It Matters...But is it Working: A White Paper Series on Our Region's Nonprofit Sector

It Matters …

But Is It Working?

A White Paper Series on Our Region’s Nonprofit Sector

Governance March 2010

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_____________________________________________________________________ The Philadelphia Foundation It Matters… March 2010

____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… March 2010

Executive Summary Governance: Bench Strength, Capacity, Renewal

This white paper examines several aspects of nonprofit board leadership in the Southeastern Pennsylvania region. A synopsis of key points follows:

 The large number of seats to be filled on Southeastern Pennsylvania nonprofit boards presents a daunting recruitment challenge.

 While precise measures of regional nonprofit board membership are lacking, it is safe to assume ‐‐ based on national data ‐‐ that women and persons of color are under‐represented on Southeastern Pennsylvania nonprofit boards.

 Although some existing mechanisms to train and support Southeastern Pennsylvania nonprofit board members are effective, they cannot begin to fully address the full spectrum of demand for such training.

 It is clear that informed and engaged nonprofit board members are needed to provide for the greater public good. Ensuring that nonprofit board members fulfill that role is no easy task.

 The new IRS Form 990, which has brought a renewed emphasis on transparency and accountability in nonprofit governance, might have a negative impact on nonprofit board recruitment.

These findings generate several questions that need to be explored by the broader community to ensure that the nonprofit sector remains dynamic and robust. By topic area, these questions are:

 How to address the challenge of recruiting, training and supporting Southeastern Pennsylvania nonprofit board members.

 How to assess the quality and effectiveness of the governance of Southeastern Pennsylvania nonprofits in order to ensure appropriate, consistent and continuing training.

 How to evaluate existing Southeastern Pennsylvania governance models and, if needed, improve them.

 How to support Southeastern Pennsylvania nonprofits in weathering the current economic crisis and put them on a firm footing for the future.

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It Matters…But Is It Working?

A White Paper Series on Our Region’s Nonprofit Sector

Typical of other major, diverse urban regions, the “nonprofit sector” in the five‐county Greater Philadelphia region is large, diverse and active. But just how large, diverse and active? And is its scale, diversity and activity aligned to the work our community needs the sector to perform, and enjoying the support and resources it needs to do that work?

To date, our region’s nonprofit sector has not been studied with the precision needed to answer these questions. Lacking these answers, our nonprofit sector cannot work as effectively as it might to improve the quality of life for our citizens and our community. Equally, our community cannot take the full measure of the value our nonprofits are contributing against the resources being applied to it.

Against this backdrop, The Philadelphia Foundation commissioned a study by the Economy League of Greater Philadelphia to quantify and describe the nonprofit landscape in Southeastern Pennsylvania (Bucks, Chester, Delaware, Montgomery and Philadelphia counties).

This work captured important baseline information, and the numbers confirm that our region’s nonprofit sector is, indeed, large, diverse and active. The data is posted in almanac form on The Philadelphia Foundation’s website at www.philafound.org/nonprofitstudy2010

Just as important, the research enabled The Philadelphia Foundation to begin framing a series of strategic questions about the sector’s contribution to the people of our region and their needs. These questions focus on the sector’s vitality, its leadership, its sustainability, and its future direction. Some of these questions were answered by the research, but others were not, underscoring that more work needs to be done.

Of course, these strategic questions are framed against a very challenging backdrop of an economy still in crisis after the extraordinary financial meltdown during 2008 and early 2009.

This backdrop includes a state budget process in disarray, and the prospect for 3‐5 years of serious economic challenge ahead, while the demand on human services nonprofits has surged.

As a result, the fault lines are certainly clearer and the need for action more acute.

This white paper is the first in a series striving to frame the relevant questions for and about our region’s nonprofit sector, report on what is known and what remains to be explored, and suggest directions forward. Further, these white papers are a call to action, inviting the region’s nonprofit sector, as well as government, the private sector, the media and citizens‐at‐large, to freshly articulate the role we need our nonprofit sector to play, and to reaffirm the support it needs to perform that role well.

