Principle #1—Comply with all applicable laws and regulations—federal, state, local, and international. Check out IRS's Stay Exempt Web Site for guidance from the IRS about what is required.Principle #3—Have policies and procedures for conflicts of interest. Charity regulators require that board members and staff disclose any interest in a transaction or action that could be viewed as affecting their objectivity or independence. First, any potential conflicts should be disclosed. Then there should be policies to deal with them transparently. If a board member has a material conflict of interest, the law requires that he/she not discuss or vote on the issue. An Internet search will provide sample conflict-of-interest policies to use as a model.Principle #21—Keep complete, current, and accurate financial records, preferably audited or reviewed by a qualified independent financial expert. State laws vary on the sizes and types of organizations that are required to have audits or reviews by an outside accountant, so check on your state's requirements. Creating an audit committee of board members (including some with financial expertise) helps reduce a possible conflict of interest between the paid staff and the outside auditors.Principle #25—Establish clear written policies for paying or reimbursing business or travel expenses. The IRS does not want to see "lavish, extravagant, or excessive expenditures." A review of IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses," can help you write your reimbursement policies.Principle #26—Do not pay for expenses or reimburse travel for spouses, dependents, or others who accompany someone conducting business for the charity. This restriction doesn't apply for small costs (such as a meal) or if the person is also working on charity business.Principle #27—Be accurate and truthful in your solicitation materials. What you need to address is covered in A Donor Bill of Rights, developed by the Association of Fundraising Professionals.
Principle #8—Have a governing body responsible for reviewing and approving the organization's mission and strategic direction, annual budget and key financial transactions, compensation practices and policies, and fiscal and governance policies. Not being responsible about compensation can cost money—in fact, the IRS's Executive Compensation Initiative Project report concluded that there was need for "a continued enforcement presence in this area."Principle #12—Have a substantial majority of independent board members. Board members should not be compensated as employees or independent contractors. They should not have compensation determined by individuals compensated by the organization, not receive material financial benefits, and not be related or residing with those who are not independent.Independent judgment is required of board members, and the organization's interest must be placed above personal interests. Thus, most individuals on the board should be free of financial conflicts of interest.Principle #13—The Board should hire, oversee, and annually evaluate the performance of the CEO and conduct an evaluation prior to any change in compensation. This is the board's responsibility, and the IRS guidance is clear:Set compensation in advance using appropriate comparability data.Make sure no one involved in setting the salary has a conflict of interest.Document decisions on compensation.The IRS regulations call for "reasonable" compensation—the amount that would be paid for "like services" by "like enterprises" (could be taxable or tax-exempt), under "like circumstances." Small organizations should have at least three comparables, and the IRS implies that larger organizations should have more than three.Principle #20—The Board should serve without compensation. If compensated, use appropriate comparability data to determine the amount to be paid. Because compensating board members is unusual, detailed documentation is necessary if a charity does more than reimburse expenses. If board members are setting their own compensation, they clearly have a conflict of interest, so use an independent data source.
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