Welcome to the Age of Corporate Governance

Gahanna Convention & Visitors BureauFebruary 10, 2012

“Directors are like parsley on fish— decorative but useless.”

Irving Olds, former board chair of U.S. Steel

“All over the world, people just like us serve on all sorts of boards. Some work incredibly well. Some leave members shell shocked or

numb with frustration.”

The Montessori Foundation “Serving on a Nonprofit Board”

The days of “sitting” on a nonprofit board are over.

“Many organizational leaders...come to the charitable sector motivated by the mission of the organization and may not always have the requisite governance and financial knowledge.”PANEL ON THE NONPROFIT SECTOR

10the top

thingsYour Nonprofit Board

Needs to Know (plus One Bonus Tip)

No. 1It’s a whole

new ballgame.

“You will be confronted with questions every day that test your morals. Think carefully, and for your sake, do the right thing, not the easy thing.”

Commencement Speaker St. Anselm College, 2002

“Ex-Tyco Chief Executive Kozlowski Sentenced to 8 to 25

Years”Headline / Bloomberg.com / 09.19.2005

Strong Fundamental Values

“We must demand of ourselves and of each other the highest standards of individual and corporate integrity. We safeguard company assets. We comply with all company policies and laws.”

Source: The Tyco Guide to Ethical Conduct

“We safeguard company assets.”

Regency mahogany bookcase, c. 1810, $105,000

George I walnut tallcase clock, $113,750

Custom queen bed skirt, $4,995

Ascherberg grand piano, c. 1895, $77,000

Chandelier, Painted Iron, c. 1930, $32,500

Pair of Italian armchairs, c. 1780, $64,278

Persian rug, 20 feet by 14 feet, $191,250

“In corporate America, crime pays. Handsomely. Grotesquely, even.”Arianna Huffington Pigs at the Trough

“”

We’ve got this idea that business means

anything goes.

R. Edward Freeman, Director Olsson Center for Applied Ethics

“It can be easy for non-profits to feel that the problems of the private sector don’t relate to them...”

–Stephen D. Potts, Fellows Chairman

Ethics Resource Center

“...that the ‘good people’ who populate the non-profit world are, by nature, more trustworthy.”

–Stephen D. Potts, Fellows Chairman Ethics Resource Center

“This is a dangerous assumption.”

Stephen D. Potts, Fellows Chairman Ethics Resource Center

“Anderson woman pleads

guilty to Humane Society theft”

Headline / The Herald Bulletin / 05.11.2009

“Her attorney...presented the court with several character letters from acquaintances and co-workers, and said Sullivan provides live-in care for her sick mother.” Justin SchneiderThe Herald Bulletin

“We haven’t had a serious review of the tax-exempt laws since 1969. The world has changed since then, and so has the charitable community.” –Senator Chuck Grassley,

Senate Committee on Finance

The New 990(version 2.0)

WAKE UPT h i s i s y o u r

c a l l

2. You have a duty of care.

Duty of Care

Board members have an obligation to make informed decisions and to act with care in their actions.

Commonly described as the “care that an ordinarily prudent person would exercise in a like position and under similar circumstances.”

New York’s Board of Regents replaced eighteen of Adelphi University’s 19 trustees for acting “blindly, recklessly and heedlessly” in determining the compensation of the university’s president.

The legally requires every board member to participate in meetings, provide

operational and policy oversight, and exercise a reasonable level

of care in making decisions on the organization’s behalf.

duty of careR

EMIN

DER

Where on the agenda does it

say I get to speak?

The board chair is the conductor responsible for making sure every performer contributes.

Board members who regularly miss meetings are neglecting

the duty of care.

Come prepared!

THREE: You have a duty

of loyalty.

DUTY OF LOYALTY

Directors are obligated to set aside personal concerns and make decisions that are in the

best interest of the organization.

Conflict of>> INTEREST

The Lucy Webb Hayes National Training School for Deaconesses

and Missionaries(Sibley Hospital)

BESTI n t e r e s t

full disclosure

4) You have a duty of obedience.

