Family Foundations

Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism

FatimaNajiy — Mon, 13 Sep 2021 14:25:35 +0000

Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism FatimaNajiy Mon, 09/13/2021 - 10:25

Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism

In late 2020, the Council on Foundations (the Council) launched the Values-Aligned Philanthropy project to continue to build on their previous efforts within the philanthropic sector to respond to growing concern about the issue of funding hate and extremism. The Council took this step recognizing that while there is significant work being done by grantmakers and social sector leaders across the country to prevent hate funding, there has not been a comprehensive analysis of what has been done and who is doing what from the perspective of philanthropy. The Council believes that mapping the eco-system will provide a baseline for identifying gaps, best practices, and next steps to addressing this problem. Research and writing for the project have been provided by Roey Thorpe, an independent consultant, with guidance from Council staff.

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Values-Aligned Philanthropy: Foundations Resisting Hate and Extremism

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Disaster Relief: A Practical Guide for Foundations and Corporations

council-webteam — Tue, 25 Nov 2014 03:56:55 +0000

Disaster Relief: A Practical Guide for Foundations and Corporations council-webteam Mon, 11/24/2014 - 22:56

Disaster Relief: A Practical Guide for Foundations and Corporations

Moved by widely publicized human suffering and increased disaster aid requests, foundations and corporations are becoming more active in the disaster relief field. Grantmakers have a distinct role to play in disasters because of their ongoing relations with grantees, long-term perspective, flexibility, and convening capacity. Lacking the sizable emergency relief resources of governments and some well-known nongovernmental organizations (NGOs), foundations and corporate grantmakers nevertheless can make a significant contribution — for instance, by filling critical gaps in underfunded areas like disaster rehabilitation, prevention, research, and education.

Based on lessons learned from a year-long joint study of the European Foundation Centre and the Council on Foundations, we concluded that grantmakers can be more effective and strategic in addressing disasters by following eight principles:

First, do no harm.
Not all disaster assistance is beneficial. Inappropriate items can overwhelm limited transportation, storage, and distribution capacities, thereby delaying the delivery of assistance that is desperately needed. Aim to ensure that your grant contributes to the solution and not to the problem.
Stop, look, and listen before taking action.
Information is the key to good disaster grantmaking. Every disaster has unique characteristics. Take the time to learn about the specifics of a disaster before deciding how to respond.
Don't act in isolation.
Coordination among disaster grantmakers, among NGOs operating on the ground, and between these two groups can reduce duplication of effort, make efficient use of resources, and ensure that the highest-priority needs are addressed first. Grantmakers can participate in various standing and ad hoc fora - both real and virtual - where needs are discussed, information is exchanged, and assistance is coordinated.
Think beyond the immediate crisis to the long term.
The emergency phase of a disaster attracts most of the attention and resources. Grantmakers can play a very useful role before the crisis by supporting disaster prevention and preparedness activities and afterward by filling gaps between emergency relief and long-term development programs.
Bear in mind the expertise of local organizations.
Community-based organizations and NGOs with a local presence are the first on the scene when disasters occur. They know best what assistance is needed and they understand the complex political, social, and cultural context of a disaster. However, these organizations are often hampered by the lack of resources and organizational capacity to carry out their important role. Working with and/or supporting these organizations can prove mutually beneficial.
Find out how prospective grantees operate.
Organizations that work on disasters vary greatly in their approaches and overall philosophies. Some specialize only in emergency relief, while others have a long-term development orientation. Some support the work of local organizations, while others do not. It is wise to know what approach you are supporting before making a grant.
Be accountable to those you are trying to help.
Grantmakers should be accountable not only to their donors, boards, and shareholders, but also to the people they seek to assist. Grantmakers need to go beyond merely determining how their grant was spent to engage their grantees in a process that assesses social impact.
Communicate your work and use it as an educational tool.
Highlighting examples of good disaster grantmaking is an excellent way for grantmakers to educate both internal and external audiences about the disaster process. It is useful to build a knowledge base, capture lessons learned, and share your experience with boards, staff, employees, other grantmakers, the media, community groups, public officials, and international organizations.

A number of practical suggestions for good disaster grantmaking flow from these principles and are highlighted in this guide.

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Disaster Relief: A Practical Guide for Foundations and Corporations

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FAQ: Global Grantmaking

council-webteam — Sun, 16 Nov 2014 14:40:42 +0000

FAQ: Global Grantmaking council-webteam Sun, 11/16/2014 - 09:40

FAQ: Global Grantmaking

What are the legal requirements for private foundations wishing to make cross-border grants?
What are the legal requirements for public charities wishing to make cross-border grants?
What anti-terrorism actions and policies of the U.S. Government relate to global grantmaking?

What are the legal requirements for private foundations wishing to make cross-border grants?

Private foundations wishing to make a cross-border grant must ensure that:

The grant is clearly for a charitable purpose, and
The grant counts as a qualifying distribution for the purpose of meeting the foundation’s annual distribution requirement.

The easiest way for a private foundation to satisfy both of these requirements is to choose a grantee that is recognized by the IRS as a public charity.

If a private foundation chooses to make a grant to a non-U.S. organization that is not recognized by the IRS as a public charity, the foundation must follow one of the two options provided in the tax code:

Determine that the non-U.S. grantee is the “equivalent” of a U.S. public charity (“equivalency determination”), or;
Exercise “expenditure responsibility.”

What is Equivalency Determination?

Equivalency determination is a process designed to assess whether a potential non-U.S. grantee organization is the equivalent of a U.S. public charity. It involves collecting certain information from the grantee about its origins, activities, and finances through an affidavit (see link below for sample affidavit). On the basis of the information provided in the affidavit, the private foundation then makes a good-faith determination concerning U.S. public charity equivalency and documents that decision. The determination may be made by the private foundation on its own or relying on the written opinion of counsel or the potential grantee’s counsel. The process need not be complicated; many private foundations routinely conduct equivalency reviews of prospective grantees.

