Policymaking Made Clear: Eleven Foundation Policies Your Board Should Consider

Policymaking Made Clear: Eleven Foundation Policies Your Board Should Consider By Elaine Gast $15 Non-Member $10 ASF Member www.smallfoundations.org

Policymaking Made Clear Eleven Foundation Policies Your Board Should Consider By Elaine Gast Table of Contents I. Introduction to Foundation Policies II. Eleven Foundation Policies to Consider 1. Attending Fundraisers 2. Board Membership and Meetings 3. Conflict of Interest 4. Discretionary Grants 5. Investment Strategy & Policy 6. Personnel 7. Records Retention 8. Spending 9. Travel and Expense Reimbursement 10. Trustee Compensation 11. Whistleblower III. Making Policies Work for You IV. Additional Resources

I. Introduction to Foundation Policies Your foundation needs policies in order to operate. Yet, the word policy can send some board members running. The good news is that policies aren t as complicated as they sound and often, they can create some of the most interesting discussions your board will have. Policies are your board s plan for how to run the foundation. Policies guide the foundation in its daily course of action, and steer the board as it works to fulfill the foundation s mission. Not only do policies provide direction, but they also make it easier for your board to handle difficult situations, in the most objective way. Policies are different from bylaws. Although the two are related, they are created at different times and used for different purposes. When your foundation was formed, the original founder(s) or board created bylaws the internal rules that guide your board s activities. Bylaws lay out the board s choices of board size and structure, selection procedures, term length, and term limits. (If your foundation is a trust, the trust instrument may include these specifications.) Policies, as distinct from bylaws, focus on your foundation s daily operations and practices. They not only address issues related to the board, but also issues related to finances, grantmaking, personnel and more. The current board votes on new policies, and periodically revises those policies already in place. Some foundations set dozens of policies; others run fine on just a few. This primer walks you through 11 policies your foundation should consider, giving you tools to take back to your board. Quick Tip Your board should periodically review both bylaws and policies to make sure they remain relevant and effective. Establishing and following some or all of these policies can help your foundation to: operate more smoothly and efficiently; align daily operations with your mission; fulfill your legal and ethical responsibilities; and make your foundation more transparent and accountable to the public. The primer can also be used as a roadmap for creating a board handbook for your trustees, which can help orient them and keep them engaged over time. To find sample policies, contact the Association of Small Foundations at 888/212-9922. A Note On Terminology The members of a board may be known as board members, directors, trustees, or foundation managers, depending on the structure of the foundation. These terms are used interchangeably in this primer as well as in the philanthropic community. DISCLAIMER: The Association of Small Foundations cannot be held liable for the information provided in this primer. We strongly encourage you to consult your attorney to ensure compliance with federal and state laws and regulations. 1

II. Eleven Foundation Policies to Consider 1. Attending Fundraisers Foundation board and staff members often are invited to attend fundraisers as an additional way to support a grantee. Understandably, many foundations write that $10,000 check to buy a table and send their trustees and spouses to the event all to support the grantee. What could be the problem with this? Although at times attending these events may not seem like much of a benefit to you, the IRS may see it differently. In fact, they may see it as self-dealing. To adhere to self-dealing rules, your board should have a clear written policy for when and how it is appropriate for trustees and staff to attend fundraisers. A policy also makes it easier to respond to grantee invitations. To offer you guidance, ASF gathered views of several lawyers that can be the basis for a policy. It is legitimate for foundation managers (board members or executive directors) to attend an event paid for by the foundation, if they are there to review the grantee or to encourage support for it. However, having said this, events with a perceived benefit such as golf outings or black tie dinners/dances, etc. are questionable, and in a climate of increased scrutiny by media and Congress, may be more likely to be noticed. It is unacceptable for spouses, family, etc. of foundation managers to attend unless they pay the full price of the ticket. This is not simply the value of the meal, but the full value that includes the charitable amount. For example, if a 10-person table goes for $10,000, each disqualified person (other than the foundation manager) would need to pay $1,000 per ticket even if the value of each meal is only $150. The disqualified person should pay up front rather than reimbursing the foundation; otherwise the foundation has made a loan to the disqualified person, which is also prohibited under the self-dealing rules. Note: Also beware of accepting free tickets. All disqualified persons, including trustees, are prohibited under the self-dealing rules from receiving any tangible benefit (i.e., tickets for a dinner) in return for a foundation grant. For more information on the selfdealing rules, see ASF s Primer, Legal Essentials for Small Foundations, at www.smallfoundations.org. There are several ways your foundation can be supportive and stay within the law: Make it foundation policy not to buy tickets to fundraisers, but rather give a grant to the organization. If given tickets in Who Is a Disqualified Person? Substantial contributors to a private foundation, foundation trustees, foundation managers, family members of foundation donors, trustees and managers, corporations and partnerships in which disqualified persons hold significant interests, and certain public officials. 2