M E E T H MANHATTAN EYE, EAR & THROAT HOSPITAL

“mission drift”

DUTYOFOBEDIENCE

Directors must remain faithful to the purpose

of the organization, and operate within the stated

bounds of its mission.

DEADHANDCONTROL

“The duty of obedience is often overlooked...precisely because it is so basic as to

be almost invisible.”

Rob AtkinsonProfessor of Law, Florida State University

a.k.a. duty of compliance

Comply with:Articles of

incorporation

By-laws and other governing documents

Local, state, and federal laws

Registration and reporting requirements

IRS regulations

5. You have a duty to manage accounts.

Directors are responsible for ensuring the

organization’s financial

soundness.

“One of the primary duties of the board of directors of a charitable organization is to ensure that all financial matters of the organization are conducted legally, ethically, and in accordance with proper accounting rules.”

PANEL ON THE NONPROFIT SECTOR Report to Congress and the Nonprofit Sector on Governance, Transparency, and Accountability

Nonprofit boards need accounting geeks

who understand finances themselves and who can

make the numbers meaningful to

everyone else.

“Accountants aren’t just boring geeks

anymore. We’re hot!”Eva Rosenberg, author of Small Business Taxes Made Easy

You have one employee.

THE EXECUTIVE DIRECTOR IS THE SOLE EMPLOYEE OF THE BOARD OF DIRECTORS

only one

of meddling by self-proclaimed expertsB E W A R E

They think nothing of going around the executive

director and crossing the sacred line that separates

board members from employees.

3000 vs. 36

D & OINSURANCE

“Most of the lawsuits filed against nonprofit directors and officers involve some form of employment practices liability. Insurers are

becoming more keenly aware of this exposure and some have made subtle policy changes

that restrict coverage in these areas.”

Alliance of Nonprofits “Key Facts About Insurance and Legal Liability”

“…while acting in an official capacity…”

Volunteer Protection Act of 1997

“A volunteer of a nonprofit organization generally will be relieved of liability for harm if the volunteer was acting within the scope of his responsibilities and if he was properly licensed, certified, or

authorized for the activities.”

Volunteer Protection Act of 1997 Section 4. Limitation on Liability for Volunteers

Is it really worth the risk?

7. Although they’re not your employees, it’s your responsibility to ensure that staff members behave ethically.

“People are basically honest. And they’re even

more honest when you watch them.”

attributed to Alan “Ace” Greenberg The Bear Stearns Companies

“Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or

her employment, even if the employee acted directly contrary to company

policy and instructions.”

United States Sentencing Commission

Paula Desio, “An Overview of the Organizational Guidelines”

PROACTI V E

U.S. Federal Sentencing Guidelines

Seven guidelines used to determine whether

an organization shares responsibility for the

misbehavior of its employees; adherence can mitigate penalties

and fines.

Establish compliance standards and procedures for employees and other agents to follow that

are reasonably capable of reducing the prospect of

criminal conduct.

codeofconduct:POLICY COVERING THE ORGANIZATION’S STANCE ON—AND EACH EMPLOYEE’S RESPONSIBILITY FOR—WORKPLACE ISSUES, INCLUDING HARASSMENT, DIVERSITY, CONFLICTS OF INTEREST, VIOLENCE, CONFIDENTIALITY, AND EQUAL OPPORTUNITY.

“Was that wrong? Should I have not done that? I tell you I gotta plead ignorance on this thing because if

anyone had said anything to me at all when I first started here that that sort of

thing was frowned upon, you know, cause I’ve worked in a lot of offices and

I tell you people do that all the time.”

George Costanza Seinfeld, Episode 29

• Board Member Agreement

• Board Self-Assessment

• Code of Ethics

• Conflict of Interest

• Confidentiality

• Electronic Media

• Equal Employment Opportunity

• Executive Compensation

• Financial Audits

• Gift Acceptance

• Investments

• Lobbying and Political Activity

• Mission Statement

• Record Retention and Document Destruction

• Whistleblower Protection

• Workplace Environment

“One explanation that’s common in the field of business ethics, and this

may sound shocking, is that they just didn’t recognize the ethical

issue for what it really was.”