The following documents, translated into English, are necessary to make an equivalency determination:

Founding documents of the organization.
A description of the purposes of the organization as well as its past and present activities.
Dissolution provisions, either contained in the founding documents or applicable law (see link below to country notes).
Restrictions on private benefit, non-charitable activities, lobbying, and participation in political campaigns, either contained in the founding documents or applicable law (see link below to country notes)
Detailed financial records (excluding religious institutions or medical or educational organizations).

Advantages of Equivalency Determination

This method does not require grantee reports at the end of each accounting period, a separate account dedicated to charitable purposes, or detailed reporting on Form 990-PF.

Disadvantages Equivalency Determination

This method requires substantial documentation in English plus financial reporting from previous years.

What is Expenditure Responsibility?

Expenditure responsibility is a method of making direct cross-border grants to a non-U.S. organization whereby the private foundation assumes full responsibility for ensuring that its grant is used for a charitable purpose. The process need not be unduly burdensome for either the grantmaker or grantee. Private foundations may apply expenditure responsibility grants to their payout requirement if they take the following steps:

Undertake a pre-grant inquiry with reasonable determination that the intended grantee is capable of fulfilling the charitable purposes of the grant.
Conclude a grant agreement that includes spending and reporting responsibilities and commits the grantee to spend the money only for the specified charitable purposes.
Require grantee to maintain grant funds in a separate account for charitable purposes.
Require one or more reports from the grantee detailing how the funds have been spent.
Report the grant on the foundation’s form 990-PF.

Reporting for expenditure responsibility grants:

The U.S. Department of the Treasury requires that recipients of expenditure responsibility grants provide reports on how the funds were used. Existing IRS guidance does not provide clear answers on the following aspects of the reporting requirement: grants for capital equipment, grants for endowment, and reasonable efforts to secure reports from grantees. In the absence of guidance from the IRS, the Council on Foundations has made available its recommendations to international grantmakers in a letter to the U.S. Department of the Treasury: Guidance on Expenditure Responsibility: Council on Foundations Letter to Treasury (in PDF).

Advantages of Expenditure Responsibility

Because equivalency determination can occasionally be a lengthy and ultimately unsuccessful process (i.e., the prospective grantee turns out not to be the equivalent of a U.S. public charity), grantmakers often choose to exercise expenditure responsibility instead.

Disadvantages of Expenditure Responsibility

Grant reports are required from the grantee until all funds have been expended, which may require monitoring the grant over a period of several years.

How do I decide whether to use Equivalency Determination or Expenditure Responsibility?

In 2001, the IRS made clear in a letter to the Council on Foundations that a private foundation wishing to make a grant to a foreign organization could choose between expenditure responsibility and equivalency determination, and that there was no obligation to rule out equivalency before turning to expenditure responsibility.

Table 1: When There Is No Choice

Situation	Required Action
Grantee is a non-charitable enterprise that will use the grant for charitable purposes	Expenditure responsibility is the only way to make this grant
Grantee cannot supply the information required for an equivalency affidavit	Grantor must use expenditure responsibility because it does not have enough information for an equivalency determination
Grantor evaluates the affidavit and concludes that despite everyone’s best efforts, the grantee is not the equivalent of a public charity	Expenditure responsibility is the only way to make the grant

Table 2: When the Grantor Can Choose

Circumstances that favor Equivalency	Circumstances that favor Expenditure Responsibility
Grantor expects long-term relationship	Grantor plans a one-time grant
Grantee can supply governing documents and no financial data is needed (i.e., grantee is a school, hospital, or church)	Grantee may have considerable difficulty in supplying historical financial data or obtaining a certified copy of its governing documents
Grantor wants flexible reporting procedures	Grantor wants strict reporting provisions
Grantor wants to make a general support grant
Grantee plans to re-grant funds received to accomplish its exempt purposes

What are the legal requirements for public charities wishing to make cross-border grants?

International grantmaking requirements for public charities are significantly less onerous than those for private foundations, yet public charities still have a fiduciary duty to ensure that grant funds are used exclusively for charitable purposes. Although they are not required to do so, most public charities follow the grantmaking rules for private foundations.

The Pension Protection Act of 2006, signed into law by President Bush on August 17, 2006, introduced new rules for international grants made from donor-advised funds. International grantmaking from donor-advised assets now requires equivalency determination or expenditure responsibility. While the Council is seeking guidance as to what expenditure responsibility means for public charities, the regulations for private foundations provide some guidance.

The suggested approach by the Council on Foundations for public charities that do not use donor-advised funds for their international grantmaking is as follows:

Obtain English copies of organizational documents and a description of the activities and programs of the grantee.
Enter into a specific written agreement, documenting the grantee’s commitments and the use of funds for charitable purposes.
Obtain a yearly accounting of the funds for each year until the funds are expended.

What anti-terrorism actions and policies of the U.S. Government relate to international grantmaking?

The U.S. government took a number of steps to ensure that charitable funds were not diverted to terrorists and their organizations in the United States and around the world following the terrorist attacks of September 11, 2001. These included Executive Order 13224 and the USA Patriot Act, both issued shortly after 9/11, as well as the Treasury Department’s “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities,” originally issued in November 2002 and most recently re-issued on September 29, 2006. This section provides a brief description of U.S. government anti-terrorism initiatives:

Executive Order 13224
U.S.A. Patriot Act
U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

What does Executive Order 13224 do?

Executive Order 13224 was signed by President George W. Bush on September 24, 2001, to cut off resources to terrorists and terrorist organizations through asset blocking. The Executive Order prohibits transactions with those entities deemed by the Executive Branch to be associated with terrorism and freezes all assets controlled by or in the possession of these entities and those who support them. The EO prohibits the provision of any financial or material support to any entity specifically listed in an Annex or determined by the Secretaries of State or Treasury, as well as any associated entities. Several U.S. government agencies have created lists of known or suspected terrorists, as has the United Nations and the European Union. The most comprehensive of the U.S. lists is the Treasury Department's Specially Designated Nationals (SDN) list. Both the Treasury Department and Executive Order lists are physically included in the Executive Order. The open-endedness of the prohibitions contained in the EO is worrisome for grantmakers. No distinction is made in the EO between domestic and international terrorism.

How does the U.S.A. Patriot Act relate to grantmaking?

