chair been in that position?
• Does the board have a conflict-of-interest policy?
• Did the board review and approve the organization’s budget?
• Does the board have an audit committee?
• Has the board engaged in a process to assess the board’s performance in the past three years?
• Did the board conduct a formal evaluation of the CEO’s performance this year?

Board members might be asked to simply check Yes or No, or supply a figure in response to these questions, but the forms could also allow room for explanation. To account for the vast difference in expectations between large and small organizations, this governance disclosure form could be tailored to ask different questions depending on the size or type of organization filling out the form.

While the primary purpose of the form would be to allow government and the public to keep a closer eye on board activities, developing questions about board-governance practices could be a powerful way to educate executives and board members of charitable organizations about the importance of governance in general, and about basic practices that put boards in a position to act as independent overseers.

Many charities and foundations are governed by knowledgeable and conscientious board members, but others have had little experience and some do not understand the duties and responsibilities that they have undertaken as trustees. A disclosure form for board members could become a checklist for the basics of good governance that every nonprofit organization in America would have to review annually.

Asking board members to fill out a disclosure form could also have another important benefit: As trustees focus on filling out their own disclosure forms, they might take a closer look at the Forms 990 or 990-PF that their organizations submit to the IRS.

Because studies have found that many of these forms are filled out inaccurately — omitting key pieces of information or not providing the data that were requested — it could be helpful for board members to take a greater role in ensuring that all disclosure forms are reporting information clearly, correctly, and comprehensively.

While disclosure of additional information would provide the transparency that is essential to ensuring that all nonprofit organizations operate in the public interest, disclosure alone is not enough.

The Internal Revenue Service and state attorneys general need to have the authority and the manpower to act on any improprieties at nonprofit organizations. Congress needs to take steps to make it easier for state regulators and the IRS to share information they gather about nonprofit groups and to be sure that government regulators have the resources they need to identify and redress violations.

The twin pressures of disclosure and enforcement lie at the heart of this nation’s securities laws and have proved to be very effective techniques in ensuring accountability in much of the for-profit corporate world. Why not apply the same principles to the nonprofit world?

Deborah S. Hechinger is president and chief executive officer of Board Source, in Washington.