Principles Guide

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The document outlines principles for good governance and ethical practice for charities and foundations to strengthen their operations.

The Panel on the Nonprofit Sector has been dedicated to finding ways to strengthen governance, transparency, and ethical standards within the charitable community since its creation in October 2004 at the encouragement of the U.S. Senate Finance Committee.

The Panel issued its first report to Congress and the nonprofit sector in June 2005, and a supplement to that report in April 2006. Together, those reports offered over 150 recommendations for actions that Congress and the Internal Revenue Service should take to achieve those goals.

Principles for

Good Governance
and Ethical Practice
A Guide for Charities
and Foundations

October 2007

Panel on the Nonprofit Sector


Co-Conveners
Lorie A. Slutsky, President, New York Community
Trust, New York, NY
M. Cass Wheeler, Chief Executive Officer,
American Heart Association, Dallas, TX

Panel Members
Susan V. Berresford, President, Ford Foundation,
New York, NY
Paul Brest, President, William and Flora Hewlett
Foundation, Menlo Park, CA
Linda Perryman Evans, President and CEO,
The Meadows Foundation, Dallas, TX
Jonathan F. Fanton, President, John D. and
Catherine T. MacArthur Foundation,
Chicago, IL
Brian Gallagher, President and CEO, United Way
of America, Alexandria, VA
Robert Greenstein, Executive Director, Center on
Budget and Policy Priorities, Washington, DC
Steve Gunderson, President and CEO, Council on
Foundations, Washington, DC
Stephen B. Heintz, President and CEO,
Rockefeller Brothers Fund, New York, NY
Wade Henderson, Executive Director, Leadership
Conference on Civil Rights, Washington, DC
Dorothy A. Johnson, Trustee, W.K. Kellogg
Foundation, Grand Haven, MI
Valerie Lies, President and CEO, Donors
Forum of Chicago, Chicago, IL

Paul Nelson, Former President, Evangelical


Council for Financial Accountability,
Winchester, VA
William D. Novelli, CEO, AARP,
Washington, DC
Jon Pratt, Executive Director, Minnesota Council
of Nonprofits, St. Paul, MN
John R. Seffrin, President and CEO, American
Cancer Society, Atlanta, GA
Sam Singh, Former President and CEO, Michigan
Nonprofit Association, Lansing, MI
Edward Skloot, Former Executive Director,
Surdna Foundation, New York, NY
William E. Trueheart, President and CEO,
The Pittsburgh Foundation, Pittsburgh, PA
William S. White, President, Charles Stewart
Mott Foundation, Flint, MI
Timothy E. Wirth, President, United Nations
Foundation, Washington, DC
Gary L. Yates, President and CEO, The California
Wellness Foundation, Woodland Hills, CA
Raul Yzaguirre, Former President and CEO,
National Council of La Raza, Washington, DC

Executive Director
Diana Aviv, President and CEO,
Independent Sector, Washington, DC

Cover photo credits (left to right): Habitat for Humanity International; Public Allies; Mark Godfrey/The Nature Conservancy;
Ed Kashi/Robert Wood Johnson Foundation.

e are delighted to share with you these principles for good governance and ethical practice, which are designed to guide board members and staff leaders of every charitable
organization as they work to improve their own operations. The Panel on the Nonprofit
Sector has been dedicated to finding ways to strengthen governance, transparency, and ethical
standards within the charitable community since its creation in October 2004 at the encouragement of the U.S. Senate Finance Committee. Over the last three years, we have brought together
thousands of people involved with charities and foundations to develop and refine recommendations to
Congress, the Internal Revenue Service, and our own community that would achieve those goals.
The Panel issued its first report to Congress and the nonprofit sector in June 2005, and a supplement
to that report in April 2006. Together, those reports offered over 150 recommendations for actions that
Congress and the Internal Revenue Service should take to improve the laws, as well as education and
enforcement efforts to prevent unscrupulous individuals from abusing charitable resources for personal
gain. It also outlined actions that we in the charitable community needed to take to improve our own
practices. Many of those recommendations have been enacted into law through the Pension Protection
Act of 2006, and we continue to work with Congress and the IRS to make improvements in the regulatory framework under which charitable organizations operate.
We know that government action cannotand should notreplace strong, effective governance of
individual organizations and constant vigilance by our own community. The Panel has spent the past
eighteen months working with an outstanding advisory committee led by Rebecca Rimel, President,
Pew Charitable Trusts, and Joel Fleishman, Director, Philanthropic Foundations Research Program,
Terry Sanford Institute of Public Policy, Duke University, to examine how we might advance the state of
governance and self-regulation throughout our community. It further invited public comment from the
charitable community. The result is the 33 principles presented here.
We encourage the 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. Many organizations
will find that they already followor go beyondthese principles. Others may wish to make changes
in their current practices over time, and some may conclude that certain practices do not apply to their
operations. We hope these principles will help our organizations as we continue to reach for the highest
standards of governance and ethical practice that the communities we serve expect and deserve.

Lorie Slutsky
President and Director
New York Community Trust

M. Cass Wheeler
Chief Executive Officer
American Heart Association

Co-Conveners, Panel on the Nonprofit Sector

Preamble
Nonprofit organizations in the United States
educational, charitable, civic, and religious
institutions of every size and missionrepresent
the most widespread organized expression of
Americans dedication to the common good. The
creation of these voluntary, often grassroots organizations to accomplish some public purpose is a
distinguishing feature of our national life. Since
the 1835 publication of Alexis de Tocquevilles
Democracy in America, they have been recognized
internationally as a source of social cohesion,
a laboratory of innovation, and a continually
adaptable means of responding to emerging ideas,
needs, and communal opportunity. Individuals
have continued to use their First Amendment
freedoms of speech
and association to
create and energize
organizations that
onprofit
define common needs,
organizations have
rally popular support,
and pursue innovative
long embraced the
approaches to public
need for standards
problems. These
of ethical practice
nonprofits have been
that preserve and
a source of national
achievement on many
strengthen the
fronts.
publics confidence.
The variety of
purposes, forms, and
motivating beliefs
that make up the charitable community in the
United States is one reason why it has consistently
earned widespread support from large numbers of
Americans. In recent decades, the percentage of
survey respondents expressing confidence in the
ethics and honesty of U.S. charities and voluntary
organizations overall has hovered around twothirds.1 For individual charitable organizations,
responses are even more favorable, some reaching
above 70 percent. In 2006, 20 percent of all
Americansmore than 61 million of them
volunteered in some capacity in an assortment of
different kinds of nonprofit activity.2 Individual
donations totaled more than $207 billion, which

came on top of the $41 billion given by corporations and foundations created from private money.
Preserving this diversity, adaptability, and
capacity for innovation depends in large part on
maintaining the publics trust. The public has
high expectations for both the ethical standards
and the impact of the countrys 1.4 million
charitable organizations, but often has trouble
distinguishing one nonprofit from another.
Unethical or improper conduct by an individual
organization, though rare, can thus jeopardize the
human and financial support on which countless
other activities rely. Yet government attempts to
prevent such abuses, if not carefully pursued, can
themselves diminish the unique value that nonprofits bring to American life. Too heavy a regulatory hand, or too uniform and inflexible a set of
legal restraints, could stifle the very creativity and
variety that makes nonprofit activity worth protecting and encouraging. 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.
Just as important, nonprofit organizations have
long embraced the need for standards of ethical
practice that preserve and strengthen the publics
confidence. Many such systems in fact already
exist, though none have applied to the entire
range of American charitable organizations. The
pages that follow therefore set forth a comprehensive set of principles to inform the field. Their
purpose is to reinforce a common understanding of transparency, accountability, and good
governance for the sector as a wholenot only
to ensure ethical and trustworthy behavior, but
equally important, to spotlight strong practices
that contribute to the effectiveness, durability, and
broad popular support for charitable organizations
of all kinds.

 Principles for Good Governance and Ethical Practice

Toward a balanced system


of law and self-governance
Any approach to preserving the soundness and
integrity of the nonprofit community must strike
a careful balance between the two essential forms
of regulationthat is, between prudent legal
mandates to ensure that organizations do not
abuse the privilege of their exempt status, and,
for all other aspects of sound operations, wellinformed self-governance and mutual awareness
among nonprofit organizations. Such a balance
is crucial for ensuring that structures of accountability and transparency are core strengths of our
nonprofit community, affording organizations
the support they need to pursue their various callings and the flexibility they need to adapt to the
changing needs of their communities, their fields
of endeavor, and the times.
The Panel on the Nonprofit Sector has worked
over the past three years to help find that balance.
Created in 2004 at the encouragement of the
leaders of the Senate Finance Committee, the
Panel had addressed concerns shared by nonprofit
organizations, members of the public, Congress,
and federal and state oversight agencies about
reports of illegal or unethical practices by some
charitable organizations and their donors. The
Panels Final and Supplemental Reports, issued
in 2005 and 2006 respectively, offered more than
100 recommendations for improving government oversight, including new rules to prevent
unscrupulous individuals from abusing charitable
organizations for personal gain. The Pension
Protection Act of 2006 enacted many of these
recommendations into law, and the Panel is continuing to work with members of Congress and
the executive branch on ways of implementing the
remaining ones.
The Panel has been equally committed to
formulating effective, broadly applicable methods
of self-regulation since its inception in 2004.
Its work has proceeded from a beliefamong
lawmakers and their staffs no less than among
charitable organizationsthat 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 organizations governing
board and management to adapt them to the
dictates of that organizations scope and mission.
Widespread use of such principles would enable
organizations to improve their operations by
learning from each other. Critically, it would also
provide a common yardstick by which members
of the public can evaluate how to direct their
support.

