Nonprofit Compensation and Governance in Spotlight

Increased scrutiny ratchets up demands on nonprofit board members

 

Since the earliest days of the nonprofit sector’s development, organizations have faced scrutiny. However, in recent years, several factors have caused the spotlight on nonprofits and their boards to shine more brightly. High-profile scandals and questionable business practices have prompted potential donors—both individuals and foundations—to routinely seek out information from industry watchdogs such as GuideStar, Charity Navigator and the Better Business Bureau before they write a check. The Internal Revenue Service is also looking more closely at nonprofits. In addition, the increased demands for services that nonprofits provide, and the consequent growth in the size of many providers, have raised the stakes on strategic decisions boards must make.

It’s no wonder, then, that demands on directors of large nonprofits and foundations also are increasing. Board members are criticized and sometimes held accountable if something goes wrong. For example, when the president and CEO of the Boys & Girls Club of America came under fire from certain U.S. senators last year for accepting a total compensation package of almost $1 million, critics were asking, “How was this decision reached? Where was the board?” Whether the criticism was justified or not, board members felt the heat. As a result, more boards than ever are doing self-assessments or hiring outside experts to review their policies and procedures.

Pressure on large nonprofits to rein in executive compensationhas prompted some organizations to form compensation committees to review and approve salaries and benefits for the organization’s CEO and other key employees. When faced with questions regarding compensation, boards that have taken these steps can be more confident that executives are being paid appropriately compared to similarly sized nonprofits. 

Fifteen or twenty years ago, few organizations thought of instituting conflict of interest, whistle-blowing or document retention policies. Now they are standard, particularly for larger nonprofits. In some cases, this is a result of a trickle-down effect in which business leaders who serve on corporate boards bring their expectations to their charitable activities. If their corporate boards have such policies, they believe nonprofits should as well.

In 2009, the Internal Revenue Service began demanding more information on its 990 forms. The IRS now requires that executives and directors report family and business relationships, encouraging even more organizations to introduce conflict of interest policies. According to BoardSource’s “Nonprofit Governance Index 2007,” 99% of nonprofit boards with budgets more than $10 million have such policies. Scandals involving embezzlement or other improper use of funds have also led nonprofits to adopt formal whistleblower policies, which protect employees who report suspected financial impropriety.

Another result of increased scrutiny of nonprofits can be changes in board composition. For example, if board members see executive compensation or real estate costs becoming issues for board deliberation, they are likely to look around the table to see whether anyone has expertise in these areas. If no one does, they often decide to target people with the needed expertise for immediate recruitment.

One of the key reasons to serve on a nonprofit board is to help ensure that the organization not only does things right, but does the right thing. Increased focus on board governance and transparency do just that.

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