return, donate them back for other potential donors or community members who would not typically be able to attend. If the foundation buys tickets, foundation managers might invite community members (other than disqualified persons and personal friends) who would be interested in supporting the charity. 2. Board Membership and Meetings When your foundation was formed, the original founder(s) or board established bylaws that guide your board s activities. (Foundations formed as trusts have trust instruments.) Among other important topics, bylaws usually address any or all of the following: A. Board size and structure; B. Board membership; C. Term limits and rotation; D. Board meetings and attendance; and E. Removing board members. Policies (or bylaws) on board membership and meetings will help you: Achieve your mission; Help trustees understand their responsibilities; Communicate expectations for board service to prospective trustees; and Help your foundation plan for the future. If the above topics are not already included in your bylaws, ASF recommends creating policies that address them. Like all board policies, these should be designed to advance your mission and goals. The following introduces each kind of board membership or meeting policy. A. Board Size and Structure The size and structure of your board should reflect your mission and the needs of your community. There is no ideal board size, although some states do require a minimum size for nonprofit boards (sometimes one, but usually three members). According to ASF s 2005-2006 Foundation Operations and Management Survey, the typical small foundation board consists of five board members. Many foundations avoid listing a hard and fast number in their bylaws or board policies. This allows them to adjust the board size to meet changing conditions. TIP: Some boards opt for an uneven number of members to prevent tie votes. As for board structure, most small foundations designate one person to be responsible for leading the board, usually the board chair or president. Depending on the size of your board, your foundation might name other officers as well, such as vice chair, treasurer, and secretary. Some foundation boards use a two-tier structure, where former trustees are elected to serve as honorary (ex officio) members. 3

Other foundation boards establish standing committees to help them accomplish their work. Typically, committees focus on grants and programs, finance, and board recruitment. Each committee meets as a small, separate group and reports back to the full board. Some boards form ad hoc committees to accomplish special short-term tasks. B. Board Membership When deciding who will be on your board, it helps to think in terms of overall composition. Your board s composition should represent your foundation s mission and goals. Family foundations might approach board composition also as a way to fulfill their hopes for family involvement. By developing a board membership policy, you have the opportunity to brainstorm who would best contribute to fulfilling the foundation s mission and goals. And, once you have your policy in place, it s much easier to respond to family members and other prospective trustees who are interested in serving on the board. Deciding who will serve on your board is one of the most important policy decisions you can make. To figure out the best composition for your board, follow these three steps: 1. Map out what skills and qualities the board needs. Three questions will guide you: a) What basic tasks are required for your foundation to operate? For example: managing investments, filing tax returns, reviewing proposals, and making grants decisions. b) What tasks fulfill your foundation s particular mission and goals? For example: Do you invite unsolicited proposals, and therefore need someone on the board who will review and summarize the proposals? Do you specialize in a particular program area, and therefore need a program expert to help develop guidelines and review proposals? Do you want to convene groups in your community to address problems together, and if so, need a board member skilled in convening and facilitating? c) What professional and personal qualities should you seek in a board member? For example, you might look for someone who: Balances both the private and public trust; Has vision; Is enthusiastic and committed to the foundation s mission and grantee work; Has fresh ideas and perspectives; and 4

