As mentioned in Part 1, the IRS is now focusing a spotlight on the role any given board assumes with respect to self-monitoring, accountability, and ethical conduct. This new initiative, dubbed “regulation by disclosure” in Minutes of the Nonprofit Governance Subcommittee of the American Bar Association, August 10, 2008, p. 5., is reflected in the addition of an entire section to the Form 990 focusing exclusively on governance policies and procedures. The 28 questions cover issues ranging from director independence to whistle-blower and joint venture policies, and narrative explanations are required for a number of the responses.
Further, whether or not additional legislation is enacted that would effectively mandate the establishment of governance committees, nonprofit community customs and practices are changing. That is, more and more nonprofits are embracing a committee-based governance oversight function.
Given this focus on board policies and conduct, it seemed natural to extend the responsibilities of existing board nominating committees to include oversight of regulatory compliance. The combined responsibilities suggested that the appropriate nomenclature for such a body would be the “governance committee.”
Some boards may presently have a nominating committee, or have had one in the past. This committee should be considered the ancestor of the governance committee. ‘Nominating committees’ were primarily responsible for recruiting new members to the board. Over time, boards have discovered that such a task is more important […] than they expected. Further, effective boards realized that a committee should take the new members it has recruited and educate them about the work of the board, both in orientation sessions and throughout their tenure as board members. Discovering that it is not just new members who benefit from education about good governance – that everyone on the board finds this useful – good boards further developed a job description of this particular committee. Many boards called this new expanded nominating committee the ‘board development committee.’ The message of its expanded role was translated, but the name of the committee still remained somewhat confusing. It became too difficult to differentiate between the board development committee and the development committee, which is responsible for involving the full board in fundraising. Thus, the original nominating committee has morphed into the ‘governance committee’ which provides general oversight for the health, well-being, and perpetuation of the board.
Berit M. Lakey, Outi Flynn, and Sandra R. Hughes, governance committee: Book One of the BoardSource Committee Series (Washington, DC: BoardSource, 2004), 2.
In the context of this article, what has been defined as a “governance committee” is sometimes also referred to as a “Committee on Trustees” or “Committee on Directors.” In some very rare cases, boards have elected to split the board director recruitment, training, and assessment function from the regulatory and policy oversight function and to have two committees. In that case, the Committee on Trustees or Committee on Directors has taken on the board development function (i.e., the work of a traditional Nominating Committee). A separate governance committee takes on the oversight of statutory compliance on matters such as conflict of interest, bylaws, IRC 4958, etc.
Setting aside the question of whether or not creation of a governance committee, per se, is a best practice, there is a clear trend toward, if not an outright consensus in, the necessity that governing boards exercise certain governance oversight responsibilities that have increasingly crystallized since 2003. This following list of responsibilities is derived from the general concepts delineated in The Source: Twelve Principles of Governance That Power Exceptional Boards, Washington, DC: BoardSource 2005. “The Source” incorporates observations, academic knowledge and the proven practice of exceptional boards into a comprehensive reference on governance to guide nonprofits in reaching exceptional levels of performance. They are:
- Developing conflict of interest, ethics, whistle-blower, document preservation and confidentiality policies, and procedures for monitoring each;
- Reviewing all disclosures of conflicts and dualities of interest on an ongoing and annual basis;
- Making recommendations to the board when special action is required related to the above, especially when violations occur;
- Reviewing all documentation relating to IRC 4958 transactions, and overseeing compliance with activities necessary to availing the board of “safe harbor” provisions;
- Annually reviewing corporate bylaws and governance-related procedural policies for sufficiency and consistency, and developing recommendations for modifications as needed;
- Review of the effectiveness of structural relationships with affiliated entities wth respect to independent and shared responsibilities, and the use of reserved powers;
- Review of all due diligence reports affecting or evaluating board effectiveness; and
- Handling of other governance-related projects as assigned by the board.
Who Selects the Members of the Governance Committee?
The touchstone legal principle of corporate governance, including nonprofit corporate governance, is that “the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board.” Cal. Corp. Code §5210. The board, however, may “delegate the management of the activities of the corporation to any person or persons, management company, or committee however composed, provided that the activities and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the board.” Cal. Corp. Code §5210.
More specifically, the board may create committees, either via the bylaws or board resolutions. Cal. Corp. Code §5212(a). In creating a committee, it may, if it so desires, choose to delegate the power to exercise the authority of the board – making it a so-called “board committee.” Cal. Corp. Code §5212(a). If it does so, certain limits on what powers can be delegated are imposed. Cal. Corp. Code §5212(a)(1)-(8). For example, a committee is prohibited from filling vacancies on any committee Cal. Corp. Code §5212(a)(2); fixing compensation of the directors for serving on any committee Cal. Corp. Code §5212(a)(3); amending or repealing the bylaws or adopting new bylaws Cal. Corp. Code §5212(a)(4); and the appointment of committees of the board or the members thereof. Cal. Corp. Code §5212(a)(6). If the board does not delegate the power to exercise the authority of the board to the governance committee—making it a so-called advisory committee—these restrictions do not apply.
From a policy and legal perspective, governance boards, at a minimum, are advised to expressly undertake certain governance oversight responsibilities itemized above. The recommended method of doing so is the establishment of a standing governance committee, either as a stand-alone committee or, as is more common, in combination with the membership committee, for the following reasons:
- A governance committee focuses attention on a sustained basis on governance policies, practices and procedures. This can be particularly important at a time when governance practices are evolving, as they have been in the last few years;
- Its creation would be consistent with a clear trend in the nonprofit sector and possibly with best practices; and
- Its creation would demonstrate and underscore, at a time of increasing media and government scrutiny, the organization’s or institution’s continuing commitment to sound governance policies, practices and procedures.
Even so, establishment of a governance committee is not the only method available to an organization or institution. Rather than create a governance committee, it could divide up the specific governance oversight responsibilities and delegate them to other committees. This method, while minimally satisfying the Board legal obligation to ensure sound governance policies, practices and procedures, has drawbacks, in that:
- It could dilute the focus of other committees on their primary responsibilities;
- Governance issues would not receive the focused and sustained attention they deserve;
- It would be more difficult to achieve a consistency in governance policies, practices and procedures;
- It would make it more difficult for the board to monitor and evaluate the effectiveness governance oversight by the committees; and
- Compared with establishing a governance committee, it would be more difficult for the Foundation to demonstrate to the public and to regulators its commitment to sound governance policies, practices and procedures.
I hope the foregoing will provide useful guidance to boards as they considers how best to meet their governance responsibilities.