Your New Board Policies Courtesy of the IRS, third of four posts

This article is the third of four blog posts that describe the major concerns of the IRS and how downtown organizations should respond.  This blog post describes the four new policies that the IRS is interested in seeing nonprofit organizations adopt. This material was developed for a presentation I am making at the National Trust Main Street Center annual conference in Des Moines IA on May 23 at 2PM. Come see me! New interest in governance The IRS 990 has been redesigned in the last three years to ask many more questions about nonprofit organizational governance.  This comes in the form of questions in Part IV of the IRS 990 form that require yes/no responses.  These answers trigger further explanations either on other schedules to be included on the 990 or on other parts of the core form.

 New policies needed The IRS on the Governance Guide Sheet is asking about four organizational policies. These policies include:

  1. Conflict of interest
  2. Whistleblower
  3. Document retention & destruction
  4. Compensation

 Conflict of interest policy Of the four policies that the IRS suggests, conflict of interest is suggested to be a component part of your organization’s bylaws. In their handy “Governance and Related Topics - 501(c)(3) Organizations” piece, the IRS notes ”Instructions to Form 1023 contain a sample conflict of interest policy. Organizations are urged to tailor the sample policy to their own particular situations and needs, with the help of competent counsel if necessary.”  The sample policy IRS policy is here, see Schedule A in the back of the instructions.  The IRS also recommend that you have a form that each Board member signs each year saying that they read, understand and will comply with the conflict of interest provision in the bylaws. According to the IRS 990 Instructions, “a conflict interest arises when a person in a position of authority over an organization, such as an officer, director, or manager, can benefit financially from a decision he or she could make in such capacity, including indirect benefits such as to family members or businesses with which the person is closely associated. For this purpose, a conflict of interest does not include questions involving a person’s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.” Page 22.

 The model conflict of interest policy is not difficult to understand. Most Main Street organizations do grapple with conflict of interest;  it is part of the work of the downtown organization. We learn about who is leasing, who is closing shop, who is seeking variances, who wants to sell—it is part of what we do downtown.  But virtually all of this information is confidential (or should be considered so), and should only be discussed with other Board members.  Secondly this information may give rise to conflict of interest among Board members.  Perhaps a real estate broker is representing one client, while another business is trying to lease a space.  Both are Board members. You can see the real or potential conflict here. We need to know that these real or potential conflicts exist and that people disclose them and not take advantage of their position on the Board to benefit themselves.

 Duty of Loyalty One of the three legal duties of all nonprofit Board members is the duty of loyalty—that your service as a Board member is first to the organization, and not to yourself.  This duty is hard to police because people join Boards precisely to be or become an insider—to know what is going on.  The issue here is not to act on this information if it benefits you financially, your family, or your business.  This is where natural conflicts of interest arise.  It is critical that these conflicts be acknowledged and not be allowed to occur without proper written acknowledgment as stated in the IRS model conflict of interest provision.  Read it.  See if it makes sense.  I think it does.  Talk about it at your Board meeting.  Add it to the bylaws, if you don’t have this policy already. Make everyone understand why it is important. Look in the next blog post for some free examples of these policies that you can review with your attorney and decide whether to adopt these.

Whistleblower Policy The next policy the IRS seeks is a code of ethics or whistleblower policy. Since the Board is the body that would handle complaints by staff and volunteers regarding financial improprieties or misuse of assets, a policy is needed about how this information is handled by the organization. The IRS encourages a code of ethics to “encourage a charity’s board or trustees to consider adopting and regularly evaluating a code of ethics that describes behavior it wants to encourage and behavior it wants to discourage. A code of ethics will serve to communicate and further a strong culture of legal compliance and ethical integrity to all persons associated with the organization.”

 “The Internal Revenue Service encourages the board of directors to adopt an effective policy for handling employee complaints and to establish procedures for employees to report in confidence any suspected financial impropriety or misuse of the charity’s resources. Such policies are sometimes referred to as whistleblower policies. The Internal Revenue Service will review an organization to  determine whether insiders or others associated with the organization have materially diverted organizational assets.” This quote is from the previously mentioned "Governance and Related Issues for 501c3 Organizations."

 Instructions to the IRS 990 form also go on to say “A whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported.” Document Retention and Destruction Policy The third policy that the IRS seeks is a document retention and destruction policy. This is rather straight forward and identifies the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and the destruction of the organization’s documents and records.

 According to the IRS web site, the “The Internal Revenue Service encourages charities to adopt a written policy establishing standards for document integrity, retention, and destruction. The document retention policy should include guidelines for handling electronic files. The policy should cover backup procedures, archiving of documents, and regular check-ups of the reliability of the system. For more information, see IRS Publication 4221, Compliance Guide for 501(c)(3) Tax-Exempt Organizations, available on the IRS website. Here is the link to that document.

 Your accountant or CPA can provide this for you, and the Board can adopt it wholesale. We will supply links to sample policies in the next and final blog post on this topic. Compensation Policy The final policy the IRS seeks is for compensation. There is a great deal of material about compensation issues in both the IRS 990 and the 990 EZ form.  There has been considerable abuse about compensation for CEOs and in some cases Board members in the nonprofit sector, and consequently the IRS has made this a high priority.  In their handy “Governance and Related Topics - 501(c)(3) Organizations” piece, there is good guidance on this matter. See this publication here.

 For most downtown organizations, high compensation this is less troubling than other nonprofits because most often we rely on the state coordinating program’s annual salary survey to determine if the local manager’s pay is reasonable.  Given that most local downtown executive directors are paid less than other comparable community development professionals in their region (pathetic but often true), the IRS concerns about unrealistic-–meaning high—salaries is probably moot for our tiny sector in the nonprofit world.  But the IRS still wants to see that the Board or the committee in charge of determining compensation (perhaps the Executive Committee) has some basis for comparison and writes that down for the personnel file.

 About the last post in this series In our final blog piece in this series we will tell you where to get free samples of these policies on the web, and how to use them to strengthen the oversight of your Board. Please look for the other two blog posts from this series, join our mailing list or become a FAN of Heritage Consulting Inc (click the link on the right), so you are kept up to date on new information we post on this blog. The earlier two posts of this series can be found here and here.  If you have questions about any of these matters, please contact your organization’s attorney to discuss. P.S. this is our 200th blog post!  The photos are from a visit to Longwood Gardens in April 2010.