Is fair and impartial in dealing with grantseekers and the public. For more qualities of a good trustee, see ASF s primer, Effective Governance for Unstaffed Foundations, at www.smallfoundations.org. 2. Create position descriptions. Once you have created a list of skills and qualities needed, next create a written position description for board members. Position descriptions set and differentiate roles, increase efficiency, and give potential board members a clear idea on what to expect. Sample board position descriptions are available in Foundation in a Box at www.smallfoundations.org. 3. Develop membership criteria. Many foundations are created to involve family members in giving, as well as support communities. It s important to set certain membership criteria about who, among family, is eligible to participate. Different foundations set different criteria. For example, some boards include only immediate family, while others include spouses and extended family. Some automatically award next generation members a place at the board table, while others require them to earn their position. Some invite community members or outside experts to draw upon specific experience or expertise. In addition to these variables, many boards limit their membership by age setting a minimum age to join (typically 21) and a maximum age to serve. According to ASF s 2005-2006 Foundation Operations and Management Survey, 30% of ASF members have a formal, written policy about who may serve on their board. Also, 18% of foundations restrict or limit board service in some way. TIP: Your board s membership criteria should take into account the specific goals, characteristics, and culture of your foundation. The key is to decide on criteria that will help you achieve your mission, and that fit your values and culture. Then you can communicate those criteria to prospective trustees, helping them understand what you expect in a board member. To create your Board Membership Policy, summarize the three elements described above in a one or two-page document: The skills and qualities needed for your board; The position descriptions; and The membership criteria. In sum, when you are deciding the composition of your board, always consider what s important for your foundation fulfilling your mission and program goals, and, if applicable, keeping your family involved. 5

C. Term Limits and Rotation Terms, term limits, and rotation policies are a good way to keep your board fresh and focused. By creating new board openings on a regular basis, your board can bring a continuous flow of new ideas and involvement. If trustees know they only have a finite term of service, they are likely to concentrate more effort and attention on foundation activities. Terms and term limits can also make it easier for your board to remove an ineffective trustee, should the situation arise. ASF members that establish term limits commonly set 2- or 3-year terms, with a maximum of two successive terms. Some also limit the total number of years a trustee can serve typically 6 years. D. Board Meetings and Attendance A policy on board meetings helps trustees know what is expected of them, and helps them plan ahead. The policy should describe the meeting schedule, locations, and rules for attendance. Some foundation boards meet twice yearly, while others meet quarterly. According to ASF s 2005-2006 Foundation Operations and Management Survey, the typical foundation holds three board meetings per year. Foundations with more assets tend to hold more meetings than those with fewer assets. When determining the meeting schedule and locations, make choices that support the foundation s mission, and are sensitive to trustees lives outside the foundation. For example, if trustees reside in different parts of the country, consider rotating your meeting locations. Be sure to schedule meetings far enough in advance to allow trustees to plan and prepare for them (i.e., arranging for travel, reviewing materials, preparing presentations). Include in your policy rules for board meeting attendance. Some states have guidelines that dictate the minimum number of meetings that trustees must attend (which may be as little as once a year). E. Removing Board Members Trustees should discuss and state in writing how the board will handle a situation where a trustee must be removed. If your board creates a board member removal policy in advance, it will give you objective guidelines to follow at a time that might be unpleasant or awkward. ************* See Board Membership Questions on the next page. For more on structuring the board to accomplish your goals, see ASF s primer, Effective Governance for Unstaffed Foundations, at www.smallfoundations.org. 6

In Sum: Board Membership Questions What is the foundation trying to accomplish? What skills do board members need to accomplish it? What are the goals for family involvement? What size and structure do we need to get the job done? What are qualities of a good foundation trustee? Who is eligible for board service? Who is eligible among family members? How will the board identify and select new trustees? How long should trustees serve on the board (in number of terms and years)? How many meetings will our board need to accomplish its job? Where will meetings be held? What are the rules on missing a meeting? Can board members attend a meeting by phone? What happens when a board member becomes unable to perform his duties, or prevents the board from working well? 7

3. Conflict of Interest Conflicts of interest (COI) can arise when foundation board or staff members role at the foundation intersects with outside roles, creating the potential for benefit from the foundation in a personal, direct, or economic way. The benefit, or potential for benefit by board or staff, can lead to biased decisions and unethical behavior, or the appearance of such. Also at risk is the foundation s reputation among grantees and the community. A conflict of interest policy helps your board and staff maintain ethical integrity in their decisionmaking and uphold the foundation s reputation. It does this by requiring that board and staff disclose their affiliations (see below for examples), and establishes a decisionmaking process that removes potential biases. While federal law does not require foundations to have a conflict of interest policy, ASF recommends that all member foundations adopt and follow one. Recently, the Internal Revenue Service (IRS) began to request that organizations applying for tax exempt status adopt some means of dealing with conflicts of interest if they do not have an actual policy. In the near future, this request may be made in the foundation tax return (the 990-PF Form). Conflicts of interest are common in the course of running your foundation, because trustees and staff are likely to be affiliated with many organizations in their communities both on a professional and personal basis. Common involvements might include: business interests, family relationships, political affiliations, and volunteer and other charitable activities. Some examples of conflicts of interest include: A foundation trustee serves as a board member of a grant applicant; A foundation pays necessary and reasonable compensation to one of its board members to manage the foundation s investments; or A foundation makes a general operating grant to a small college run by a trustee s sister. Note that in all these examples, the foundation s activity is legal (unless any state laws apply). What is questionable is whether individual board members and staff took part in decisions that benefit or could benefit them. The key is to manage decisions to remove bias, using a conflict of interest policy. Your conflict of interest policy should lay out the following actions: Require disclosure of potential conflicts Trustees, staff, and volunteers must disclose the connections, if any, they have to any organization or person that the board is considering for involvement in foundation activities. Some boards create a disclosure statement at the beginning of each year to identify most potential conflicts. Trustees should also disclose any conflicts that arise throughout the year. Determine which connections are actual COIs The board determines whether the connection is actually a conflict, and if the conflict exists, whether it is material enough 8

