The House and Senate held hearings in June on nonprofit abuses, and the Senate Finance Committee released a “discussion draft” outlining possible legislative remedies . In response, the Philanthropy Roundtable put the following questions to a variety of nonprofit leaders—foundation heads, consultants, academics, and politicians. Symposiasts were invited to answer as many or as few of the questions as they liked.
1. What abuses most need correction?
2. What are the two most important principles for reform?
3. Is current law sufficient to address these abuses? If not, should the federal government or states take the lead in reform? What’s the role for the IRS? for state attorneys general?
4. Can and should the field self-regulate? If so, how precisely?
5. Have the IRS and the state attorneys general done enough to enforce existing legal requirements? How could they improve?
6. What should be done about abuses of donor intent?
7. When is staff or trustee compensation unreasonable? Are existing laws adequate to protect against this?
8. Do you favor the extension to foundations of Sarbanes-Oxley-style requirements for independent boards?
9. Do you fear any legislative over-reaching in the current environment? What do you most fear?
10. Should foundation perpetuity be allowed?
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As we think about the controversy surrounding foundation abuses, we mustn’t focus too narrowly or too indiscriminately. First of all, this discussion should be about the abuses—and the benefits—of the entire nonprofit voluntary sector. Some specifics apply to foundations, but we are all in this together, as is clear from the breadth of the hearing that Senator Grassley (R-Iowa) held in June. Remembering this should inform our response to real abuses.
And there are real, outrageous abuses, ranging from Hale House in New York City to charitable trusts and foundations as reported in the Boston Globe. On the philanthropic side, these include disgraceful salaries, conflicts of interest, self-dealing, and fictional valuations for donated property. Most of these cases are a failure of governance. Stupidity is no excuse; board governance carries real responsibilities. One can only hope that boards and perpetrators of such abuses are brought before a “hanging judge”—the stocks at Williamsburg come to mind, too.
In general, however, the necessary laws are in place. The responsible public agencies must have both the capacity to enforce them and be held accountable if they don’t. While we shouldn’t engage in “blaming the enforcer,” is it possible that they were asleep at the switch? True, the responsible agencies have neither the systems nor the resources to do what they should have been doing. Thus, much of this focus on abuses should result in more resources and accountability for the enforcers.
Most new legislative solutions suggested to date involve significant cost-shifting and complex requirements that would be unnecessarily burdensome on an already struggling voluntary sector. We should bear in mind that some of the reforms in 1969 did intended and unintended damage to the sector. One can anticipate some of the results we might see now: universal remedies that ignore nuances and eliminate honest and creative efforts in the sole interest of compliance; requirements that have a chilling effect on board membership and good governance; significant added costs that would reduce program funding; restrictions that would result in less philanthropy and public spiritedness. Extending some provisions from Sarbanes-Oxley requirements might impose heavy restrictions while doing little to protect the public. The discussion draft from the Senate Finance Committee even had a suggestion mandating that board membership be between 3 and 15: silly! After all of this, the voluntary sector and philanthropy could easily be less robust and effective. It is unclear how much wrongdoing would actually be caught or avoided by all of this.
In the end, I just don’t believe something is systematically wrong with the sector or with philanthropy generally. There are some bad people, and they should be caught. There are some inattentive boards, and they need a continuing reminder of what is expected of them. But let’s face it: We don’t live in a perfect world; some abuses are inevitable. Markets, sectors like the nonprofit world, and even government are vast information systems and learning communities. We need to encourage constant improvement, enable real vigilance and let it work.
Public access to information and transparency are crucial for the sector. We need an educated public press that can ferret out abuses and also understand the sector. Public officials need to be better informed about the sector. We need to do a much better job of communicating the good stories as well as the difficulties of finding and funding effective programs. We as a sector should do a better job of condemning the bad apples. That in turn suggests that much, much more needs to be done on accountability, results, and outcomes. Similarly, we need more research on the true extent and nature of abuses (a few hours of public hearings don’t make for good policy).
We as individuals and as a sector should not countenance abuse in our actions, public documents, or in our cocktail conversations. We need outspoken leadership taking the moral high ground with respect to the standards our sector expects, as well as with respect to the sector’s importance and independence (some do still call it the independent sector).
As we work through these difficult issues, it may be worth remembering that not all issues should be a matter of public policy, as much as policy wonks from the left and right would like them to be. Some things are best left to “private policy.” For instance, there are good and bad reasons for foundation perpetuity; that should be left to donors and boards. Donor intent is a very important and complex issue, and it should primarily be left to donors and boards. Egregious abuses are just that-egregious-and are now subject to various legal forums should that be necessary. Decisions to limit foundations to a minimum of $20 million (or $5 million) shouldn’t be decided by legislative fiat; donors and families can have very good and effective chartable reasons for small foundations.