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The white paper series will focus on three, broad strategic themes and include convenings of the community for further discussion: ‐ Governance: Bench Strength, Capacity, Renewal ‐ Fiscal Health: Sustainability, Business Models, Processes ‐ Human Capital: Talent Base, Generational Change, Career Paths

This project is a collaboration between The Philadelphia Foundation’s senior management team and David R. Curry, Managing Principal of davidrcurryAssociates. Special thanks to senior foundation staff including Pat Meller, Vice President for Finance & Administration; Heather Gee, CAP, CFRE, Vice President for Development and Donor Services; Beatriz F. "Bia" Vieira, Vice President for Community Impact, and Betsy Anderson, Communications Officer.

Finally, we see these white papers as a strategy in our role and larger mission to “build community,” and another step in realizing our vision:

…a flourishing Delaware Valley made up of safe, thriving and diverse communities, strengthened by a dynamic and robust nonprofit sector that is critical to our quality of life, and that inspires civic participation through philanthropy.

We invite your participation.

R. Andrew Swinney President The Philadelphia Foundation

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It Matters…But Is It Working?

A White Paper Series on Our Region’s Nonprofit Sector

Governance: Bench Strength, Capacity, Renewal

Strategic Questions: Scale and Bench Strength  With 15,000+ nonprofits in our region, reflecting 40% growth since 2000, do we have the citizen talent (bench strength) in our region to provide competent, engaged governance for our nonprofit sector?  Are we assuring that women and people of color are finding opportunities to serve on and lead our nonprofit boards?

Development, Training and Support  Have we built the development, training and support infrastructure needed to attract, retain and recognize the necessary cadre of individuals to serve in governance roles?

Governance Models, Engagement, Action  Are the governance models guiding our nonprofit boards delivering the oversight and leadership needed to assure performance and responsible stewardship?

New IRS Form 990s, Accountability, Recruitment  How will the new IRS Form 990 information requirements around accountability impact recruiting and retaining Board talent, and how will we address it?

What We Learned: It Matters Research Nonprofit organizations in southeastern Pennsylvania total some 15,000. Nearly 7,300 of those are required to file tax returns, more than 5,000 organizations are classified as Public Charities, and more than 3,600 exist to provide households and individuals with direct services (NPISH organizations). From 2000 to 2007, the number of nonprofits in southeastern Pennsylvania grew by about 40%. In terms of sheer numbers of nonprofit organizations, the Human Services subsector boasts over 1,800 organizations spread across the five‐county region (see chart on NTEE groups on page 6).

The research conducted by the Economy League of Greater Philadelphia did not collect data on nonprofit governance per se, but the overall scale of the nonprofit sector as above did raise a series of questions we seek to explore further in this paper.

Scale and Bench Strength BoardSource began surveying nonprofits and collecting information on nonprofit governance in 1994, and has published its Nonprofit Governance Index series every few years. We extract some key data from the 2007 report on the next page. ____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… March 2010 4

Nonprofit Governance Index 2007 Board Source, 2007, p.10+

…Over the last decade, average board size has stayed relatively constant at 16 members. There’s no one right size, however, so each board must determine how many members it needs to work efficiently and effectively.

This year’s Governance Index surfaces a sweet spot. Boards with 15 to 22 members are rated as more effective by their chief executives and repeatedly report better governance practices.

A board member can serve, on average, seven years through a combination of term length and limits. The most popular pattern, which has held steady over the years, is two consecutive three-year terms. Small boards and small organizations have a higher percentage of no term limits than their large counterparts.

Board officer positions have shorter terms and more limits than those of board members, taking into account the time commitment and value of continuity.

The average number of years for board chair terms is 1.8 years, and chairs can serve an average of 1.9 consecutive terms. Other board officers serve an average term of 1.7 years, with an average of 2.1 terms.

Board chairs make a serious commitment to the organizations they lead, especially in terms of time and fundraising. They report spending twice as much time on board work as other board members (20 vs. 10 hours per month)

Addressing questions about our region’s “bench strength” in terms of citizen talent to fill and properly lead our region’s nonprofits requires some quick math.

Let’s start by assuming that nonprofit boards in our region range in size and note the two key data points from the Index above, i.e. a 16‐member average with 47% of boards having less than 15 members. If we posit a more conservative average of ten members per board, and roughly 15,000 nonprofit boards, our region’s board population could be a rather daunting cadre of 150,000!

