Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

Are nonprofits “follow the money” obsessed?

Are Nonprofit follow the money obsessed?Have the leaders of nonprofits been overly incentivized to “follow the money,” resulting in a troubling shift in the composition of boards? The answer is yes according to a recent article in the Stanford Social Innovation Review. The trend may be “distort[ing] organization priorities” and may “dilute charitable values.”

According to the author, Garry W. Jenkins, nonprofits board are becoming overly reliant on financial industry executives. Among organizations surveyed in New York, they comprise just under 40% of board members, and between 44% and 56% of board officers. Anecdotal experience suggests this trend, while perhaps not as pronounced elsewhere, is national.

“Boards and board governance are inevitably shaped by the identify and background of those who make up the boards themselves.” Thus, the large portion of financial industry executives on boards has at least two effects feared by the author. Groupthink is dangerously prevalent among nonprofits boards according to some. As The Board Book suggests, lack of “industry diversity” among a nonprofit’s board squashes discussion. By way of example, it holds that the best boards “take care that there is ample inclusion and weighty voices of” diverse values “to ensure that those values are woven into the guts of the institution.

Groupthink exacerbates another alleged ill effect, a board that increasingly incorporates “finance practices” into decision making. These include “data-driven decision-making, an emphasis on metrics, prioritizing impact and competition, managing with three- to five-year horizons and plans, and advocating executive style leadership . . .”

As one who advises hundreds of nonprofits annually and also sits on boards, I see both merits and problems with Prof. Jenkins’ concern. I am a firm advocate that entrepreneurial thinking has a place in almost every nonprofit, especially when it comes to good management technique. Notwithstanding, too much emphasis on entrepreneurship, especially when it translates to building earned revenue programs rather than good management practice, can result in a emphasis on earning and raising money. A focus on recruiting finance executives (because of the money they presumably will bring to the organization) both overtakes the charitable purpose of the organization and can even threatened exemption.

Many factors are constantly shaping and reshaping the nonprofit sector. If the trend Prof. Jenkins and others report on is real, should we be concerned? Share your thoughts.

What has been your experience as a nonprofit board member, advisor, or otherwise? Is there overrepresentation of finance executives on nonprofit boards. Is that bad or good? Does it depend? And has the emphasize of some boards shifted too much from mission in order to “follow the money”?

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IRS Targets Nonprofit Self-Declarers

It’s official. IRS targeting of nonprofit self-declarers will begin this year.

Most organizations that qualify for federal tax-exemption other than non-church 501(c)(3) charities do not need to apply for tax-exemption. Whereas may do, they can simply self-declare that they are tax-exempt.

When such nonprofit organizations complete their Forms 990 they need only identify their 501(c) category. That will change in 2015.

Last week the IRS announced that starting next year, self-declIRS Targets Nonprofit Self-Declarersared exempt organization will be required to check a box on their Form 990 that they are self-declared. While the IRS is coy about what it will do with this information, it is likely they will use is to target organizations for possible audits. This seems to be a follow-up to an IRS study commenced two years ago.

Is your nonprofit organization’s exemption self-declared? Do you think this new rule will result in more organizations applying for tax exemption instead of self-declaring?

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Should Social Welfare Organizations Be Treated More Like Charities?

Currently, the IRS requires 501(c)(4) social welfare organizations to be “primarily engaged” in promoting social welfare. This means social welfare organizations can spend a minority of their total expenditures on political campaign activity without losing their exemption. As these organizations are not required to publicly disclose the sources of their funds, it also means that this is a potential loophole for contributors to support political activity without public knowledge.

Some want 501(c)(4)s to instead be treated like 501(c)(3)s, i.e., to engage in no political activity, or at least to be limited to less political activity. Recently, two new bills were introduced to make this change happen.

The 501(c)(4) Reform Act of 2013, introduced by Rep. Michelle Lujan Grishman (D-N.M.), would be an outright ban against 501(c)(4)s participating in or intervening in political campaigns. Rep. Lujan Grisham explains that this is “common-sense legislation” that would prevent social welfare organizations from acting like political campaign organizations. She wants to ensure that political activity is only carried out by political action committees that are subject to disclosures under federal campaign finance law.

But some aren’t ready to go so far. Rep. Matthew Cartwright (D-Pa.) is proposing a bill that will instead limit the political spending of 501(c)(4)s. The Openness in Political Expenditures Now Act would limit political spending by 501(c)(4)s to the lesser of 10% of the organization’s total yearly spending or $10 million. The bill would also require 501(c)(4)s to disclose certain political activity spending to their members.

What do you think about these new bills? Will limiting political activity be sufficient or is an outright ban needed? Post your comments below.

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