Nonprofit Governance and the Role of the Board in ... · Document retention and destruction policy...

Nonprofit Governance andthe Role of the Board inFinancial Management

Nonprofit Financial Health Webinar Series

The Moody’s FoundationNational Center for Charitable Statistics at the Urban Institute

Indiana University Lilly Family School of Philanthropy

October 9, 2014

Webinar Housekeeping

Today’s WebinarPresenters• Thomas Pollak

Program Director, National Center for Charitable Statistics at the Urban Institute

• Una OsiliDirector of Research; Professor of Economics & Philanthropic StudiesIndiana University Lilly Family School of Philanthropy

• Dennis GephardtVice President and Senior Analyst, Moody’s

Overview

• The State of Nonprofit Governance

• Board Governance in Financial Management

• Governance and Nonprofit Credit Quality

• Questions and Discussion

Tom PollakNational Center for Charitable StatisticsCenter on Nonprofits and Philanthropy

The Urban Institute

Nonprofit Governance and the Role of the Boardin Financial Management

October 9, 2014


The State of Nonprofit Governance

Purpose of the Study

Goal: Examine governance policies and practices among operating public charities in the following ways:

1) 2010 Snapshot2) 2010 vs. 20053) Board and organizational characteristics

Governance policies & practices

Background

• Sarbanes-Oxley Act (2002) – Enron, Worldcom• Senate Finance Committee Hearings (2004)• Independent Sector Panel on the Nonprofit Sector (‘04-07)• Redesign of the IRS Form 990 with governance questions

(2007-2008) – “good governance -> tax compliance”• Form 990 used by IRS, state regulators, & public• Board roles:

– Duties of care and loyalty– Monitoring and strategy

Board Size, 2010

Source: IRS Statistics of Income Sample Files, 2010

2.9

11.5

40.6

32.7

12.3

0

5

10

15

20

25

30

35

40

45

Fewer than 3 members 3 ‐ 4 members 5 ‐ 10 members 11 ‐ 20 members 20 or more members

Board Independence

• No material financial benefits received, either directly or indirectly, from the organization

• IRS 4-part test• A substantial majority of the board of a public charity, usually meaning at

least two-thirds of the members, should be independent. independent members should not: (1) be compensated by the organization as employees or independent contractors; (2) have their compensation determined by individuals who are compensated by the organization; (3) receive, directly or indirectly, material financial benefits from the organization except as a member of the charitable class served by the organization; or (4) be related to anyone described above (as a spouse, sibling, parent or child), or reside with any person so described. - Independent Sector

Board Independence, 2010


14.5

2.6 0.7

82.2

0

10

20

30

40

50

60

70

80

90

Less than half One‐half to two‐thirds Two‐thirds to three‐quarters

Three‐quarters or more

Percen

t of O

rgan

izations

Percentage of independent board members

Governance Policies and Practices, 2010


61.8

42.448.6

62.5

45.7

63.5

79.1

0

10

20

30

40

50

60

70

80

90

100

Conflict of interestpolicy

Whistleblowerpolicy

Document retentionand destruction

policy

Compensationreview and approvalprocess for CEO

Compensationreview and approvalprocess for otherofficers or keyemployees

Financialstatements

compiled, reviewedor audited byindependentaccountant

Audit committee(orgs usingindependent

accountant only)

Percent o

f Organiza

tions

Changes in Governance Policies and Practices, 2005 to 2010

Source: 2005 Urban Institute National Survey of Nonprofit Governance; IRS Statistics of Income Sample Files, 2010

50.2 52.0

29.6

67.3

19.9

61.8

42.448.6

63.5

50.0

0

10

20

30

40

50

60

70

80

90

100

Conflict of interestpolicy

Whistleblower policy Document retentionand destruction policy

Audit Audit committee

Percen

t of O

rgan

izations

2005 2010

Board and Organizational Characteristics Associated with Good Governance Policies and Practices, 2010

Conflict of Interest Policy

Whistleblower Policy

Document Retention and Destruction

Policy

Compensation Process for

Chief Executives

Compensation Process for Other Key Employees

Have Independent Accountant

Compile, Review or Audit Financial Statements

Audit Committee

Organization Size + + + + + + +

Type of Organization

Arts ‐ ‐ ‐ ‐ ‐ ‐ ‐

Education ‐ ‐ ‐ + ‐

Environment + ‐ ‐ ‐ ‐ ‐ ‐

Health + + + + + + +

Human Services ‐ ‐ ‐ + ‐ +

International + + + +

Received Government Grants + + + + + + +

Board Size ‐ ‐ + ‐ +

Board Independence + + + + + + +

Age + + + + + + +


Governance Policies and Practices by Organization Size, 2010


Organization Size (Total Expenses)