to be of practical importance. After the board understands the circumstances of the potential conflict, the person who has the connection recuses him/herself from the discussion and voting to decide whether or not it is an actual conflict of interest. For actual COIs, recuse from decisionmaking Persons with conflicts of interest may offer information to help the board make the impending decision. However, after offering this information, he/she should abstain from voting, or leave the meeting (in the case of major conflicts) when the board discusses and votes on the decision. Require competitive bids The board should collect competitive bids whenever possible to ensure a fair price for every significant transaction. The bids should be sought from outsiders those with no affiliation to trustees and staff. Keep records The board should keep a record of the action it takes for every conflict of interest that arises. Recordkeeping should include: which person had the conflict of interest; how they recused themselves and for what decisions; and any other information that indicates how the board ensured it made an unbiased decision. Once you develop the conflict of interest policy document, each trustee should sign it, and the board should review the policy annually. If a board or staff member violates the policy, the foundation should take disciplinary steps. TIP: It is critical that the board understand that following a conflict of interest policy does not relieve a foundation from following the very detailed self-dealing rules. For information on the self-dealing rules, see ASF s primer, Legal Essentials for Small Foundations, available at www.smallfoundations.org. For more information, see sample conflict of interest policies at: www.irs.gov/pub/irstege/eotopice00.pdf, or www.mncn.org/info/template_pacc.htm. 9

4. Discretionary Grants Discretionary grants are grants made by board members or staff that are decided upon by the individual, rather than the entire board. These special grants allow trustees to support organizations that the foundation may not traditionally fund. The board still holds full fiduciary responsibility over all grants made. Overall, 34% of ASF members allow their board chair to make discretionary grants; 27% allow other board members to make discretionary grants; and 16% allow their CEO/Top Administrator to make such grants. (Source: ASF s 2005-2006 Foundation Operations and Management Survey.) Discretionary grants can encourage board member involvement, incubate new program areas, and fund emergency grants. At the same time, they may dilute the foundation s mission, creating a focus on individual decisions rather than decisionmaking by the overall board. Your board should discuss the opportunities and drawbacks of discretionary grantmaking, and develop a policy accordingly. The policy might very well be no discretionary grants allowed. However, if the board decides discretionary grants are right, use the following questions to develop a policy: What do you want to accomplish with your discretionary grants? For example, reward board members, allow geographically dispersed members to fund in their local communities, or incubate new program areas? How will the board approve discretionary grants before or after the fact? What is the maximum discretionary grant amount per person, per year? Will the board limit discretionary grants to a percentage of total grantmaking? Will the percentage change if the board size increases? What selection criteria must discretionary grants meet? For example, will they be limited to certain types of organizations? Will grants be prohibited in certain program areas? When must they be made by? What reporting requirements are necessary from trustees and grantees? Remember that the board still holds full fiduciary responsibility over all grants made. Many foundations that allow discretionary grants limit recipients to public charities, in order to streamline the board s due diligence responsibility over these grants. (Foundations may make grants to other types of organizations, including international ones, but the IRS requires extra due diligence.) If your foundation allows discretionary grants to any organization, you must still use expenditure responsibility or equivalency determination when appropriate. 10