Unfortunately, the terms of the debates about this sector have been commandeered by conservative and liberal critics who have made common cause (sometimes unintentionally, but nevertheless too often in fact) against the voluntary sector. Much of the rhetoric promotes a “politicization” of the nonprofit sector and philanthropy-the notion that all problems must be and can only be solved by political action and legislation. The history of philanthropy in the United States and Britain gives us many lessons of how this diminishes the charitable spirit in our communities. Have we forgotten that less than 40 years ago, much conventional wisdom held that there was little role left for private philanthropy and a voluntary sector? It is worth remembering Tocqueville’s uncanny warning in 1835, which is just as prescient today:
Among democratic nations it is only by association that the resistance of the people to the government can ever display itself; hence the latter always looks with ill favour on those associations which are not in its own power; and it is well worthy of remarking that among democratic nations the people themselves often entertain against these very associations a secret feeling of fear and jealousy, which prevents the citizens from defending the institutions of which they stand so much in need.
I have been surprised by the extent of abuses. I have also been impressed by the level of concern and the efforts of a wide variety of nonprofit and philanthropic intermediaries to address the issues in a serious and effective way. While these efforts may seem disorganized, real progress is often messy and that is O.K. I also find the value and independence of civil society (of which voluntary and philanthropic organizations are a major part) exceedingly important. Our increasing individual and collective vigilance about abuses within the sector should always include vigilance for the health of the sector. I also worry that some of the purported remedies are more about generating public revenues than about solving problems. Let us be sure that any unintended consequences of addressing these abuses don’t actually harm the voluntary sector. Change is necessary; it is already happening; and it need not always be “political.”
2. There are no one-size-fits-all solutions, and neither is there one “silver bullet” action that will address all the problems. Reform will require a multifaceted approach of short- and long-term efforts—both private and public—that recognize the diversity of the organizations within the charitable community. We also must ensure that in solving one problem we don’t create unintended consequences that damage other parts of the sector.
3. Current law is sufficient in some areas, but not adequately enforced. In other areas, we probably need to strengthen the law. States serve as a laboratory for testing out new ideas before we take them to scale nationally. It is important to note that the IRS and the state attorneys general must have adequate resources to do the job we need them to do and be able to share relevant information.
4. Self-regulation works for those organizations that are looking to do the right thing. Much can be done with education, clear standards, technical assistance, and peer encouragement. For those who disregard the law and are not responsive to peer pressure, enforcement by government is called for.
1. ASF’s members, numbering about 2,900 foundations, focus on teaching each other that expenses incurred in operating a foundation should be reasonable and necessary to the charitable purpose of the foundation. Guided by this, I’d say the abuses that most need attention are proven cases where a conflict of interest is compounded with a situation of excessive private inurement.
2. When considering the most important principles for reform, we need to remember, first, that foundations are not the entire system. Second, the goal of reform should be more, and more effective, philanthropy, keeping in mind those donors who will emerge in years to come. Finally, we should realize that donors, families, and foundations are unique.
Assuming foundations are the entire field is simplistic and leaves important components out of the analysis. We have a system that includes economic, social, and political players. The economy generates the wealth, the donors give it away, and the government sets the rules. Giving each of these players credit—in the right amount—is important, but each has a role. Each has a responsibility.
Foundations truly represent one of the high water marks in our society; they are based on a high degree of trust. That means unchecked regulation and political headline-grabbing can be just as damaging to philanthropy as trustees who treat foundations as their personal piggy banks.
Reform needs to recognize the foundation board’s (or donor’s) authority in stewarding the foundation assets and grants. It’s often said that once the donations are placed in the foundation, it’s the public’s money, but in practice the responsibility is somewhat of a blend, and this blend of responsibility helps pave the way for more philanthropists.
4. Should the field self-regulate? Well, education and enforcement are two different things. The field can do an excellent job at education, and education is valuable. Even the staunchest critics agree that most foundations are upstanding and trying to do the right thing, something I see daily at ASF as we respond to literally thousands of foundation trustees who want to learn to operate legally and effectively. If the government wants to delegate enforcement power to “the field” because that will be a more effective way of finding the bad apples, fine. But sharing power is what it will take; otherwise, self-regulation is most likely an exercise in self-gratification.
5. Government enforcement to uncover the bad apples is not that expensive. The government’s excise tax on foundations would be adequate to police the entire nonprofit community (especially when you consider that many nonprofits also pay for audits and legal reviews). Over the next ten years, foundations will pay about $5 billion for this enforcement, enough to expect careful, considered efforts on behalf of government employees.
6. Regarding donor intent, ASF continues to teach leadership techniques to help donors avoid abuses and decide with eyes open which paths to follow for their foundations. It’s up to the donor to establish succession plans consistent with his or her goals.
7. Reasonable staff and trustee compensation depends on what the donor envisions, balanced by what’s necessary to do the charitable work of the foundation. Responsible grantmaking takes work; some of it is handled by volunteers, some needs to be compensated. Some foundations are more hands-on, others choose to operate with minimal effort.