Document Retention and Destruction

Policy

Compensation Process for Chief

Executive


Independent Accountant Compiles, Reviews or Audits Financial

Statements Audit

Committee

$250K or less 38.8% 18.9% 26.3% 33.3% 20.4% 39.9% 64.9%

$250K‐$500K 49.3% 29.3% 35.1% 49.3% 31.0% 51.4% 73.4%

$500K‐$1M 68.5% 43.3% 52.9% 62.8% 40.7% 68.3% 74.4%

$1M ‐ $5M 81.0% 61.4% 67.4% 76.0% 53.1% 85.5% 84.7%

$5M ‐ $10M 91.9% 78.4% 80.2% 86.6% 71.1% 93.3% 91.5%

$10M+ 97.4% 88.0% 88.1% 91.0% 77.5% 96.4% 94.2%

Governance Policies and Practices by Type of Organization, 2010





Document Retention

and Destruction

Policy


Chief Executive



Statements Audit

Committee

Arts 47.1% 30.6% 32.3% 53.3% 34.0% 56.8% 75.3%

Education 60.8% 41.7% 46.5% 62.2% 44.6% 62.5% 77.2%

Environment 63.4% 35.7% 41.5% 54.9% 43.1% 52.0% 76.7%

Health Care 79.6% 65.4% 69.9% 74.8% 58.2% 76.3% 87.6%

Human Services 60.1% 39.9% 47.1% 62.2% 44.7% 64.5% 77.6%

International 72.8% 51.2% 60.8% 75.4% 51.5% 59.3% 89.8%

Other 58.7% 36.1% 45.6% 55.9% 42.0% 55.9% 77.3%

Governance Policies and Practices by Size and Type of Organization

Source: IRS Statistics of Income Sample Files, 2010. “Small” = <$500,000 revenue “Medium” = $500K - $5M revenue “Large” = $5,000,000+ revenue




Document Retention

and Destruction

Policy


Chief Executive



Statements Audit

Committee

Arts 47.1% 30.6% 32.3% 53.3% 34.0% 56.8% 75.3%Small 34.6% 18.5% 19.4% 38.8% 19.4% 48.6% 64.2%Medium 64.8% 47.4% 50.3% 66.6% 43.0% 67.6% 87.4%Large 99.1% 84.0% 88.8% 97.8% 89.0% 99.4% 92.3%

Health Care 79.6% 65.4% 69.9% 74.8% 58.2% 76.3% 87.6%Small 59.8% 41.4% 46.7% 44.1% 30.3% 48.8% 75.4%Medium 81.8% 64.1% 72.7% 79.5% 53.2% 84.6% 86.9%Large 97.6% 91.5% 90.6% 90.0% 78.9% 95.3% 94.7%

ALL ORGS 61.8% 42.4% 48.6% 62.5% 45.7% 63.5% 79.1%

Governance Policies and Practices by Size and Type of Organization




Document Retention

and Destruction

Policy


Chief Executive



Statements Audit

CommitteeBoard Indep. Less than 2/3 39.6% 26.6% 32.6% 42.2% 37.6% 41.4% 64.4%

Small 28.6% 13.5% 21.9% 29.1% 22.4% 28.4% 51.1%Medium 48.6% 39.1% 40.8% 47.4% 41.4% 57.1% 67.0%Large 93.9% 86.9% 86.4% 85.0% 78.3% 91.4% 90.3%

Board Indep. 2/3 or More 68.5% 47.2% 53.5% 66.1% 47.1% 69.9% 81.5%

Small 50.0% 27.4% 33.7% 44.7% 27.4% 51.5% 72.6%Medium 80.1% 56.3% 64.8% 73.2% 49.0% 81.7% 82.7%Large 95.7% 84.2% 85.2% 90.0% 74.8% 95.9% 93.6%

ALL ORGS 61.8% 42.4% 48.6% 62.5% 45.7% 63.5% 79.1%Source: IRS Statistics of Income Sample Files, 2010. “Small” = <$500,000 revenue “Medium” = $500K - $5M revenue “Large” = $5,000,000+ revenue

Governance Policies and Practices of Those with Government Grants and Those Without Government Grants , 2010


