Legal Basics: 5 Strategies for Keeping Trustees on the High Road

Foundation trustees have many responsibilities, but fulfilling their legal duties probably tops the list. As such, it’s important that you know the rules and where trustees trip up most. Beyond the law, there are many things foundations can do, such as having a clear mission statement and healthy decision-making process, to help trustees stay out of trouble.

Here are five strategies for keeping your trustees on the right track.

1. Develop a cohesive and compelling purpose for the foundation

Foundations that have a clearly worded mission statement—to which trustees are committed and which potential grantees understand—avoid the sorts of conflicts that can arise when trustees’ personal agendas dominate.

2. Expect great things from your board members

Generally, people will rise to the occasion if you expect them to. Set and communicate standards before individuals agree to become trustees—even in family foundations. Make sure trustees are well trained, active, informed, and respectful in meetings.

3. Make sure trustees know and follow all state and federal private foundation rules

Seven sections of the Internal Revenue Code relate to private foundations. Trustees should be especially well versed in the following rules:

• Self-dealing—Be sure you know who meets the criteria of a disqualified person and know the extensive list of prohibited transactions with disqualified persons. Most notably, be careful not to break the rules when renting space, paying compensation, and paying for family to attend board meetings or charity events.
• Taxable expenditures—Be sure no grants are made that influence public elections or support noncharitable activities or lobbying. Other expenditures are allowed only if the foundation meets additional requirements (e.g., special steps for international grants or scholarship programs).

4. Put policies and processes in place to help trustees always choose the high road

A few simple policies and processes can help trustees to make consistent, unbiased, and thoughtful decisions, including:

• Conflict of interest policy to minimize the potential for bias and unethical decision making
• Internal financial controls (and perhaps a whistle-blower policy) to ensure proper financial oversight
• An investment policy statement to help trustees uphold their fiduciary duties by establishing a plan for your foundation’s investments and advisors
• A decision-making process that encourages consensus but allows for healthy discussion and dissent
• Ethics policies, which are considered a best practice by the Internal Revenue Service, to define the overall moral fabric of a foundation and hold trustees to high standards

5. Engage competent outsiders in your effort to strengthen and educate trustees

People often are better able to internalize ideas and concepts after hearing them from several different sources:

• Make sure you have competent advisors, knowledgeable in foundation law and accounting, to help ensure that trustees sign and file a complete and correct Form 990-PF (regulators estimate that 25% are filed with errors); avoid breaking the more complicated rules, such as self-dealing; and know the latest legal changes (e.g., updated regulations on grants to supporting organizations).
• Turn to investment professionals, foundation consultants, and community experts, as needed. Invite advisors to meet with your board to help you create processes, think through challenges, and continue your learning.
• Turn to Exponent Philanthropy and other philanthropy support organizations for educational and networking meetings, publications, and advisor recommendations.