Your policy should remind board members that foundation funds are a public trust, and should always be used for the welfare of the community. 5. Investment Strategy & Policy Once you have established a spending policy and spending objective (see the section, Spending Policy), you are ready to develop an investment strategy and policy. To develop an investment strategy, you and your board need to do the following four tasks: 1) Calculate the return requirement. The return requirement is the rate of return on investment your foundation needs to achieve, in order to maintain the value of your endowment (if you have long-term goals), and meet your spending goals. To calculate your return requirement, 1) start with your spending objective (see the section on Spending Policy the minimum is 5 % of your endowment); 2) add the expected rate of inflation over the investment time period; and 3) add your estimated investment-related fees and expenses (see example). Example on How to Calculate the Return Requirement Return Component % of Average Assets Spending objective 5.50 Expected rate of inflation over investment period 3.50 Estimated investment-related fees/expenses 0.75 Average Annual Investment Return Required 9.75 In this example, the foundation must achieve an average annual investment return of 9.75% in order to maintain the real value of its endowment. TIP: When establishing the spending and investment strategies, your board must determine whether the return requirement it sets is realistic and achievable over time. 2) Develop an overall asset allocation strategy. Asset allocation is the practice of spreading risk (the possibility of losing or not gaining value) across a range of investment assets and management styles to balance the effect of a volatile market. Asset allocation is the main determinant of your investment returns how your portfolio performs. It is your board s single most important investment strategy decision. TIP: To achieve a rate of return that allows your foundation to maintain or grow the real value of its endowment, you likely need to invest a substantial percentage of your endowment in stocks or other assets with the potential for high rates of return (such as 11

real estate, venture capital, hedge funds, etc.). In addition, foundations often invest in some bonds to provide a steady stream of income to cover cash flow requirements. Therefore, private foundations should invest in some mixture of stocks, bonds, alternative investments, and cash equivalents. 3) Consider foundation-specific factors. A number of foundation-specific factors affect how your foundation will allocate its assets, such as the question of perpetuity and the return requirement (discussed previously). Another major question is: How much risk or market volatility is the board willing to accept? Your board will need to define what is called a risk tolerance stating what is, and is not, acceptable regarding the likelihood and frequency of returns falling below what is expected. Riskier asset classes may have a greater potential payoff, but a higher likelihood of falling outside of expected returns. TIP: Your foundation can manage risk by diversifying and investing in order to meet return objectives, rather than to maximize returns. The length of your foundation s time horizon (the amount of time you invest) will also affect how you allocate assets. If a foundation looks long-term, it may face more declines in the value of individual assets, and at times have to scramble to meet short-term payout commitments. But, it can use diversification to take advantage of higher risk (and potentially higher return) asset classes. If your time horizon is short, your asset allocation decision will want to steer clear of more volatile asset classes. TIP: Give your strategies time to work and stay the course through market upswings and downswings. Your foundation can manage risk by diversifying and investing in order to meet return objectives, rather than to maximize returns. 4) Develop your written strategy and investment policy. Your foundation s written investment strategy and policy helps guide the board, the investment committee (if there is one), investment consultant, and investment managers in managing the foundation s portfolio. An investment policy should include the following: Investment objectives tie the investment policy to the mission and goals of the foundation. They include the specific return requirement, description of time horizon, diversification and target risk levels, etc. This is also a place to include any objectives related to aligning investments with your mission; 12

Oversight describes who will be responsible for various investment-related tasks (e.g., the investment committee, investment consultant, key staff, outside investment managers, etc.); Asset allocation sets target ranges for each asset class as a percentage of the overall portfolio; Rebalancing procedures set guidelines for re-adjusting the portfolio as changes in the values of individual assets occur. Rebalancing usually is done annually, or if one of the asset classes reaches its threshold for what the board considers acceptable; and Performance benchmarks includes any of a number of possible common indexes and measures to help review ongoing performance (e.g., S&P 500, the Russell 2000, and the Lehman Aggregate Bond Index). Benchmarks are chosen relevant to each asset class. In sum, spending and investment can be complex, and may require skilled knowledge and oversight. The above offers you a starting place for examining your foundation s objectives and strategies, but is in no way a comprehensive guide. Unless you have a financial expert on the board, your foundation should consider working with an investment advisor (also called investment consultant) to develop your spending and investment policies, and to select individuals to manage aspects of the portfolio. Note: Remember that foundation trustees are legally responsible for ensuring that foundation resources are invested prudently and effectively to protect assets and support the mission and spending policy. Also, note that many states have enacted the Prudent Investor Act; check to make sure your investment policy is in line with any state regulations. The material in this section is adapted from, Fashioning an Investment Strategy, by Jason Born, in Splendid Legacy: The Guide to Creating Your Family Foundation, National Center for Family Philanthropy, 2002. Visit www.ncfp.org. For sample investment strategies and policy statements, visit the Stewardship Principles for Family Foundations, at http://bestpractices.cof.org. ASF s Professional Directory for Foundations lists investment professionals nominated by ASF members. Available at www.smallfoundations.org. 13

