Foundation Board Basics
A grantmaking foundation is a charitable tax-exempt organization whose primary function is to distribute funds for charitable purposes. Private foundations are typically formed by individuals, families, or corporations. Regardless of whose generosity is benefiting worthy causes, a foundation needs a governing board (or a board of trustees as foundation board members often are called) because it is structured as a tax-exempt organization. In principle, the role of the foundation board does not differ from that of other nonprofit boards, but foundation boards have specific challenges.
The IRS has registered nearly 80,000 private foundations. The Tax Reform Act of 1969 created the concept and legal framework for foundations as we know them today. The purpose of this law was to prevent private exploitation of charitable trusts and foundations. There are two key elements of the law: 1) It stipulated a minimum payout rate at 6 percent (since then lowered to 5 percent), and 2) it forbade self-dealing — business transactions with board members. Foundations also need to pay an excise tax on their net investment income and must not earmark grants for lobbying, possess more than 20 percent of business holdings in any single business, and engage in risky investments.
Usually one or several major contributions — or money transfers — create the endowment of a foundation. During this transfer, the donor delegates the overall management and supervision of the funds to the foundation’s board and stipulates the primary objectives of their use. The board has a foremost duty to respect the original intent of the donor. In a way, the donor creates the original mission for the foundation and may indicate the types of activities that the foundation will support. It is worth repeating, nonetheless, that the donor gives up the “ownership” of the funds — he or she alone can no longer make financial decisions regarding the use of the funds or control the details of grantmaking. Without this premise, the original gift is not tax deductible.
Building a board
The composition of foundation boards varies greatly depending on who creates the organization.
- Corporate foundation boards mostly consist of company executives and other senior employees to ensure alignment with the company’s priorities.
- Family foundation board members usually include the donor (if still alive) and other family members to ensure that the donor intent is respected — or properly interpreted if detailed guidelines no longer exist or have become outdated.
- Independent foundations often have more “outsiders” on their boards. The original board usually reflects the preferences of the founder but with time, as the founder connection weakens, the composition of the board evolves. These foundation boards tend to include individuals who are interested in the mission area of the organization and who bring specific expertise with them.
It is commonly accepted that “insiders” — relatives, friends, or business colleagues — may serve on a foundation board. However, even under these circumstances, onboarding members who have no personal or business relationship with the foundation makes ample sense. An outsider perspective or expertise that otherwise is not included generally allows the board to widen its point of view, to better scrutinize its decisions, and to better reflect the needs of the grantees.
All nonprofits must steer away from private inurement — offering insiders financial benefits that are greater than what they provide in return. Rules are even stricter for foundation board members. No trustee may participate in a financial transaction as the provider and receiver of the benefit. In practice, this means that no trustee may, for example, engage in buying, selling, or leasing property with the foundation; borrow money from the foundation; or lend interest-bearing funds. It is acceptable, however, to pay for a member’s professional (legal, accounting, investment management) services.
Compensating foundation board members for their governance work is not considered self-dealing, as long as the pay is reasonable. It is worth noting, however, that due to some bad practices, foundations have received unwanted publicity concerning compensation that clearly misused foundation assets to benefit it trustees and managers. Most nonprofit board members serve as volunteers, and the preferable approach is to separate governance work and paid staff activities. If foundation trustees wear multiple hats and hiring staff is not feasible, it may be appropriate and is legal to discuss compensation, however.
Private foundations are required by law to distribute at least 5 percent of their net investment assets on an annual basis. The purpose of this law is to eliminate excessive hoarding of assets and to make foundations respect their primary mandate: granting funds to eligible charities and thus benefiting society.
An ongoing debate vacillates between the actual payout percentage and the types of expenses that can be included in the calculations. If a foundation is to exist in perpetuity, it wants to make sure that inflation and other unavoidable expenses do not erode its endowment. Some question whether 5 percent is the right figure; others focus on the need to do more. Some question whether certain administrative expenses should continue to be included in the calculations or to be absorbed separately. The board’s role here is to set the tone and determine the values for the foundation.
Assessment of impact
Increasingly, foundations state expectations for their grantees. They set performance standards, want to track how the grant money is spent, and expect measurable positive results. Via reports and site visits, they want to see the impact their grants make. Today, many foundations are including themselves in this scrutiny. By requiring self-assessment and studying the foundation’s own performance, these foundation boards are serving as an example to their grantees.
Private foundations are privileged charitable organizations: Due to their endowments, they usually do not need to raise funds, but rather are in the business of distributing money to other charities and those in need. The primary duty of the foundation board, as is true for all nonprofit boards, is to remain loyal to its stated mission and priorities.
101 Resource | Last updated: June 21, 2016