If we assume a generous length of service of 6‐7 years for a Board member, and also assume that many board members serve on more than one board, we still get a rather startling recruitment challenge: tens of thousands of fresh board seats to be filled annually.

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nt

173 Orgs/ 141 NPISH 2007 Assets: $582M Revenue: $196M

e erm pow m e

Environment oc /S c i bl Pu

610 Orgs/ 291 NPISH 2007 Assets: $5.85B Revenue: $2.4B

82 Orgs/ 72 NPISH 2007 Assets: $132M Revenue: $116M

In

B 646 Orgs/ 532 NPISH 2007 Assets: $3.4B Revenue: $869M

Arts, Culture

Human Services

1808 Orgs/ 1691 NPISH 2007 Assets: $6.51B Revenue: $4.29B

January 2010

NPISH

Total Orgs

- NTEE: National Taxonomy of Exempt Entities - Public Charity: 501c3s which receive support from diverse sources - NPISH (Nonprofits Serving Individuals and Households): A subset of Public Charity devised for this almanac. NPISH organizations provide services directly to persons and households rather than to other organizations. For the purpose of this almanac, NPISH were defined by The Philadelphia Foundation and the Economy League as all Public Charities: - Minus hospitals and higher education institutions, - Minus NTEE Minor Groups of Health Care, Medical Research, Philanthropy, Science and Technology, Social Science, Public and Societal Benefit, Religion Related, Mutual and Membership Benefit, and Unknown, -Minus types of organizations that provide services to other nonprofit organizations and not to households or individuals.

938 Orgs/ 646 NPISH 2007 Assets: $27.6B Revenue: $11.9B

786 Orgs/ 245 NPISH 2007 Assets: $19.1B Revenue: $16.2B

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Regional Nonprofit Landscape: Public Charity NTEE Groups: Ranked by Total Organizations with NPISH Subset

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Diversity Of course, the overall question about how we fill board seats to properly govern the 15,000+ nonprofit organizations in our region raises another question: the presence of women and persons of color on those boards and the question of governance diversity overall.

At the national level, the recently released The White House Project Report: Benchmarking Women’s Leadership, discusses leadership and board activity across a number of sectors including academia and nonprofits.

Key findings include:  Women make up 43% of nonprofit board members, according to the most recent BoardSource Nonprofit Governance Index 2007 survey of more than 1,000 nonprofits in the U.S.  Women serve most often on the boards of smaller arts, cultural, health, human services, environmental and educational organizations. As budgets get larger, the percentage of female board members declines—from a high of 51% for nonprofits with budgets of less than $500,000 to a low of 33% for nonprofits with budgets greater than $25 million.  Women account for less than 30% of college and university board members.  Persons of color account for 14% of the board members in nonprofits. African Americans account for 7% of board membership, Hispanics/Latinos 3% and Asians 2%.

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The Urban Institute conducted the first‐ever national representative study of nonprofit governance in 2005 covering over 5,100 nonprofit organizations of varied size, type, and location. The study notes:

“… With respect to race and ethnicity, we find even more homogeneity. This

study raises basic questions about the ability of many boards to truly

represent and respond to the diversity of the public they serve. On average,

86% of board members are white, non‐Hispanic; 7% are African‐American or

black; and 3.5% are Hispanic/Latino (the balance are from other ethnic

groups). Medians convey even greater homogeneity — 96% for white

members and zero for African‐Americans and Hispanics. Fifty‐one % of

nonprofit boards are composed solely of white, non‐Hispanic members.

“… As one might expect, nonprofits located in metropolitan statistical areas (MSA) are more racially and ethnically diverse. Nonetheless, 45% of them are still entirely composed of white, non‐Hispanic members (the figure is 66% outside MSAs) … Among nonprofits whose clientele is over 50% black or African‐American, 18% include no African‐American or black trustees. Among nonprofits whose clientele is 25 to 49% black or African‐American, 36% have no black or African‐American board members. The percentages are even higher for Hispanics/Latinos: among nonprofits whose clientele is over 50% Hispanic/Latino, 32% have no Hispanic/Latino members, and the figure climbs to 52% among those whose clientele is 25 to 49% Hispanic/Latino….”