9. Ultimately, our goal should be to encourage more people to become philanthropists. Government can’t inspire people to become philanthropists, but government certainly can deter them. And the people you most want to avoid wrongfully harassing are the donors, the first generation who are deciding to hand over their wealth.
There certainly will be instances when innocent trustees will go through needless lawsuits to clear their names, but we shouldn’t assume all suits will be brought for political expediency.
When all is said and done on the legislative front, I’m not that fearful of over-reaching. I’m pleased to have encountered some political staff who are deeply, honestly concerned with improving philanthropy and who are searching for creative ways for government to play its role with limited resources—without over-stepping its power.
10. Some think perpetuity may be unwise, that it may be a conceit, but I’m not ready to see it done away with as an option. Our country and our political system are too young to be making sweeping judgments like that, yet.
1. The greatest public policy failing with regard to foundations is the U.S. tax code, whose provisions affect how much individuals decide to earn, save, and give. The continued existence of the estate tax and the failure to enact a flat tax on income guarantees that a good number of taxpayers will endow foundations just to protect their estates and reduce their taxable income, rather than to do good.
Currently, foundation donors can receive generous savings just by assuring the government that they are following its broad, vague guidelines for providing a public benefit. Sometimes, this leads to controversy and scandal when the public discovers what some foundation trustees consider publicly beneficial or in compliance with the donor’s intent.
But it’s futile to argue over what foundations should do with their money absent clear instructions from their donors. Instead, Congress should eliminate the tax code inequities that give individuals an incentive to set up foundations instead of investing, spending, and giving during their own lifetimes. That means the two most important principles for reform are fair tax treatment of income and respect for inheritances.
4. The foundation field can and should self-regulate. The more the nonprofit community can regulate itself, the less need for government oversight. Government oversight is necessary, but it is important to prevent such oversight from becoming so intrusive that it undermines foundations’ independence.
Watchdog organizations should take the lead in setting standards of accountability, specifically ensuring that foundations are donating a reasonable percentage of their overall wealth, and not hoarding it for “empire-building.” Also, standards should be developed to measure the effectiveness of foundation giving and its ability to fulfill its stated mission. Admittedly, it is not always easy, and it’s sometimes quite hard, to quantify a foundation’s performance. Nevertheless, it is a worthy goal. Capital Research Center has published numerous studies that show how some organizations and philanthropy researchers are doing beneficial work in this area. Having establishing credibility, independent watchdog groups can be in a position to influence foundations by publicizing their strengths and weaknesses. A foundation depends on its reputation and prestige. If enough watchdog groups do their jobs, they can encourage foundations to be accountable for their actions.
5. The IRS has not done nearly enough to enforce existing legal requirements. This is most apparent in the way the IRS ignores nonprofit grantees that repeatedly violate the law through civil disobedience and other illegal tactics. Greenpeace and the Ruckus Society are examples. Every year, these and other radical groups receive money from organizations like the Tides Foundation and Tides Center. Foundations that give to groups that they know use illegal tactics to advance their agendas should be held accountable by Congress and regulators.
But the IRS will only take action if an official complaint is filed, and then it often takes years for the agency to issue a ruling. If the abuses described in the Boston Globe series continue, it may be necessary to at least consider creating a separate agency that is solely responsible for policing foundations. Such an agency would function for the nonprofit community the way the Securities and Exchange Commission does for the stock market. There could be both a federal agency and state equivalents.
The main argument against such an entity is that it could turn into a heavy-handed government bureaucracy that threatens foundations’ innovation and independence. Thus, it may be better to strengthen existing government entities such as the state attorneys general, who have shown they can take decisive steps—when motivated.
6. As for donor intent, donors themselves are probably most responsible for abuses here. They allow abuses by failing to provide clear instructions about their intentions or leave no instructions at all. Martin Wooster, author of the Capital Research Center study The Great Philanthropists and the Problem of Donor Intent, suggests that donors can best protect themselves by giving as much money as possible during their lifetimes.
7. In the area of staff and trustee compensation, foundations must strive to be as lean as possible, always sensitive to the fact that they are, after all, nonprofits. As nonprofits, they must avoid overspending on themselves—something that means a foundation is not spending the donor’s money wisely. That doesn’t mean a foundation doesn’t have a right to hire the qualified people and build the administrative infrastructure it needs to discharge its mission. Rather, the foundation should always be on guard against losing sight of its primary mission.
8. It is always worth considering new legislation that may improve foundation accountability, but the existing system mandating board oversight and tax audits is essentially sufficient. The problem is making sure that foundation boards actually fulfill their oversight responsibility. It doesn’t matter how many laws are enacted if the individuals and entities charged with enforcing those laws simply don’t do their job.
