Reason to Know

U.S. Capitol building By Linda Crompton, president and CEO

As you may know, last year a Commission on Accountability and Policy for Religious Organizations was formed (at the request of U.S. Senate Finance Committee member Charles Grassley) to address some of the most challenging tax and policy issues involving religious organizations; its charter includes an examination of issues surrounding all tax-exempt organizations. I serve on the Commission as a representative of the nonprofit sector and recently articulated BoardSource’s position on excess benefit transactions for the Commission. You can find our position paper here; scroll to “Nonprofit Excess Benefit Transactions.”

The Commission posed questions regarding excess benefit transactions – meaning, essentially, overly generous executive compensation — for response. In all cases, the questions proposed higher standards for oversight of executive compensation: 1) changing the level of knowledge required for personal liability for approving excess compensation from “actual knowledge to “reason to know”; 2) assessing penalty taxes on organizations, in addition to individuals, that approve excess compensation; 3) replacing the “rebuttable presumption” protection with a provision stating that the steps involved in establishing the presumption constitute “minimum standards for due diligence”; and 4) whether new guidelines are needed for compensation studies, and whether there should be more disclosure of comparison data used.

In a nutshell, BoardSource and I disagree with all of the higher standards but the first. Our analysis of nonprofit executive compensation tells us that egregious pay is, thankfully, an uncommon problem that gets a lot of press when it does occur, and heightened standards are unnecessary and counterproductive, particularly when they threaten to penalize the organization and its ability to fund its services to the community.

So what heightened standard do we agree with? We believe that changing the level of knowledge by management (which includes the board) for liability for approving excess compensation from “actual knowledge” to “reason to know” is a good idea. Now, board members need to know we’re not throwing them under the bus here. We’re only saying that changing the standard to “reason to know” acknowledges the fiduciary duty that already exists. Board members need to know and approve their chief executive’s compensation and any other transaction that could be construed as excessive. No board member, as a fiduciary of an organization, should ever be able to claim when asked about the chief executive’s compensation, “I didn’t know!”

Not surprisingly, we also advocate for board education, to ensure that boards are keenly aware of that responsibility to know and approve compensation. What does your organization do to make sure your board knows its fiduciary responsibilities?

 

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