6. Personnel Even if your foundation has only one staff member, it should establish and communicate certain personnel policies. There are a variety of federal and state laws and executive orders on how employers must select, compensate, and treat individuals in the workplace. Written policies help your board meet these legal responsibilities and clarify expectations to staff. Policies also keep operations smooth in the event that a staff transition occurs. Personnel policies can be simple or elaborate, depending on your foundation needs. Most personnel policies cover: Hiring practices and, if applicable, probation periods; Work schedule, vacation, and leave; Compensation and benefits; Professional development; and Performance evaluation. Some foundations create a personnel policy manual, which can serve as a reference guide for staff throughout their tenure. If you do develop such a manual, ask your legal counsel to review it to be sure it complies with the law. Quick Tip Check with ASF, your local State Association of Nonprofit Organizations (www.ncna.org), or your colleague foundations of similar size, for sample personnel policies that work best for them. 14

7. Records Retention Whether your foundation has its own office or uses a home office, you should set up a system of files and recordkeeping. Many small foundations delegate their recordkeeping duties to accountants, custodians, or consultants. Even so, it is important and legally required to make sure your records stay in good order. Not only does this help you stay organized, but it also demonstrates accountability during this era of audits and scrutiny. Recordkeeping Checklist A good records retention policy lists which records the foundation should keep permanently, and the records to keep for specified time periods. Examples of permanent records include: Original organization documents (articles of incorporation, trust instrument, bylaws, etc., plus any amendments to these documents); Form 1023, the application for federal tax-exempt status, and all related correspondence with the IRS; Form SS-4, the application for taxpayer identification number; IRS favorable determination letter the IRS ruling that 501(c)(3) status is granted; All Forms 990-PF, the foundation s annual tax return; Any official correspondence with the IRS; Foundation s annual reports; Quick Tip Keep back-up computer files and photocopies of your vital records in case the originals are deleted or destroyed. It helps to use at least two sets of back-up media a CD- RW or a tape drive, for example. Always store your back-up files and copies off-site, away from your office. Any other tax exemption certificates for example, from state or local authorities; Correspondence with attorneys, accountants, and/or custodians of the foundation s assets; Board records, such as meeting minutes and committee actions. In addition to the permanent records listed above, your foundation should keep some files on hand for a certain period of time: Note: State law also influences how long certain documents should be kept. Grant files keep for a minimum of seven years in case of an audit (only four years for declined grant requests); Record of contributions keep until tax reporting is complete and the audit period has ended; Personnel records, as applicable check with your attorney or accountant to determine the required length of time to retain these records; Financial records keep investment reports until assets are sold and for the duration of the audit period; keep foundation transaction records for the tax reporting and audit period that follows; and Contracts in general, keep for seven years after the contract expires. 15

Your records retention policy should call for a backup system in case of disaster. For paper files, this may mean storing additional copies of your permanent records off site or electronically. For electronic documents, make sure you regularly create computer backups. Public Disclosure Rules Your board should know about and comply with the IRS public disclosure rules. As a private foundation, you are required to make the following documents available: Form 990-PF, the annual information return filed with the IRS, for the three most recent years; and Form 1023, the application for federal tax-exempt status (and all related correspondence with the IRS).. To be technically "complete," these documents must be provided exactly as filed with the IRS, including having all signatures. Copies for Inspection: Foundations must provide copies of the above documents for inspection during normal business hours at their principal office (usually on the same day requested), or at an alternative location, if the foundation has no office (within 30 days of a written request). Copies by Request: Foundations also must respond to requests for photocopies of the above documents, within 14 days of receiving the request. (You may charge reasonable fees for copying and mailing costs.) The Web Option: You may avoid having to comply with requests for photocopies if you make your documents widely available by posting them on the Web, with signatures. The Web site must be in a format that allows persons to download, view, and print the documents free of charge. Remember that Guidestar (www.guidestar.org) automatically posts your three most recent 990- PF forms on its Web site. This makes it easy to fulfill requests for your foundation's documents. Be aware, however, that Guidestar will post your 1023 Form only if you pay them to do so. And, there is some lag time between your filing with the IRS and Guidestar posting your forms online. Note about Posting Documents on the Web without Signatures: If you post your 990-PF and 1023 forms on the Web without your signature, or direct the public to Guidestar which does not post signatures, you will still have to provide photocopies to anyone who requests complete forms. The 990-PF and 1023 forms are not technically complete without the signatures. TIP: Be sure to check your state laws, as certain states (such as New York) impose further disclosure requirements. ****************** 16