While there is no survey work in hand which has measured nonprofit board diversity in our region, the Forum for Executive Women here has been measuring corporate board diversity for several years as part of an annual survey process.

Ellen Toplin, President of The Forum of Executive Women and a managing partner at The Star Group, notes that women have held 88, or roughly 10% of the 868 corporate board seats at the top 100 companies by revenue in the greater Philadelphia region, for the last several years. Just nine of those seats are held by women of color. More at: http://www.forumofexecutivewomen.com/SiteData/docs/2009%20WOB%20R/57683deba7b78afd/2009%20WOB%20Report.p df ____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… March 2010 8

"While we have not formally surveyed the not‐for‐profit profit sector for in‐depth data over the nine years since we have been producing our report, anecdotally I can tell you that we do see a greater degree of gender and other diversity across major not‐for‐profit boards in our region,” Toplin said. “However, here too I do not believe that the scales are not balanced yet, and particularly when it comes to a strong enough inclusion of women of color. So, groups like The Forum will continue making the case for the importance of diversity of experience, perspective and thought in the governance in the for‐profit and not‐for‐profit arenas, as well as the public service sector."

Development, Training and Support Once board members have been recruited, appropriate orientation and training of those board members is key. So who is helping address this challenge currently?

The Nonprofit Center at LaSalle University’s School of Business offers governance training for boards – and potential board members – in organizations operating across the nonprofit spectrum.

On the question of the available “governance talent pool” in the Delaware Valley, LaSalle’s Nonprofit Center Director Laura Otten, Ph.D., notes, “There is simply no question that we have the talent pool to provide effective governance for our growing nonprofit community. In fact, we have only begun to tap the nonprofit board potential in our corporations and businesses.

The issue is more around how to prepare capable people to serve and govern well. There is no concise `user manual’ so training around best practices in nonprofit board governance is key.

It’s not a skill set that people typically gain from their professional work experience, but it is crucial to delivering on the responsibility entailed in serving on a board.”

The course description for LaSalle’s “Best Practices in Board Governance” provides a useful perspective for understanding what “governance training” is intended to deliver: Being an effective board member is more than attending meetings. … This course will show how to maximize the all‐important partnership of board and executive director.

Participants will develop a deeper understanding of key elements of board responsibility, such as the law’s performance expectations of nonprofit board members, strategic planning, fundraising, financial management, and the care and feeding of the board.

Participants will leave knowing that they can now cement their good intentions in best practices, including being able to apply standard tools for board assessment and governance and sample essential policies to their organizations. http://www.lasallenonprofitcenter.org/Course‐Details‐379‐est%20Practices%20in%20Board%20Governance ____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… March 2010 9

The Arts & Business Council of Greater Philadelphia’s Business On Board program is a solid answer for one segment of the nonprofit community.

http://www.artsandbusinessphila.org/bob

Since launching the program in 1996, Business On Board has trained more than 400 business executives and placed them on boards and board committees of more than 100 arts and culture organizations in the region. These graduates have contributed more than 32,000 hours of service to their organizations — an estimated value of more than $5.2 million. This program has been a best practice replicated in other cities in the U.S.

The It Matters research determined that our region has some 650 nonprofits in the arts and culture sub‐sector group. Using our 10‐board member average, this suggests a cadre of perhaps 6,500 to 7,000 board members, and an annual recruitment challenge of thousands.

Arts & Business Council CEO Karen Davis comments, “While the Arts & Business Council has made a substantial impact and even helped other cities and regions replicate our success, the work is far from complete. Like nonprofits in other sectors, arts organizations in our region are under unique pressure today due to the economic crisis and its continuing impacts. Now more than ever, board members face difficult decisions around finances, programming and even survival. Making those tough decisions and engaging these responsibilities translates to the need for the kind of ongoing board training and capacity building we deliver.”

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So both within sector groups and across the nonprofit landscape, we need to examine whether our region has an infrastructure that is adequate to train, support and recognize the citizen talent we need to assure responsible governance of our nonprofits.

Governance Models, Engagement, Action Boards large and small need informed and engaged members to provide leadership, guidance, direction and support. But the conventional wisdom is that many boards do not exhibit those qualities, or do so unevenly at best.