Developing
sector-wide
principles to
support self
regulation

he best bulwark
against misconduct
will always be a wellinformed vigilance
by members of the
nonprofit community
themselves, including
a set of principles they
could adopt, promote
sector-wide, and
improve over time.

Though given fresh


impetus by current
members of Congress
and by the creation
of the Panel on the
Nonprofit Sector, the
idea of self-regulation
is far from a recent
preoccupation among
charitable organizations. Among the
earliest such efforts dates back to 1918, when a
coalition of nonprofits established the National
Charities Information Bureau to help the public
learn about the ethical practices and stewardship
of organizations that raise money from donations.
Many excellent systems of self-regulation have
long been in use in various subsets of the sector,
each tailored to the goals, resources, and challenges of its particular field and membership. In
searching for generally applicable standards for the

A Guide for Charities and Foundations 

whole sector, the Panels first step was therefore


to commission two studies to review, analyze,
and find patterns among these existing systems.
The Panel then called together 34 leaders from
charities, foundations, academia, and oversight
agencies to form a special Advisory Committee
on Self-Regulation. Armed with the two studies
of self-regulation regimens already in use, the
Committee began its work in 2006 with a detailed
review of principles and standards drawn from
more than 50 such systems, including selections
from both the nonprofit and for-profit sectors.
After extensive deliberation, the members
developed a comprehensive set of principles
drawn from current systems and incorporating
the advice of experts in nonprofit law and
governance.
This first set of
draft principles
was circulated for
elf-regulation
public comment in
begins with good
early 2007. After
considering the
governance.
resulting feedback,
the committee and
the Panel made
revisions and released a second draft for a longer
comment period. The wide-ranging reaction to
both drafts demonstrated a broad interest across
the nonprofit community in achieving consensus
on the elements of transparent, accountable,
and ethical conduct. The resulting guidance and
encouragement further strengthened the Panels
final set of principles.

Using and adapting the principles


for your organization
In the following pages, the Panel sets forth 33
principles of sound practice that should be considered by every charitable organization as a guide
for strengthening its effectiveness and accountability. Six of these principles describe actions
that all charitable organizations must take because
they are required by law.3 The other 27 describe
actions that charitable organizations should

strongly consider following, based on their legal


and operational structure and their particular
charitable purposes.
This distinctionbetween firm rules based
on law and more flexible principles that must be
interpreted and applied differently in different
casesis essential to understanding and using this
document. In following this approach, the Panel
on the Nonprofit Sector examined a broad continuum of different models, reflecting greater and
lesser degrees of uniformity and means of enforcement. At one end of this spectrum are systems of
accreditation, such as those for hospitals and institutions of higher education, that carry the force
of law and sanctions for violations. Further along
on the continuum are standards that members
of an association or network of similar organizations, such as associations of land trusts or certain
religious institutions, agree to follow. While
failure to meet these standards may not force an
organization to close its doors, the advantages to
being a member in good standing of the umbrella
network is usually sufficient to encourage careful
adherence to its rules and norms. Finally, there are
standards that nonprofits subscribe to on a purely
voluntary basis, without any external verification,
because they want to strengthen their governance
practices and ethical conduct.
The first two approaches tend to be effective
primarily with organizations that are closely affiliated with one another or belong to a relatively
homogeneous groupwhere practices and professional expectations are highly standardized or
where social sanctions have a strong impact. For
a group as broad and diverse as the whole community of nonprofits, the third approach is clearly
more appropriate: standards of practice that
organizations are encouraged, but not required,
to meet. Many national and state associations of
charitable organizations with voluntary memberships have found this approach benefits their
member nonprofits. The Panel has followed the
practice, common to many such voluntary
associations, of describing the reasoning behind
each principle and offering guidance on how to
adapt and apply it.

 Principles for Good Governance and Ethical Practice

To be sure, a significant number of nonprofit


organizations already function under one of the
more prescriptive regimens as a result of their
participation in some subset of the sector. Yet few
of these systems offer a comprehensive approach
to good governance and ethical practice. Even
organizations that subscribe to the more comprehensive systems may well find ideas and practices
in this document that will improve their self-governance further.
Still, given the wide, necessary diversity of
organizations, missions, and forms of activity that
make up the nonprofit community, it would be
unwise, and in many cases impossible, to create a
set of universal standards to be applied uniformly
to every member. Instead, the Panel commends
the following set of principles to every charitable
organization as guideposts for adopting specific
practices that best fit its particular size and
charitable purpose. Organizations can use these
principles to evaluate their current standards.
Self-regulation begins with good governance.
Every charitable organization, by federal and
state law, must have a board of directors or, if it
is established as a charitable trust, one or more
trustees. The board sets the organizations broad
policies and oversees its operations, including its
financial policies. The board also has a responsibility to create an environment in which there
is open and robust deliberation of the issues on
which it takes action. Whether or not the organization has paid staff, the board bears the primary
responsibility for ensuring that the organization
lives up to its legal and ethical obligations to its
donors, consumers, and the public. For organizations that do have staff, the chief staff officer, in
partnership with the board, has responsibility for
overseeing or carrying out many of the activities
implied by these principles. It is therefore to the
boards and chief executives of nonprofit organizations that this document is particularly,
though not exclusively, addressed.

The 33 principles that follow are organized


under four main categories:
1. Legal Compliance and Public Disclosure
(principles 1-7, pages 8-12)responsibilities
and practices, such as implementing conflict
of interest and whistleblower policies, that will
assist charitable organizations in complying
with their legal obligations and providing information to the public.
2. Effective Governance (principles 8-20, page
13-19)policies and procedures a board of
directors should implement to fulfill its oversight and governance responsibilities effectively.
3. Strong Financial Oversight (principles 21-26,
pages 20-23)policies and procedures an
organization should follow to ensure wise
stewardship of
charitable resources.
4. Responsible
Fundraising (printrengthening
ciples 27-33, pages
ethics and
24-27)policies
accountability is
and procedures
organizations that
an organic process
solicit funds from
that requires an
the public should
ongoing commitment
follow to build
by boards and
donor support and
confidence.
staff of individual

organizations and by

It is advisable that
the entire nonprofit
an organizations board
community.
conduct a thorough
discussion of the complete set of principles,
and determine how the organization should apply
each to its operations. It is possible that after this
review, a board may conclude that certain principles do not apply to its organization. Developing
a transparent process for communicating how the
organization has addressed the principles, including the reasons that any of the principles are not

A Guide for Charities and Foundations 

relevant, is likely to foster a greater appreciation


of the diverse nature of the sector and a deeper
respect for the boards good stewardship.
A reference edition of these principles
is available on the Panels website,
www.nonprofitpanel.org. It includes legal
background on each principle, a glossary of
terms, the two studies on self-regulation systems
commissioned by the Panel to inform this work,
and the more than 50 existing self-regulation
systems and standards that the Panels Advisory
Committee on Self-Regulation studied during
its work.
Independent Sector, which convened and
supported the Panel, also offers information on
its website, www.independentsector.org, to assist
organizations in finding tools and other resources
for applying these principles.

A process of continuing
vigilance and adaptation
Strengthening ethics and accountability is
an organic process that requires an ongoing
commitment by boards and staff of individual

organizations and by the entire nonprofit


community. Over time, discussion within
organizations and across the community may
well result in refinement of the principles
presented here. Such discussions would provide
a further demonstration of the value to the whole
sector of coming together to improve its work.
For organizations whose practices do not
currently meet the standards recommended
by the Panel, and for existing systems of selfregulation that fall short as well, reaching those
levels may take some time. Yet even the process
of striving toward these standards will strengthen
the organization and its ability to serve its
community. The key is to begin that process
today.
Independent Sector, Keeping the Trust:Confidence in
Charitable Organizations in an Age of Scrutiny, August 2002,
p. 2.
1

Bureau of Labor Statistics, Volunteering in the United States,


2006, Washington, DC: U.S. Department of Labor, 2007.
2

Principles 1, 3, 21, 25, 26 and 27 describe actions that are


required by law of all charitable organizations.
3

 Principles for Good Governance and Ethical Practice

Principles for
Good Governance
and Ethical Practice
Legal Compliance and Public Disclosure page 8

Effective Governance page 13

Strong Financial Oversight page 20

Responsible Fundraising page 24

Legal Compliance and Public Disclosure


1 A charitable organization must comply with all applicable federal laws and regulations, as well
as applicable laws and regulations of the states and the local jurisdictions in which it is based
or operates. If the organization conducts programs outside the United States, it must also
abide by applicable international laws, regulations and conventions that are legally binding on
the United States.
Charitable organizations are subject to a range of
federal, state, and local laws, which are described
in the reference version of this report available at
www.nonprofitpanel.org. An organizations governing board is ultimately responsible for overseeing and ensuring that the organization complies
with all its legal obligations and for detecting and
remedying wrongdoing by management. While
board members are not required to have specialized legal knowledge, they should be familiar
with the basic rules and requirements with which
their organization must comply and should
secure the necessary legal advice and assistance to
structure appropriate monitoring and oversight
mechanisms.