70.9

51.457.2

69.8

48.8

75.5

84.1

56.3

36.843.3

56.8

43.1

56.1

75.0

0

10

20

30

40

50

60

70

80

90

100

Conflict of InterestPolicy

WhistleblowerPolicy

DocumentRetention and

Destruction Policy

CompensationProcess for Chief

Executive

CompensationProcess for OtherKey Employees

IndependentAccountant

Compiles, Reviewsor Audits Financial

Statements

Audit Committee(organizations

using anindependent

accountant only)

Percen

t of O

rgan

izations

Has Government Grants No Government Grants

Governance Policies and Practices by Board Independence, 2010


39.6

26.632.6

42.237.6

41.4

64.568.5

47.253.5

66.1

47.1

69.9

81.5

0

10

20

30

40

50

60

70

80

90

100

Conflict ofInterest Policy

WhistleblowerPolicy

DocumentRetention andDestruction

Policy

CompensationProcess for Chief

Executive

CompensationProcess OtherKey Employees

IndependentAudit

Audit Committee

Percen

t of O

rgan

izations

Less than 2/3 Independent At least 2/3 Independent

Conclusions

• Many public charities have good governance policies and practices in place.

• Size matters

• Correlation ≠ Causation

• Why are some organizations less likely to adopt these policies? Could there be unintended consequences?

• Impact of good governance practices on access to credit? Organizational strategy? Long-term financial health?

Una OsiliDirector of Research

Indiana University Lilly Family School of Philanthropy


October 9, 2014


Board Governance inFinancial Management

Purposes of the Study

• To investigate nonprofits’ financial literacy and explore how such knowledge informs their practices Survey the financial and economic literacy of nonprofit

managers and executives Examine role of board governance in nonprofit financial

decision-making. Promote discussion and research on financial literacy and

management in the nonprofit sector

Methodology• An online survey of U.S. nonprofits Organizations with an annual revenue between $100,000 and

$100 million• Study does NOT including higher educational institutions, hospitals,

and international nonprofits

Conducted in late 2010 Response rate: 15% Total sample: 526 Final sample in analysis: 514

• A focus group of regional and local nonprofits

Profile of Organizations Surveyed

22%

33%

19%

26%

Less than $100,000

$100,000-$499,999

$500,000-$999,999

$1 million or more

Total Charitable Donations Received in 2009

Health/ Human

Services66%

Civic/ Environment

14%

Arts/Culture11%

Education9%

By subsector

$100,000 -Less than $1

million32%

$1 million -Less than $5

million41%

$5 million -$100 million

27%

By revenue

Organizations Having An Audit Committee(Different than Finance Committee)

Have an audit

committee39%

Do NOT have an

audit committee

61%

27%

38%

57%

Less than $1 million $1 million to $4.99 million $5 million or more

Number of Members Serving on Audit Committee (Different than Finance Committee)

None4%

1 to 2 members

36%

3 to 4 members

46%

5 or more members

14%

Internal Members

None29%

1 to 2 members

41%

3 to 4 members

25%

5 or more members

5%

External Members

Organizations Providing Board Orientation Materials

37%

53%

64%

74%

89%

93%

97%

98%

Periodicals to keep abreast of sector trends

Acceptance policy for pro bono services from board members

Financial risk management procedures

Most recent Form 990

Audited financial statements

Ethics policies (e.g., conflict of interest, whistleblower)

Board member role and responsibilities

Organization briefing that covers mission, program and services

Organizations with Board Review of Internal Policies

79%

64%

64%

43%

43%

42%

34%

14%

13%

21%

20%

34%

38%

36%

47%

67%

Debt policy

Policy about accepting pro bono services from others

Policy about pro bono services acceptance from board members

Cash management policy

Gift acceptance policy

Investment policy

Records retention policy

Code of ethics policies (e.g., whistleblower, conflict of interest)

