Program Summary
Foundation Accountability in Action: A Self-Assessment Workshop

Maine Philanthropy Center

February 7, 2008

Portland, Maine

Facilitator & Presenter: David Biemesderfer, President, DJB Consulting Services

Accountability Discussion
Accountable to Whom?
Push for Greater Accountability
Self-Assessment Tool
Information on Copies of Tool

Accountability Discussion

Biemesderfer facilitated a discussion with workshop participants about what accountability means to them. How do they define it? Why is it important? How does it affect their work? Their responses:

· I have an accountability to our foundation’s donor and an obligation to comply with all laws.

· We have an accountability to the sectors we serve.

· Although we are called a “private” foundation we receive tax benefits from the federal government and therefore we are accountable to the public.

· We are using public money and we have no right to keep it closely held.

· Our foundation funds advocacy, which increases scrutiny of our work and therefore heightens our need to ensure we are being fully accountable.

· Accountability requires a commitment to transparency.

· Our foundation engages in fundraising, which makes transparency even more critical.

· Accountability is about ensuring that we are fulfilling our mission and are making an impact with our work.

· We have an accountability to the grantmaking community, to engage in collaborations whenever possible to ensure that we leverage our financial resources and maximize our impact.

Accountable to Whom?

When talking about accountability, exactly who are foundations accountable to? Biemesderfer outlined several key groups:

Donors

Foundations are accountable to the donor who provides the original funds to the foundation to be used for the public’s benefit, and to the donor’s family members, who often have a strong interest in ensuring that the funds are used appropriately and in accordance with the donor’s original intent.

Beneficiaries

Funders should also consider themselves accountable to the people and organizations that benefit from their charitable funds, including the nonprofits they fund and the communities they serve. These beneficiaries often have a strong vested interest in ensuring that foundations are using their charitable funds responsibly.

Public Representatives

In addition, several governmental and legal entities serve to represent the public’s interest in holding grantmakers accountable to the public:

· IRS: The federal government’s grant of tax exemption gives it a stake in making sure funders comply with the requirements for maintaining tax-exempt status, with a key oversight measure being the 990/990-PF filings. IRS oversight is limited to ensuring compliance with the tax code, and sanctions are only those prescribed by the federal tax code, primarily penalty taxes.

· Congress can add further limitations or restrictions to the tax code if legislators believe that the current laws and regulations are not sufficient to hold foundations accountable.

· State Regulators (Attorneys General, etc.): Since foundations and charities are created under state laws, state charity regulators (primarily state Attorneys General) work to ensure the proper administration of charitable funds, and act to represent the public at large, which is the ultimate beneficiary of charitable funds. State regulators can take a broader role than the IRS in providing oversight of the charitable sector, and can look beyond just legal violations to examine governance issues, donor intent, charitable mission, etc. Attorneys General also have broader powers than the IRS to correct wrongdoing, including fines, removal of directors and even the dissolution of a charity.

· State Legislatures: Like Congress, state legislatures can add additional limitations or restrictions to how charitable funds are used or how foundations operate, if they believe that the philanthropic sector is not being sufficiently accountable to the public.

· Courts: Charitable funds are subject to the ultimate supervisory jurisdiction of the courts, which can interpret and clarify an Attorney General’s powers in absence of legislation. Most matters are settled out of court.

Biemesderfer noted that the media can also play an important unofficial role in foundation accountability. Many media reporters have become more skilled in reviewing 990-PF forms, and there are many examples where media stories of foundation misconduct have prompted new calls by legislators for tougher oversight of foundations and to Attorney General investigations of foundations.

The Push for Greater Accountability

Why is accountability such a hot-button issue in philanthropy today? Biemesderfer observed that there are several key drivers behind the push for greater foundation accountability. A primary reason is the isolated but egregious misconduct of a few foundations that have received considerable media coverage in recent years, as exemplified by the foundations highlighted in the Boston Globe series of a few years ago. Also, the tremendous growth of philanthropy in recent years—most notably the giving of Bill and Melinda Gates and Warren Buffett—has made foundations a bigger target for scrutiny.

Philanthropy has also been affected by a few high-profile examples of recent accountability lapses in the broader nonprofit sector, such as at the American Red Cross and the Smithsonian, because the public does not see the distinctions between foundations and charities (even nontraditional nonprofits like the Red Cross and Smithsonian). The corporate scandals at companies like Enron, Tyco and WorldCom, although not directly involving the foundation field, have also made the public more aware of accountability issues in general, and there are many examples of calls for nonprofit accountability, at both the state and federal level, where legislators have cited the corporate accountability scandals.

Biemesderfer cited numerous examples of how the push for greater foundation accountability is playing out today, including:

Congress

Congress has become much more active in providing oversight of the charitable sector in recent years. A few examples:

· Sarbanes-Oxley Act: Although this act was focused on financial controls and financial management for corporations, not the charitable sector, it raised the visibility of accountability issues in D.C. and spurred calls for a nonprofit version of the act, which has been happening at the state level. The act also increased the legal liability risk for nonprofit organizations that do not have record retention and whistleblower protection policies.

· Pension Protection Act: The 2006 Pension Protection Act included some of the most significant new federal laws affecting foundations in many years. Although many potentially harmful proposed provisions never made it into the final language, we can expect to see more bills addressing various foundation accountability issues.

· 990/990-PF reform: In 2007, Senate Finance Committee Chair Max Baucus and Ranking Member Charles Grassley asked Treasury Secretary Henry Paulson to place a top priority on modernizing the 990 and 990-PF forms, and they called for foundations and charities to post their 990 forms on their websites.

IRS

The IRS has become much more involved in examining more detailed governance, management and reporting issues for foundations and charities in recent years. A few examples:

· Executive compensation: In 2007, the IRS released the results of a study of how foundations and charities report executive compensation on their 990 forms, and found significant reporting errors and problems.

· Good governance practices: In February 2007, the IRS posted a draft of good governance practices for charities, covering such issues as having a clearly articulated mission statement, having a code of ethics, due diligence by directors, transparency and audits.

· New Form 990: In 2008, the IRS released a revised Form 990 that includes a new section on governance, management and financial reporting. This section delves much deeper into an organization’s governance and management than the IRS has done in the past. For example, the revised 990 asks nonprofits if they have a whistleblower policy, a conflict of interest policy and a document retention policy; if they make their various financial and governance documents available on their website; if they have an audit committee, etc.

State Legislators & Regulators

The past few years have also seen a notable increase in oversight of the nonprofit sector at the state level, both by state legislatures and state charity regulators. A few examples:

· New audit requirements: On the heels of Sarbanes-Oxley, a number of states have passed new laws that impose new audit, reporting and registration requirements on nonprofits. Most notably, California’s Nonprofit Integrity Act of 2004 requires all nonprofit corporations with at least $2 million in revenues to conduct and file an independent audit, overseen by an audit committee. New laws were also passed in 2004 and 2005 to require audited financials from nonprofits in Connecticut, Maine, Massachusetts and New Hampshire.

· New governance requirements: In 2004, Hawaii passed a new law giving the Attorney General legal authority to remove directors or officers of charitable corporations who breach their duties. Iowa passed a new nonprofit corporation