There are many resources to help charitable


organizations and their boards understand the
law. The Internal Revenue Service provides a free
online workshop at www.stayexempt.org, which
covers tax compliance issues relevant to small and
mid-sized tax-exempt organizations. Some state
attorneys general and other state charity officials,
as well as many national, state and regional associations of nonprofit organizations, provide online
tools and resources that offer legal guidance.
Organizations may also find it helpful to consult
with state and local chapters of bar associations for
referrals to low-cost or pro bono legal assistance.

2 A charitable organization should have a formally adopted, written code of ethics with which
all of its directors or trustees, staff and volunteers are familiar and to which they adhere.
Adherence to the law provides a minimum standard for an organizations behavior. Each organization should also have a code of ethics that outlines
the practices and behaviors that its staff, board,
and volunteers agree to follow. The adoption of
such a code, though not required by law, helps
demonstrate the organizations commitment to
carry out its responsibilities ethically and effectively. The code should be built on the values that
the organization embraces, and should highlight
expectations of how those who work with the
organization will conduct themselves in a number
of areas, such as the confidentiality and respect
that should be accorded to clients, consumers,
donors, and fellow volunteers and board and staff
members.

The process by which a code of ethics is adopted


and implemented can be just as important as the
code itself. The board and staff should be engaged
in developing, drafting, adopting, and implementing a code that fits the organizations characteristics. It should then be complemented by policies
and procedures that describe how the principles in
the code will be put into practice. Organizations
should include a discussion of the code of ethics in
orientation sessions for new board and staff members and volunteers, and should regularly address
adherence to the code in their ongoing work.

 Principles for Good Governance and Ethical Practice

3 A charitable organization should adopt and implement policies and procedures to ensure that
all conflicts of interest, or the appearance thereof, within the organization and the board are
appropriately managed through disclosure, recusal, or other means.
A conflict of interest arises when a board member
or staff persons duty of loyalty to the charitable
organization comes into conflict with a competing financial or personal interest that he or she
(or a relative) may have in a proposed transaction. Some such transactions are illegal, some are
unethical, but others may be in the best interest of
the organization as long as certain clear procedures
are followed.
Establishing and enforcing a conflict-of-interest
policy is an important part of protecting charitable
organizations from unethical or illegal practices.
The policy need not be complex, but it must be
consistent with the laws of the state in which the
nonprofit is organized and should be tailored to
specific organizational needs and characteristics.
The policy should require full disclosure of all
potential conflicts of interest within the organization. It should apply to every person who has the
ability to influence decisions of the organization,
including board and staff members and parties
related to them. Some organizations may extend
the policy to substantial contributors as well.
Board members and staff should be encouraged to
disclose any interest they have in a transaction or
matter that is before the organization where that
interest could be reasonably viewed by others as
affecting the objectivity or independence of the
decision maker, even if the interest is not the result
of the staff or board member having a formal
affiliation with some other party. The practice of
full disclosure should be fostered particularly at
board meetings, and the fact of any conflict and
the action taken in response, including abstention,
should be recorded in the minutes.

Conflict-of-interest policies should distinguish


between situations that give the appearance of a
conflict and those that involve a material conflict
where a board or staff member has a direct or
indirect financial interest in transactions with the
organization. It is important that there be in place
a transparent process, in which board members
engage, to understand the nature of the conflict
and whether it can be appropriately managed. For
example, some foundations and grantmaking public charities prohibit grants to organizations for
which one of the funders board or staff members
serves as an uncompensated director or trustee.
Others require disclosure of this relationship and
recusal from the decision-making process. Still
others encourage board or staff members to be
engaged actively with other charitable organizations, including the charities they may fund, as a
way of learning about those organizations and the
fields in which they work.
Once a conflict-of-interest policy is developed, all
board and senior staff members should be required
to sign it and to disclose any material conflicts
of interest, both at the time they join the organization and at the beginning of each new board
year. Many organizations use an annual questionnaire or disclosure statement for this purpose
and commonly provide information about board
members conflicts to auditors or others reviewing
the organizations financial transactions. When
senior employees, board members or their family
members have a material conflict of interest in a
matter being considered by the board or the staff,
they should refrain from attempting to influence
other decision-makers regarding the matter. Board
members with a material conflict of interest are
required by law to recuse themselves from board
discussions and votes regarding those matters,
other than to respond to information requests.

A Guide for Charities and Foundations 

4 A charitable organization should establish and implement policies and procedures that enable

individuals to come forward with information on illegal practices or violations of organizational


policies. This whistleblower policy should specify that the organization will not retaliate
against, and will protect the confidentiality of, individuals who make good-faith reports.
Every charitable organization, regardless of size,
should have clear policies and procedures that
allow staff, volunteers, or clients of the organization to report suspected wrongdoing within
the organization without fear of retribution.
Information on these policies should be widely
distributed to staff, volunteers and clients, and
should be incorporated both in new employee
orientations and ongoing training programs for
employees and volunteers. Such policies can help
boards and senior managers become aware of and
address problems before serious harm is done to
the organization. The policies can also assist in
complying with legal provisions that protect individuals working in charitable organizations from
retaliation for engaging in certain whistle-blowing
activities. Violation of such provisions may subject
organizations and the individuals responsible for
violations to civil and criminal sanctions.
Policies that protect people who report wrongdoingsometimes known as Whistleblower
Protection Policies or Policies on Reporting of
Malfeasance or Misconductgenerally cover suspected incidents of theft; financial reporting that
is intentionally misleading; improper or undocumented financial transactions; improper destruction of records; improper use of assets; violations
of the organizations conflict-of-interest policy;
and any other improper occurrences regarding
cash, financial procedures, or reporting.
The policy should be tailored to the nonprofits
size, structure, and capacity, and it must reflect
the laws of the state in which the nonprofit is

organized or operates. All policies should specify


the individuals within the organization (both
board and staff ) or outside parties to whom such
information can be reported. Small organizations
with few or no paid staff may wish to designate
an external advisor to whom concerns can be
reported without any threat of retaliation. This is
a particular concern for family foundations whose
board members and staff may not feel comfortable
sharing concerns about suspected illegal or unethical practices directly with another family member
or close associate of the family. Larger organizations should encourage employees and volunteers
to share their concerns with a supervisor, the
president or executive director, and/or the chief
financial officer of the organization, but should
also provide a method of reporting anonymously
to either a board member or an external entity
specified by the organization. Some large organizations have set up computerized systems that allow
for anonymous reports, and a number of private
companies offer anonymous reporting services via
a toll-free telephone number, email address, or
intranet site.
It is equally important that the organization have
clear procedures to investigate all reports and take
appropriate action. The policy should stipulate
that there will be no retaliation against any individual who reports a suspected violation, except
in those instances where the organization determines that a false report was made with intent to
harm the organization or an individual within the
organization.

5 A charitable organization should establish and implement policies and procedures to protect
and preserve the organizations important documents and business records.
A written document-retention policy, consistently
monitored over time, is essential for protecting
the organizations records of its governance and
administration, as well as business records that are

required to demonstrate legal compliance. Such a


policy also helps to protect against allegations of
wrongdoing by the organization or its directors
and managers. Board members, staff and volun-

10 Principles for Good Governance and Ethical Practice

teers should be made thoroughly familiar with the


policy and informed of their responsibilities in
carrying it out.
The policy should address the length of time specific types of documents must be retained, as well
as when it is permissible or required to destroy
specific types of documents. The policy should
provide guidance to staff and volunteers for paper
and electronic documents, files and e-mail messages. Specific procedures should also ensure that
any document destruction is immediately halted
if an official investigation of the organization is
under way or anticipated.

Charitable organizations are required to maintain


permanently their organizational documents,
board minutes and policies, and materials related
to their state and federal tax-exempt status. Other
documents related to the governance, administration, fundraising, and programs of the organization must be kept in paper or electronic form for
specific periods, depending on applicable laws and
reporting requirements. Federal and some state
laws prohibit the destruction, alteration, mutilation, or concealment of records related to an official legal proceeding.