Reviewed in 2010 Reviewed in 2007-2009

Organizations with Board Review of Internal Policies, by Organizational Revenue

84%

68%

65%

59%

51%

50%

46%

24%

7%

17%

15%

22%

26%

29%

33%

55%

Debt policy



Investment policy





Less than $1 million Reviewed in 2010 Reviewed in 2007‐2009


78%

63%

61%

42%

39%

37%

28%

9%

16%

21%

21%

38%

42%

37%

52%

73%

Debt policy



Investment policy





$1 million to $4.99 million Reviewed in 2010 Reviewed in 2007‐2009


74%

64%

63%

43%

41%

30%

17%

10%

15%

24%

26%

38%

44%

54%

57%

75%

Debt policy






Investment policy


$5 million or more Reviewed in 2010 Reviewed in 2007‐2009

Frequency of Board Preparing and Reviewing Documents

88%

68%

63%

59%

23%

22%

8%

10%

34%

25%

28%

47%

2%

8%

1%

4%

4%

4%

2%

14%

2%

11%

45%

26%

Analysis of income andexpenses against

budget

A cash forecast that isrevised and updated

A comprehensive annualoperating budget

A target level ofrevenue and support

A capital projects budget

A multi‐year strategicand financial plan

Prepared, reviewed quarterly or more often Prepared, reviewed annually

Prepared, not reviewed Not prepared

Board Involvement in Financial Management, by Function

66%

53%

43%

38%

30%

27%

27%

27%

26%

Financial accountability

Strategic planning

Internal audit and riskmanagement

Investment management

Budget development

Fundraising

Debt restructuring

Maximization andprotection of cash flows

Financial scenario planning

Very Active

24%

16%

13%

8%

6%

6%

5%

3%

2%

Fundraising

Debt restructuring

Budget development

Investmentmanagement

Financial accountability

Strategic planning

Maximization andprotection of cash

flows

Financial scenarioplanning

Internal audit and riskmanagement

Not At All Active

Nonprofit Financial Governance and Organizational Performance Suggested from Research

• Board performance and organizational effectiveness Boards of effective organizations are more involved in financial planning and control Board size is positively related to program diversity, program spending, and

fundraising performance

• Funding sources and governance Donations and government grants are positively associated with 6 factors that

capture good governance Board effectiveness is a significant predictor of an organization's financial health,

especially with nonprofits deriving a majority of funding from private donations

• Limited research on use and impact of monitoring mechanisms Differences in funding source lead to differences in audit committee composition Organizations with audit committees and employing Big 4 auditors are associated

with better internal control qualitySources: Aggarwal, Evans & Nanda, 2012; Green & Griesinger, 1996; Harris, Petrovits & Yetman, 2014; Hodge, Hodge & Piccolo, 2011; Pridgen & Wang, 2012; Vermeer, Raghunandan

& Forgione, 2006

Dennis GephardtVice President and Senior Analyst

Moody’s


October 9, 2014


Governance and Nonprofit Credit Quality

Understanding governance is crucial to predicting the credit quality of a not-for-profit

Moody’s rates ~1,000 501(c) 3 organizations

out of a universe of ~1,000,000

While Moody’s rates only a small portion of the not-for-profit universe, our frequent conversations with leaders within the sector inform our assessments of governance quality.

Diversity of opinion is positive for credit health

Basic Idea Diversity among organization’s board members, managers, employees and volunteers tends to facilitate financial sustainability and adoption of best practices; diversity can be measured in numerous ways: professional background, skill level, geographic origin, socioeconomic background, gender, age, demographic and other profiles

Financial Benefit Facilitates consideration of many inputs to improve financial management and planning; promotes self-evaluation and incorporation of new best practices

Organizational Culture Tends to make organizational culture open and accepting of change and best practices; maximizes attractiveness of organization for talented employees and volunteers

Future Impact Promotes incorporation of new and emerging ideas, keeps organization vital and current, provides check against group-think, stagnation, and unrealistic financial plans

Board’s oversight role crucial to strategic course

Basic Idea Board of Trustees plays a critical role in selecting and overseeing CEO, establishing policies and promoting accountability; rubber stamping is of no value and can be dangerous to organization’s future health

Financial Benefit Effective controls necessary for donor confidence and to maintain eligibility with grantors

Organizational Culture Clearly defined organizational roles provide for sound oversight of management, board is engaged but not micromanaging

Future Impact While proper controls and board review cannot eliminate problems, they can provide early warnings that minimize the challenges

Commitment to disclosure aids accountability

Basic Idea Internal and external disclosure allows a not-for-profit to explain its social impact, resource limits and financial health

Financial Benefit Engages in donors, grantors and others in the primary mission translating into ongoing support; clear financial disclosure enhances stakeholder confidence

Organizational Culture By prompting the organization to track its resources and explain what it does to diverse audiences, disclosure encourages ongoing review of strategic priorities and performance

Future Impact Accountable organizations that excel at explaining the outcome of their work and continue to produce outcomes that engage stakeholders will gain an increasing share of support