A 2007 study on Chicago's health and human services sector sponsored by the United Way of Metro Chicago and The Chicago Community Trust observed:

Board engagement is a factor for many agencies within the Sector.

Among larger agencies that responded to the Survey (with revenues of more than $10 million) less than half reported that their boards were highly engaged around the organization’s response to community and funding changes. Among small and medium‐sized organizations, the percentage of Survey participants with highly engaged boards was even lower, averaging less than 25 percent. Fifty‐eight percent of all survey respondents identified board development as a significant challenge to fundraising; however, lack of board expertise and support were also cited by some agencies as barriers to pursuing a number of strategies in response to the changing environment, including closing programs, changing program focus, developing new revenue producing services, investing in management resources, or developing partnerships to share back‐office expenses.

Board engagement, of course, is a complex dynamic that proceeds from both individual board members and from the board culture and governance models in place. We perceive that the Chicago story above is not unique to Chicago’s health and human services sector. Further, the current economic crisis only serves to exacerbate the situation.

Further to the challenge of good governance overall, John C. Bogle, founder and former chief executive of the Vanguard Group of Mutual Funds, writes a compelling opinion article ‐ A Crisis of Ethic Proportions: We must establish a 'fiduciary society' ‐ in the Wall Street Journal (20 April 2009) (accessed 25 April 2009).

Bogle is focused, of course, on the commercial sector and public companies as he argues that "a heavy responsibility for the (economic) meltdown" lies with "a broad deterioration in traditional ethical standards." He charts this deterioration as part of "the growth of giant business corporations and giant financial institutions controlled not by their owners in the 'ownership society' of yore, but by agents of the owners, which created an 'agency society.' The

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managers of our public corporations came to place their interests ahead of the interests of their company's owners..."

This indictment of the for‐profit sector does not have exact parallels in the non‐profit world, but his underlying thesis does. He concludes that "We must work to establish a `fiduciary society,’ where manager/agents entrusted with managing other people's money are required ‐‐ by federal statute ‐‐ to place front and center the interests of the owners they are duty‐bound to serve. The focus needs to be on long‐term investment (rather than short‐term speculation), appropriate due diligence in security selection, and ensuring that corporations are run in the interest of their owners. Manager/agents need to act in a way that reflects their ethical responsibilities to society. Making that happen will be no easy task.“

Indeed, reworking Mr. Bogle's concluding language a bit helps us think more clearly about the challenge facing nonprofit governance.:

We must work to establish a "fiduciary society," where nonprofit trustees

and directors recognize and act to place front and center the interests of the

public good they are duty‐bound to represent. The focus needs to be on

long‐term public good and responsible performance, as well as appropriate

due diligence and oversight of program direction and effectiveness. Nonprofit

boards must ensure that their actions reflect their ethical responsibilities and

their role as public stewards of the nonprofits they govern.

Making that happen will be not be an easy task either.

Bogle’s opinion piece suggests further reflection on the crossover between corporate and nonprofit governance. We see the "Key Agreed Principles to Strengthen Corporate Governance of U.S. Publicly Traded Companies" issued late in 2008 by the National Association of Corporate Directors as an interesting template which might inform discussion about our nonprofit governance models.

In reading the principles and the associated italicized text we have excerpted, we substituted words like "corporate" and "publicly‐traded" with "constituents" and "nonprofit" to test whether the ideas presented are pertinent and valuable as part of a framework for nonprofit board governance. We believe that there is much that is pertinent and valuable.

We provide elements from the introductory discussion and present the Core Principles in Appendix A (p. 19). Presenting this rather extensive set of principles underscores the importance of the dialogue we believe needs to begin about nonprofit governance and its role in sustainability and impact of our nonprofit sector.

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The Philadelphia Foundation has also supported first steps in this direction through its ongoing support of and participation in Drexel University LeBow College of Business’ Nonprofit Director’s Dialogue. But much more needs to be done. http://www.philafound.org/ForNonprofits/NonprofitDirectorsDialogue/tabid/649/Default.aspx

New IRS Form 990s, Accountability, Recruitment Transparency and accountability in nonprofit governance is in transformation as the new 990 and its supporting principles and requirements take hold.

