While the roles of a nonprofit board and a foundation board don’t differ hugely, foundation board members face several specific challenges. As a charitable tax-exempt organization, the foundation’s chief role is to distribute charitable funds. Of course, you need a board at the helm to make that happen. So what is different about a foundation board and a traditional charity nonprofit board? In a private foundation that has been created by an individual or family, there are some nuances to consider when forming a board. Let’s look at the main distinctions.
The foundation board member composition typically varies depending on the entity who created the foundation. If a family created a family foundation, board members typically include the original founder and other family members to ensure the founder’s original intent is followed. It is common practice for “insiders” to serve on a family foundation board: family members, close friends and business colleagues. However, balance and perspective are helpful, so bringing on a couple of members with no personal or business ties to the family can widen your point of view.
Not surprisingly, corporate foundation boards are mainly comprised of company executives and senior employees to ensure that foundation giving is aligned with the corporate culture. These boards also need to ensure they cover sufficient business and philanthropic knowledge areas.
In a more independent foundation run by an individual, boards tend to be composed of more “outsiders”. This often occurs over time as the connection with the original founder diminishes, but the foundation continues to function. Boards usually evolve in this circumstance and a community foundation board member with an interest in the organization’s mission is typically recruited for his or her expertise in that area.
While all boards need to steer clear of self-dealing and “insider” compensation, private foundations must be particularly cognizant of this. Avoid offering board members financial benefits that outweigh their actual contributions. Of course, there are IRS rules to follow.
In fact, the IRS Tax Reform Act of 1969 provides the legal framework by which foundations operate. The IRS is busy – there are over 80,000 private foundations to date. This law basically prevents private exploitation of charitable foundations by stipulating a minimum 5% annual payout rate (distribution of funds) and forbidding any self-dealing (e.g. business transactions with board members.)
Foundations cannot have more than 20 percent holdings in any single business, cannot make risky investments, and cannot use grants to pay lobbyists. Strict rules also apply for foundation board members regarding business dealings. When planning board member succession, an eye toward ethics and integrity in these individuals is crucial.
Even so, it is still fair game to compensate your foundation board members for their work. The IRS does not consider this as self-dealing, but the pay must be reasonable. Unfortunately, a few bad apples have created negative publicity regarding compensation, so these days, most board members, whether nonprofit or foundation, serve as volunteers without compensation.
Regardless of all the rules and regulations, foundation boards (and nonprofit boards for that matter) have one overarching function: meet the donor’s original intent for the organization. This is truly the board’s foremost duty. The donor has created the original mission statement but in effect gives up ownership of the funds to the board. This transfer of responsibility takes the decision-making away from a single founder and puts it in the hands of the board. In short, the board’s job is to implement that mission and bring it to fruition.
As you can see, there are several important differences between a foundation board member and other types of board members. It takes a special person to have the commitment, discipline, and character to be an excellent foundation leader.
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