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Board Governance

A Better IRS Code

One simple change to the IRS code would ensure that nonprofits assemble diverse boards that truly represent the organizations’ owners: the community.

In a public company, the board of directors is responsible for representing the needs of shareholders. The board ensures that the company makes decisions in the best interest of the owners. Nonprofit boards serve the same purpose, but their shareholders include every taxpayer who is subsidizing the nonprofit by allowing it to be exempt from taxes. In this sense, the public owns the nonprofit, and nonprofit boards represent the public’s interest.

For a company listed on NYSE or NASDAQ, the shareholders appoint board members in a general meeting or through a proxy statement. This is designed to limit the ability of insiders to stack the board or remove its independence. This is not the common practice of nonprofit boards, where the sourcing and election of board members is often done by a small group of insiders. This presents governance challenges, including the fact that, on average, 86 percent of board members are white.

As a result of this, we fail to have diverse boards that truly represent the owners of nonprofit organizations—that is, the community. It is a significant barrier to effective governance. It limits the ability of boards to ask tough questions and act in the best interest of the community, especially if those actions aren’t in the best interest of the organization.

The IRS could make one change that would radically shift this dynamic. For nonprofits with budgets of $1 million annual revenue or more, the IRS should require that all vacant board seats be publicly posted at least 60 days prior to any new member election. This proposed rule—I’d call it the Board Election Transparency Rule (BETteR)—would ensure that members of the community seeking to join the board have an opportunity to apply. Organizations such as BoardSource and LinkedIn could serve as platforms to promote these opportunities to the public.

If the IRS were to adopt BETteR, it would have a number of broader benefits to the sector and society. It would:

  1. Raise awareness about board service in the community
  2. Help fill the estimated 2 million open board seats in America today
  3. Increase competition for board seats
  4. Incentivize nonprofits to develop board case statements and role descriptions

Unlike many of the proposed changes to the IRS code that would damage the sector (such as eliminating charitable deductions), this one would make the sector stronger and better. Let’s begin a dialog about how to improve the sector, not constrain it.

Read more stories by Aaron Hurst.

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COMMENTS

  • Lisa Gans's avatar

    BY Lisa Gans

    ON June 7, 2013 04:09 PM

    Encouraging more people to join boards through legislation would increase accountability to the communities served by non-for-profits, and allow the organizations to benefit from a broader range of views.  But because effective governance requires specific skills and networks, it would be important for not-for-profits to have broad discretion under the legislation to select from the applicant pool.  Exposing organizations to retaliatory complaints from disgruntled applicants for board positions and IRS subsequent action could create substantial and unintended burdens for organizations.

  • BY Darian Rodriguez Heyman

    ON June 7, 2013 07:15 PM

    I think this idea has a lot of merit- in addition to diversifying the boards ethnically, I’d also hope that this would address the need to get more young leaders on boards- currently, only 3% of boards have a member under 30, and even more surprisingly, only 8% have a single member under 50!  The key is for nonprofits to represent the communities they serve, so as to better deliver on their missions and objectives. 

    As long as we’re on the topic of new requirements, I also suggest adding a question into the filing documents sent to the IRS to start up a new nonprofit: asking for a competitive analysis, similar to what you’d find in any business plan.  This would avert at least some of the incredible duplication of efforts found in the social sector.

  • BY Rachel Ciprotti

    ON June 10, 2013 10:52 AM

    This idea is fascinating. I think it has a lot of merit. The proposal is just that Board positions be posted - there is nothing here about requirements for choosing from applicants, but it does mean opening up the process to the at-large community.

    Darian - where did you get your statistics? Although I know that young people are under-represented on Boards, I find your 8% figure highly suspect. I know that Boardsource’s Nonprofit Governance Index in 2007 found that 48% of Board members were under 50 years old, and I don’t think that number has reduced significantly since then. I don’t see how all those people could be concentrated into just a few Boards. Anecdotally, I have never served on or worked for a Board without some 40-somethings serving on it. Under 40 is a different matter.