Joel Wilson, Francis Schweigert, and Grover A. Cleveland, of the College of Management, Metropolitan State University in Minnesota provide a very useful synopsis and fuller paper titled The Door Has Opened: New Form 990 Creates Strategic Opportunities and Risks for Nonprofit Organizations. June 2009 available on Guidestar at http://www2.guidestar.org/

The authors argue: “…the impact that the increased transparency (of the new 990) will have on nonprofit organizations has been severely underestimated. It is not sufficient for nonprofit staff and board members simply to be made aware of these changes. They must also be alert to the changes' strategic implications and have tools to manage them successfully. If prepared, nonprofit organizations can capitalize on the opportunities created by the increased transparency. If unprepared, they may be unnecessarily subjected to potentially damaging external risks. The key to strategic use of the new reporting requirements lies in nonprofit organizations' governance practices.”

They note that as important as the 2002 Public Company Accounting Reform and Investor Protection Act (Sarbanes‐Oxley) and the new 990 are, there is a third key document that nonprofit boards must address carefully.

The IRS’s “Life Cycle of an Exempt Organization” provides guidance for a nonprofit organization for IRS interactions, and includes an 8‐page set of principles and requirements titled “Governance and Related Topics.” More at http://www.irs.gov/charities/article/0,,id=169727,00.html and http://www.irs.gov/pub/irs‐tege/governance_practices.pdf

The discussion of board accountabilities in this document is organized around Mission, Organizational Documents, the Governing Board, Governance and Management Policies, Financial Statements and Form 990 Reporting, and Transparency and Accountability. It is both refreshing and sobering.

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A sample section from the Governing Board section is illustrative: The Internal Revenue Service encourages an active and engaged board believing that it is important to the success of a charity and to its compliance with applicable tax law requirements. Governing boards should be composed of persons who are informed and active in overseeing a charity’s operations and finances. If a governing board tolerates a climate of secrecy or neglect, we are concerned that charitable assets are more likely to be diverted to benefit the private interests of insiders at the expense of public and charitable interests. Successful governing boards include individuals who not only are knowledgeable and engaged, but selected with the organization’s needs in mind (e.g. accounting, finance, compensation, and ethics).

Wilson and his colleagues note The Life Cycle guidance makes it clear that the IRS will utilize the new 990 “to determine whether the nonprofit organization has implemented policies relating to executive compensation, conflicts of interest, investments, fundraising, documenting governance decisions, document retention and destruction and whistleblower claims.” They infer that the IRS intends to use the answers to questions related to these areas to identify nonprofits for future audit.

The nonprofit sector is becoming more aware of these implications of these changes, but we recognize that there is a good deal of training and capacity building needed. To address this challenge, The Philadelphia Foundation continues its program of discretionary grant‐making around capacity building and specific training strategies. More at: https://www.philafound.org/ForNonprofits/NonprofitServicesResources/TrainingsEventsforNP Os/tabid/269/Default.aspx

These new IRS requirements were described earlier as refreshing and sobering. We also see them as an extraordinary opportunity for nonprofits to ask the tough questions that these requirements demand, and forge answers that are both responsible and that can function as a new foundation for engaged governance going forward.

Equally, we see these strengthened accountabilities as having a potentially chilling effect on board recruitment, as the era of “hands‐off” governance passes.

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We close with a summary of areas for further engagement:

Four Areas for Discussion, Research, Planning, Action

 The challenge of recruiting, training and supporting a cadre of board members to

govern 15,000+ nonprofits in our region is a daunting one. How do we address effective recruiting? How do we recruit women and persons of color to serve and lead?

How can we incent and reward Board service so that it is recognized as a civic responsibility and a point of pride in community service?

 How do we assess our region’s nonprofit sector governance “capacity” – that is, the quality and effectiveness of the governance provided to our nonprofits? Building necessary governance capacity will likely involve a more consistent and continuing training approach for Board members across the span of their governance service, and training more appropriate to the nonprofit subsector in which they serve.

 What do we understand about the governance models that our region’s nonprofits employ? Do these governance models best serve the sector’s sustainability and vitality? Do we need to adopt or build new and more effective models to help our nonprofit sector deliver needed results?

 How do we build and deliver technical support and other needed infrastructure to help nonprofit board leadership weather the current economic crisis, and put their organizations on firm footing for the future (which may include exploring strategic alliances, merging, or even dissolution).

