Talk of Integrity Amid Scrutiny

IRS chief urges foundations to do more to crack down on excessive compensation, poor governance

Foundations have taken significant steps to stem abuses among their peers, but even so, the Internal Revenue Service remains concerned about excessive compensation, poor governance practices, and other issues, Commissioner of Internal Revenue Mark W. Everson told the roughly 1,800 people who attended the Council on Foundations’ annual conference here.

“You need to be generous, but unless you have integrity in the operation, you’re going to be sloppy at best and damaging at worst,” he said. “You need to get both things right.”

He blamed the problems on, among other things, the rapid growth among nonprofit organizations, a decline in enforcement by the revenue service, and a lack of self-regulation.

He compared nonprofit groups with corporations in the late 1990s, when many businesses became lax in their accounting practices and a few committed fraud. But unlike for-profit entities, charities and foundations have been more responsive to regulators’ concerns, he said.

“I don’t see the same defensiveness,” Mr. Everson said. “There isn’t the denial that took place in the business sector.”

Yet he warned foundations not to be complacent. “I’m not going to claim victory yet. There’s an awful lot to do.”

To improve the nonprofit world the revenue service needs to change as well, Mr. Everson said. New tools he wants to use include:

• Technology upgrades that would allow more foundations and charities to file their tax returns electronically.
• Revised rules that would remove the barriers that prevent state attorneys general and the IRS from sharing some information about nonprofit groups.
• New penalties that are harsher than the “small” monetary fines the revenue service can impose but gentler than the “nuclear option” of removing an organization’s tax-exempt status. “We need to look at having more flexibility,” he said.

Concerns about government scrutiny of foundations dominated the three-day conference, which was held just days after the Senate Finance Committee held a hearing on charity abuses (The Chronicle, April 14).

With the Senate committee poised to propose new laws affecting grant makers, Dorothy S. Ridings, president of the Council on Foundations, a Washington association of about 2,000 organizations, encouraged grant makers to fight many of the proposals.

“There is pending Congressional action that would place new constraints on nonprofits — and while some can be seen as checks on egregious behavior by foundations and charities, others would clearly be detrimental,” she said.

Ms. Ridings promoted self-regulation as the key to solving the foundation world’s problems and pushed grant makers to improve their governance practices and raise their ethical standards. “We do philanthropy no service by ceding to government the major responsibility for our behavior,” she said. “We must aggressively confront the cheats who are camouflaged as nonprofits.”

While most foundation leaders agreed with Ms. Ridings, at least one issue — the practice of compensating board members — was a point of debate among them.

During a session on Congressional proposals to stamp out nonprofit abuses, participants feuded over the practice.

“It would be a mistake to tell foundations not to compensate their board,” said Alexander C. Crosby, executive director of the William McCaskey Chapman and Adaline Dinsmore Chapman Foundation, in Carmel, Calif. Mr. Crosby said he was concerned Congress will move to prohibit compensation of trustees.

He said his five board members deserve to be paid for their efforts, which include meeting 10 times a year. In the 2003 fiscal year, the Chapman Foundation paid its trustees a total of $49,500, according to its most recent tax return. “They’re working for their money.”

But Drummond M. Pike, president of the Tides Foundation, in San Francisco, disagreed. He said foundations would never support a charity that pays its board members and therefore should forgo offering such compensation themselves. In addition, the practice has been rife with problems, he said: “There’s no question there have been abuses.”

According to a report on 128 grant makers released last year by the Center for Effective Philanthropy, in Boston, about half of the respondents compensate some or all of their board members, and the median annual compensation of board members was $22,000.

During the session, Diana Aviv, president of Independent Sector, a Washington coalition of nonprofit groups and grant makers, said Mr. Crosby’s concerns about an outright ban on board compensation are unfounded. Lawmakers are instead seeking a way to define “reasonable” payment, she said.

While members of Congress may not make the practice illegal, it remains an ethical dilemma that requires discussion by grant makers, said Sherry P. Magill, president of the Jessie Ball duPont Fund, in Jacksonville, Fla. “It is the elephant in the room,” she said.

Most foundations are wasting a valuable tool by failing to align their charitable missions with how they vote on proxy statements — proposals corporations send to stockholders to make certain business decisions — said Douglas Bauer, senior vice president of Rockefeller Philanthropy Advisors, in New York.