The U.S.A. Patriot Act was enacted in October 2001 and reauthorized in 2005. Among its many provisions, the Act increased existing criminal penalties for knowingly or intentionally providing material support or resources for terrorism. For grantmakers, these criminal statutes open the possibility that they could be found -- despite their best intentions -- to have knowingly or intentionally provided material support or resources for terrorism. Another concern for grantmakers is potential civil liability should their grants end up in the wrong hands. Nonprofit grantmaking organizations are not immune to potential legal liability because of the inherent charitable or humanitarian nature of their missions.[1]

What are the Treasury Department’s Voluntary Anti-Terrorist Financing Guidelines?

On September 29, 2006, the U.S. Department of the Treasury issued an updated version of the “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities.” The “Guidelines” were originally issued in November 2002 and revised in December 2005 to assist charitable organizations in complying with Executive Order 13224 and the USA Patriot Act following 9/11. The new Guidelines may be accessed here: Revised Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

On the same day, the Treasury Department released a document responding to public comments it received during the comment period following the release of the second version of the Guidelines in December 2005. This document may be accessed: Response to Comments Submitted on the U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (PDF).

These comments include a submission by the Treasury Guidelines Working Group, a broadly representative group of more than 40 U.S. charities, foundations, religious organizations, corporations, umbrella associations, watchdog groups, and advisors, created in the spring of 2004 and coordinated by the Council on Foundations. In February 2006, the Treasury Guidelines Working Group submitted comments in response to the invitation for public comments on the revised “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities” issued on December 5, 2005. Download the comments (PDF).

The working group developed the Principles of International Charity (PDF) that identifies eight principles to guide the anti-terrorism efforts of charities. The Principles of International Charity were submitted to the Treasury Department as an alternative to the Guidelines in March 2005.

Read the revised Anti-Terrorist Financing Guidelines: Voluntary Best Practices For U.S.-Based Charities
Download the Treasury Guidelines Working Group Comments (PDF) submitted to the Treasury Department in February 2006
Download the Principles of International Charity (PDF)
Download Council on Foundation Comments on Original U.S. Department of Treasury Anti-Terrorist Financing Guidelines (PDF) submitted in June 2003.

How should grantmakers respond to these various anti-terrorism measures?

Despite the attention paid in the media to a handful of charities alleged to have helped finance and aid terrorist activities, the Executive Order and the U.S.A. Patriot Act are not targeted directly at grantmaking organizations. As a result, they do not spell out specific procedures that grantmakers should undertake in order to comply with the law.

In the absence of such guidance, grantmakers will have to rely a good deal on common sense. Some useful ideas to consider include:

Know as much as you can about your grantees and their associates.
Know what you can about donors who play a role in identifying grantees.
Involve your donors and grantees in the compliance process.
Educate board and staff about internal anti-terrorism measures.
Consider developing an anti-terrorism policy statement.
Discuss concerns with legal counsel.
Document steps taken to comply with the Executive Order and the Patriot Act.
Keep informed about anti-terrorism developments.
Consult International Grantmaking: A Guide for Funders Making Grants Outside the United States.

International grantmakers are responding to the federal anti-terrorism policies in many ways. The Council’s global philanthropy experts conducted an informal survey of a representative sample of approximately 35 of the Council’s international grantmaking members to determine what, if any, changes they had made or were planning to make in their procedures because of the government’s anti-terrorism actions. Read the results of this survey in: "Federal Anti–Terrorism Measures: How Foundations and Corporate Grantmakers are Responding."

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FAQ: Scholarships

council-webteam — Mon, 10 Nov 2014 17:12:03 +0000

FAQ: Scholarships council-webteam Mon, 11/10/2014 - 12:12

FAQ: Scholarships

What are the advantages, disadvantages, and likely costs of scholarship programs?
What do the private foundation rules require, and how should community foundations apply the rules?
What rules or procedures govern community foundation scholarship programs?
Does a community foundation need to notify the IRS before starting a scholarship program?
What are the community foundation's tax reporting requirements in connection with scholarship assistance? What are the tax consequences to the student who receives scholarship aid?
Can a community foundation make scholarship grants to individuals?
May a scholarship fund be established through a donor-advised fund?
What constitutes a charitable class in establishing a scholarship program?
To whom should the community foundation make out the scholarship check, the student, or the school?
May a community foundation give a scholarship to a student attending a for-profit school, such as a vocational school?
Are there sample documents for scholarship funds?
Can we increase the number or size of awards after recipients are selected?

What are the advantages, disadvantages, and likely costs of scholarship programs?

Scholarship programs focus on youth and education, two central concerns of most community foundations. Good publicity about these programs can help create community awareness of the foundation's existence and resources and can generate contributions from diverse segments of the population. Through convening scholarship granting committees, the community foundation can bring new volunteers into its activities. The drawback of scholarship programs is that they involve a good deal of administrative work on the community foundation's part. Publicizing the existence of the programs, collecting applications, coordinating the work of review committees, disbursing funds, and tracking recipients are among the tasks that are involved in running scholarships. Traditionally, community foundations have estimated that administrative costs run from five to twenty percent of the programs. If administrative costs are to be deducted from the particular scholarship fund to which they are attributable, donors should be made aware of such charges from the start. Similarly, if the community foundation opts to levy a fixed administrative fee on scholarship funds, the donor should be aware of the amount.

What do the private foundation rules require, and how should community foundations apply the rules?

In addition to the existence of a charitable class, the private foundation rules require that grants be made in a objective and non-discriminatory fashion. The selection criteria for a foundation's grants should be reasonably related to the purpose of the grant. Thus, for a scholarship grant, likely criteria on which a decision might be based include prior academic performance; test scores; recommendations from instructors; and conclusions regarding an applicant's motivation, character, and potential that are formed from an interview with them. Financial need is another legitimate consideration. Donors may also want to identify particular skills and achievements; scholar-athletes and musicians are frequently targeted for scholarship aid.

The private foundation rules further provide that people charged with selecting scholarship recipients must not be in a position to derive an economic benefit, directly or indirectly, from the scholarship process. In general, relatives of applicants should not serve on committees that will consider these requests for aid. However, there may be circumstances in which it is impossible to avoid a conflict (when a scholarship committee is required to include the principal of the local high school and she has a son who's a terrific candidate for the award). The community foundation should attempt to spot such conflicts in advance and adopt policies to resolve them (for example, allowing the principal to recuse herself from voting that year so that her child can be eligible).

