One of the most significant and valuable developments of the post-Sarbanes-Oxley Act environment has been the emergence of governance "Best Practices" proposals designed to enhance and improve corporate responsibility and governance.
These proposals have come from a wide variety of sources, ranging from self-regulatory agencies (e.g., NYSE, NASDAQ) and business groups (e.g., The Business Roundtable, The Conference Board, National Association of Corporate Directors) to professional associations (e.g., the American Bar Association) and major corporations (e.g., General Electric, WorldCom, TIAA/CREF). While most of these Best Practices proposals have been recommended for adoption by public companies, their relevance as an aspirational goal for nonprofit corporations and non-public companies is widely recognized. From these and other resources, we have developed the following set of guidelines as "food for thought" concerning governance "Best Practices" to assist nonprofit corporations in responding to the current "corporate responsibility" environment.
To set the proper perspective, a few important caveats are in order. First, these are Best Practices guidelines, and do not in most instances, reflect current legal requirements. Instead, the guidelines reflect our perspective on evolving trends in nonprofit governance and law. In many circumstances, adoption of, and adherence to, "Best Practices" may reduce a nonprofit corporation’s exposure to potential state and federal corporate, charitable trust and tax challenges. Their adoption by nonprofits may also improve the ability of corporations to attract charitable contributions and grants, to the extent it evidences a commitment to appropriate stewardship of charitable assets. It must be stressed, however, that no negative inference should be drawn from a board’s decision not to adopt, or adhere to, any or all of these guidelines. "Best Practices" are at this time aspirational goals, not legal requirements. There exists no overwhelming legal mandate for their adoption, and a decision not to do so is not indicative of a breach of fiduciary duty.
Second, "one size does not fit all." Whether a nonprofit corporation should adopt some or all of these "Best Practices" is a decision uniquely within the prerogative of each organization’s Board of Directors based upon a variety of facts and circumstances unique to that corporation. These facts and circumstances logically might include the size, location and business sophistication of the nonprofit corporation, the industry it serves (e.g. health, higher education), whether the organization is a private foundation or public charity, the nature of its tax exempt status under the Internal Revenue Code, whether it is an operating or a grant-making organization, and the unique characteristics of its charitable mission and sponsorship. Also relevant will be its access to a pool of willing director candidates. For example, nonprofits based in smaller communities can not reasonably be expected to have multiple committees, all filled exclusively with "independent" directors. Furthermore, multi-corporate systems will be called upon to consider the application of Best Practices to both the parent entity and to its multiple affiliates; e.g., is their adoption at the "parent" level sufficient? It may also be important to evaluate the impact of state-specific nonprofit corporate and federal exempt organization tax laws and regulations on the implementation of certain guidelines.
Third, relevant public policy should not be undermined in situations where a board elects to combine or consolidate components of individual "Best Practices" guidelines to meet the particular characteristics of its institution. The policy goal of enhanced corporate governance should not be compromised by well-conceived variances from these guidelines: for example, requiring only a majority (as opposed to complete) control of key committees in "independent" directors; combining certain discrete functions under one committee for efficiency; and where there is no corporate general counsel, identifying an outside law firm to perform certain of the suggested reporting roles.
In the final analysis, the goal of "Best Practices" is the preservation and effective stewardship of the charitable assets of the nonprofit corporations. We hope you find the guidelines to be a useful resource as you evaluate how best to govern your organization.