Thomas Dunfee, Wharton professor

Assign specific high-level individual(s) the responsibility

for overseeing the overall compliance with standards

and procedures.

C E OChief Ethics Officer

Exercise “due care” not to delegate discretionary authority

to individuals with a known propensity to engage in

illegal activities.

“I look forward to pursuing my new responsibilities and continuing to make a contribution as part of Rite Aid’s world-class team.”

-Chris Hall Senior VP-Real Estate and Planning

former Chief Financial Officer

57 percent of job

applicants believe that telling lies during a job interview is acceptable

SOURCE: SHL

“Marge, it takes two to lie.One to lie and one to listen.”

– Homer Simpson

Take steps to effectively communicate—to all levels

of employees—the rules and expectations, such as holding

mandatory training programs and distributing written materials.

“Ethics programs are associated with higher

perceptions that employees are held accountable for

ethics violations.”

Source: Ethics Resource Center

78% vs. 39%

Take reasonable steps to achieve compliance, including

the use of monitoring and auditing systems designed to detect criminal conduct and methods for employees to

report suspected wrongdoing without the fear of retaliation.

“More Companies Squeezing Employee

Internet Use”Headline / AccountingWEB.com / April 12, 2007

Call our ethics hotline:

1-800-VIO-LATE

help-line

Consistently enforce the standards through appropriate

disciplinary mechanisms, including punishing individuals

responsible for failing to detect an offense.

WorldCom created “a negative culture for compliance. It

emphasized making the numbers before all else.”

– Deborah House, VP and Deputy General Counsel for Corporate Compliance, Fannie Mae

Once an offense has been detected, take all

reasonable steps to respond appropriately and prevent further similar offenses.

Fool me once, shame on you. Fool me twice, shame on me.“ ”

why bother?

THE softer SIDE OF SEARS

“This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high

level personnel in the actual offense conduct.”

Paula Desio, “An Overview of the Organizational Guidelines”

8. Although they’re not your employees, it’s your responsibility to ensure that staff members are treated fairly.

fairlaborpractices

Fair Labor Standards Act of 1938 (FLSA)

Stipulates minimum requirements for compensation issues such as wages, overtime, and equal pay, and specifies

those employee classes exempted from its provisions.

“In fiscal year 2008, more than 197,000 employees received a total of $140.2

million in minimum wage and overtime back wages as a result of Fair Labor

Standards Act (FLSA) violations.”

U.S. Department of Labor2008 Statistics Fact Sheet

Non-exempt employees are prohibited from working more than 40 hours a week unless they are paid time and a half of their hourly rate. Example: An administrative assistant attends a board meeting one night to take minutes and the hours put the assistant over the 40-hour limitation. Did you pay the assistant overtime?Example: A bookkeeper attends your social fundraising event on Saturday evening to help count money. Is it overtime?

Are your employees “suffering” overtime?

“New lawsuit claims back pay for some

part-time employees” Headline / FederalTimes.com / 04.17.2007

Donning, Doffing, Walking, & Waiting, L.P.A.Serious lawsuits only, please.

FMLA

“Termination of employees seeking

FMLA leave continues to be the primary reason

that employees filed a complaint.”

U.S. Department of Labor 2008 Statistics Fact Sheet

9. The watchdogs are watching.<fundraising

NEWexpectationsin fundraising

privacy

Ask your donors if you can publicly

recognize their gifts or if they prefer to

remain anonymous.

Organizations should establish policies that govern the acceptance and

disposition of charitable

GIFTS

RESTRICTED vs.UNRESTRICTED

“Potential donors seek more information than ever before when determining whether to respond to a

charitable appeal.”– Art Taylor, BBB Wise Giving Alliance

Spend at least 65 percent of total expenses on program activities.

Spend no more than 35 percent of related contributions on fundraising.

Avoid accumulating funds that could be used for current program activities.

FLATRATE(Not commissioned.)