9. There is definitely cause to fear that Congress and the states may overreact and impose onerous regulations that sap foundation vitality. The preferred solution is publicity. Foundations ultimately depend on their good name. One recent example involves the Ford Foundation. In 2003, it was revealed that Ford was giving money to Palestinian groups suspected of terrorist connections and/or corruption. After a journalist broke the story, members of Congress called for an investigation of Ford grants to possible terrorist groups. Ford officials immediately introduced changes to ensure money did not go to groups promoting violence or terrorism.
10. Just as donors should be free to transfer their wealth to heirs, so should they be free to set up foundations in perpetuity. However, under a proper tax system, donors will be less likely to establish foundations than to invest and give during their lifetimes. When donors choose to create foundations, they should consider time-limiting the foundation’s lifespan to probably no more than 25 years after their death as a way of preserving donor intent.
Most of the recent press attention on foundation abuses has focused squarely on issues of financial mismanagement, insider transactions, high trustee fees, inflated staff salaries, and a host of other instances in which ethical boundaries within institutional philanthropy have been breached. The accounts have reflected badly on the entire field and even embarrassed foundations a bit. But all the revelations and horror stories require some perspective. There really are no fields in which absolutely every organization is well run and where abuses have been eradicated completely. Ultimately, foundations are no different from other organizations in that there will always be some poor performers and ethically challenged managers. Contrary to what the vast legions of their supplicants tell them, not all foundations are above average.
In the short run, constructing a reform agenda will not prove hard. Government at the state and federal levels should tighten up existing rules and make penalties for gross transgressions far more severe. This can be done both by rewriting some elements of the IRS code and by encouraging state attorneys general to go after abuses more aggressively. Of course, the resources available for enforcement are very limited at present. Thus, rather than crafting major new regulatory reforms, government may first want to ask how it can better enforce existing rules and take steps toward closing the gap between principles and practice.
In the longer run, more attention should be given to the structural characteristics of the foundation world that lead to the kind of abuses that occur. This means thinking of new ways to reward donors who eschew perpetual foundations entirely and give their wealth away now, rather than over time through institutions. Many of the abuses we read about have occurred as smaller foundations became distanced from their founders and the opportunity to bend rules in the absence of strong leadership presented itself. Direct giving by living donors not only gets the money into the hands of needy groups faster, it also addresses the whole issue of mission drift-and ethical drift.
Still, all the talk about narrow regulatory reforms aimed at dealing with financial mismanagement in foundations is frustrating to some extent because it misses the broader point. The real problem in organized philanthropy is not really that a small number of foundation workers have abused the public trust by stealing funds or overspending on overhead, but rather that a very large number of foundations—controlling huge amounts of funds—do not always take seriously their responsibility to use philanthropic funds creatively and effectively. In this sense, the foundation field is lucky that Congress is focused on the mundane issue of financial accountability rather than on the hugely complex and high-stakes issue of effectiveness. If the national debate over foundations were ever to turn to the issue of effectiveness, I suspect foundations would find themselves in even deeper trouble than they are now confronting.
1. The following abuses need to be addressed:
2. The two most important principles for reform are (1) transparency and disclosure, and (2) strong regulations and enforcement.
3. Current legislation and regulations will not suffice to address the field’s many abuses. The first order of business is for the Congress to amend federal legislation and regulations to put a brake on excesses, to set broad standards for the sector, and to require the IRS to conduct its oversight activities with diligence. The legislation should permit close consultation between the IRS and the state attorneys general. The latter should be given additional revenues to strengthen their work and to prosecute illegal activities.
4. The field cannot self-regulate. I have been around for 40 years and have rarely seen any successful self-regulation. It is the federal government’s responsibility to regulate charitable organizations, assisted by the work of state attorneys general.
5. The IRS and the state attorneys general haven’t done enough to enforce existing legal requirements, partly because of a lack of resources and partly because of a lack of political will. Congress needs to allocate substantial additional resources for the IRS’s tax-exempt division so it can carry out many more audits, add many new staff, and modernize its technology. Congress also needs to appropriate new money for the state attorneys general.
6. I don’t believe you can legislate against abuses of donor intent. It is often a complicated and subjective issue, with which boards of directors will have to struggle. For how long after a donor’s death should his/her intent be honored? Is there a cut-off time, which would permit new public needs, societal demands, and mores to override narrow interpretations of donor intent?
7. In general, foundations should not pay their trustees any fees or compensation for services rendered to the foundation, since board members of nonprofits are not paid for their service. As a practical matter, in order to permit more low-income, working- and middle-class people to join foundation boards, I would advocate a legislatively imposed ceiling of $8,000 per year for foundation trustees for all their services to a foundation. This would get rid of most of the trustees’ self-dealing activities.
With respect to staff compensation, I would prohibit all deferred compensation and special benefits to the CEO that are not enjoyed by other staff. The salary of the President of the United States-$400,000-is not a bad guideline to follow, and I would require all foundations that pay more to justify the greater salary in their 990-PF tax forms.