We have made further work around these themes a strategic priority for The Philadelphia Foundation. We invite members of the nonprofit sector and our community overall to join us.

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Sources

Francie Ostrower, NONPROFIT GOVERNANCE IN THE UNITED STATES: Findings on Performance and Accountability from the First National Representative Study. The Urban Institute, 2007 http://www.urban.org/publications/411479.html

A Report on the Chicago Region’s Health and Human Services Sector. United Way of Metropolitan Chicago and the Chicago Community Trust, 2007 www.cct.org/FileDownload.cfm?file=HHS_Study.pdf

Nonprofit Governance Index 2007, Board Source http://www.boardsource.org/UserFiles/File/Research/GovIndex‐2007.pdf

John C. Bogle, A Crisis of Ethic Proportions: We must establish a 'fiduciary society' ‐ in the Wall Street Journal (20 April 2009)

Key Agreed Principles to Strengthen Corporate Governance of U.S. Publicly Traded Companies by the National Association of Corporate Directors, 2008 www.nacdonline.org/keyprinciples

The Door Has Opened: New Form 990 Creates Strategic Opportunities and Risks for Nonprofit Organizations. June 2009 Joel R. Wilson, CPA, Francis J. Schweigert, Ph.D., Grover A. Cleveland, DBA, CPA, College of Management, Metropolitan State University

The White House Project Report: Benchmarking Women’s Leadership 2009 http://www.benchmarks.thewhitehouseproject.org

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Glossary

501(c)(3) organization: To be tax‐exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates. Includes private foundations and public charities (see below).

Filing nonprofits: NPOs that file a Form 990 annually. Most nonprofits file tax returns. However, religious congregations, organizations grossing less than $25,000 annually, and standalone entities that are subsidiaries (included on another organization’s return) are not required to file. Filing nonprofits exclude these exceptions.

Five‐county region: Bucks, Chester, Delaware, Montgomery, and Philadelphia counties.

NPO (NonProfit Organization): NPOs include many federal tax classifications, the most familiar of which are 501(c)(3) for charitable organizations, 501(c)(4) for advocacy organizations, and 501(c)(6) for trade associations. However, nonprofit status is a matter of state, not federal, law.

Most federal tax‐exempt organizations are nonprofit organizations and file federal tax returns.

Organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax.

NPISH (Nonprofits Serving Individuals and Households): A subset of Public Charity devised for this research. NPISH organizations provide services directly to persons and households rather than to other organizations. NPISH is defined by The Philadelphia Foundation and the Economy League as all Public Charities:  Minus hospitals and higher education institutions  Minus NTEE Minor Groups of Health Care, Medical Research, Philanthropy, Science and Technology, Social Science, Public and Societal Benefit, Religion Related, Mutual and Membership Benefit, and Unknown  And minus types of organizations that provide services to other nonprofit organizations and not to households or individuals.

NTEE (National Taxonomy of Exempt Entities): The most widely accepted classification of nonprofit organizations.

Private foundations: One of two types of 501(c)(3) under the federal tax code. (The other type is a Public Charity.) Typically, an organization that has a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and has as its primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. ____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… March 2010 17

Public charity: One of two types of 501(c)(3) under the federal tax code. (The other type is a Private Foundation.) Generally, public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources (e.g., the general public, governmental agencies, corporations, private foundations, other public charities), (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities. This study examined only those Public Charities that file a federal tax return (the Federal 990 form).

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Appendix A

"Key Agreed Principles to Strengthen Corporate Governance of U.S. Publicly Traded Companies" issued late in 2008 by the National Association of Corporate Directors "The Principles provide a framework for board leadership and oversight in the especially critical areas of strategic planning, risk oversight, executive compensation, and transparency.

"Principle I emphasizes the responsibility of every board to design its own governance structure and practices, and Principle II emphasizes the importance of the board explaining how it has tailored governance structures and practices to meet its own needs. Principles II through X describe the key fundamentals that boards should take into account in designing and explaining structures and practices." _________________________________ The Key Agreed Principles

I. Board Responsibility for Governance Governance structures and practices should be designed by the board to position the board to fulfill its duties effectively and efficiently. "...The board's fiduciary objective is long‐term value creation for the corporation; governance form and process should follow..." "...the board must order its governance structures and processes, providing both oversight and guidance to management regarding strategic planning, risk assessment and management, and corporate performance. Serving as a director is demanding and‐in addition to significant substantive knowledge and experience relevant to the business and governance needs of the company‐requires integrity, objectivity, judgment, diplomacy, and courage...."