10. SOx is coming.

Sarbanes-Oxley Act of 2002 Public Company Accounting Reform and Investor Protection Act

CORPORATEGOVERNANCE

Requirement of boards and auditors to oversee, direct, and

report the organization’s practices on behalf of its shareholders.

“BoardSource

WHILE NEARLY ALL OF THE PROVISIONS OF THE ACT APPLY ONLY TO PUBLICLY TRADED CORPORATIONS, THE PASSAGE OF THE BILL SERVED AS A WAKE-UP CALL TO THE ENTIRE NONPROFIT COMMUNITY.”

AAudit-related functions should be performed only by independent,

financially literate directors.

in·de·pend·entAdjective. Free from the authority,

control, domination, or influence of somebody or something else.

“All nonprofit organizations that conduct outside audits, particularly medium to large organizations, should consider forming an audit committee and should separate the audit committee from the finance

committee.” –BoardSource, “The Sarbanes-Oxley Act and

Implications for Nonprofit Organizations”

financial EXPERT

IIndependent auditors must be rotated and may

not provide consulting services unrelated to the

organization’s audit.

Changing auditors every five years ensures fresh scrutiny. If that’s not practical, an option is

to ask the auditing firm to assign a different reviewing partner

every five years.

“Nonprofit organizations would be well served to adopt the Sarbanes-Oxley rule of preventing auditing firms from providing non-auditing services.”

BoardSource

exceptions:AUDITING FIRMS OFTEN PROVIDE TAX SERVICES AND PREPARE FORM 990 FOR THEIR NONPROFIT CLIENTS. SUCH ARRANGEMENTS MAY ACTUALLY REDUCE A NONPROFIT’S EXPENSES.

MManagement’s compensation should

be determined based on achievement of objective,

predetermined goals.

“Senators critical of salary expenses at Boys & Girls Clubs

of America” Headline / The Washington Post / 03.13.2010

Without specific, measurable, and well-communicated grading criteria, outsiders will assume the worst about how evaluation decisions are determined. W

AR

NIN

G

Could you defend it?

QUESTION:

DDevelop procedures for handling confidential

and anonymous complaints.

“Employees who learned about improper corporate adjustments appear

to have feared senior management’s criticism or even the loss of

their jobs. It was common for employees to be denigrated in

public about their work.”Source: Report of Investigation by the Special Investigative

Committee of the Board of Directors of WorldCom

SAFETY FIRST

Organizations must focus on identifying and

removing problems, not on shooting the messenger.

MMonitor, justify, and carefully administer

intentional document destruction.

I said, “Ship the documents to the feds.”

She heard, “Rip the documents to shreds.”

LLoans to directors and executive officers are

prohibited.

At best, insider loans raise conflict-of-interest questions. At worst, they could qualify as

illegal executive compensation.

avoid groupthink!

bonus tip:

A demonstrated tendency for a group to stay together and remain united in the pursuit of its goals and objectives.

C O H E S I O N

Good Cohesion

results in higher individual effort

More personal job satisfaction

Higher team tolerance for disruptions

Less turnover

Greater adherence to group norms

Cohesion can also have negative effects on group performance. And when it’s bad, it’s really, really bad.

“Because people value their membership in cohesive groups, they are willing to

adjust their behavior to group standards.”

SUSAN CAROL LOSH, Ph.D. FLORIDA STATE UNIVERSITY

GROUPTHINK occurs when the pressure to

conform within a group interferes with the group’s

decision making ability.

A B CExhibit 1 Exhibit 2

Solomon Asch

Subjects went along with the clearly erroneous majority 33 percent of the time

74 percent conformed to the majority at least once

28 percent conformed more than half the time

“The tendency to conformity in our society is so strong that reasonably intelligent and well-meaning young people are willing to call

white black.”

Solomon Asch 1951

consensusgroup

Groupthink stops members from suggesting ideas that might deviate from the collective opinion, causing a deceptive appearance of

when, in fact, only one approach is considered.

10the top

thingsYour Nonprofit Board

Needs to Know (plus One Bonus Tip)

Welcome to the Age of Corporate Governance

Gahanna Convention & Visitors BureauFebruary 10, 2012