As part of your records retention policy, include in writing what information must be made available to the public. This will not only inform trustees, but also help demonstrate your foundation s accountability and transparency. You should also designate in advance who will be responsible for responding to any public disclosure requests. For more information, see ASF s primer, Keeping Good Records, at www.smallfoundations.org. 8. Spending A spending policy is your foundation s plan for how much it will spend to cover both its operating costs and its grants. A key part of your spending policy is your spending objective, which is the amount you plan to spend each year. To calculate your spending objective, start with what is required by law. The IRS requires that private foundations pay out at least 5 % of their net investment assets each year. Payout, also called qualifying distributions, generally includes: Grants to public charities, nonprofits, and individuals (including scholarships or emergency aid); Administrative expenses that help achieve your foundation s charitable purpose; Equipment that helps you achieve your foundation s charitable purpose; Direct charitable activities, such as convening, research, publications, communications. Each year, your foundation must meet the minimum payout requirement. Note that the following expenses do not count toward the 5 % payout: Investment management fees; Custodial fees; and Salaries or board meeting expenses to oversee investments. Your foundation may spend more than the minimum 5 % to run its program. Most foundations calculate their spending by starting with the minimum payout requirement of 5 %, and then considering other factors such as: Past grantmaking; Current grantee needs; Additional administrative expenses and equipment; Additional direct charitable activities; New grant opportunities; The status of current market returns; and The foundation s mission and goals. Also, see the spending questions in the box below. 17

Spending Questions Your foundation must address a number of important questions when setting or evaluating its spending policy: Will the foundation exist in perpetuity? Is the foundation fully funded or will additional assets be received? Does the foundation board want to exceed the minimum payout requirement? If so, by how much? Does the board want to grow the foundation s endowment, or is it satisfied maintaining the value of the endowment on an inflationadjusted ( real ) basis? How can the foundation best achieve its program objectives: By spending more now? By constant and sustained effort over time? Or by growing the endowment so that more can be spent in the future? Does the policy reflect the philosophy of the donors and/or board of trustees? By considering these and other factors, foundations might adopt one of the following spending objectives (not an exhaustive list): Meet the minimum payout requirement (5 % annually); Distribute 5 % of assets in grants, plus administrative expenses; Distribute 6 % of assets each year; Meet the 5 % distribution requirement, but consider paying out a bit more, depending on program objectives and current investment returns; or If the foundation is considering spending out, distribute 10 % each year, with the expectation that all assets will be paid out within a certain time period. Remember that, at a minimum, your foundation must meet the 5 % payout requirement. The spending objective you develop is essential to developing your investment strategy, described below. The material in this section is adapted from, Fashioning an Investment Strategy, by Jason Born, in Splendid Legacy: The Guide to Creating Your Family Foundation, National Center for Family Philanthropy, 2002. Visit www.ncfp.org. 18

9. Travel and Expense Reimbursement Private foundations are permitted to pay for or reimburse ordinary and necessary expenses incurred in carrying out their activities, including the costs of foundation-related travel by trustees. It is common for foundations that do not compensate trustees to reimburse them for travel and out-of-pocket expenses, especially for trustees who may not have the individual resources to travel to foundation events. For example, many foundations reimburse trustees expenses (airfare, hotel, and meals) to attend a foundation board meeting. According to ASF s 2005-2006 Foundation Operations and Management Survey, 66 % of foundations reimburse board members for expenses incurred on foundation business. Your board should state its reimbursement policy clearly and in writing, laying out: The types of foundation travel, and quantity of travel per year, that are eligible for reimbursement (e.g., for board meetings, site visits, conferences); That travel on behalf of the foundation be undertaken in a cost-effective manner. The law requires that these expenses not be lavish or extravagant ; That the policy should be adhered to by anyone traveling or incurring expenses on behalf of the organization (for example, trustees, staff, consultants, volunteers, etc.); That expenses are reimbursable only if they are directly related to the foundation s work, and reasonable and necessary for that work. Expenses should not be for personal activities; What is and what is not reimbursable. For example, a foundation might pay for transportation, lodging, and meals, but not pay for first-class travel; The documentation required to receive reimbursement (i.e., itemized phone bills for longdistance board calls), and who will approve requests for reimbursement; and That the foundation will not pay for nor reimburse travel or out-of-pocket expenses for spouses, dependents, or others unless they, too, are conducting business for the foundation in an official capacity. Special rules apply to many types of travel-related expenses and reimbursement, such as per diem payments, car allowances, security expenses, and travel expenses for spouses or other family members. Using Per Diem Allowances: As an alternative to reimbursing for travel expenses, the IRS permits the use of an optional method "per diem allowances" for meals and lodging expenses, in lieu of actual expenses. See IRS publication 1542 at: www.irs.gov/pub/irs-pdf/p1542.pdf). The use of per diem allowances is intended to simplify the burden of keeping detailed records. 19