6 A charitable organizations board should ensure that the organization has adequate plans
to protect its assetsits property, financial and human resources, programmatic content
and material, and its integrity and reputationagainst damage or loss. The board should
review regularly the organizations need for general liability and directors and officers
liability insurance, as well as take other actions necessary to mitigate risks.
The board of a charitable organization is responsible for understanding the major risks to which
the organization is exposed, reviewing those risks
on a periodic basis, and ensuring that systems have
been established to manage them. The level of
risk to which the organization is exposed and the
extent of the review and risk management process
will vary considerably based on the size, programmatic focus, geographic location, and complexity
of the organizations operations.
Risk management generally includes a review of
potential risks to the organizations significant
assets, such as its property, its good will, and its key
programs and activities, and decisions about the
most appropriate ways to protect those assets from
loss. All organizations should consider carefully all
of the principles in this reportfor effective governance, strong financial oversight, and responsible
fundraising practicesas they develop appropriate
policies and procedures to protect their assets.
Board members may have personal liability for
fines and other penalties as a result of certain legal
violations, such as failure to pay required payroll
and other taxes or approval of excess benefit or

self-dealing transactions. Federal and some state


volunteer liability laws provide some safeguards for
board members who are not compensated, other
than receiving reimbursement of expenses, and
who act in good faith. Nonetheless, while it is rare
for a charitable organization and its board to be
the target of a lawsuit, each organization should
still take steps to protect its assets in such an event.
The board of directors should consider including
indemnification provisions in the organizations
governing documents, based on a review of the
laws of the states in which it is based or operates.
The board should also assess periodically the organizations need for insurance coverage based on its
program activities and financial capacity. Insurance
is only one risk management strategy, however.
Other financial strategies should also be considered
to protect an organizations assets, such as establishing reserve funds to absorb minor losses, borrowing from lenders, and negotiating with third
parties to assume certain losses. The organization
should also have policies and procedures designed
to reduce the risk of various occurrences, or limit
the exposure of the organization to certain identified risks.

A Guide for Charities and Foundations 11

Even the smallest organizations should have procedures for backing up and preserving electronic
and print copies of documents and other information vital to their governance, financial, and
programmatic operations. Larger organizations
may require more extensive risk management
programs, including emergency preparedness and
disaster response plans in case of natural or manmade disasters or other crises that may disrupt
significantly its programs and operations.

Organizations that employ staff should have written personnel policies that conform to federal
and state laws. They should develop appropriate
procedures to protect the health and safety of both
employees and volunteers while they are at work.
Organizations providing services to vulnerable
individuals should ensure that appropriate screening, training and supervision procedures are in
place to minimize safety risks to consumers and
clients, as well as to paid and volunteer staff.

7 A charitable organization should make information about its operations, including its

governance, finances, programs and activities, widely available to the public. Charitable
organizations also should consider making information available on the methods they
use to evaluate the outcomes of their work and sharing the results of those evaluations.
For private foundations and most public charities, filing an accurate and complete annual
information return with the IRS is a legal requirement. Those returns serve as a primary source
of information about their finances, governance,
operations and programs for federal regulators, the
public and many state charity officials. Beyond this
basic requirement, charitable organizations can
demonstrate their commitment to accountability
and transparency by offering additional information about what they do and how they operate.
A good first step is to provide an annual report
that lists the organizations board and staff members, describes its mission, shares information on
program activities, and details financial information including, at a minimum, its total income,
expenses and ending net assets. Such reports need
not be elaborate, can be produced in paper or
electronic form, and can direct the reader to other
readily available documents (such as the Form
990 return or audited financial statements) for
further information. If an organization chooses to
produce such reports on a less frequent basis, such
as every two or three years, it should ensure that
any intervening changes in its board and staff or
programs and its current financial statements are
provided as an attachment or are otherwise made
known to readers of the report.

Another source of transparency and accountability and a key method for communicating about
the organizations work is a website, which can
be maintained independently or through another
organization. A website should feature the same
information recommended for annual reports,
with links directly to or instructions on how to
request the organizations most recent IRS Form
990 return and other financial statements. Useful
websites often provide such essential information
as the organizations vision and mission statements; lists of board and staff members; statement of values and code of ethics; and policies on
conflicts of interest, whistleblower protection and
travel policy.
Information on an organizations results and how
they are measured can be an especially valuable
means of explaining its work and accounting to
donors and the public. Such information, and the
ability to provide it, will vary considerably from
one organization to another. To the extent evaluation or information on outcomes is available,
some version of it should be included in annual
reports, websites and other forms of communication. More information about program evaluation
is provided in principle #19.

12 Principles for Good Governance and Ethical Practice

Effective Governance
8

A charitable organization must have a governing body that is responsible for reviewing and
approving the organizations mission and strategic direction, annual budget and key financial
transactions, compensation practices and policies, and fiscal and governance policies.
The board of directors bears the primary responsibility for ensuring that a charitable organization
fulfills its obligations to the law, its donors, its
staff and volunteers, its clients, and the public
at large. The board must protect the assets of the
organization and provide oversight to ensure
that its financial, human and material resources
are used appropriately to further the organizations
mission. The board also sets the vision and mission for the organization and establishes the broad
policies and strategic direction that enable the
organization to fulfill its charitable purpose.

When the board determines that the organization


is ready to add paid staff, the board is responsible
for selecting, overseeing, and, if necessary, terminating the chief staff officer. In smaller, un-staffed
organizations, the board may have a more direct
role in overseeing and sometimes delivering the
organizations programs and services. In larger
organizations, the board generally works as a
strategic partner to the staff leadership in ensuring that the organization meets its goals and
commitments.

The board of a charitable organization should meet regularly enough to conduct its business
and fulfill its duties.
Regular meetings provide the chief venue for
board members to review the organizations financial situation and program activities, establish and
monitor compliance with key organizational policies and procedures, and address issues that affect
the organizations ability to fulfill its charitable
mission.
Charitable organizations should ensure that their
governing documents satisfy legal requirements
in establishing rules for board activities, such as
quorum requirements and methods for notifying
board members about meetings. The board should
establish and implement an attendance policy
that requires board members to attend meetings
regularly. Given the time and expense involved in
traveling to meetings, some boards may choose to
conduct their business through conference calls or
forms of online communication that permit members to hear and be heard by all other participants.
In such cases, the organizations governing documents should specify that such alternative methods of holding meetings are permitted.

Boards often form committees and authorize them


to handle some work between full board meetings.
The organizations governing documents should
specify whether the board may create one or more
such committees. In most states, the law prohibits
boards from delegating certain responsibilities to
committees, such as dissolving the organizations
assets; electing or removing directors; and altering
the organizations governing documents. However,
committees may investigate and make recommendations on any of these issues, subject to the full
boards consideration and decision.
While many charitable organizations find it prudent to meet at least three times a year to fulfill
basic governance and oversight responsibilities,
some with strong committee structures, including
organizations with widely dispersed board membership, hold only one or two meetings of the full
board each year. Foundations that make grants
only once a year may find that one annual meeting is sufficient.

A Guide for Charities and Foundations 13

10

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.
The ideal size of a board depends on many factors,
such as the age of the organization, the nature and
geographic scope of its mission and activities, and
its funding needs. Although a larger board may
ensure a wide range of perspectives and expertise,
a very large board may become unwieldy and
end up delegating too much responsibility to an
executive committee or permitting a small group

11

of board members to exercise substantial control.


Conversely, smaller boards may elicit more active
participation from each member, but they should
consider whether their members collectively have
the full range of knowledge and experience necessary to inform their decisions, and, if not, provide
opportunities for the board to confer with outside
experts or advisory groups on specific matters.

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 organizations mission.
Boards of charitable organizations generally strive
to include members with expertise in budget
and financial management, investments, personnel, fundraising, public relations and marketing,
governance, advocacy, and leadership, as well as
some members who are knowledgeable about
the charitable organizations area of expertise or
programs, or who have a special connection to its
constituency. Some organizations seek to maintain
a board that respects the culture of and reflects the
community served by the organization. Boards
increasingly are being encouraged to be inclusive
of and sensitive to diverse backgrounds when
recruiting board members, in addition to purposefully recruiting board members with expertise and
professional or personal experiences that will be
beneficial to the organization.
Because the board must ensure that all financial
matters of the organization are conducted legally,
ethically and in accordance with proper accounting rules, it should make every effort to ensure
that at least one member has financial literacy
that is, the ability to understand financial statements, to evaluate the bids of accounting firms

that may undertake an audit or review and to


assist the board in making sound financial decisions. This need not entail advanced training in
accounting or financial management. If the board
finds itself unable to recruit members with such
skills, it should contract with or seek pro bono
services of a qualified financial advisor, other
than its auditor, to assist the board in its financial
responsibilities.
Organizations should also consider the requirements of current and prospective funding sources
regarding the composition of the boards of their
grantees.
Some donors to private foundations wish to
involve family members on the boards of their
foundations to ensure that the donors philanthropic tradition will continue through future
generations. If family members do not have the
necessary expertise and experience, the board may
wish to bring in advisors. The board should also
consider the advantages of diversity and the perspective offered by representatives from outside
the family.