8. Some Sarbanes-Oxley-type requirements could apply to the largest 1,000 foundations or so, but they may not be suitable for many smaller ones. Would family foundations with a majority of family members be considered to have an independent board? What about those family foundations where family members are a minority on the board. My suggestion is that, through either a carrot or a stick, family foundations be required to have two-thirds of their boards composed of non-family members after 25 years.
9. I don’t fear congressional over-reaching. The worst thing that could happen is for Congress to do little or nothing to redress the abuses in the nonprofit sector.
10. Foundations should have the right to decide whether they want to continue for a long time or go out of business after a set period of time. But I don’t think we should confuse the perpetuity issue with the retention of a minimum 5 percent payout. Payout can and should be considerably higher without endangering perpetuity.
The following is excerpted from his testimony to the Senate Finance Committee :
Most tax-exempt organizations are governed by dedicated boards of directors who properly manage the charitable assets with which they are entrusted. However . . . some boards . . . fail to fulfill their responsibilities because they are inattentive, ill-informed, or self-interested . . . .
Periodic Review of Exemptions: Exemptions from federal income taxation should not be perpetual. They should be periodically reviewed by the IRS. The states charities regulators could provide helpful input into that review. We are closer to the scene. We generally know if there have been complaints, investigations, or law suits, and we can add to the IRS’s enforcement resources . . . .
IRS-State Cooperation: Under current law, IRS employees are prohibited from sharing information with state charity regulators. That prohibition can have absurd results. Not too long ago, I received a call from an IRS agent who could not locate documents concerning a matter which we had referred to the IRS. He could not mention the name of the organization but expressed the hope that I could figure it out and send him the file. I could and I did . . . . [New York State] Attorney General Spitzer applauds the Committee and its staff for their repeated efforts to enact amendments to the Internal Revenue Code that will designate state charities regulators as state tax authorities, so IRS and the states can work together.. . .
We believe that in addition to law enforcement, the IRS and the states should shoulder some of the responsibility for educating those to whom we entrust our charitable assets. To that end, we conduct symposia throughout New York State and publish information to assist fiduciaries of charitable assets . . .
Improved Databases and Electronic Filing: Enhancing accountability of the nonprofit sector depends on the availability of data on nonprofit organizations. The IRS, state charity officials, and other government agencies need up-to-date data to enforce the laws governing nonprofits. For example, with searchable data on compensation from Form 990, we would be able to prioritize for review organizations that may be excessively compensating their directors and officers. Foundations, corporate giving programs, and individual donors also need current data in an easy-to-use format to help them make informed choices about their charitable contributions.
We will not be able to take full advantage of available information without fundamental changes in the way it is collected, processed, and disseminated. A key component is electronic filing, which is the most efficient, accurate, and cost-effective way to collect data. Converting paper-filed 990s into usable data is a time consuming, error prone, and expensive process . . . .We cannot overstate the importance of prompt implementation of the State Retrieval System, which will allow annual reports to be filed simultaneously with the IRS and one or more states. It will encourage more organizations to file electronically by providing a single-point filing system. It will also eliminate the need for states to reinvent the electronic filing wheel . . .
Revenue Sharing: As Marion Fremont-Smith documents in her just-published Harvard University Press/Hauser Center book, Governing Nonprofit Organizations, some states have no registration and/or enforcement, and the capabilities of those that do vary widely. States should enact or have registration and minimum legal governance standards to qualify for revenue-sharing, as proposed in the Committee’s comments. Then such qualifying states would be entitled to a share of revenue based on number of registrants or value of charitable assets registered. NASCO and we are ready and able to work with the Committee to develop those standards . . .
Accountants and Lawyers: The IRS has told us that 25 percent of 990s are filed incomplete, inconsistent, or even false, and this is New York’s experience as well. Yet many of these 990s are prepared and signed by paid preparers who are usually accountants, sometimes lawyers or both. Accountants and lawyers have falsely claimed to us (and to their clients) that 990s have been filed where they have not. A lawyer allegedly master-minded the scheme where the six directors of a $10 million foundation, which made only grants to established public charities, took away $3.4 million in compensation and pension benefits. A lawyer, who was a compensated executive of a charity, caused his law firm to bill its client, the charity, for nonlegal work. Accountants for private foundations, seemingly routinely, answer the 990-PF self-dealing question “no,” and then schedule the compensation of paid directors and officers without filing Form 4720. One paid preparer for a private foundation caused it to answer the 990-PF political contribution question “no” and then scheduled the political contributions on the contributions schedule. Needless to say, he did not file Form 1120 POL. Virtually nobody files Form 4720. There should be severe penalties on paid preparers who fail to file that form or Form 1120 POL . . . .
Just as the Committee’s comments recommend authority . . . to remove directors and officers, there should be authority to require exempt organizations to change their lawyers and accountants, if they are not doing their jobs, and institute procedures to deny persistent offenders rights to practice before the IRS and the Tax Court.
