How Much Information Should Foundations Disclose?

In May, charities began to file the redesigned Form 990, the informational tax return that most nonprofit organizations submit annually to the federal government. The new form is designed to be used for fiscal years beginning on or after January 1, 2008.

In an annual report released last year, the Internal Revenue Service referred to the redesign of the Form 990 as “the most significant” accomplishment of its tax-exempt division in the past 30 years. The report goes on to highlight the three goals that guided drafting of the new form: increasing openness, promoting accountability, and encouraging compliance with tax laws.

Private foundations, other than community foundations, use the Form 990-PF, not the 990. As yet, there have been no changes to the 990-PF that parallel those made to the 990.

Assuming that the IRS’s efforts to increase openness and promote accountability in the nonprofit world will eventually touch private foundations, how close do those institutions come today to satisfying the requirements of the revised Form 990? Are foundations already well down the road toward meeting the new standards of disclosure that the redesigned 990 establishes?

To answer those questions, I reviewed the public Web sites of the 50 wealthiest American foundations that have Web sites. Some key findings:

Conflict of interest. The old and new versions of the 990 ask whether an organization has a conflict-of-interest policy. If one exists, the new form asks for details about the content of the policy. The 990-PF, by contrast, has no questions that request information about conflict-of-interest policies.

Eighteen of the 50 foundations reviewed make available on their Web sites either the full text of their conflict-of-interest policies or a summary of them. Providing this information is the prevailing practice among the very largest foundations: Nine of the 10 wealthiest do it.

Just to be clear, the focus here is on disclosure. The overwhelming majority of the 32 other foundations probably have policies designed to prevent conflicts. They just do not say anything about them on their Web sites.

Whistle-blowers. The new 990 asks whether the organization has a written whistle-blower policy. The 990-PF does not have a similar question. Fourteen of the 50 foundations provide information on their Web sites about whistle-blower procedures, either in the form of a separate policy document or as a section of a broader policy statement dealing with conflicts of interest or codes of conduct.

Compensation. The new 990 peers much deeper into the area of compensation than the old form and asks questions about the process used to determine the compensation of the organization’s chief executive, other officers, and key employees. On the Web sites of the largest foundations, commentary about how compensation is determined is rare. Only three of the 50 foundations reviewed discuss the topic: the J. Paul Getty Trust, the Doris Duke Charitable Foundation, and the James Irvine Foundation.

The Web sites of six other foundations include the charters of board committees with responsibility for certain compensation decisions. The 990-PF does not request information about the process used to set compensation.

Governing documents. The revised 990 includes a new question that asks the organization to describe “whether (and if so, how)” it makes its governing documents available to the public. Nothing similar is in the 990-PF.

Eleven of the 50 foundations include their founding documents on their Web sites. For some, they are articles of incorporation. For others, they are trust indentures, and in one instance, a last will and testament. The same number of foundations (though not necessarily the same institutions) make their bylaws, or a summary of them, available on their Web sites. Slightly fewer foundations (10 of the 50) provide charters of committees of the board or summaries of the responsibilities of those bodies.

Making the tax form public. The 990 asks an organization to say how it makes its 990 available for public inspection. Twenty-five of the 50 foundations post their most recently filed Form 990-PF (Form 990 for community foundations) on their Web sites or provide an active link to another site where that form can be found.

Financial statements. The new 990 asks an organization to describe “whether (and if so, how)” it makes its financial statements available to the public. Twenty-five of the 50 foundations include on their Web sites, as a stand-alone document, the independent auditor’s report, together with financial statements and notes. Seven other foundations (bringing the total to 64 percent) provide this same information in their annualreport publications, which are accessible in PDF format on their Web sites.

Mission statements. The revised 990 requires an organization to provide a text description of its mission. The 990-PF does not ask for the same information; however, all of the Web sites of the wealthiest foundations include a statement of the foundation’s mission, or at least of its current grant-making priorities.

Progress in achieving the mission. The 990 requires an organization to describe “its exempt purpose achievements for each of the organization’s three largest program services by expenses.” Finding information of this kind on the Web sites of the largest foundations is much less straightforward than locating mission statements. Among the 50 foundations reviewed, only two issue reports each year that focus specifically on performance: the Robert Wood Johnson Foundation and the James Irvine Foundation. The annual letter from Bill Gates of the Bill & Melinda Gates Foundation, released for the first time in January, is a new addition to this modest literature.

More than 70 percent of the other foundations publish annual reports that can be viewed on their Web sites. These documents often include extensive commentary on foundation activity; however, as would be expected, the format for that varies greatly from foundation to foundation. Not all annualreport publications provide clear descriptions of achievements in the largest areas of grant making.

A foundation that wants to present itself to the public as an accountable institution should include on its Web site an audited financial statement; the Form 990-PF; and a succinct annual statement of achievements in each main area of grant making. Those disclosures focus on how funds were used and what was accomplished.

To demonstrate that it is open to public scrutiny, a foundation should also consider including on its Web site: the organization’s founding document; its bylaws and committee charters; policies concerning management of conflicts of interest; whistle-blower procedures; and a description of the process used to determine the compensation of its highest paid executives.

A foundation committed to an even higher degree of openness might also include on its site a searchable database of past grants; evaluations of individual grants or of broad areas of grant making; and a statement about the relationship between foundation investment activity and pursuit of the organization’s mission. Twenty-four of the 50 largest foundations offer the first of these.

Providing information about evaluations is less common; only 13 of the 50 make this a priority on their Web sites. Even rarer is commentary about whether the foundation’s mission plays any role in investment decision making. Only four of the 50 provide such information — the Gates, Hewlett, David and Lucile Packard, and Rockefeller foundations.

Which foundations come closest to following all of these suggestions? In the group of the 10 wealthiest foundations, the Gates, Ford, Robert Wood Johnson, MacArthur, Gordon and Betty Moore, and Hewlett foundations. Among the 40 other largest foundations, the California Endowment and the Packard, Rockefeller, Doris Duke Charitable, and Irvine foundations. The Web sites of these organizations are well worth reviewing.

In the years ahead, private foundations will probably come under pressure to be more accountable and open. They can hope they will be bypassed or that the spotlight will shine on them only briefly before moving on. Neither is an especially strong position.

Alternatively, they can look to the example of several of the largest foundations that are already providing the public with substantially more information about their operations than what is required. Private foundations might also embrace the disclosure standards that now apply to the majority of their grantees.

William F. McCalpin is founder and managing director of Holos Consulting. He was previously executive vice president and chief operating officer of the Rockefeller Brothers Fund. This article is based on a speech he delivered at a conference held this spring by the Center for Effective Philanthropy, in Los Angeles.