We’re Not Signing It

Our Concerns About Independent Sector s Principles for Good Governance and Ethical Practice

Our colleagues at Independent Sector have issued their “Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations.” The document was prepared by the Panel on the Nonprofit Sector convened by IS at the request of Max Baucus and Charles Grassley, chairman and ranking member of the Senate Finance Committee, respectively. See nonprofitpanel.org for the 33 principles and accompanying explanations.

The Philanthropy Roundtable applauds Independent Sector and the Panel on the Nonprofit Sector for their tireless and well-organized work to improve nonprofit governance, board financial oversight, fundraising practices, and compliance with the law, all subjects of the principles in this document. The Roundtable believes that most of the 33 principles in the IS document are quite sensible and offer a helpful guide for self-assessment by trustees and chief executives of charities and foundations.

However, The Philanthropy Roundtable does not recommend the Independent Sector document as a whole as a guide to improving governance and accountability among foundations. Independent Sector is now embarking on a major campaign to promote its principles, and is encouraging foundations, charities, and associations that represent them to sign the following statement:

“We agree that the Principles issued by the Panel on the Nonprofit Sector provide a strong guide for private foundations and public charities that aspire to high standards of governance and ethical practice. We join in encouraging board and staff leaders of every charitable organization to examine these principles carefully and determine how best they should be applied to their own operations.”

There are three reasons The Philanthropy Roundtable will not sign this statement.

First, a number of the Independent Sector principles take an arbitrary and one-size-fits-all approach to setting standards for a very diverse sector.

Second, the Independent Sector principles imply improperly that foundations act unethically or practice misgovernance unless their boards include members from diverse backgrounds.

Third, while it is entirely appropriate for Independent Sector to put together standards of conduct for its own members and for anyone else who wishes to adhere to them, it would be a mistake for the philanthropic community as a whole to endorse the entire document. Despite Independent Sector’s assurance that its principles represent “standards of practice that organizations are encouraged, but not required to meet,” a number of the more problematic principles could be written into law or regulation if it is perceived that there is a wide consensus behind them in the nonprofit community. 

A One-Size-Fits-All Approach

In the introduction to its “Principles of Good Governance and Ethical Practice,” Independent Sector offers an excellent summary of the traditional relationship between government and nonprofit organizations in the United States:

“Government appropriately sets rules for the organizations and activities that are exempt from taxes and eligible to receive tax-deductible contributions: for example, government has determined that such contributions may not be used for partisan political activities or the private benefit of the donor. At the same time, government has wisely avoided intruding on how organizations pursue their missions, manage their programs and structure their operations.”

The Philanthropy Roundtable is committed to preserving this longstanding public policy framework for foundations and charities. Indeed, we have established the Alliance for Charitable Reform to protect the freedom of foundations and other grantmakers to continue to make their own internal decisions so long as they follow the law. 

Unfortunately, some of the principles in the Independent Sector document would themselves represent an unwarranted intrusion into the operating freedom of foundations and other grantmakers. They do this by applying a one-size-fits-all approach to charities and foundations that have diverse objectives and circumstances. 

For instance, Principle #10 says, “The board of a charitable organization should establish its own size and structure and review these periodically. The board should have enough members to allow for full deliberation and diversity of thinking on governance and other organizational matters. Except for very small organizations, this generally means that the board should have at least five members.”

Principle #20 articulates a strong presumption against compensation of foundation board members: “Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. A charitable organization that provides compensation to its board members should use appropriate comparability data to determine the amount to be paid, document the decision and provide full disclosure to anyone, upon request, of the amount and rationale for the compensation.” 

These principles unnecessarily restrict the ability of donors and trustees to use their best judgment in carrying out their charitable objectives. There are many foundations, including most prominently the Bill & Melinda Gates Foundation and the Michael and Susan Dell Foundation, whose boards do excellent work with fewer than five members. Does anyone really think the Gates or Dell Foundation would be more effective or better governed if they had six or seven board members instead of two or three? And if not, why is this one-size-fits-all rule in there?

As for compensation, within the foundation world there is a long and venerable tradition of volunteer board service, as well as a long and venerable tradition of compensated board service. Our experience at The Philanthropy Roundtable suggests that philanthropic excellence is common in both traditions—as is philanthropic mediocrity—and that principles of “good governance and ethical practices” should not favor one tradition over the other. The Independent Sector document implies that compensating foundation board members is either unethical or misgovernance. But while a majority of foundations have volunteer boards, there are a number of circumstances where foundations have completely legitimate reasons to consider paying board members:

  • When foundations are convinced that directors will take their fiduciary, legal oversight, and other board responsibilities more seriously if they are compensated.
  • When boards of foundations take on responsibilities such as grant reviews, site visits, and program evaluations that would normally be the work of staff;
  • When a donor asks others to sacrifice time from their businesses or families to serve as trustees to help him achieve his charitable objectives, and believes it is appropriate to provide some compensation.