14 Principles for Good Governance and Ethical Practice

12

A substantial majority of the board of a public charity, usually meaning at least two-thirds of
the members, should be independent. Independent members should not: (1) be compensated
by the organization as employees or independent contractors; (2) have their compensation
determined by individuals who are compensated by the organization; (3) receive, directly
or indirectly, material financial benefits from the organization except as a member of the
charitable class served by the organization; or (4) be related to anyone described above
(as a spouse, sibling, parent or child), or reside with any person so described.
All directors of nonprofit corporations have a
duty of loyalty that requires them to put the
interests of the organization above their personal
interests and to make decisions they believe are
in the best interest of the nonprofit. Individuals
who have a personal financial interest in the affairs
of a charitable organization may not be as likely
to question the decisions of those who determine
their compensation or fees or to give unbiased
consideration to changes in management or program activities.
The founders of a nonprofit corporation sometimes initially turn to family members and business partners to serve on its board of directors, but
interlocking financial relationships can increase
the difficulty of exercising the level of independent
judgment required of all board members. It is
therefore important to the long-term success and
accountability of the organization that a sizeable
majority of the individuals on the board be free of
financial conflicts of interest.

13

This principle does not apply to private foundations and certain medical research institutions that
operate under specific legal restrictions regarding
self-dealing transactions, and other charitable
organizations whose articles of incorporation
or trust instruments include special stipulations
regarding board composition. For example, an
organization established under the auspices of a
religious institution may be required to include
clergy or other paid representatives of that institution on its board. A supporting organization may
be required to have representatives of its supported
organizations on its board. For a complete list
of the types of organizations excluded from this
principle, consult the reference addition of these
principles at www.nonprofitpanel.org.
When a charitable organization determines that
having a majority of independent board members
is not appropriate, the board and staff should
evaluate their procedures and meeting formats to
ensure that board members are able to fulfill their
responsibilities to provide independent, objective oversight of management and organizational
performance.

The board should hire, oversee, and annually evaluate the performance of the chief executive
officer of the organization, and should conduct such an evaluation prior to any change in that
officers compensation, unless there is a multi-year contract in force or the change consists
solely of routine adjustments for inflation or cost of living.
Boards of directors have the authority to delegate
responsibility for maintaining the daily operations
of the organization to a chief executive officer.
One of the most important responsibilities of the
board, then, is to select, supervise, and determine
a compensation package that will attract and
retain a qualified chief executive. The organizations governing documents should require the full

board to evaluate the performance and approve


the compensation of the chief executive annually
and in advance of any change in compensation.
The board may choose to approve a multi-year
contract with the CEO that provides for increases
in compensation periodically or when the CEO
meets specific performance measures, but it is
important that the board institute some regular

A Guide for Charities and Foundations 15

basis for reviewing whether the terms of that


contract have been met. If the board designates
a separate committee to review the compensation
and performance of the CEO, that committee
should be required to report its findings and
recommendations to the full board for approval
and should provide any board member with
details, upon request. The board should then
document the basis for its decision and be
prepared to answer questions about it.
When determining the reasonableness of the compensation package paid to the chief executive, the
board should ensure that the individuals involved
in making the compensation recommendation
do not have a conflict of interest with regard to
the executive. The board or its committee should
examine the compensation paid by similarly situated organizations, both taxable and non-taxable,
for functionally comparable positions. Many
professional associations prepare regular compensation surveys that can be useful in evaluating
compensation, or the committee may turn to
compensation surveys compiled by independent
firms or actual written offers from similar organizations competing for the executives services.
Some organizations may find it difficult to locate
salary surveys or other data to establish comparable values for executive compensation within
their geographic area or field of operation, but the
board should still seek objective external data to
support its compensation decisions.

14

When governing boards use compensation consultants to help determine the appropriate salary for
the chief executive, the consultant should report
directly to the board or its compensation committee and should not be engaged in other business
with or have any conflicts of interest with regard
to the chief executive.
Governing boards are responsible for hiring and
establishing the compensation of the CEO and for
approving the compensation range of other persons in a position to exercise substantial control of
the organizations resources. It is the responsibility
of the CEO to hire and set the compensation of
other staff, consistent with reasonable compensation guidelines set by the board. If the CEO finds
it necessary to offer compensation that equals or
surpasses his or her own, in order to attract and
retain certain highly qualified and experienced
staff, the board should review the compensation
package to ascertain that it does not provide an
excess benefit.
The board or a designated compensation committee should also review the overall compensation program, including salary ranges and benefits provided
for particular types of positions, to assess whether
the compensation program is fair, reasonable, and
sufficient to attract and retain high-quality staff.

The board of a charitable organization that has paid staff should ensure that the positions
of chief staff officer, board chair, and board treasurer are held by separate individuals.
Organizations without paid staff should ensure that the positions of board chair and treasurer
are held by separate individuals.
Concentrating authority for the organizations
governance and management practices in one or
two people removes valuable checks and balances
that help ensure that conflicts of interest and other
personal concerns do not take precedence over the
best interests of the organization. Some state laws
require that the offices of president and treasurer
be held by different individuals. Both the board
chair and the treasurer should be independent
of the chief staff executive to provide appropriate oversight of the executives performance and

to make fair and impartial judgments about the


appropriate compensation of the executive.
When the board deems it is in the best interests
of the charitable organization to have the chief
executive officer serve as the board chair, the board
should appoint another board member (sometimes referred to as the lead director) to handle
issues that require a separation of duties, such
as reviewing the responsibilities, performance or
compensation of the chief executive.

16 Principles for Good Governance and Ethical Practice

15

The board should establish an effective, systematic process for educating and communicating
with board members to ensure that they are aware of their legal and ethical responsibilities,
are knowledgeable about the programs and activities of the organization, and can carry out
their oversight functions effectively.
Most people volunteer for boards because of a
commitment to the mission of the organization
and the value of the organizations work to society.
Yet they may not have the training or information
necessary to understand adequately their fiduciary
responsibilities or common practices of boards of
charitable organizations.
An effective board orientation process fills this
need by detailing the broad oversight responsibilities of the board and the specific legal and ethical
responsibilities of individual members. Members
should be made aware of their personal liability
for the boards actionsor for its failure to take
actionand of the protections available to them.
All board members should receive oral and written
instruction regarding the organizations governing documents, finances, program activities, and
governing policies and practices. Even members

16

who have served on the boards of other organizations can


benefit from a specific orientation to each organization for
which they provide board service. Charitable organizations,
if needed and if funds permit, should provide opportunities for board members to obtain special training or advice
on legal and financial issues and responsibilities. It is also
advisable for an attorney or insurance agent who is
knowledgeable about board liability to explain the legal
protections available to board members, as well as the
options for insurance.
The ongoing process of board education includes ensuring that members have received and reviewed sufficient
information on the issues to be addressed at each board
meeting. Agendas and background materials should be
distributed far enough in advance of all board meetings so
that all members can be expected to read and consider the
issues prior to attending the meeting.

Board members should evaluate their performance as a group and as individuals no less
frequently than every three years, and should have clear procedures for removing board
members who are unable to fulfill their responsibilities.
A regular process of evaluating the boards performance can help to identify strengths and
weaknesses of its processes and procedures and to
provide insights for strengthening orientation and
educational programs, the conduct of board and
committee meetings, and interactions with board
and staff leadership. Many boards will find it helpful to conduct such a self-assessment annually;
others may prefer a schedule that coincides with
the terms of board service or regular long-range
planning cycles. A number of print and online
tools, ranging from sample self-assessment questionnaires to more complex evaluation procedures,
can help an organization design a board evaluation
or self-assessment process that best meets its needs.

The board should establish clear guidelines for the duties


and responsibilities of each member, including meeting
attendance, preparation and participation; committee
assignments; and the kinds of expertise board members are
expected to have or develop in order to provide effective
governance. Many boards assign responsibility for oversight
of the board evaluation and development function to their
executive committees or to a separate board development
committee. Board members with this responsibility should
be empowered to discuss problems of attendance or other
aspects of board performance with individual members
to ascertain whether the problem can be corrected or the
individual needs to resign or be removed from the board.
Removing a non-performing board member generally
requires the action of the full board or, if the organization
has members, the action of the membership.

A Guide for Charities and Foundations 17

17

18

The board should establish clear policies and procedures setting the length of terms and the
number of consecutive terms a board member may serve.
Every charitable organization should determine
whether its best interests are served by limiting
the length of time an individual may serve on its
board. Some organizations have found that such
limits help in bringing fresh energy, ideas and
expertise to the board through new members.
Others have concluded that term limits may
deprive the organization of valuable experience,
continuity and, in some cases, needed support
provided by board members. They believe organizations should rely solely on rigorous board procedures for evaluating board members and removing
those who are not able to fulfill their governance
responsibilities effectively. Some family foundations may decide not to limit board terms if their
donors expressed a wish that family members continue serving as long as they are willing and able.

experienced members. Many organizations find it useful


to establish policies making board members eligible for reelection after taking a year or more off. It is always valuable
to find ways in which members who have completed their
service can continue to be engaged in the organizations
programs and services.

Organizations that do limit the terms of board


service should consider establishing a staggered
term process that provides a continual flow of
new participants while retaining a cadre of more

Whether or not the organization establishes board term


limits, it is always helpful to have a process for involving
prospective board members on committees or task forces
until there is an appropriate opening on the board.

Organizations that choose not to limit the terms of


board service should consider establishing a regular process whereby the board reaffirms its commitment to this
approach and members actively indicate their desire to
continue serving on the board. Some organizations create an alumni council or honorary board to provide an
easy option for board members who feel it is time to leave
active service but still wish to be involved in the organization. Others specify the age at which a member must retire
from the board.