Private foundations have a duty to monitor the spending of the grant and ensure that it was used for a charitable purpose. Community foundations would be wise to track their scholarship grants as well by, for example, requesting that a recipient to whom a check is made out forward a verified copy of his or her transcript. Grants that are not used for educational purposes should be refunded to the community foundation.

These rules are explained and their relevance to community foundations discussed in Grants to Individuals by Community Foundations (Nober, J. Council on Foundations, 2000).

What rules or procedures govern community foundation scholarship programs?

Like all community foundation grants, scholarship grants must be made for charitable purposes. Since furthering education is a charitable purpose, scholarships are almost by definition a charitable activity, so long as the persons benefited are members of a charitable class (see #4 below). Beyond these general principles, there are actually no specific IRS rules for how community foundations are to make scholarship grants to individuals. In the absence of such guidance, the Council recommends that community foundations look to the very exacting requirements imposed on private foundations. While community foundations need not follow these rules to the letter (although in the case of scholarship programs administered for corporate employees and their children, close attention is highly recommended), they provide a set of guidelines that the IRS has approved. If a community foundation's scholarship program substantially complies with the private foundation rules, the community foundation can be fairly certain that it is operating safely. The guidelines for a community foundation's scholarship program should be clear, consistent, and widely available.

Does a community foundation need to notify the IRS before starting a scholarship program?

Newly formed community foundations that plan to offer scholarships should disclose this proposed activity in their Application for Exemption on Form 1023. Established community foundations that decide to establish scholarship programs should inform the IRS of this new activity when they file their next tax return on Form 990. Unlike private foundations, community foundations need not secure advance approval of their procedures for making scholarship grants to individuals. When private foundations establish scholarship funds through community foundations, however, the advance approval requirement may apply.

What are the community foundation's tax reporting requirements in connection with scholarship assistance? What are the tax consequences to the student who receives scholarship aid?

Under current IRS practice, community foundations making grants for scholarships have no tax-reporting requirements except to the extent that such payments represent compensation for services provided by the recipient. To the extent that the scholarship grant pays for costs other than tuition; fees; or books, supplies and equipment required for study at a tax-exempt institution, a student may be liable for income taxes on the grant, but it is not the community foundation's responsibility to provide tax advice to its grantees. Indeed, because it will be hard to know each individual's circumstances fully, it would be irresponsible and unwise to offer such advice.

Can a community foundation make scholarship grants to individuals?

Generally, yes, but a community foundation wishing to embark on a scholarship program should first determine that its governing instruments authorize the community foundation to make grants to individuals for educational purposes. In some cases a governing instrument will specify that grants may be made only to "organizations," and the community foundation will have to weigh whether it wants to amend the documents to allow grants to individuals. If changing the documents is not desirable, the foundation may still make grants for scholarship purposes to educational institutions and give the institutions the discretion to select the individual scholarship recipients. No community foundation should embark on a scholarship program without consulting expert legal counsel.

May a scholarship fund be established through a donor-advised fund?

No. The Pension Protection Act of 2006 prohibits grants to individuals from a donor-advised fund.

What constitutes a charitable class in establishing a scholarship program?

In general, a charitable class is a group that is large enough so that an indefinite number of individuals may benefit. However, a charitable class may properly be comprised of a comparatively small number of beneficiaries, provided the class is open and the identities of the individuals to be benefited remain indefinite. "All the graduating seniors at a local high school" is a common and generally acceptable class. A class that includes members of a single family, on the other hand, is likely to be too small to qualify as charitable. Potential recipients may be limited to members of one sex or an economically disadvantaged group. Race-based limitations pose special questions and should certainly be discussed with expert counsel.

To whom should the community foundation make out the scholarship check, the student or the school?

Either one is fine, but making the check out to the school may be easier for monitoring purposes. If the community foundation makes the payment to an educational institution and requires that the institution use the funds to defray the student’s expenses only if they are enrolled and their status is consistent with the conditions of the grant, the community foundation essentially places much of the monitoring burden on the school.

May a community foundation give a scholarship to a student attending a for-profit school, such as a vocational school?

To the extent that such a grant is for a charitable purpose, there should be no bar to providing financial assistance to a student attending vocational school. Establishing a fund to assist students at particular for-profit institution may also raise problems that establishing a fund for students attending a particular state university would not.

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Conflicts of Interest - Key Issues for Foundations

council-webteam — Sun, 09 Nov 2014 16:00:46 +0000

Conflicts of Interest - Key Issues for Foundations council-webteam Sun, 11/09/2014 - 11:00

Conflicts of Interest - Key Issues for Foundations

With Congress and the media focusing on corporate governance and foundation administration, now is the time to make sure that all grantmakers have a strong conflict of interest policy in place. Both private foundations and public charities (such as community foundations) should have clear guidelines on financial or other interests that must be disclosed and transactions that must be scrutinized or avoided. The policy should cover both board members and foundation staff. A robust conflicts policy can not only help a grantmaker stay on the right side of the law, but can also keep the organization from engaging in behavior that gives even the appearance of conflict.

While the Tax Code does not require that a charitable organization have a conflicts policy in place, it would be difficult to achieve or demonstrate compliance with applicable provisions of the law without such a document.

The Law on Conflicts

Board members or trustees of a charity have fiduciary duties to the organization. This means that they must be careful stewards of the charity's assets and must put the charity's interests first. On occasion, however, a board member's other involvements–business interests, family relationships, or political or other charitable activities–may make it impossible for him or her to provide disinterested advice to the charity. Especially when the matter affects the financial interests of a board member, this duality of loyalties may become a conflict of interest.

In addition, for private foundations, Section 4941 of the Tax Code prohibits a variety of financial transactions between the foundation and "disqualified persons." This category includes substantial contributors to the foundation and its managers, plus members of both those groups' families and businesses in which they have a large stake. Specifically barred transactions include rent payments to a disqualified person and loans from the foundation to a disqualified person, even when the terms of the deal would benefit the foundation substantially.

