Nonprofit Law Resource Library
Nonprofit Governance, Boards & Bylaws
Nonprofit Governance and the Critical Concept of "Stewardship" for Boards of Directors
With some of my nonprofit and international organization clients, I have noticed a trend that is somewhat troubling. Often, I represent “friends” groups, which promote awareness and raise money for an NGO based in another country. We loosely refer to them as friends groups in the US; sometimes they are classified by the technical term supporting organization.
Many organizations, whether universities, hospitals, or orphanages just to mention a few, often have friends groups in the US. Among them, for example, I have five clients located in Costa Rica, Jamaica, Scotland, France, and Nepal. The common problem that they all seem to have, and I am struck by how similar it is for each organization, is in communicating and reaching a mutual understanding between the organization and its friends group concerning one particular issue.
With regard to the mission and purpose of the NGO, its programs and activities, the organization and these friends groups are in agreement and harmony. However, a difference in perception arose over which of the organizations has the final say and decision-making authority concerning the funds raised for the organization in the US. The US-based group understood the way of doing things in one way, while the organization based abroad operated under another assumption.
This is a critical issue because it involves financial control. The issue has caused difficulties and tension and, in some instances, interpersonal problems between the friends groups and their affiliates abroad.
Let me give you an example. An NGO operates a historic site in one of the countries I mentioned. A corporation in the United States donates money to the NGO’s friends group in the US. The NGO is informed of the donation and asks the friends group to forward the money to them for their operations. The friends group replies saying that the contribution is subject to US rules and regulations, and that it can not just simply pass it through to the NGO because they have to exercise their own duties of stewardship. This is where the conflict begins. The root of the problem is a lack of understanding as to the process required to transfer the money to another country.
On the one hand, the foreign NGO feels that since the funds were raised on its behalf, and to support its activities, it is entitled to receive a transfer of the entire amount. On the other hand, the US organization feels it has an obligation to its donors and the public to exercise more oversight and control.
How is this tension resolved?
It is the goal of my talk today to present to you the concept of “stewardship” with the hope that both sides understand their duties of stewardship and use this understanding as a basis for facilitating the successful transition of US gifts. Perhaps even more importantly, it is my hope that this understanding will result in continued successful relationships between US friends organizations and their international counterparts.
In today’s increasingly globalized economy, nonprofit organizations are working together on an international scale more than ever before. The globalization of NGOs means that there are greater numbers of US “friends” groups and supporting organizations working with NGOs abroad, more US organizations undertaking charitable activities in other countries, and more internationally-based NGOs undertaking activities in the United States.
With nonprofit globalization comes an increased need to understand how organizations are governed, define clearly what the role of the board of directors is, and perhaps have some generally accepted standardized governing practices. I will first simply explain the legal nature of US nonprofit organizations, and then move on to the critical concept of stewardship: what it means, its importance, and how it defines the US nonprofit sector. There are many unfavorable elements in the internal revenue code of the United States. US tax law, probably like every other tax law in the world, is unnecessarily complex, lengthy, archaic, difficult to understand, and obtuse. The interesting thing, however, is that the nonprofit law in the USA is very favorable to, and very conducive toward providing a supportive and flourishing non-profit sector. In fact, over the past few decades, it has become increasingly understood that US NGOs comprise their own sector of society, called a third sector or an independent sector (with the first sector being business and the second sector being government).
In the United States, according to the IRS regulations, not only is the income from non-profit organizations in the US exempt from taxation, but contributions to those organizations are deductible to charitable donors. So, the nonprofit organization receives this double subsidy in the US, which I have come to understand is unusual—both in its breadth and scope.
So, for instance, not only is it the traditional education, health, and human services activities that qualify for tax exemption, but its also such activities as environmental protection, advocacy, and the promoting the arts. An art gallery you may walk into, thinking that it’s a typical art store/gallery, may well be non-profit in the sense that it promotes the further understanding of arts and culture. Entrepreneurial organizations can qualify for charitable tax-exempt status if, for example, they employ disabled people and provide job training.
I’ll give just one more example to give you a sense of the breadth of the US tax code. I represent one tax-exempt organization which seeks to reduce air pollution and it does so by encouraging mass transportation. Currently, it is advocating the extension of a subway line to reduce the use of automobiles into the city. On the other side of that very same issue, a group is opposed to building the subway because it is going through an old town center. This organization also qualified for tax exemption because it is involved in community preservation. Both have tax-exempt status and both are arguing on opposite sides of the exact same issue.
This helps to give you a sense of how broad and progressive the US tax code is in this area. Similarly, there is great leeway and discretion as to how US NGOs are operated and governed.
But, and this all comes down to the key point, the IRS and the states that authorize the establishment of these organizations require that, in return for all of the benefits and leeway in operating an organization, the organization has a legal duty to actively oversee the nonprofit activities and act with care, loyalty, and good faith to see to the fulfillment the organization’s mission.
Who actually has this duty in the end? It is the board of directors. This leads to the idea of stewardship and the critical role of stewardship in nonprofit governance. Stewardship is such a central concept that it is also the key concept from which most US nonprofit law flows.
Let me define stewardship. Stewardship simply means holding assets on behalf of another. In this case, assets are being held on behalf of the public: specifically, the indefinite segment of the public that benefits from the services of the organization. The board of directors has this responsibility of stewardship just as a trustee holds assets and oversees programs on the behalf of another. Most US nonprofit law, as complex as it may be, is based on this concept.
In a traditional nonprofit organizational structure, the staff of the organization report and are accountable to assistant directors or vice presidents, possibly to other officers, such as the chief financial officer, chief operating officer, etc. The latter report and are accountable to the executive director, often also referred to as the president. Sometimes, the president is the voluntary head of the board, or the paid executive director. It is the president who reports to, is accountable to, and also works in conjunction and partnership with the board of directors to ensure that the organization fulfills its mission. The board of directors is, in turn, responsible and accountable to the public which both is served by the organization and supports the organization. This creates a cycle of responsibility, conveying the idea of stewardship, which differentiates US nonprofit organizations from for-profit companies.
Editorial note: The remainder of the workshop discussed applying the concept of stewardship to creating sustainable relationships between US friends groups and the NGOs they support. In particular, the presentation described: the legal duty of the friends group to oversee, monitor and review the use of funds it raises; and the resulting need to develop an understanding and mutually acceptable process for grant distribution and reporting between the US friends organization and the NGO it supports, tailored to the needs of each organization.
If you have questions about these concepts or would like to discuss them in the context of your organization, please feel free to contact us directly.