The board should review organizational and governing instruments no less frequently than
every five years.
Regular reviews of the organizations articles of
incorporation, bylaws and other governing instruments help boards ensure that the organization is
abiding by the rules it has set for itself and determine whether changes need to be made to those
instruments. The board may choose to delegate
some of this deliberation to a committee, but
the full board should consider and act upon the
committees recommendations.

Most state laws permit the state attorney general to file suit asking the court to hold a board
accountable for failure to abide by the requirements set forth in these basic documents. If it
becomes impractical or no longer feasible to carry
out the purposes of the organization as outlined
in its articles of incorporation, the board should
take appropriate action to amend the articles and
to file the amended articles with state officials, as
required. In some instances, a charitable organization may need court approval to amend its organizing documents.

18 Principles for Good Governance and Ethical Practice

19

The board should establish and review regularly the organizations mission and goals and
should evaluate, no less frequently than every five years, the organizations programs, goals
and activities to be sure they advance its mission and make prudent use of its resources.
As stewards of the publics trust and the resources
invested in the organization, board members have
an obligation to ensure that the organization uses
its resources as effectively as possible to advance its
charitable mission. Every board should therefore
set strategic goals and review them annually, generally as part of the annual budget review process.
This review should address current needs and
anticipated changes in the community or program
area in which the organization operates that may
affect future operations. It should also consider the
financial and human resources that are needed to
accomplish the organizations goals. Such periodic
performance reviews and assessments are a
common feature of many self-regulation,
accreditation and funding programs in which
nonprofit organizations participate.

20

Although discussions of individual program activities and


accomplishments are typical of most board meetings, these
are not a substitute for a more rigorous periodic evaluation
of the organizations overall impact and effectiveness in
light of goals and objectives that the board has approved.
Because organizations and their purposes differ, it is
incumbent on each organization to develop its own process
for evaluating effectiveness. Most organizations should
have at least an informal review of their progress on goals
and objectives annually, but, because of the time and cost
involved, they may choose to conduct a more rigorous
evaluation less frequently. Even for organizations whose
work is not properly measured in one-year increments,
such as scientific research or youth-development programs,
interim benchmarks can be identified to assess whether the
work is moving in the right direction.

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.
Although some charitable organizations reimburse
expenses related to board work, the vast majority
of board members serve without compensation.
In fact, board members of public charities often
donate both time and funds to the organization, a
practice that supports the sectors spirit of giving
and volunteering.
When organizations find it appropriate to compensate board members due to the nature, time or
professional competencies involved in the work,
they must be prepared to provide detailed documentation of the amount of and reasons for such
compensation, including the responsibilities of
board members and the services they provide. Any
compensation provided to board members must
be reasonable and necessary to support the performance of the organization in its exempt function.
Compensation paid to board members for services
in the capacity of staff of the organization should

be clearly differentiated from any compensation


paid for board service.
Board members of charitable organizations are
responsible for ascertaining that any compensation they receive does not exceed to a significant
degree the compensation provided for positions in
comparable organizations with similar responsibilities and qualifications. Some organizations hire
compensation consultants to identify comparable
compensation levels, some rely on data available
through national and regional associations or forprofit firms, and some conduct their own surveys
of compensation paid by similar organizations.
When they establish their own compensation,
board members generally cannot be considered
independent authorizing bodies and therefore
generally cannot avail themselves of the legal
protections accorded to such bodies.

A Guide for Charities and Foundations 19

Strong Financial Oversight


21

A charitable organization must keep complete, current, and accurate financial records. Its
board should receive and review timely reports of the organizations financial activities and
should have a qualified, independent financial expert audit or review these statements annually
in a manner appropriate to the organizations size and scale of operations.
Complete and accurate financial statements are
essential for a charitable organization to fulfill its
legal responsibilities and for its board of directors
to exercise appropriate oversight of the organizations financial resources. A board that does not
have members with financial expertise should
retain a qualified paid or volunteer accounting
professional to establish whether financial systems and reports are organized and implemented
appropriately.
Having financial statements prepared and audited
in accordance with generally accepted accounting principles and auditing standards improves
the quality of the information. Each organization
must ensure that it has its annual financial statements audited or reviewed as required by law in
the states in which it operates or raises funds or as
required by government or private funders. When
an audit is not legally required, a financial review
offers a less expensive option that still provides the
board, regulators and the public with some assurance of the accuracy of the organizations financial
records. Many smaller organizations that have

22

opted to work with an independent accountant


have noted that the accountant provided invaluable guidance.
Every charitable organization that has its financial
statements independently audited, whether or
not it is legally required to do so, should consider
establishing an audit committee composed of
independent board members with appropriate
financial expertise. By reducing possible conflicts
of interest between outside auditors and the
organizations paid staff, an audit committee can
provide the board greater assurance that the audit
has been conducted appropriately. If state law
permits, the board may appoint non-voting, nonstaff advisors rather than board members to the
audit committee.
Organizations with small boards of directors or
limited organizational structures may not choose
to delegate the audit responsibility to a separate
committee. Audit committees may also be inappropriate for charitable organizations that are
organized as trusts rather than as corporations.

The board of a charitable organization must institute policies and procedures to ensure that
the organization (and, if applicable, its subsidiaries) manages and invests its funds responsibly,
in accordance with all legal requirements. The full board should review and approve the
organizations annual budget and should monitor actual performance against the budget.
Sound financial management is among the most
important responsibilities of the board of directors. The board should establish clear policies
to protect the organizations financial assets and
ensure that no one person bears the sole responsibility for receiving, depositing, and spending
its funds. Day-to-day accounting and financial

management should be the task of staff or, in


the case of organizations with no or one staff
member, designated volunteers who have the
necessary time and skills. The board is responsible for reviewing practices and reports to ensure
that those staff or volunteers are adhering to the
board-approved policies.

20 Principles for Good Governance and Ethical Practice

The organizations annual budget should reflect


the programs and activities the organization will
undertake in the coming year and the resources
it will need to raise or generate to support those
activities. Careful review of regular financial
reports showing both budgeted and actual expenditures and revenues will permit the board to
determine whether adjustments must be made in
spending to accommodate changes in revenues.
Financial reports should also reflect how the organization has adhered to any restrictions placed on
funds by donors or grant programs.
Prudent financial oversight requires that the board
look beyond monthly or annual financial reports
to consider how the organizations current financial performance compares with that of previous
years and how its financial future appears. If the

23

organizations net assets have been declining over a


period of years, or if future funding seems likely to
change significantly, the board may need to take
steps to achieve or maintain stability.
Whenever possible, an organization should generate
enough income to create cash reserves for its future.
When an organization has built sufficient reserves
to allow for investments, the board is responsible for
establishing policies that govern how the funds will
be invested and what portion of the returns, if any,
can be used for immediate operations or programs.
The boards of organizations with sizeable reserves
or endowments generally select one or more independent investment managers to handle the organizations investments. In those cases, the board or a
committee of the board should monitor the outside
investment manager(s) regularly.

A charitable organization should not provide loans (or the equivalent, such as loan guarantees,
purchasing or transferring ownership of a residence or office, or relieving a debt or lease
obligation) to directors, officers, or trustees.
The practice of providing loans to board members
and executives, while infrequent, has created both
real and perceived problems for public charities.
While there may be circumstances in which a
charitable organization finds it necessary to offer
loans to staff members, there is no justification
for making loans to board members. Federal laws
prohibit private foundations, supporting organizations and donor-advised funds from making loans
to substantial contributors, board members, organization managers and related parties. Many states

also forbid such loans or allow them only in very


limited circumstances.
When a charitable organization deems it necessary
to provide loans to an employeefor example, to
enable a new employee of a charity to purchase
a residence near the organizations officesthe
terms of such loans should be clearly understood
and approved by the board. Such loans then must
be reported on the organizations annual information returns (Forms 990 and 990-PF).

A Guide for Charities and Foundations 21

24

A charitable organization should spend a significant percentage of its annual budget on


programs that pursue its mission. The budget should also provide sufficient resources for
effective administration of the organization, and, if it solicits contributions, for appropriate
fundraising activities.
Charitable organizations have an obligation to
devote their resources to the charitable purposes
for which they were granted tax exemption, and
to spend donated funds on the programs and
activities for which the funds were contributed.
At the same time, the successful operation of any
business or organizationincluding the responsible pursuit of nearly any kind of charitable
purposerequires effective management and
administration. Administrative activities include
financial and investment management, personnel
services, recordkeeping, soliciting and managing contracts, legal services, and supporting the
governing body of the organization. Not only
do these elements ensure that the organization
complies with all legal requirements, but they also
help provide complete, accurate, and timely information to donors, the public, and government
regulators.
Charitable organizations rely on other supporting
services to carry out their missions. Most public
charities have fundraising operations to encourage
potential donors to contribute money, materials
and other assets and to ensure that donors receive
necessary reports about how their contributions
were used. Some public charities also rely on
membership development activities to solicit pro-

spective members, collect membership dues, and


ensure that members receive promised benefits.
Private foundations and some public charities
also have expenses associated with making grants
and contributions to other organizations and
individuals.
Qualified personnel are crucial for providing programs, recruiting and managing volunteers, raising
funds, and ensuring proper administration. The
costs of compensating personnel, including salaries
and benefits, must be allocated to the particular
functions they perform for the organization based
on appropriate records.
Some self-regulation systems and watchdog
organizations recommend that public charities
spend at least 65 percent of their total expenses
on program activities. This standard is reasonable
for most organizations, but there can be extenuating circumstances that require an organization
to devote more resources to administrative and
fundraising activities. The board should review
the budget and financial reports to determine
whether the organization is allocating its funds
appropriately.