  • BY Rachel Ciprotti

    ON June 10, 2013 10:54 AM

    Apologies….it is 38% of Board members under 50 years old, not 48%, but my concerns still stand. (Reference: http://philanthropy.com/blogs/leading-edge/do-nonprofit-boards-really-want-younger-members/22039)

  • BY David McGinty

    ON June 10, 2013 02:54 PM

    Amen that we need creative solutions for new marketplaces to bring the next generation of social change leaders to board service. And, the idea of nonprofits representing community interests is compelling. In my board meetings we often discuss the disconnect between our desire to and the reality of engagement with cross-generational leaders, clients/beneficiaries, and persons with diverse profiles. In that spirit, I’ll add fuel to the flame:

    First, broad community representation of nonprofits is the justification of charitable nonprofit tax-exempt organizations.  Different and varying justifications support tax exemption of more commercial nonprofits—e.g., political clubs, trade associations, unions, country clubs, and organizations driven by earned income.  Even many religious or educational nonprofits do not pretend to represent broader public interests. Thus, this solution would focus on a subset of nonprofits if the justification for the solution is that nonprofits represent the broader community. Then, we face the wild reality that what is “charitable” is murky at best. (Geek out at http://1.usa.gov/nNf4VN ) [Also, dork out on the different justifications for tax exemption versus deductibility of contribution; broad community representation gets watered down even more.]

    Second, considering having the IRS serve as the catalyst for these potentially desirable changes gives me flashbacks to 2002 (SOX) and 2009 (the infamous IRS Form 990 revamp and its regulation by public disclosure). If the IRS were to take this up, the change would not have to be a mandate / regulation to be impactful (or very controversial): could be by simple disclosure (similar to the independent director disclosure) or by policy requirements (similar to the lovely yes/no if the organization has a conflict of interest policy).

    Finally (whew), maybe the IRS isn’t the only game in town for a solution. A few possibilities: self-regulation (e.g., setting industry standards and best practices), industry reporting (e.g., board stats ala Charity Navigator), community reviews (e.g., a marketplace for communities ala Yelp to rank a nonprofit’s perceived community representation), or, more traditionally, state regulators or courts via their definitions and enforcement of fiduciary duties.

    And, I’m sure there are many other possibilities. Let’s figure it out!

  • Matt O'Grady's avatar

    BY Matt O'Grady

    ON June 11, 2013 09:05 AM

    Another great idea, Aaron, a step in the right direction. It would be great to do more than encourage broad publication of these service opportunities, but to require that broad publication. Makes it just a bit more transparent, by enabling constituents to monitor how their governing boards integrate this into their recruitment.

  • BY James Weinberg

    ON June 11, 2013 02:16 PM

    Great post, Aaron!  They say sunlight is a great disinfectant, and there would be numerous benefits to a fully public process that identified who was being nominated to a board and why they were being suggested.  I can see diversity as well as skill-gaps and equity issues being addressed along these lines.

    I might take it a step further to recommend a crowd-sourcing process to nominate community-based board members and ensure community-driven decision making.  When my alma mater wants to add board members, every alumni gets an online vote in the process.  I would love to see every family receiving services from a nonprofit have a say in who was overseeing the administration of those services.  The disconnect between those in power over nonprofits and those served by nonprofits is at least as big a concern as any other deficiency of social sector leadership.

    But I agree with McGinty’s concerns about the IRS as a scary source from which to originate this solutions.  It would certainly be an effective means to a level playing field for >1M organizations, but I worry about the amount of time required to pass this measure, if it is even implementable in the first place, and all the red tape and confusion that might come along with such a move if it were.  Plus, it would be extremely tough to monitor and police.

    I like the suggestion of moving toward solutions that could be popularized by Charity Navigator, Guidestar, Idealist, Board Source, Independent Sector, Foundation Center, and other online resources and aggregators. 

    Or, just have 10-20 of the largest foundations in the country start requiring this of their grantees and you would see a tectonic shift overnight.

  • BY Aaron Hurst

    ON June 11, 2013 02:28 PM

    James, great suggestion re the top foundations - the true power in the sector.

  • BY Amir Homayoun Rafizadeh

    ON June 17, 2013 01:48 PM

    Not surprised about the board findings and totally support the IRS change to increase diversity amongst Non Profit Boards.

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