There are dangers of excessive compensation for foundation boards, and current law properly requires that any compensation be reasonable—defined as the amount that would ordinarily be paid for like services by like organizations (tax-exempt or taxable) in like circumstances. But it is an unnecessary paperwork burden and invasion of privacy to require foundations to explain and disclose publicly their rationales for paying trustees, as well as any comparability data. It is also inappropriate for Independent Sector to imply that high standards of governance and ethical practice require volunteer foundation boards. Whether to compensate board members of foundations is a decision best made by donors and the individuals to whom they have entrusted their charitable resources.

Many foundations that reward directors prefer to do so indirectly—by giving individual board members discretionary authority to recommend a certain level of grants. Whether to follow this approach or to reward more directly should also be left to the judgment of the foundations themselves.

Misunderstanding Diversity

The Independent Sector document suggests improperly that foundations act unethically or practice misgovernance unless their boards include members from diverse backgrounds and perspectives.

Principle #11 states: “The board of a charitable organization should include members with the diverse background (including, but not limited to, ethnic, racial, and gender perspectives), experience, and organizational and financial skills necessary to advance the organization’s mission.”

At first glance, this principle seems unobjectionable. Who, after all, could object to a principle stating that boards should include members “necessary to advance the organization’s mission”?

But let’s examine a little more closely the implication that diversity of background and perspective on the board is essential for achieving an organization’s mission. In doing so, let’s initially leave aside the question of ethnic, racial, and gender diversity, and focus instead on different philosophical outlooks and life experiences. 

It is not at all clear that a variety of perspectives is desirable on foundation boards. On the contrary, boards run best when there are common values and a shared sense of mission.  A grantmaker with board members of radically different perspectives tends to get paralyzed. The grantmaker either funds both approaches or neither and moves on to a different area where accord can be found. This paralysis sometimes occurs in family foundations where board members are demographically similar but have sharply opposing worldviews.

Boards also function best when there is strong mutual trust among board members, so they can speak more freely with each other on issues of mission, strategy, and oversight. Diversity of perspective can sometimes be helpful, but it doesn’t necessarily lead to that trust. The goal should not be to diversify each board—that’s a recipe for sector-wide homogeneity. The goal should be a sufficiently vibrant sector with lots of different foundations representing lots of different interests, philosophies, and philanthropic strategies.

Nor does the variety of background and skills have to be at the board level—the board just has to draw on other perspectives, not necessarily give them a board seat.

Now add the more specific question of diversity in race, gender, and ethnicity on boards. Implying that this kind of diversity is essential for achieving the mission of foundations would likely be destructive of the charitable spirit.

For instance, the presumption that a black philanthropist in Chicago is unable to make wise philanthropic decisions about strategies to reduce poverty in rural white America unless she has rural whites on her board is factually unmerited and would have the unintended consequence of encouraging philanthropists to focus their charitable resources only on the communities where they are personally most familiar. By the same logic, no American foundation could give to distressed communities overseas unless those communities were represented on its board.

Any presumption in favor of racial and ethnic diversity is also a dagger at the heart of family foundations. A presumption, say, that a Hispanic immigrant family in Phoenix must include Anglos on its family foundation board in order to make wise philanthropic decisions about the state of Arizona is insulting to the judgment of the family and runs contrary to the principles of philanthropic freedom.

Codification into Law and Regulation

Independent Sector insists that the principles in this document are voluntary, and that charities and foundations should feel free to conclude that certain recommendations do not apply to their operations. Its rationale for the principles allows for considerable flexibility on the part of individual organizations: 

“The best bulwark against misconduct will always be a well-informed vigilance by members of the nonprofit community themselves, including a set of principles they could adopt, promote sector-wide, and improve over time. These principles should be clear enough to be practical and readily implemented in a wide variety of organizations, but flexible enough to allow each organization’s governing board and management to adapt them to the dictates of that organization’s scope and mission.”

There is a danger, however, that some of the more problematic Independent Sector principles will not remain voluntary but will be codified into law or regulation, if it is perceived that there is a wide consensus in favor of them within the charitable community.

This is no idle threat. The Panel on the Nonprofit Sector was convened at the request of Chairman Baucus and Senator Grassley to forge a consensus within the charitable community in favor of legislative reforms. Senator Grassley has made it clear that he is not finished with his legislative agenda for foundations and charities, and there is a good chance he will look to the language of the Independent Sector principles as a guide for future legislation.

There is also a risk that the Internal Revenue Service will incorporate some of the more problematic principles into its own regulations. Earlier this year the IRS published a draft document, “Good Governance Practices for 501(c)(3) Organizations,” which stated that “charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service.” This language, which made no distinction between public charities and private foundations, is very close to the Independent Sector principle on this subject.

Philanthropists who have reservations about specific principles in the Independent Sector guide should therefore be very cautious about endorsing the entire document, lest they allow others to convey the impression that there is a widespread consensus for all of its recommendations.

From November / December 2007 issue of Philanthropy magazine

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