1. The abuses that most need correction are self-dealing and conflicts of interest by the founders or trustees of small foundations.
2. The two most important principles for reform are (1) clear regulations concerning the compensation, other benefits, and conflicts of interest with respect to “disqualified persons,” including the possibility of prohibiting compensation in some circumstances; (2) possibly requiring a minimum endowment size to qualify as a foundation.
3. Existing law can address many abuses on a case-by-case basis, but this requires more investigatory and enforcement resources than are likely to be allocated. Therefore, I see a need for some clear regulations specifying permissible and impermissible behavior. There is a role both for state attorneys general and the IRS.
4. The field can and should begin to develop minimum standards of governance and transparency for membership in national organizations (e.g., the Philanthropy Roundtable, Council on Foundations, and RAGs).
5. I’m not sure whether the IRS and the state attorneys general have done enough to enforce existing legal requirements, but given their resources, the absence of clear standards, and the many other issues on their agenda, I cannot fault existing enforcement efforts.
6. As for abuses of donor intent, the best assurance that intent will be followed over time is if the donor clearly states his or her purposes in the founding documents. Even so, interpreting donor intent a generation or more after a foundation is established is a much more complex enterprise than most people think. The difficulty that the Supreme Court has had in applying the intent of the founders to a very different world from the one they understood suggests that it is much more plausible for trustees to be faithful to donors’ general values than to their intent in a very specific way. The primary responsibility for fidelity to the donor’s intent or values lies with the trustees. State courts can guard against occasional abuses.
7. I think staff compensation should be benchmarked against compensation in the field and should be commensurate with the value that a staff member adds to the foundation. So, too, for trustee compensation, though it is debatable whether trustees should be compensated at all.
8. I don’t believe that the existing Sarbanes-Oxley law for businesses requires independent boards, but only independent committees for certain decisions. In general, I think that Sarbanes-Oxley imposes very heavy burdens on businesses without commensurate benefits to shareholders and the public. Such rules should not be mindlessly extended to nonprofit organizations. However, I think foundations should take great pains to insulate themselves against business deals with board members. For the most part, existing regulations pertaining to disqualified persons cover this. There is much less reason for concern for making grants to nonprofit organizations in which board members are actively involved—though generally an involved board member should be recused from such decisions.
9. I am concerned that Congress may use some very blunt tools to address abuses; for example, imposing limits on administrative expenses without any appreciation of the role they play in effective grantmaking.
10. On the question of foundation perpetuity, I don’t see why it shouldn’t be allowed.
1. All abuses should be corrected, from the symptomatic to the systemic. This is the basic principle to guide reform. Society has invested heavily in the foundation world—directly with tax subsidies and indirectly with benefit-of-the-doubt oversight. Our sector has an obligation to pay back society at a minimum with probity. This is the basic principle for all reform.
3. The IRS, prodded if necessary by the Congress, should close the loophole that allows internal expenses to be counted towards required minimum payout. Over time, the distinction between charitable contributions and administrative expenses has been eroded; the giant foundations would like to see it erased altogether. The federal government should remind these foundations of their obligations: Society gave tax benefits to foundations to incentivize them to make charitable contributions. Society is fairly confident, I believe, that no incentives are required to persuade foundation managers to pay for their own salaries and perks.
The state attorneys general, for their part, should perform oversight on officers of resident foundations. Current laws are sufficient to the task. Most of the misdeeds reported over the last few years have been invited by no-show enforcement and would have been detected by routine screens.
4. Self-regulation is a good idea now and would have been a better idea ten years ago. The unsettling alternative is corrective legislation.
6. Regarding donor intent, we at FMI stress mission and governance techniques that ensure fidelity to it. When abuses occur, however, there are three levels of response, all of which, regrettably, we have been obliged to recommend in one or more cases: (1) generating publicity that calls the offending official to account; (2) catalyzing sanctions by the pertinent public authority; and (3) as a last resort, litigating the insoluble issues.
7. If executive compensation is paid out of principal—and is not “charged” to the taxpayer via deduction from charitable payout—it should be set by the board, subject only to the laugh test and existing regulation against unreasonable compensation and self-enrichment. If, however, executive compensation is to be deducted from the payout, the taxpayer has an interest. He agreed that in return for his tax subsidy, the grantee community would receive charitable contributions. In this situation, the taxpayer’s interest should be protected. Senator Grassley (R-Iowa) has suggested that such compensation be capped at federal employee levels. That seems reasonable.
8. I don’t favor the extension to foundations of Sarbanes-Oxley-style requirements for independent boards. That model doesn’t apply to the foundation world.
9. I always fear legislative over-reaching. In this particular area we may wind up with the Large-foundation Executive Empowerment Act of 2004. Why? Because for every donor-oriented representative like FMI, and every grantee representative like Rick Cohen of NCRP, there are scores, perhaps even hundreds of representatives from Big Philanthropy engaged in this Washington conversation.
