By Lauren Kotkin, Exponent Philanthropy
Foundation trustees gathered last month for our daylong Foundations 101 Seminar, co-hosted by Southeastern Council of Foundations and led by colleague Mary Phillips of GMA Foundations, an Exponent Philanthropy Professional level Sustaining Partner, with support from U.S. Trust philanthropic advisor Mary Stokes and attorney Marc Lane.
More than a few points stood out as essentials that can be easily overshadowed or overlooked as funders go about the complex work of giving well.
Know where your founding documents are and what they say
A nonprofit’s articles of incorporation and bylaws, or a trust’s trust instrument, are legal documents that outline how a foundation will be governed.
“The founding documents are the board’s blueprints for building the foundation,” says Mary. “These documents should be part of each board member’s orientation and a chapter in the foundation’s operating handbook. Trustees should be as familiar with the founding documents as they are with their own backgrounds.”
Trustees have a duty to understand what the documents contain and what they mean; staff members will also find them helpful in their work. Yet far too often, they are filed away and forgotten. In our recent survey of member foundations, 7% were unsure whether they represented a nonprofit corporation or a trust—a telling statistic.
If faced with a governance question or quandary, consult your founding documents first. Guidelines on minimum number of board meetings, board member term limits, voting policies, and much more are often addressed in your founding documents. If your board amends its bylaws, be sure to notify the IRS when filing your annual tax return.
Value your meeting minutes
For some foundations, board and committee meeting minutes are perfunctory (or even nonexistent), not capturing key data, decisions, presentations, actions, or the parties assigned to next steps. Meeting minutes are a powerful way to document that fiduciaries took proper action to fulfill their duties. And, because they may be subpoenaed in a lawsuit or IRS audit, they also serve a legal function.
Minutes needn’t record exactly who says what, but they do need to be created mindfully to guarantee key information isn’t lost or forgotten. It is good practice to prepare minutes as if they were public documents, and to prepare them immediately and approve them at your next meeting to ensure any errors are caught and corrected.
Says Mary, “Committee meeting minutes can provide background on a committee’s work that substantiates its board recommendations. Along with verbal committee reports, the minutes serve to keep the full board informed.”
Write and use board member position descriptions
Our member foundations are reporting more frequent use of written policies—for some policies, as much as a threefold increase over the past decade. And yet, those who use written position descriptions for board members are still in the minority: 38% of foundations in 2015 (up from 14% in 2005).
Don’t underestimate the power of position descriptions to get everyone on the same, ahem, written page. Position descriptions help with recruiting and orienting board members, clarifying roles, setting expectations, and managing unsatisfactory performance. Plus, the process can open doors to discuss the qualities and skills your board wants in fellow board members—e.g., tolerance, courage, proven leadership—not only the responsibilities a board member will fulfill.
“The job of board member has fiduciary, tax, legal, and community obligations,” says Mary. “Not knowing what these are would make it challenging for anyone to do their best work. Position descriptions are also essential to expanding the board, replacing board members, and planning for succession.”
Know what self-dealing is and how to avoid it
Each year, we field dozens of questions about self-dealing. They touch on board retreats, credit cards, shared space, and so much more.
Put simply, a host of “disqualified persons,” which include trustees, officers, staff, substantial contributors, and certain family members, plus entities they control, are prohibited from engaging in a list of financial transactions with the foundation. The often counterintuitive rules can—and do—trip up even the most seasoned and well-intentioned funders.
It is imperative that board members and key staff review the self-dealing rules each year, and get expert advice before engaging in any financial transaction with the foundation—even if it may appear to benefit the foundation.
Says Mary, “Self-dealing is not to be confused with conflict of interest. A foundation can develop a conflict of interest policy with some options, but self-dealing is defined by Internal Revenue Code. There are no options. Although the Code does define specific acts of self-dealing, there are gray areas that can challenge even experienced funders.”
Don’t overlook impact investments
Impact investing, or making investments in search of social and financial returns, is well on its way to becoming mainstream. In 2014, J.P. Morgan and the Global Impact Investing Network reported $46 billion in impact investments under management among foundations and financial institutions, up 26% from 2013. The projected market potential is $45 trillion.
Foundations of all types are making impact investments, from screens to direct investments in private companies to deposits at CDFIs, and they’re earning returns on par with their counterparts.
“In determining the impact your board hopes to achieve, consider all of its assets as tools in the toolbox,” says Mary. “In addition to grants, many foundations use convening, advocacy, and education to achieve their mission. Impact investing is one more tool that we can deploy to create social change.”
Senior Program Director Lauren Kotkin plans a range of educational programs for the Exponent Philanthropy community, including conferences, webinars, and conference calls. She also dedicates a portion of her time to managing our resources on investments. Previously, she worked at the Council on Foundations in the Family Foundation Services department. Lauren holds an undergraduate degree from Duke University and an M.Ed. from Lesley University, with a focus on using arts in education.