There's also a general prohibition on the use of a private foundation's income or assets "by or for the benefit of” a disqualified person. That means that a foundation's grants and other expenditures must not provide tangible economic benefits to disqualified persons. An exception to the bar on self-dealing allows foundations to pay disqualified persons reasonable compensation for very limited personal services that are necessary to the foundation's operation.

For public charities such as community foundations, financial transactions between the charity and its board members, as well as other "insiders,” are covered by the intermediate sanctions rules in Section 4958 of the Tax Code. Insiders also include major donors, charity executives, and their families. If any payments to such insiders, including salaries and payments for goods or services, exceed fair market value, the insiders, and possibly members of the organization's board, will be subject to penalty excise taxes.

In addition to those federal rules, some states have laws that regulate whether a board member or other charity official may participate in voting or other actions when the board member has a financial interest in the outcome.

Getting into Compliance

Legal rules help shape the outlines of the conflicts policy that a charity should have. Both private foundations and public charities should have written rules, approved by the board, that require board members and executives to disclose business or other ties that may result in a conflict of interest or bias (for or against) making a particular grant or investment. Ideally, this disclosure happens on a regular basis, say, at the beginning of the year or when a director's term begins. At the very least, foundation managers must be required to make full disclosure when a relevant matter is under consideration by the foundation.

Depending on what the manager's conflict is, it may be appropriate for him or her to abstain from voting on or even discussing the matter. For example, if a partner in the foundation's investment management firm serves on the board, he or she should not vote on any resolution to retain or dismiss the firm. The minutes of the board or committee meeting should note this abstention.

Foundation staff, too, should be required to disclose positions or interests that may give rise to conflicts. Does the program officer have a spouse who works at a potential grantee? Does the program officer personally receive consulting fees from nonprofits that may apply for funds? Depending on the size and activities of the foundation, it may be wise to have a parallel conflicts policy for staff members.

In addition, foundations should prepare themselves for situations where there may be no legal conflict but there may be the appearance of conflict. A board member's printing firm, for example, might seek the contract to produce the community foundation's annual report. One approach is to bar board members from doing business with the foundation. Another approach is to mandate a rigorous bidding process so that foundation managers can be confident that the best bid, even if it comes from a foundation insider, will win.

The stronger and more comprehensive a foundation's conflict of interest policy is, the easier it should be to spot conflicts and address them before they become a problem. Furthermore, when a foundation has evidence that it has gone through the procedures required by its conflicts policy, it will more easily be able to defend its actions to the media or government authorities.

Some conflicts, once disclosed, turn out not to be conflicts at all. Where a foundation board member serves on the board of an organization seeking a foundation grant, the foundation may generally make the grant without penalty. Disclosing this tie provides other board members with an opportunity to learn about the applicant charity from their colleague. Foundation policy may require that the board member abstain from voting on the grant, although there is no federal legal requirement that he or she do so. Because the board member's dual role has been disclosed, other board members may weigh his or her comments appropriately.

But some conflicts cannot be cured by disclosure. Where a community foundation proposes to pay above-market rates to a fundraising firm operated by the executive's spouse, no amount of disclosure can make the problem go away. Where a private foundation's investment manager uses foundation assets to manipulate the price of a stock held by disqualified persons, there's a genuine conflict (and probably an act of self-dealing, too).

Feeling Conflicted?

Conflicts of interest often give rise to interesting questions for the legal staff at the Council on Foundations. Members with a particular situation that they are uncertain of should not hesitate to contact Council legal staff at legal@cof.org.

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Recommended Best Practices in Managing Foundation Investments

council-webteam — Fri, 07 Nov 2014 22:44:14 +0000

Recommended Best Practices in Managing Foundation Investments council-webteam Fri, 11/07/2014 - 17:44

Recommended Best Practices in Managing Foundation Investments

The Council's Board of Directors released this guidance memorandum in March 2010 and strongly recommends that when reviewing and approving foundation investment policies and procedures practices, all foundations—private and public—consider these best practices in foundation investment management.

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Networking for Success: Building Networks Is Essential to Investment in Social Impact Bonds

council-webteam — Tue, 04 Mar 2014 15:14:20 +0000

Networking for Success: Building Networks Is Essential to Investment in Social Impact Bonds council-webteam Tue, 03/04/2014 - 10:14

Networking for Success: Building Networks Is Essential to Investment in Social Impact Bonds

Working in collaboration with the Center for American Progress, the Council co-hosted conversations among foundations, community development financial institutions, and investment firms about social impact bonds and Pay for Success. Out of these conversations, two issue briefs were created:

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Legal Basics: What Every Foundation Leader Should Know

council-webteam — Sat, 30 Nov 2013 01:12:18 +0000

Legal Basics: What Every Foundation Leader Should Know council-webteam Fri, 11/29/2013 - 20:12

Legal Basics: What Every Foundation Leader Should Know

A guide to legal basics for foundation leaders covering: tax on investment income, self-dealing, payout requirements, excess business holdings, jeopardy investment rules, taxable expenditures, intermediate sanctions, reasonable compensation, and grants to non-charities.

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Legal Basics: What Every Foundation Leader Should Know

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Board Compensation

council-webteam — Sun, 17 Nov 2013 18:50:44 +0000

Board Compensation council-webteam Sun, 11/17/2013 - 13:50

Board Compensation

Introduction

Should your foundation board members be compensated for service, or should they serve in a voluntary capacity? Whether you are considering this issue for the first time, or whether it’s a question that has arisen before, compensation has become more than an internal management question. It has become part of keeping the public trust.

A note on Excessive Compensation
The Council board of directors is firmly opposed to excessive or unreasonable compensation. Even the public perception of excessive compensation can be damaging to the entire field of philanthropy.

What follows is a description of the basic legalities of compensation, a sampling of the most common practices and a breakdown of the pros of both compensated and voluntary board service. Unless otherwise noted, the word “compensation” throughout this brief refers to payment for overall board service and should not be confused with reimbursement for expenses such as travel or professional development, or compensation for professional services such as investment management, accounting or legal advice.

What is legal?

