Strategic Source Online

March 2005

Making Mistakes As A Director Or Trustee Can Be Expensive

The spotlight is on private foundations, supporting organizations, and donor advised funds. Best to proceed carefully, with good counsel, and a full understanding of your responsibilities as well as limitations.

• Carl Yeckel and Thomas Vett, former officers of the Dallas-based Carl B. and Florence E. King Foundation, were hit with a combined $20 million judgment. The Texas Attorney General claimed that the compensation and expense reimbursements paid to these two individuals were excessive. The jury agreed, deciding Yeckel and Vett should repay over $7.5 million to the Foundation, plus $14 million in punitive damages.
  
• James Beard Foundation president resigned after the board discovered the organization had wasted hundreds of thousands of dollars on high salaries and extravagant meals.
  
• The trustees of the Lotta Crabtree Charitable Funds were removed from their position by a local court and ordered to pay back $250,000 in fees and expenses. The court found that they had paid themselves inflated salaries at a time that the foundation’s assets were declining and grant making was virtually stopped.
  
• The trustee of the Paul & Virginia Cabot Charitable Trust received $5.2 million in salary and perks between 1999-2003, while giving away $2.1 million in grants.
  
• The Bielfeldt Foundation gave away $26 million in grants, while paying themselves and family members $21.6 million over the same period of time.
  
• Detroit Mayor Kwame Kilpatrick created a foundation to help city students, through scholarships and other support. But, between 2002-2003, more than half of the funds raised went to the Mayor’s sister, wife, and friend.

What are best practices in compensation and benefits, and how can the founder and board protect against abuse in the future?

Some trust and corporate bylaws specifically prohibit compensation for trustees and directors. But, should it? Is it fair or appropriate to expect a family member or friend to spend significant time and effort to manage a foundation, implement its grant making program, and assume responsibility for the investment of its assets, without some compensation? If compensation is prohibited, will the duties involved receive secondary attention?

• Bylaw provisions. If compensation is to be permitted, the trust instrument or corporate bylaws should address the process that is required to provide for compensation.
  
• Compensation process. The abuse usually arises when the person being compensated is the only one who decides if, when, and how much is to be paid. Best practice requires third party review and determination. This can be done by a compensation firm, consultant, or other party who is not affected by the advice that is given. Sometimes the foundation’s accountant is involved, but this may compromise the accountant’s relationship with the foundation’s executive, the same person who has retained the firm for accounting purposes and for compensation analysis.
  
• Independent directors. Even if family members are not compensated, independent directors often are. Sometimes the compensation is dependent on board or committee attendance, and sometimes it comes in the form of discretionary grant authority. The rules, procedures, and guidelines should be clearly describe in the foundation’s governing documents and, if available, its operating protocol.
  
• Peer review. Many public charities, especially hospitals and universities, understand that peer review is a proven method of increasing efficiency and effectiveness and improving internal systems and procedures. Foundations are not used to this procedure, but it’s becoming a growing trend and should be utilized more often. Each organization, both the one reviewed as well as the one performing the review, learn from the process.
  
• Association and third party surveys. The Council on Foundations and the Association of Small Foundations each produce a national survey of salaries and benefits for foundation management, directors, and trustees. These are the standards by which many foundations measure the appropriateness of the compensation. In 2002, IFF Advisors produced the most comprehensive compensation study ever done for California based foundations. The results of the study are available if requested, and are useful to understand the features and factors related to compensation.
  
• Conflict of interest disclosures. Every foundation should have a conflict of interest policy in effect which requires that every director or trustee, as well as officers and senior management, disclose any actual or potential conflict of interest which may exist between the individual and the foundation. Such conflicts can arise because of an economic interest in the activity or decision of the foundation or the individual, the individual’s family members, or companies owned by the individual or family members. Conflicts can exist between the foundation and third party vendors, consultants, or providers. Disclosure of all the relevant facts is the best way to both identify the conflict and evaluate its potential impact. The board of directors can then determine if the conflict can be managed or if action must be taken to eliminate the conflict.
  

Council on Foundations: Determining Reasonable Compensation for Foundation Directors and Trustees and Recommended Best Practices in Determining Reasonable Executive Compensation

IRS Update: Abuse of Charitable Organizations and Deductions

The IRS announced its “dirty dozen” scams and one of them included a common abuse in the charitable field. Here is number nine:

“9. Abuse of Charitable Organizations and Deductions. The IRS has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.”

Internal Revenue Service:  IRS Announces the 2005 Dirty Dozen

Legislative Update:  Charitable Contribution Legislation Reintroduced

Both the Senate and the House Republican leadership have reintroduced the IRA/charitable rollover legislation that has languished for several years. Even though both houses had approved similar legislation last year, the two bills never reached a Conference Committee to reconcile the differences. Now there seems to be more interest in passing the legislation which, if enacted, would enable tax-free IRA rollovers for charitable purposes and, among other things, reduce the excise tax on foundation income from 2% to 1%. More on the details of the new proposals in next month’s Strategic Source Online.

Independent Sector:  CARE Act of 2005

Register Today!  Foundation Management Certificate Program at Fielding Graduate University to Begin April 8

If you are a founder, director, or trustee, foundation manager, or an advisor who regularly consults with foundations, then you should attend the Foundation Management Certificate Program, offered by IFF Advisors, Inc., and the Fielding Graduate University. This program provides the most comprehensive, hands-on and practical training available in the country.

Upon completion of the program, students will receive a Certificate from the Fielding Graduate University. The Certificate Program begins on April 8.

Fielding Graduate University: Register Today!

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