22 Principles for Good Governance and Ethical Practice

25

A charitable organization should establish clear, written policies for paying or reimbursing
expenses incurred by anyone conducting business or traveling on behalf of the organization,
including the types of expenses that can be paid for or reimbursed and the documentation
required. Such policies should require that travel on behalf of the organization is to be
undertaken in a cost-effective manner.
A charitable organizations travel policies should
be unambiguous and easy to follow, and should
reflect the organizations principled judgment
about what it considers reasonable expenditures
for individuals who must travel to conduct business on its behalf. These policies should include
procedures for properly documenting expenses
incurred and their organizational purpose.
As a general practice, travel policies should ensure
that the business of the organization is carried out
in a cost-effective manner. Decisions on travel
expenditures should be based on how best to further the organizations charitable purposes, rather
than on the title or position of the person traveling. Charitable funds generally should not be used

26

for premium or first-class travel, but boards should


retain the flexibility to permit exceptions when
they are in the organizations best interest. Such
exceptions, if any, should be explicit, consistently
applied and transparent to board members and
others associated with the organization.
An organizations policies should reflect the
requirements and restrictions on travel expenditures imposed under current law. The detailed
guidance provided in IRS Publication 463: Travel,
Entertainment, Gift and Car Expenses should
serve as a guide for managers of charitable organizations in avoiding lavish, extravagant or excessive
expenditures.

A charitable organization should neither pay for nor reimburse travel expenditures for
spouses, dependents or others who are accompanying someone conducting business for the
organization unless they, too, are conducting such business.
If, in certain circumstances, an organization deems
it proper to cover expenses for a spouse, dependent, or other person accompanying someone on
business travel, the payment generally must, by
law, be treated as compensation to the individual

traveling on behalf of the organization. This principle need not apply to de minimis expenses such
as the cost of a meal at organization functions
where participants are invited to bring a guest.

A Guide for Charities and Foundations 23

Responsible Fundraising
27

Solicitation materials and other communications addressed to donors and the public must
clearly identify the organization and be accurate and truthful.
Charitable solicitationswhether in print, via
the Internet, over the phone, or in personare
often the only contact a donor has with a charitable organization. Clear and accurate solicitation
materials help potential contributors to contact
the organization and obtain information necessary
to distinguish an organization with a solid history
of service to the community from one that may
claim a similar name or purpose, but whose fundraising appeal is misleading.
A donor has the right to know the name of anyone
soliciting contributions, the name and location of
the organization that will receive the contribution,
a clear description of its activities, the intended
use of the funds to be raised, a contact for obtaining additional information, and whether the
individual requesting the contribution is acting
as a volunteer, employee of the organization, or
hired solicitor. (A Donor Bill of Rights, endorsed
by many organizations, is available at

28

www.nonprofitpanel.org.) Descriptions of
program activities and the financial condition of
the organization must be current and accurate,
and any references to past activities or events
should be dated appropriately.
If an organization is not eligible to receive taxdeductible contributions, it must disclose this
limitation at the time of solicitation. Similarly, a
charitable organization that the IRS has recognized as eligible to receive tax-deductible contributions should clearly indicate in its solicitations
how donors may obtain proof of that status.
The charity may post a copy of its IRS letter of
determination on its website or offer to provide a
copy of the letter to donors who request it. If the
solicitation promises any goods or services to the
donor in exchange for contributions, the materials should also clearly indicate the portion of the
contribution (that is, the value of any goods or
services provided) that is not tax-deductible.

Contributions must be used for purposes consistent with the donors intent, whether as
described in the relevant solicitation materials or as specifically directed by the donor.
When a donor responds to a charitable solicitation
with a contribution, he or she has a right to expect
that the funds will be used as promised. Solicitations should therefore indicate whether the funds
they generate will be used to further the general
programs and operations of the organization or to
support specific programs or types of programs. A
donor may also indicate through a letter, a written
note on the solicitation, or a personal conversation with the solicitor or another official of the
charitable organization how he or she expects the
contribution to be used.
In some cases, an organization may not receive
sufficient contributions to proceed with a given
project or it may receive more donations than it

needs to carry out that project. If the organization


is unable or unwilling to use the contribution as
stated in its appeal or in the donors communication, it has an obligation to contact the donor and
request permission to apply the gift to another
purpose or offer to return the gift. Charitable
organizations should strive to make clear in materials that solicit contributions for a specific program how they will handle such circumstances,
A charitable organization should carefully review
the terms of any contract or grant agreement
before accepting a donation. If the organization
will be unable or unwilling to comply with any of
the terms requested by a donor, it should negotiate any necessary changes prior to concluding the

24 Principles for Good Governance and Ethical Practice

transaction. Particularly in the case of substantial


contributions, the recipient should develop an
agreement that specifies any rights it may have
to modify the terms of the gift if circumstances
warrant. Some charitable organizations include
provisions in their governing documents or board

29

30

resolutions indicating that the organization retains


variance powers, the right to modify conditions on the use of assets. Such powers should be
clearly communicated to donors through a written
agreement.

A charitable organization must provide donors with specific acknowledgments of charitable


contributions, in accordance with IRS requirements, as well as information to facilitate the
donors compliance with tax law requirements.
Acknowledging donors contributions is important
not only because of IRS requirements, it also helps
in building donors confidence in and support
for the activities they help to fund. Organizations
should establish procedures for acknowledging
contributions in a timely manner and for providing appropriate receipts for cash contributions
if requested. Regular updates to donors on the
activities they support is another way to build
trust and loyalty, as is providing ways for contributors to find more information on their ownsay,
through a website, print publications or visits to
the organizations office.

fair market value, although cost may be an important factor. For example, a hotel may donate the
food served at a banquet, thus imposing zero cost
on the charitable organization. But the fair market value of a donors meal at that banquet would
not be zero; it would be the price he or she would
have to pay for a similar meal at that hotel. The
charitable organization does not have to include
information on fair market value in a donor
acknowledgement if that value is not more than
2 percent of the contribution or $89, whichever
is less. (These are 2007 amounts; the IRS changes
them periodically.)

If the organization has provided goods or services


to the donor in exchange for or recognition of the
contribution, an acknowledgement must include
a good-faith estimate of the fair market value of
those goods or servicesthat is, the amount the
donor would have to pay to purchase those goods
or services independently. The cost of the item to
the charitable organization does not determine its

It is generally unwise, and may pose a conflict of


interest, for a charitable organization to appraise
the value of gifts of property from taxpayers seeking income tax deductions for such contributions.
Organizations should, however, alert donors
to IRS rules for substantiating such claims and
encourage them to seek appropriate tax or legal
counsel when making significant non-cash gifts.

A charitable organization should adopt clear policies, based on its specific exempt purpose,
to determine whether accepting a gift would compromise its ethics, financial circumstances,
program focus or other interests.
Some charitable contributions have the potential
to create significant problems for an organization or a donor. Knowingly or not, contributors
may ask a charity to disburse funds for illegal or
unethical purposes, and other gifts may subject
the organization to liability under environmental

protection laws or other rules. Some types of corporate sponsorships or interests in corporate stock
or assets may result in unrelated business income
for a charitable organization. Donors may also face
adverse tax consequences if a charity is unable to
use a gift of property in fulfilling its mission and

A Guide for Charities and Foundations 25

must instead sell or otherwise dispose of the


property soon after the donation is received.
A gift-acceptance policy provides some protection
for the board and staff, as well as for potential
donors, by outlining the rules and procedures by
which an organization will evaluate whether it
can accept a contribution even before an offer is
actually made. The policy should make clear that
the organization generally will not accept any
non-cash gifts that are counter to or outside the

31

scope of its mission and purpose, unless the item


is intended for resale or would otherwise produce
needed revenue for the organization. It should list
any funding sources, types of contributions, or
conditions that would prevent the organization
from accepting a gift. The organization should
also consider establishing rules and procedures
for determining whether a gift is acceptable and
should identify circumstances under which a
review by legal counsel or other experts would be
required before accepting a gift.