Under federal law, all types of foundations are allowed to compensate their boards as long as the compensation is reasonable. The source of the regulation differs, however, depending upon whether the foundation is private (such as independent or family foundations) or whether it is public (such as community foundations). Private foundations must keep compensation “reasonable” under the self-dealing rules. A similar obligation applies to community and other public foundations under the intermediate sanctions regulations. Regardless of the defining rule or regulation, however, “reasonable” for all foundations is determined through comparisons of what similarly situated people are paid for similar work.

Who compensates?

Even though compensation is legal, less than a quarter of foundations pay some or all of their trustees for their board service. Many nonprofit board members view their board service as an extension of their public service. The percentage, according to the Council on Foundations’ Foundation Management Reports, has stayed fairly even over the past two decades. In its 2007-2008 Member Survey Report, the Association of Small Foundations reported a somewhat higher percentage. Of the survey respondents, 31 percent compensate their boards.

Both studies show that compensation practices vary by type and size of foundation. Of all the foundation types, independent foundations offer compensation more frequently and at higher levels. Community foundations, on the other hand, rarely, if ever, compensate their board members. Somewhere in the middle are family foundations which are frequently unstaffed and whose board members often fulfill a variety of staff and management functions.

Typically, the larger the foundation, the more likely they are to compensate.

The chart below gives a quick overview of the common practices by the different types of foundations.

Community	213	1.40%
Family	114	31.60%
Independent	138	58.70%
Public	53	7.50%
All	518	23.90%

Source: Council on Foundations Foundation Management Series, 2010 Edition, Board Composition and Compensation.

What do you pay for?

If your practice is to compensate, it’s important to know and document what you (and others like you) are paying for. The work board members are compensated for varies from foundation to foundation depending upon factors such as asset size, spending level, program complexity, staff capabilities and foundation culture.

Some trustees receive an annual fee in payment for performing a broad oversight role. Sometimes, in newer boards or boards without staff, members may be paid for being involved operationally and taking on part or all of typical staff functions. Occasionally, individual board members may perform specific professional services—legal, accounting, investment management or advisement—but rather than be paid on a fee-for-service basis, compensation for those duties are rolled into their annual compensation. Note that these “personal services” must be reasonable and necessary to the foundations work, and compensation for these services may not be excessive.

There are also some foundations that compensate their boards for attendance at each board or committee meeting.

Among those foundations that compensated board members, 81.1 percent used some combination of set fees, with most paying an annual fee (60.6 percent) and/or a fee per board meeting (64.6 percent).

How much should you pay?

While remembering that what is typical changes depending upon the type and size of a foundation, statistics suggest that the overall actual, nominal amount of board compensation has increased at a slow but steady rate since 1986, while the real data in the chart below suggests a slow but steady decrease in the last decade.

1986	$4,500	$4,500	Both the Council on Foundations and the Association of Small Foundations have collected information on the amount and type of trustee compensation. Although neither study is a comprehensive indicator of current practices for all foundations, they both list ranges to help you determine whether your compensation practices fall within the norm.
1988	$5,000	$4,632
1990	$6,000	$5,031
1992	$5,000	$3,906
1994	$8,000	$5,916
1997	$6,300	$4,302
1999	$10,000	$6,579
2001	$10,000	$6,189
2003	$10,000	$5,957
2006	$12,000	$6,524
2009	$11,000	$5,620

Source: Council on Foundations, Foundation Management Series, various years.

But how do you determine what is reasonable and fair within the range? Most foundations have specific criteria by which they determine how much to pay. Factors that affect compensation include the following:

Size and anticipated growth of the foundation’s current assets
Number and amount of the grants and the frequency of the grant making process
Experience and management responsibilities of the board member
Amount of time spent on foundation matters
Complexity of the foundation
Independence of the individuals who establish the compensation level

Finally, for those who do compensate, it’s important to remember that, under federal law, all board compensation must be reported on the IRS form 990 or 990-PF. This information must also be made available in some form to the public.

Should you or should you not compensate?

Assuming you work within accepted compensation levels, there are a number of arguments for either practice.

The Case for Compensated Boards:

The Case for Voluntary Boards Quality of member: Compensation is needed in order to attract quality candidates. Too often, people with high visibility and valuable contacts won’t serve without pay.
Technical expertise and talent: A board is often expected to bring a level of sophistication to complex topics. Compensation helps attract individuals with strong technical, professional or subject matter expertise.
Risk: There are personal and professional risks inherent in board service. Compensation may help tip the balance in favor of serving.
Loyalty: A paid person is less apt to take advantage of board service for personal gain. Being compensated might strengthen one’s obligation to duty.
Interest: Because trustees, like anyone else, have only so much time, compensation may help sustain their interest, helping them to be more responsive and pay greater attention to their board responsibilities.
Equal pay for equal work: Both trusts and for-profit boards have a history of paying their trustees. Since the obligations and responsibilities are similar for foundation boards, why shouldn’t they be paid the same for the same work?
Diversity: Compensation promotes the recruitment of a diverse board. It opens service up to individuals from different cultures, classes, ages or personal situations who might not otherwise be able to serve as volunteers.

The Case for Uncompensated Boards:

Inspired board members: Serving without compensation encourages board members to express their philanthropic values, encourages altruism and places public benefit above self-interest.
Charitable resources: Board compensation reduces the amount of money available for grants and programs. Money not spent on compensation frees up resources to further the foundation mission.
Fairness: Public charities rarely compensate their boards. Since the obligations and responsibilities of foundation boards are essentially the same, why should they be paid?
Public trust: Compensation sends the wrong message and erodes the quality of public perception. Foundations should be particularly concerned about the models they present.
Conflict of Interest: Because volunteers aren’t paid, they are free from potential conflict that might result from trying to protect an income stream. Therefore, they are less susceptible to conflicts between what is the right thing to do and what is in the best interest of those who are signing their paycheck.
Leadership by example: Foundations often expect grantees to make the most of their charitable dollars, including keeping their administrative overhead low and using volunteer boards. A foundation can set the tone by modeling the same behaviors.

In Sum, Ask Yourselves

What is our practice when it comes to compensating our board?
How do we compare with other foundations that are of similar type and size?
How does public perception shape our views?
How do we document compensation on our IRS Form 990 or 990-PF?