Planning can optimize resource utilization

Basic Idea Realistic near-term financial plans provide a roadmap for how an organization will deploy its finite resources in the near future and respond to evolving changes

Financial Benefit When tied to strategic plan and budgeting allows for projected impact of decisions; stress testing of assumptions can underscore potential flash points to monitor

Organizational Culture Creates culture adept at planning despite uncertainty and refinement of multi-year planning accuracy over time

Future Impact Promotes recognition of key risks and development of contingency plans and can guide decision making when faced with material decision points and allocation of scarce resources

Benchmarking helps evaluate competitive landscape

Basic Idea Measuring an organization’s impact, financial strength and results versus relevant peers allows ongoing scan of performance relative to sector

Financial Benefit Can highlight gaps in performance; promotes self-evaluation and tracking of peers

Organizational Culture Sharpens ability to distinguish strengths and challenges relative to peers; fosters commitment of continuous improvement

Future Impact Promotes incorporation of competitive threats in planning; provides source of comparable information to explain to funders how the organization turns resources into impact in a responsible way

Self-Assessment fosters corrective action

Basic Idea Measuring and tracking key organizational inputs and outputs allows for effective monitoring, communication and planning

Financial Benefit Ongoing self assessment can allow for identification of adverse trends and corrective action as well as positive trends that can harnessed

Organizational Culture Effective and responsibility centered benchmarking provides objective metrics to track management and communicate outcomes; measures of impact need not be financial and can tie directly to social impact

Future Impact Promotes broad ongoing improvement and ongoing monitoring allows for early corrective action

Stakeholder relationships critical for financial health

Basic Idea Many external stakeholders including government entities can directly impact the financial health of not-for-profits

Financial Benefit Sound relationships with public sector, neighboring communities, regulatory entities, patrons and donors can translate into increased revenue or reduced expenses

Organizational Culture Ongoing maintenance of healthy relationships often involves a not-for-profit remaining adept at explaining its economic impact and other positive contributions as well as remaining actively engaged in community

Future Impact Organization is less likely to experience loss of public support, avoid undo hurdles to capital plans

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References & Resources Aggarwal, R. K., Evans, M. E., & Nanda, D. (2012). Nonprofit boards: Size, performance and managerial incentives.

Journal of Accounting and Economics, 53(1), 466-487.

Green, J. C., & Griesinger, D. W. (1996). Board performance and organizational effectiveness in nonprofit social services organizations. Nonprofit Management and Leadership, 6(4), 381-402.

Harris, E., Petrovits, C., & Yetman, M. (2014). The effect of nonprofit governance on donations: Evidence from the revised Form 990. Working paper. Available at SSRN 2154548.

Hodge, M. M., Hodge, M. M., & Piccolo, R.F. (2011). Nonprofit board effectiveness, private philanthropy, and financial vulnerability. Public Administration Quarterly, 520-550.

Pridgen, A., & Wang, K. J. (2012). Audit committees and internal control quality: Evidence from nonprofit hospitals subject to the single audit act. International Journal of Auditing, 16(2), 165-183.

Vermeer, T., Raghunandan, K., & Forgione, D. (2006). The composition of nonprofit audit committees. Accounting Horizons, 20(1), March 2006, 75-90.

Panel on the Nonprofit Sector (Independent Sector). (2007). Principles for Good Governance and Effective Practice. https://www.independentsector.org/uploads/Accountability_Documents/Principles_for_Good_Governance_and_Ethical_Practice.pdf

Questions and Discussion

We want to hear from you!

Thank You!Dennis GephardtVice President and Senior AnalystMoody'[email protected]://www.moodys.com

Tom PollakProgram DirectorNational Center for Charitable Statistics at the Urban [email protected]://nccs.urban.org

Una OsiliDirector of ResearchIndiana University Lilly Family School of [email protected] 317-278-8908 http://www.philanthropy.iupui.edu


Webinar #3Recent Trends in Nonprofit Balance Sheets and Capital InvestmentThursday, October 23, 20141:00-2:00 pm EDT

To register or for more information, visit the webinars site at http://bit.ly/NCCSEvents

Webinar #1Lessons for the Future: The Impact of Recession, and Nonprofit Financial KnowledgeThursday, September 25, 2014

To watch the recording or download the PowerPoint, visithttp://www.philanthropy.iupui.edu/moodysnccs-webinars

Nonprofit Governance and the Role of the Board in ... · Document retention and destruction policy...

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