With grant makers investing billions in the stock market, foundations could use proxy votes to influence how companies run their operations and increase corporations’ support for environmental and social causes. “We have $476-billion sitting on the sidelines,” he said, referring to the estimated amount foundations hold in assets.

According to Mr. Bauer, the overwhelming majority of grant makers vote on a proxy according to what a company suggests or simply allow their investment managers to decide. The group encourages foundation board members to establish a policy to guide how financial officers vote on proxies.

The Nathan Cummings Foundation, in New York, which has a proxy policy, has taken the idea a step further by proposing shareholder resolutions, in which a stockholder can request information or changes at a company. While such resolutions are nonbinding, meaning the company does not have to respond to them, they usually influence corporate decisions, said Caroline L. Williams, the organization’s chief financial officer.

For example, Cummings proposed a shareholder resolution that would have required Valero Energy Corporation, in San Antonio, to explain its policy on climate change. While only 10 percent of shareholders supported the effort, Ms. Williams said, Valero responded by announcing plans to cut its greenhouse-gas emissions by 5 percent by 2008. (A spokeswoman for Valero said the shareholder resolution did not trigger the decision to reduce emissions, but the resolution did prompt the company to design a Web page that outlines its environmental policies.)

“You can have a huge impact,” Ms. Williams said. “We’d love to have more foundations join us in filing resolutions.”

While foundations remain unaware of or have dismissed the potential benefits of adopting policies for handling proxy votes, state regulators might force the issue, suggested Mark Pacella, chief deputy attorney general for Pennsylvania. If foundations continue to ignore the charitable value of proxy votes, it may be considered an “oversight in fiduciary duty,” he said.

“I do see this as being an issue down the road,” Mr. Pacella said. “Regulators are likely to take notice of it.”

During the conference, Rockefeller Philanthropy Advisors released a guide for foundations on the issues involved in many pending proxy votes. The guide, “Proxy Season Preview Spring 2005: Helping Foundations Align Mission and Investment,” is available free on Rockefeller’s Web site at http://www.rockpa.org or may be obtained by contacting the organization at (212) 812-4330.

The federal government soon will revise controversial guidelines it issued on how nonprofit groups can help prevent charitable dollars from supporting terrorists, said Marc Owens, a Washington lawyer who formerly headed the Internal Revenue Service division that oversees nonprofit groups.

While the U.S. Treasury Department has not set a date for the release, Mr. Owens expected the new guidelines in a “short time period.” The federal agency issued the guidelines, which nonprofit groups are not required to follow, three years ago to prevent charities and foundations from unwittingly providing money to terrorists. The Council on Foundations and other nonprofit groups have criticized the guidelines, saying they are too burdensome and ambiguous for organizations to follow.

According to Mr. Owens, the revised guidelines are likely to include parts of a report a coalition of nonprofit groups, including the council, released last month. The report outlines eight principles to help safeguard charitable funds from terrorists and includes suggestions for how to apply them.

The report recommends:

• Transferring money to foreign organizations via check or wire transfer, rather than cash.
• Adopting additional financing measures above those required by the law in parts of the world where terrorist groups operate.
• Maintaining independence from the U.S. and foreign governments to maintain the boundary between humanitarian aid and political support.

The report, “Principles of International Charity,” is available on the Council on Foundations’ Web site at http://www.cof.org. To locate it, click on the heading “International” at the top of the page.

For Dorothy Ridings, the council’s president, the meeting’s conclusion was bittersweet.

Ms. Ridings in December announced she will retire after 10 years as the council’s leader, making the San Diego conference her last. The organization expects to name a new chief executive in the fall.

Ms. Ridings said her experience at the Council on Foundations had been “a wonderful window into the best of the human spirit.”

Yet not all her memories will be pleasant ones, such as the revelations about foundation abuses during the last two years. “While I can’t honestly speak the cliché about enjoying every minute of it,” she said, “I can say I wouldn’t have missed a minute of it, warts and all.”

Since joining the council, she said, foundations have become more diverse in how they give, have developed more tools with which to communicate with the general public, and have become more involved in public policy.

Despite leaving the association, Ms. Ridings said, she will continue to follow its work and the work of its members. Said Ms. Ridings: “I’ll cheer you on as you live up to the best our field has to offer.”