II. Corporate Governance Transparency Governance structures and practices should be transparent‐ and transparency is more important than strictly following any particular set of best practice recommendations. "...Boards should tailor governance structures and practices to the needs of the company in a pragmatic search for what is most effective and efficient...." "...Every board should explain, in proxy materials and other communications with shareholders, why the governance structures and practices it has developed are best suited to the company..." "...it is the disclosure of governance structures and practices generally and the rationale for divergences from widely accepted best practices that is important..."

III. Director Competency & Commitment Governance structures and practices should be designed to ensure the competency and commitment of directors. "...A board's effectiveness depends on the competency and commitment of its individual members, their understanding of the role of a fiduciary and their ability to work together as a group..."

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"...However, an effective board is far more than the sum of its parts: it should bring together a variety of skill sets, experiences, and viewpoints in an environment conducive to reaching consensus decisions after a full and vigorous discussion from diverse perspectives..."

IV. Board Accountability & Objectivity Governance structures and practices should be designed to ensure the accountability of the board to shareholders and the objectivity of board decisions. "...Boards are accountable to shareholders for the governance and performance of the corporation, and must provide active oversight of the management of the corporation.

Accountability in the oversight of the corporation is premised on the ability of the board to be objective and distinct from management..." "...Disclosure serves as a significant disciplining force for board independence decisions..." "...Executive sessions‐usually including both independent directors and those outside directors who do not qualify as independent‐ without members of management present should be held regularly; more often than once or twice a year. Such sessions provide the opportunity for open discussion of management's performance and management proposals regarding strategies and actions. Executive sessions are critical in establishing an appropriate environment of objectivity and candor..."

V. Independent Board Leadership Governance structures and practices should be designed to provide some form of leadership for the board distinct from management. " Accountability in the oversight of the corporation is premised on the ability of the board to be objective and distinct from management."

VI. Integrity, Ethics & Responsibility Governance structures and practices should be designed to promote an appropriate corporate culture of integrity, ethics, and corporate social responsibility. "...The board plays a key role in assuring that an appropriate corporate culture is developed, by communicating to senior management the seriousness with which the board views the matter, defining the parameters of the desired culture, reviewing efforts of management to inculcate the agreed culture (including but not limited to review of compliance and ethics programs) and continually assessing the integrity and ethics of senior management..."

VII. Attention to Information, Agenda & Strategy Governance structures and practices should be designed to support the board in determining its own priorities, resultant agenda, and information needs and to assist the board in focusing on strategy (and associated risks). "...Boards must develop their own viewpoints to provide management with meaningful strategic guidance and support and to focus their own attention appropriately. Therefore, the board must be actively engaged in determining its own priorities, agenda and information needs..."

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"...While directors must‐and should‐rely on management for information about the company, they need to recognize that their ability to serve as fiduciaries depends on the degree to which they can bring objective judgment to bear. Therefore, directors cannot be unduly reliant on management for determining the board's priorities and related agenda, and information needs..." "...Directors should strive for a constructive tension in discussions with management about strategy, performance, and the underlying assumptions upon which management proposals are based. Directors should actively participate in defining the benchmarks by which to assess success, and then monitor performance against those benchmarks...“

VIII. Protection Against Board Entrenchment Governance structures and practices should encourage the board to refresh itself. "...The board needs to ensure that it is positioned to change and evolve with the needs of the company. This requires that directorship never be viewed as a sinecure..."

IX. Shareholder Input in Director Selection Governance structures and practices should be designed to encourage meaningful shareholder involvement in the selection of directors. [no additional text selected]

X. Shareholder Communications Governance structures and practices should be designed to encourage communication with shareholders.

More at: www.nacdonline.org/keyprinciples

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The Philadelphia Foundation 1234 Market Street, Suite 1800 Philadelphia, PA 19107 215‐563‐6417 www.philafound.org

____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… March 2010