Corporate Governance

Tax exempt organizations are generally more aware of their corporate governance policies and procedures now than they have been in the past in large part thanks to the revamping of the IRS Form 990. Many organizations have had a knee-jerk reaction to the questions on the Form 990 regarding which policies a tax exempt organization has in place by simply adopting them all, quickly, without giving much thought as to whether they are necessary or appropriate. 

Practical Tips:

Assess the organization’s policies and amend (or even repeal) them as appropriate.

Tax exempt organizations should take a thoughtful look at what policies they have in place and whether those policies are appropriate for the size, activities, and financial status of the organization. Some policies are not required or even sensible for the organization and those policies that are necessary or appropriate should be tailored to fit the particular needs of the tax exempt organization.

Assess the organization’s governing documents against current practice and adjust one or the other if needed.

In addition to its policies, an organization’s leadership should take a thoughtful look at its governing documents, e.g., articles of incorporation, bylaws, policies, rules and procedures, and key position job descriptions, to ensure that these documents comport with the organization’s current actual practice. If not, the organization should assess which approach (or some other approach altogether) makes sense for the organization’s mission and exempt purposes and amend either its practice or documents, or both.

Educate the organization’s directors regarding their fiduciary duties.

At least once a year, a tax exempt organization’s directors should be educated on the scope of their state law fiduciary duties, as well as the federal income tax laws regarding excess benefit transactions (or private foundation excise taxes, as the case may be).

Director & Officer Insurance

Tax exempt organizations often have director and officer insurance, without having undertaken — at least in recent memory — an analysis of the organization’s obligations to indemnify its directors and officers in the event of a claim. The organization’s obligations may exceed the insurance coverage be broader or more limited than the current directors and officers believe them to be. For example, many tax exempt organizations (and for-profit organizations, as well) are surprised to discover that, not only do they have an obligation to indemnify a director or officer of the organization, but they may also have an obligation to advance the costs of defending the claim unless and until the director or officer is determined to be unworthy of the indemnification.

Practical Tips:

Check the organization’s governing documents, state statutes, and specific agreements to determine the organization’s default obligations.

Often a tax exempt organization’s articles of incorporation and/or bylaws will contain expansive indemnification obligations. Also, the state statutes governing the tax exempt organization in the state of organization may have default indemnification provisions or opt-in provisions. In addition to these general indemnifications, an organization may have individual indemnification agreements with specific individuals.

Instead of blanket indemnification, provide that indemnification may be granted by the organization on an individual basis.

Requiring indemnification to be individually negotiated and agreed upon encourages a tax exempt organization and its directors and officers to evaluate the particular risks the organization is likely to face and make informed and thoughtful decisions regarding the extent of indemnification, the costs of insurance, whether funds will be advanced, and how well the organization’s insurance dovetails with the its indemnification obligations.