Questions?

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Planning for CEO Succession

council-webteam — Sun, 17 Nov 2013 15:35:19 +0000

Planning for CEO Succession council-webteam Sun, 11/17/2013 - 10:35

Planning for CEO Succession

Many foundations may be uncertain about what’s involved when it comes to succession planning. Some wonder why they should worry about the future at all when they have so much work to do in managing their grantmaking, community leadership and development, and administrative duties.

Succession planning is more than just replacing a CEO. It’s an opportunity to evaluate what works at your foundation—and identify areas in which you can improve. It can give both the board and staff a clear picture of long-term goals, and help you set priorities and make decisions.

Planning ahead can also help ease anxiety and create a smooth transition from one CEO to the next.

Ask Yourself

Does your foundation currently have a succession plan? How will planning ahead help you?
What will you do in case of an emergency departure or prolonged absence of your CEO?
Will you need to appoint an interim CEO? What are the required qualifications?
If your CEO resigns, how long should the transition period be?
How much time, if any, will the departing CEO spend training his successor?
In what areas is your foundation functioning well?
What areas could a new CEO improve?
What talents, experience, and personality traits are you looking for in your next CEO?
What do your staff and board perceive to be the foundation’s needs?

Succession Planning Basics

It is the board’s responsibility, often in conjunction with the CEO and the executive staff, to develop a succession plan policy. A succession plan policy (see the sample plan below) typically includes the following key components:

a statement of commitment to prepare for inevitable leadership change
a statement of commitment to assess leadership needs before beginning a search
a plan to appoint interim leadership to ensure smooth operations and compliance with contractual obligations
an outline of succession procedures, including:
- the internal management line of succession to the interim position
- a time frame for making the interim appointment
- a time frame for appointing a board transition committee
- the responsibilities of the transition committee, such as communicating with stakeholders, identifying a transition management consultant, conducting an organizational assessment, and designing the search plan

Source: TransitionGuides

Frequently Asked Questions

What do we do if the leadership change occurs unexpectedly?

The board should always have a clear CEO succession plan in case of emergencies. Such a plan ensures the continuous coverage of executive duties and provides guidelines for temporarily appointing an acting CEO.

An emergency plan can guide the board through a hectic time by identifying what will happen if the CEO is absent for a short or long period. Usually the best course of action is to appoint an interim CEO. With this in mind, the emergency plan should include:

a list of the current CEO’s priority functions
several staff members, board members, or consultants who could be appointed as acting CEO
how the acting CEO will be trained and compensated, and what level of authority this individual will hold
a description of the hiring process, if needed, for the next CEO, including the appointment of a transition or search committee
how to communicate changes to donors, grantees, and the community

If change is anticipated, what can the current CEO do to prepare for the transition?

If you are a departing CEO, you and the other staff members can help your board implement a succession plan. Here’s how:

Help the board appoint an acting CEO to serve during the transition if there is no overlap between the current and incoming CEO.
Complete performance reviews for all personnel before you leave. This ensures that the staff receives your feedback before you leave—giving personnel a fair opportunity to reflect on their past performance, and giving the new CEO the input needed about each employee.
Organize your office, ensuring that there are labels on all documents and drawers. Meet with appropriate staff and board members to review where you keep files and important documents. A staff member should keep a key to the office and appropriate board members should have keys to the desk drawers and file cabinets.
Distribute emergency contacts to your staff. Give your staff the names and phone numbers of at least two board members whom they can contact if needed.
Hold weekly staff meetings. Depending on the size of the organization, have weekly meetings with the full staff (if small) or all managers (if the staff is large) during the transition and until a new CEO is hired. Have a board member attend the meetings. Designate a staff member to attend portions of the board meetings.
Meet with a board member once a week before you leave. Review the status of work activities, any current issues, etc.
Help the board and staff prepare for the new CEO’s orientation. Discuss who among the board and staff members will lead the orientation and what materials will be presented.
Discuss with the board how to handle public relations. The community will soon hear that the CEO is leaving. Agree on how this message will be conveyed to the community.
Move your duties to the new CEO. If possible, spend some time training the new CEO.

How do we inform community members about the upcoming change?

As soon as the CEO gives their departure date (or departs unexpectedly) and you have appointed an interim CEO, send a press release and post a notice on your website announcing the change. Try to be as transparent as possible about when the CEO is leaving and how the foundation will seek a successor. In the case of an unexpected departure or leave of absence, simply state who is acting as interim CEO and fill in the remaining details later, as they are determined.

How do we start the hiring process for a new CEO?

If your foundation’s CEO is departing in a year, then the new CEO should be on site and getting up to speed in 11 months. That may seem like a long time at the outset of the search process, but an executive search committee may need months to narrow down the candidate pool. Depending on how frequently your board meets, board approvals may hinder the process—special sessions may be required to avoid slowing things down. Deadline creep could keep your foundation from meeting its goal of a smooth transition, so don’t let it occur. Be sure to consider holidays, conferences, and other major events that may slow or halt work for a week or two.

Do we need to appoint a transition committee?

In times of transition, you should have a few trusted people who are actively managing the change. Whether they are board or executive staff members, outside associates, or ex-officios, these people should understand what the foundation needs, how it operates, who the key players are, and what challenges may arise.

Keep the committee’s size manageable—three to five people is usually recommended. Too large a committee could hinder the process with scheduling challenges alone. If the board appoints a committee, make sure expectations are clear by outlining responsibilities, key dates for meetings or calls, and deadlines.

How long do transition periods last?

It varies, depending on the circumstances of the CEO’s departure and how well the foundation has planned in advance.

A good rule to follow: Allow more time than you think you need. Good candidates will need time to wind down at their current position and to get up to speed with your community foundation and its operations. With more time, you’ll be in a better position to choose the best candidate for your organization. If your outgoing CEO is comfortable with long-term planning, request one year’s notice. While that may be wishful thinking, a year is optimal for conducting a careful search and implementing a smooth transition process.

We chose a successor. Now what?

