Charities to improve their governance

To stave off regulators and appease increasingly suspicious donors, a growing number of public charities are voluntarily implementing some of the provisions required by the Sarbanes-Oxley Act.

Some not-for-profit companies are adopting the mandates requiring certification of financial reports and the creation of an independent audit committee.

“A lot of it makes sense,” says Patrice Tosi, executive vice president and chief operating officer of the Dallas-based Susan G. Komen Breast Cancer Foundation, which recently began studying Sarbanes-Oxley to see which provisions it could use to bolster its own corporate governance. “We have to conform if we want to gain, and retain, the public’s trust.”

Financial advisers, who often play a role in helping clients direct their charitable dollars, say any move by charities to improve corporate governance is likely to be welcomed by donors.

“Anything that indicates to the public that the organization has raised its awareness of these issues is always a positive,” says Beth Gamel, a financial adviser at Pillar Financial Advisors Inc. in Waltham, Mass. “It’s a help if all the other elements of their program are acceptable to a donor.”

BEST PRACTICES

Of course, the breast cancer foundation is hardly alone in looking to conform to gain the public’s trust.

Since the passage of Sarbanes-Oxley in 2002, the Fidelity Charitable Gift Fund has tweaked its bylaws to bring them more in line with the law. With $2.48 billion in assets, the Boston-based fund is the nation’s second-largest charity, after the Salvation Army.

Meanwhile, directors of the Vanguard Charitable Endowment Program, another donor-advised fund, are expected to do the same thing in January.

“It’s the right thing to do,” says Ben Pierce, executive director of the program, which has $540 million in assets and is run by The Vanguard Group Inc. in Malvern, Pa. “The not-for-profit world has also had its share of stories that are unfortunate. We want to try to set a good example of how we think this should be done.”

But most charities are trying to do more than set a good example; they’re trying to stay ahead of legislatures and regulators.

New York Attorney General Eliot L. Spitzer, the man credited with uncovering the Wall Street research brouhaha last year and the mutual fund scandal this year, has proposed state legislation modeled after the federal Sarbanes-Oxley Act.

Like Sarbanes-Oxley, his legislation would require verification of financial reports by top executives within charities.

Furthermore, the Department of the Treasury is reportedly considering a rule that would require top executives at charities to certify financial statements submitted to the Internal Revenue Service, which regulates most not-for-profits. “Charities started doing this before regulators started looking into it,” says Celia Roady, a Washington-based lawyer at Morgan Lewis & Bockius LLP of Philadelphia. “I give them the benefit of the doubt. I think they were truly motivated by a desire to see what were best practices that they could adopt for themselves.”

Raising the bar

Still, simply adopting the requirements of Sarbanes-Oxley may not be the best way to raise the bar for corporate governance in the not-for-profit world, critics say.

That’s because for-profit and not-for-profit companies are two very different animals. Many of the provisions of Sarbanes-Oxley could have unintended consequences for charities.

For example, the cost of independent auditing could severely hamper the ability of some charities to achieve their missions. Also, as a result of being shouldered by more responsibilities, some charities are likely to find it more difficult to recruit qualified outside directors – many of whom are not paid for their services.

“I think there’s a lot to be learned from Sarbanes-Oxley for charitable organizations,” says Janne G. Gallagher, vice president and general counsel for the Council on Foundations in Washington, which represents some 450 community foundations nationwide. “But I am not at all convinced that the right analysis is simply to take pieces of Sarbanes-Oxley and import them.”

Instead, she says, charities should focus on taking steps to improve internal controls. In other words, an audit committee is likely to prove useless unless the information studied by that committee is completely accurate.

“If you haven’t analytically thought through what you are trying to accomplish, I’m not sure you are adding much value,” says Ms. Gallagher.

Still, many public charities are pushing ahead with plans to implement some of Sarbanes-Oxley’s provisions.

Fidelity Investments’ Charitable Gift Fund, for example, has adopted language that requires its outside accountants to keep the audit committee in the loop with regard to critical changes in accounting policies and practices.

It has also formalized its pre-existing policies for offering protection to whistle-blowers.

Directors of the Vanguard Charitable Endowment Program, meanwhile, are slated to meet next month to approve the formal creation of an audit and finance committee. That committee, which will include a “financial expert,” was informally assembled about three months ago, Mr. Pierce says.

The three-person board, which is likely to be expanded in the months ahead, is also likely to approve a plan that would protect whistle-blowers, another provision of Sarbanes-Oxley. The board will also discuss whether to establish a separate corporate-governance committee, which would be responsible for nominating new members to the board.