10. If foundations actually make the contributions they’re supposed to make, perpetuity seems like an acceptable trade-off. That was the deal struck 35 years ago: Foundations got perpetuity, the public got the payout requirement. But if foundations continue to whittle down the payout, they will have welshed on the deal, and perpetuity should be rescinded.
The following is excerpted from his testimony to the Senate Finance Committee :
I currently serve as faculty chair of the Hauser Center on Nonprofit Organizations at Harvard University. In the past, I have served for 20 years as the president of one large nonprofit (Harvard), and I am presently the chair of a large citizens’ organization (Common Cause) and a medium-size foundation (the Spencer Foundation). I also was a member of an independent committee recently invited by the Nature Conservancy to investigate its system of governance and accountability and recommend changes. My other relevant experience is as a long-time professor of regulation at the Harvard Law School.
I firmly support the Senate Finance Committee’s decision to examine the governance and accountability of nonprofit and philanthropic organizations. . .. At the same time, it is important to bear in mind that the nonprofit sector is extremely heterogeneous, including everything from billion-dollar hospitals and universities to tiny neighborhood organizations and local choral societies. The governance and accountability of these organizations are subjects still in their infancy. . .. Under these circumstances, at least two risks arise in any attempt to craft general regulatory measures for this sector.
First, there is a danger that in enacting rules in response to a few particularly flagrant, widely publicized abuses, regulators will impose burdens of paperwork, record-keeping, and other costs on all nonprofits that will more than equal any benefits achieved by government intervention. Second, in such a heterogeneous sector, it is quite possible that rules enacted with particular organizations in mind will prove inappropriate for other kinds of organizations and thereby lead to unanticipated, undesirable consequences.
Although the committee’s discussion draft includes several eminently worthwhile proposals, such as timely submission of the 990s and electronic filing, several of the other proposals threaten to give rise to one or both of the problems described above. I will mention only three examples:
1. The requirement that nonprofit boards “be comprised of no less than three members and no greater than 15.” There may be good reason for establishing some minimum number of members. After all, a board of one person is hardly a board in any meaningful sense. On the other hand, the reasons for a maximum figure are much harder to discern. In the review of the Nature Conservancy board, for example, our outside committee concluded that a board in excess of 15 was necessary to establish a sufficient number of committees to allow adequate oversight while avoiding multiple committee assignments that might cause board members to spend insufficient time on each committee to do the job properly. Similarly, almost all university boards include more than 15 members, in part because more members are needed to oversee these large and varied organizations properly and in part to strengthen the fundraising capacities required to raise hundreds of millions of dollars each year. It is not clear to me what legitimate public purpose would be served by prohibiting these practices.
2. A second proposal in the draft would require every nonprofit with gross receipts in excess of $250,000 to “include in its Form 990 a detailed description of the organization’s annual performance goals and measurements for meeting these goals.” An enormous effort would be needed to fulfill this requirement properly in the case of major universities, which typically include literally hundreds of separate programs, most of which have goals too intangible to allow truly meaningful performance measures. . .. It is not at all clear that the benefits derived from such reports will justify the substantial expenditure of time and effort required to prepare them.
3. The third and last example is the proposal that all nonprofits submit periodically to the IRS, “current articles of incorporation and by-laws, conflicts of interest policies, evidence of accreditation, management policies regarding best practices, a detailed narrative about the organization’s practices, and financial statements.” The problem is the burden that will impose in countless tiny local nonprofits with amateur, part-time executives and boards composed of neighborhood volunteers. Many of these organizations are wonderful examples of local initiative, spontaneity, and enthusiasm. Yet rules such as this one threaten to bring about the disappearance of these small, informal, grass-roots organizations, because they will lack the expertise to cope with complex government reporting requirements. . .. I fear that such rules will have a harmful effect by professionalizing and bureaucratizing local organizations that should be allowed to be operated and controlled by amateurs and volunteers. Rather than risk such a result, Congress might wish to consider imposing such detailed reporting and financial requirements only on organizations above a substantial size, leaving smaller organizations subject to only minimal restrictions needed to prohibit clear and important abuses.
In conclusion, while supporting the effort to strengthen the accountability of nonprofit organizations, I would urge great care in approaching this complex and unfamiliar task. Instead of attempting the difficult feat of crafting model procedures in an effort to encourage optimum performance, or giving the IRS the vast, uncharted task of developing (directly or indirectly) standards for accrediting all nonprofits, I would begin by concentrating on curbing reasonably clear abuses. Otherwise the costs resulting from unanticipated problems and excessive administrative burdens may well outweigh the positive results that a more cautious, incremental approach can achieve.
