It may be useful for boards and their counsel to compare the guidelines against their existing governance policies and procedures.
The Internal Revenue Service (IRS) recently released an expanded set of governance guidelines for tax-exempt organizations. In February 2007, the IRS released a draft “Good Governance Practices for 501(c)(3) Organizations,” its first comprehensive statement on the interaction between governance and tax exemption. For a description of the draft, see McDermott Hot Topic “IRS Releases Suggested Governance Guidelines for Tax-Exempt Organizations,” available here. The IRS has now released an expanded and updated version of these guidelines. They can be found here.
The new guidelines update and clarify in a significant way the IRS position on corporate governance. As such, they are a “must read” for board governance committees and their legal counsel. The guidelines reflect many of the governance themes stressed by the IRS over the past year in speeches by the exempt organizations director and in the revamped Form 990 (parts VI and XI). The guidelines are also complementary to many of the recommendations set forth in the Panel on the Nonprofit Sector’s “Principles for Good Governance and Ethical Practice,” released in October 2007. In particular, the guidelines serve to shed important new light on the IRS’s view on such important issues as the following:
- The importance of an “active and engaged” board (and how such diligence can be demonstrated)
- Governance issues associated with boards that are either “too small” or “too large”
- Director/committee member independence
- The benefits associated with the adoption of formal governance policies
- The value attributed to satisfaction of the “Rebuttable Presumption of Reasonableness”
- The need for boards to exercise oversight of sophisticated investment vehicles—including both joint ventures with for profit entities, as well as complicated and sophisticated financial products or investments and use of competent financial advisors
- Executive compensation as a continuing area of IRS focus—including with respect to such matters as the expertise of compensation committee members, the independence of the compensation committee consultant, and the emphasis on accurate and reliable comparability data
- Protocols relating to board minute taking, document retention, and whistleblower reporting and protection
- The process by which the board reviews the Form 990
- Transparency of corporate organizational and governance information
- The importance of oversight of charitable solicitation
The guidelines serve as an important demonstration of the IRS’s commitment to corporate governance as a “pillar” of its education and enforcement program for tax exempt organizations. Thus, it may be useful for boards and their counsel to compare the guidelines against their existing governance policies and procedures.