During a CEO transition, the executive staff will often work closely with the board to ensure a smooth process. Ways the executive staff members can assist the new CEO:

Prepare a list of key stakeholders. Make a list of key stakeholders the new CEO should know about (e.g., donors, nonprofits, and advisors (legal, accounting, real estate), or peer organizations.
Ask the board to send a letter to stakeholders, if it has not done so already, announcing the new CEO’s arrival, start date, background, and other details. Be aware of the effect transitions may have on donors and others in the field.
Send a news release announcing the change to key organizations, community associations, field publications, and local newspapers.
Ask all staff members to document their activities. Staff members might share a to-do list of their current important activities, planned activities over the coming two months, and any major issues. These lists can help the new CEO get up to speed.
Update the administrative calendar for the organization. Make a schedule of all major recurring activities during the year (performance reviews, special events, staff meetings, one-on-one meetings, lease or contract expiration dates, paydays, etc.)
Create authorization lists. In conjunction with the board chair, decide who will issue paychecks and sign them during a CEO transition. Often, the board treasurer or secretary will assume this role.

What support and orientation will the new CEO need?

The staff can also do a lot to help the new CEO get his bearings upon arrival and during the first few weeks on the job. Here are some ideas:

Familiarize the new CEO with the office. Be sure the new CEO is given keys, a tour of the offices, and an orientation for the copy, fax, computer, and telephone systems and any special billing procedures.
Schedule any needed training, such as computer training, including use of passwords, overview of software and documentation, location and use of peripherals, and where to go to ask questions.
Support the new CEO with an ongoing information exchange. During the first six weeks, the executive staff may want to meet regularly with the new CEO to discuss the transition, hear any pending issues or needs, and establish a good working relationship.

How much CEO overlap is useful?

Although it depends on the size of your foundation, two to three weeks is usually an acceptable time frame. One week may end up creating a time crunch and information overload for the incoming CEO. With the outgoing CEO on hand for a bit longer, the new CEO can become acclimated and ask questions. However, the outgoing CEO must be careful to begin loosening their grip on the reins when the incoming CEO arrives. Here are some views from your colleagues:

“I shadowed my predecessor half-time for one month. I also attended the Community Foundation Fundamentals course just two weeks after that. I did not know the field at all but still felt that one month was a little long—three weeks would have been better for me. The previous executive continued to assume the role and responsibilities until she left. Staff was ready for a change and that made the transition easier.”
“My predecessor and I overlapped by about six weeks. It was helpful but probably longer than necessary. I was immediately ‘in charge’ and he finished up some assignments.”

How do we avoid the “lame duck” syndrome?

Keep the outgoing CEO engaged, even though they are leaving. What planning processes can they participate in? Are there any unrealized—or perhaps unspoken—goals the CEO had for the community foundation that could be implemented before they leave? What are the challenges the outgoing CEO knows their successor will face? How can the CEO pave the way for their successor? These are just some of the questions you may want to consider.

While a leadership change usually brings with it a few difficulties, planning ahead can help smooth the CEO succession process. Letting go of the status quo can be a challenge for the staff and board members as well as for the outgoing CEO. But it also brings opportunities to reflect on one’s role and on the strategic direction of the community foundation.

Sample Succession Plan

Courtesy of TransitionGuides

A change in executive leadership is inevitable for all organizations and can be a very challenging time. Therefore, it is the policy of the [ORGANIZATION] to be prepared for an eventual permanent change in leadership – either planned or unplanned – to insure the stability and accountability of the organization until such time as new permanent leadership is identified. The board of directors shall be responsible for implementing this policy and its related procedures.

It is also the policy of the board to assess the permanent leadership needs of the organization to help insure the selection of a qualified and capable leader who is representative of the community, a good fit for the organization’s mission, vision, values, goals and objectives, and who has the necessary skills for the organization. To insure the organization’s operations are not interrupted while the board of directors assesses the leadership needs and recruits a permanent executive officer, the board will appoint interim executive leadership as described below. The interim chief executive officer shall ensure that the organization continues to operate without disruption and that all organizational commitments previously made are adequately executed, including but not limited to, loans approved, reports due, contracts, licenses, certifications, memberships, obligations to lenders or investors of the [ORGANIZATION], and others.

It is also the policy of the [ORGANIZATION], to develop a diverse pool of candidates and consider at least three finalist candidates for its permanent CEO position. The [ORGANIZATION], shall implement an external recruitment and selection process, while at the same time encouraging the professional development and advancement of current employees. The interim CEO and any other interested internal candidates are encouraged to submit their qualifications for review and consideration by the transition committee according to the guidelines established for the search and recruitment process.

Procedures for Succession

In the event the chief executive officer (CEO) of the [ORGANIZATION], is no longer able to serve in this position (i.e., leaves the position permanently), the executive committee of the board of directors shall do the following:

Within 5 business days appoint an interim CEO according to the following line of succession:
1. chief operating officer (COO) of [ORGANIZATION]
2. senior vice president of of the [ORGANIZATION]
3. external consultant (with experience as an interim executive director)
Within 15 business days appoint an executive transition committee, in the event that a permanent change in leadership is required. This committee shall be comprised of at least one member of the executive committee and two members of the board of directors. It shall be the responsibility of this committee to implement the following preliminary transition plan:
1. Communicate with key stakeholders regarding actions taken by the board in naming an interim successor, appointing a transition committee, and implementing the succession policy. The organization shall maintain a current list of key stakeholders who must be contacted, such as lenders and investors of the [ORGANIZATION], foundations, government agencies, and other.
2. Consider the need for consulting assistance (i.e., transition management or executive search consultant) based on the circumstances of the transition.
3. Review the organization’s business plan and conduct a brief assessment of organizational strengths, weaknesses, opportunities and threats to identify priority issues that may need to be addressed during the transition process and to identify attributes and characteristics that are important to consider in the selection of the next permanent leader.
4. Establish a time frame and plan for the recruitment and selection process.
5. Refer to the CEO Hiring Policy and Procedures in the Personnel Guidebook for additional procedures.

The board should use similar procedures in case of an executive transition that simultaneously involves the chief executive officer and other key management. In such instance, the board may also consider temporarily subcontracting some of the organizational functions from trained consultant or other organizations.