The Internal Revenue Service cast its attention on the governing boards of tax-exempt organizations, distributing guidelines earlier this month that contained no real surprises but nevertheless confirmed the notion that not-for-profit boards are going to be held fully accountable for their organizations’ transparency and ethics.
The recommendations on “good governance practices” are meant to be strictly voluntary, but they also carry some implicit cautionary advice: Governing boards that tolerate secrecy and neglect “are more likely to be used to advance an impermissible private interest,” the IRS said.
Not-for-profit hospitals should not be lulled into thinking the guidelines are insignificant just because the suggested practices are not breaking any new ground, said Michael Peregrine, a partner at McDermott Will & Emery in Chicago specializing in governance and tax issues. “Clearly it is a window into the IRS thinking,” he said.
The guidelines, which seem to have been selectively distributed up until now, arrive at a time when tax-exempt organizations, and in particular hospitals, have come under the intense scrutiny of Congress, plaintiffs’ attorneys and the general public.
“The most important thing about the guidelines is not the content, it’s that the IRS felt the need to issue them,” said Thomas Ealey, associate professor of business administration at Alma (Mich.) College. “It’s something that has been bearing for a long time. Part of it has to do with the changing nature of not-for-profit organizations.” A generation ago, Ealey noted, not-for-profits were for the most part community or religion-based organizations, but today many are big businesses and part of billion-dollar health systems.
Distributed earlier this month at meetings in Washington, the guidelines were described by the IRS as a “preliminary draft,” according to Peregrine. Charities will probably at some point have an opportunity to comment on them, Peregrine said, but it was not clear what the timeline was for their completion. An IRS spokesman did not respond to several requests for an interview.
As drafted, the guidelines stress that governing boards should be composed of a diversified group of people who are actively engaged in a charity’s operations and finances. Successful boards, the IRS noted, include individuals who are knowledgeable and passionate about an organization’s programs and have expertise in accounting, finance, compensation and ethics. The IRS also cautioned that governing boards should not be too large or too small without specifying an exact number. Finally, the IRS suggested that organizations review and consider certain key areas to ensure that directors fully understand their roles and responsibilities: mission statement, code of ethics, due diligence, duty of loyalty, transparency, fundraising policy, financial audits, compensation practices and document retention policy.