A charitable organization should provide appropriate training and supervision of the people
soliciting funds on its behalf to ensure that they understand their responsibilities and applicable
federal, state and local laws, and do not employ techniques that are coercive, intimidating, or
intended to harass potential donors.
A charitable organization may be legally responsible when those who solicit on its behalf engage
in illegal or fraudulent practices. Yet even beyond
ensuring that fundraising practices are lawful
and honest, a charitable organization has many
reasons to provide careful training and supervision to those who solicit donations on its behalf.
The most obvious reason is that they are often a
potential donors first, and sometimes only, direct
contact with the organization. The organization
should therefore ensure that its fundraisers are
respectful of a donors concerns and do not use
coercive or abusive language or strategies to secure
contributions, misuse personal information about
potential donors, pursue personal relationships
that are subject to misinterpretation by potential donors, or mislead potential donors in other
ways. All those who solicit contributions on the
organizations behalf, including volunteers, should
be provided with clear materials and instructions
on what information to provide to prospective
donors, including the organizations name and
address, how the donor can learn more about the
organization, the purposes for which donations
will be used, whether all or part of the donation

may be tax-deductible, and who the donor can


contact for further information.
If a charitable organization decides to use an outside professional fundraising firm or consultant,
it should have a clear contractas required by
law and guided by good practicethat outlines
the responsibilities of the organization receiving the funds and of the firm or consultant. The
fundraiser must agree to abide by any registration
and reporting requirements of the jurisdictions
in which fundraising will be conducted, as well
as federal restrictions on telephone, email, or fax
solicitations. The charitable organization should
verify that the outside solicitor is registered as
required in any state in which the solicitor will be
seeking contributions.
In general, those soliciting funds on behalf of
charities should refrain from giving specific legal,
financial and tax advice to individual donors.
Rather, when such questions arise, fundraisers
should encourage donors to consult their own
legal counsel or other professional advisors before
finalizing a contribution.

26 Principles for Good Governance and Ethical Practice

32

A charitable organization should not compensate internal or external fundraisers based on a


commission or a percentage of the amount raised.
Compensation for fundraising activities should
reflect the skill, effort, and time expended by
the individual or firm on behalf of the charitable
organization. Many professional associations of
fundraisers prohibit their members from accepting
payment for fundraising activities based on a percentage of the amount of charitable income raised
or expected to be raised. Basing compensation on
a percentage of the money raised can encourage
fundraisers to put their own interests ahead of
those of the organization or the donor and may
lead to inappropriate techniques that jeopardize
the organizations values and reputation and the
donors trust in the organization. Percentagebased compensation may also lead to payments

33

that could be regarded by legal authorities or perceived by the public as excessive compensation
compared to the actual work conducted. Percentage-based compensation may also be skewed by
unexpected or unsolicited gifts received by the
charitable organization through no effort of the
fundraiser.
A similar logic applies to employees. Some charitable organizations choose to provide bonuses to
employees for exceptional work in fundraising,
administrative, or program activities. If so, the
criteria for such bonuses should be clearly based
on the quality of the work performed, rather than
on a percentage of the funds raised.

A charitable organization should respect the privacy of individual donors and, except where
disclosure is required by law, should not sell or otherwise make available the names and
contact information of its donors without providing them an opportunity at least once a year
to opt out of the use of their names.
Preserving the trust and support of donors
requires that donor information be handled with
respect and confidentiality to the maximum extent
permitted by law. Charitable organizations should
disclose to donors whether and how their names
may be used, and provide all donors, at the time
a contribution is made, an easy way to indicate
that they do not wish their names or contact
information to be shared outside the organization. In all solicitation and other promotional
materials, organizations should also provide a
means, such as a check-off box or other opt-out
procedure, for donors and others who receive
such materials to request that their names be
deleted from similar mailings, faxes or electronic
communications in the future. The organization
should immediately remove a donors name from

any lists upon request and should ensure that all


donors at least once a year are provided information about how they may request that their names
and contact information not be shared outside the
organization.
Organizations that gather personal information
from donors and other visitors to their websites
should have a privacy policy, easily accessible
from those websites, that informs visitors to the
site what information, if any, is being collected
about them, how the information will be used,
how to inform the organization if the visitor does
not wish personal information shared outside the
organization, and what security measures the charity has in place to protect personal information.

A Guide for Charities and Foundations 27

Panel on the Nonprofit Sector Staff


Executive Director
Diana Aviv
Project Director
Patricia Read
Assistant Project Director
Jennifer Chandler Hauge

Development Staff
Sherry Rockey
Deborah Briggs
Administrative Support
Gina Catedrilla
Staci Morgan

Communications Staff
Patricia Nash Christel
Bill Wright
Additional support provided by
Jennifer Frias and Gudrun Hofmeister

Acknowledgements
The Panel thanks the many charities, private foundations, community foundations, corporate funders,
and individuals that have provided support for our work since its inception in 2004. A complete list of
funders is available on our website at www.nonprofitpanel.org.
Publication and dissemination of this report was made possible through the generous support of
The Ford Foundation, the W.K. Kellogg Foundation, and the Charles Stewart Mott Foundation.
We also extend our sincere appreciation to Celia Roady, Partner, Morgan, Lewis & Bockius, LLP, and
Marion Fremont-Smith, Senior Research Fellow, Hauser Center for Nonprofit Organizations, Kennedy
School of Government, Harvard University, for the countless hours they contributed in reviewing
documents that led to the publication of this volume.
Finally, we thank all of the organizations that provided comments on these principles and all of the
Panels work through our website, our town hall meetings, and other communications.

For Further Information


The reference edition of the Principles for Good Governance and Ethical Practice is available for
free download at www.nonprofitpanel.org. It provides legal background on each principle with detailed
footnotes, a glossary of terms, and additional information on self-regulation in the nonprofit community,
including the two studies commissioned by the Panel to inform this work.
Independent Sector, which provided leadership in convening and supporting the Panel
on the Nonprofit Sector, will continue to offer resources through its programs and website
(www.independentsector.org) to facilitate putting these principles into practice.

28 Principles for Good Governance and Ethical Practice

Advisory Committee on Self-Regulation


of the Charitable Sector
Co-chair
Joel L. Fleishman, Director, Samuel and Ronnie
Heyman Center for Ethics, Public Policy and
the Professions, Terry Sanford Institute of Public
Policy, Duke University, Durham, NC
Rebecca W. Rimel, President & Chief Executive
Officer, Pew Charitable Trusts, Philadelphia, PA

Members
Stephen M. Ahnen, Senior Vice President,
American Hospital Association, Washington,
DC
Willard Boyd, Professor of Law and President
Emeritus, College of Law, University of Iowa,
Iowa City, IA
J. Todd Chasteen, Vice President of
Administration, Human Resources and General
Counsel, Samaritans Purse, Boone, NC
Harvey Dale, Director, National Center on
Philanthropy & the Law, and University
Professor of Philanthropy and Law, New York
University School of Law, New York, NY
Charles M. Elson, Director, John L. Weinberg
Center for Corporate Governance, University of
Delaware, Newark, DE
Virginia Esposito, President, The National Center
for Family Philanthropy, Washington, DC
Marion R. Fremont-Smith, Senior Research
Fellow, Hauser Center for Nonprofit
Organizations, Kennedy School of Government,
Harvard University, Cambridge, MA
Janne Gallagher, Vice President and General
Counsel, Council on Foundations, Washington,
DC
Merrill Gappmayer, Chairman of the Board,
Intermountain Health Care, Salt Lake City, UT
Joyce Godwin, Chair, Board Governance
Committee, Presbyterian Health Care Services,
Albuquerque, NM
Donald Haider, Professor, Management and
Strategy, Kellogg School of Management,
Northwestern University, Evanston, IL
Scott Harshbarger, Senior Counsel, Proskauer
Rose LLP , Boston, MA
Sister Carol Keehan, President and CEO, Catholic
Health Association of the United States,

Washington, DC
Richard Klarberg, President and CEO, Council
on Accreditation, New York, NY
Colin Lacon, President and CEO, Northern
California Grantmakers, San Francisco, CA
Carol Larson, President and CEO, David and
Lucile Packard Foundation, Los Altos, CA
Richard Legon, President, Association of
Governing Boards of Universities and Colleges,
Washington, DC
Jennifer Leonard, President and Executive
Director, Rochester Area Community
Foundation, Rochester, NY
William L. Minnix, Jr., President and Chief
Executive Officer, American Association of
Homes and Services for the Aging, Washington,
DC
David Ormstedt, Counsel, Wiggin and Dana LLP,
Hartford, CT
Michael Piraino, Chief Executive Officer, National
CASA, Seattle, WA
Mark Sidel, Professor of Law, University of Iowa,
Iowa City, IA
Bruce Sievers, Visiting Scholar and Lecturer,
Stanford University, Stanford, CA
Rev. Larry Snyder, President, Catholic Charities
USA, Alexandria, VA
Sterling Speirn, President and CEO, W.K. Kellogg
Foundation, Battle Creek, MI
Eugene R. Tempel, Executive Director, Center
on Philanthropy at Indiana University,
Indianapolis, IN
David Ward, President, American Council on
Education , Washington, DC
David L. Warren, President, National Association
of Independent Colleges and Universities,
Washington, DC
Michael D. Weekes, President and CEO,
Massachusetts Council of Human Service
Providers, Boston, MA
Myrl Weinberg, President, National Health
Council, Washington, DC
Rand Wentworth, President, Land Trust Alliance,
Washington, DC

1200 Eighteenth Street, NW


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Washington, DC 20036
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202-467-6100
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