4. Self-regulation is the first, and most important, step toward ending abuses in the foundation world. While we recognize that self-regulation alone will never be sufficient, the Council is undertaking a new initiative to encourage and enforce foundation standards of ethics and accountability. “Building Strong and Ethical Foundations: Doing It Right” is a two-year, grant-funded program designed to increase understanding of legal practices and to develop and encourage adherence to high ethical standards in grantmaking. The organization is stepping up its 55 years of teaching responsible philanthropy to grantmakers, their advisors, foundation executives and trustees across the country. The Council is forming partnerships with state and federal regulators to call a halt to bad practices through legal means while educating regulators, the public, and the media about the appropriate role and functions of foundations.
The program has two major parts: (1) developing new guiding principles and governance standards that are more specific than what Council members currently must endorse, and (2) increasing professional development and outreach about strong legal and ethical governance practices to foundation professionals, foundation advisors, and state and federal charity officials. The Council will hold regional convenings as part of this effort.
Foundation staff and board members across the country have drafted standards and stewardship principles for family, community, and large private foundations, and for corporate giving programs. The efforts range from clarifying legal requirements to establishing operational norms to setting a gold standard for the governance of grantmaking organizations. The committee appointed to oversee the Building Strong and Ethical Foundations program will build on these efforts in drafting a code of ethics or principles statement for all foundations.
Over the program’s two-year cycle, the Council will conduct at least 12 convenings across the U.S. geared to foundation executives and trustees and professional advisors to foundations. The curriculum will focus on legal and ethical practices regarding such topics as conflicts of interest and determining compensation. We have asked the leaders of the regional associations to participate in these convenings, and we will work with other groups allied with philanthropy when that is appropriate. In some cases, training sessions will be attached to already-planned gatherings, including our own major conferences and meetings convened by the regional associations.
As in the past, the Council will advocate for an appropriate level of funding for the IRS and state charity officials to enforce the laws governing the charitable field. Working cooperatively with regional grantmaker associations, the Council will educate federal and state regulators about philanthropy and about the need for an effective regulatory presence to root out and punish those who abuse the public trust by using their positions in foundations for private gain. We hope to provide assistance to regulators in this effort.
We will also create a curriculum for CEOs and new grantmakers that can be co-sponsored by regional associations and other groups of grantmakers. We will create learning communities for new and experienced CEOs, to extend peer relations with experienced foundation leaders and with colleagues from across the country. We will strengthen our management information for foundations through partnerships with recognized professional groups and create a series of workshops on management best practices that reflect the legal and ethical standards to which we hope all foundations will aspire.
We will develop the workshops as portable seminars that other organizations can provide through partnerships with us. Finally, to take advantage of today’s technology, we will incorporate some of the fact-based information necessary for strong ethical and legal foundations into on-demand online courses that will be available to foundation board and staff, including those who cannot afford the time or money to attend in-person events. And we will enhance our current online course, “Beyond Grantmaking Basics,” to cover more issues that are ethical.
As for whether foundation perpetuity should be allowed, it absolutely should, and I am confident that it will be.
Senator Charles Grassley (R-Iowa) chairs the Senate Finance Committee, which recently held hearings to discuss improprieties in the nonprofit sector and how Congress could address them. The following is excerpted from the Senator’s remarks at the hearing:
Opening Statement:
Today the Finance Committee considers a very serious matter—ensuring that charities keep their trust with the American people. We will hear testimony today that is troubling. The testimony we will hear will suggests that far too many charities have broken the understood covenant between the taxpayers and nonprofits—that charities are to benefit the public good, not fill the pockets of private individuals.. . .
Since becoming chairman of the Finance Committee, I have been active in oversight in many areas, including charities. I have conducted investigations into such organizations as United Way, Red Cross and the Nature Conservancy. I’m pleased that my oversight has brought about good reforms at these organizations.
However, the Finance Committee is limited in its resources to perform this oversight. It’s clear that we need to look at more general reforms to address recurrent problems in the nonprofit sector. The staff of the Finance Committee, on a bipartisan basis, has produced a discussion draft that serves as a very useful beginning point to consider possible broad reforms. I welcome a dialogue about the best means of achieving the ends I hope we can all agree on—a vibrant and engaged charitable sector that enjoys the confidence of the American people that charitable donations are being used to meet charitable needs. Reforms to that end will benefit all charities—particularly the strong majority of charities that do their job and do it well and play such a vital role in our country. I view these much-needed reforms as a partner to the important efforts by President Bush to encourage charitable giving in the CARE Act—championed by Senators Santorum and Lieberman. I continue to work to see the CARE Act brought to conference and signed into law. . ..
Closing Statement:
. . .This hearing is the beginning of a discussion about how to bring reforms to the charitable sector. I think that areas that we particularly need to think about are balancing the requirements that might be placed on charities, particularly smaller charities, and not overwhelming the ability of charities to achieve their important missions. Finding that balance will be the task in the weeks ahead. My hope is that Senator Baucus and I can look to introducing legislative reforms this fall—and even earlier for some provisions. I appreciate the nonprofit sector working with us to find that balance.