10. Trustee Compensation Trustee compensation has been controversial in the philanthropy field for some time. Although many have made sound arguments both for and against compensation, the overwhelming majority of foundations do not compensate trustees for routine board service. Opponents of trustee compensation say compensation diminishes the good a foundation can do, since it directs financial resources away from grants. They also say that foundations should hold to the same standard they expect of grantees (who have voluntary boards), and that it is virtually impossible for a board to discuss this issue without it being a conflict of interest. Others can point to good reasons for compensating their trustees. Compensation, they say, provides an incentive for trustees to serve on the board and stay diligent in their work. Compensation might also increase diversity on the board, as it could attract younger or less privileged members who would be unable to serve without pay. Foundations that do compensate for routine board service usually do so using a set fee, such as an annual fee or fee per board meeting. Foundations also compensate trustees who provide a professional service to the foundation, such as accounting or legal services, or who serve in some staff capacity. According to ASF s 2005-2006 Foundation Operations and Management Survey, 24% of all member foundations compensate for routine board service, either with an annual fee or with a fee per meeting. Typically, the larger a foundation s assets, the more likely it is to compensate its trustees. Whatever your board decides about compensation, the current trustees should create a policy to clarify the board s intentions. With a clear policy in place, your board can avoid potential misunderstandings among trustees, and have an objective way to respond to any compensation requests it receives. The board should share this policy with prospective trustees. What Is Reasonable Compensation? The amount similar persons are paid for similar work at similar organizations. Ultimately, the policy can simply state: 1) Whether the board will or will not compensate trustees, and if it will, what that compensation will be; 2) What services it will compensate: routine board service, professional advisor services, or staff services; and within each of these, the nature of the service; and 3) How it will seek sufficient data to determine a reasonable compensation level. When compensating trustees, your foundation must set a reasonable compensation level defined as the amount similar persons are paid for similar work at similar organizations. To 20

determine what is reasonable, check other foundations in your region of similar size and assets, to compare what they do, or do not, pay their trustees. Also consult surveys that gather compensation data, such as ASF s Foundation Operations and Management Survey, or the Council on Foundations Grantmakers Salary & Benefits Report. TIP: Keep in mind that your board must disclose what, if anything, it pays to trustees on its tax return, which is public information. For more information, see ASF s primer, Trustee Compensation for Small Foundations, at www.smallfoundations.org. 11. Whistleblower Whistleblower or Anti-fraud policy regulations now apply to foundations and nonprofits by virtue of the Sarbanes Oxley Act of 2002. While the act does not specifically require nonprofits (including private foundations) to develop a written internal policy or procedure, board and employees must be sure to follow the new law. The new law states there can be no employmentrelated retaliation against persons who provide information on certain financial crimes. If you are interested in developing a policy of this type, the following components are common: General Standard of Conduct Wrongful Conduct Definition Reporting Responsibility Statement of No Retaliation Reporting Violations to Designated Person Acting in Good Faith Confidentiality Handling of Reported Wrongful Conduct For a sample policy, see ASF s Web site at www.smallfoundations.org, in the Sample Documents section. 21

III. Making Policies Work for You Once you have your policies in place, what s the best way to communicate them to all trustees? Consider providing every board member with a handbook describing bylaws and policies. Your board handbook may be similar to (or the same as) an employee manual (if your foundation has staff). It can serve not only as an orientation for new board members, but also as a reference throughout their term. Board handbooks need not be extensive; typically they are a folder or packet of the following materials: Foundation mission, vision, and values; Foundation history; Founding documents (articles of incorporation or trust documents); Bylaws and policies; List of board members and job descriptions; Financial information, such as investment policy and reports, the budget, audit statements, and financial procedures; The most recent copy of the 990-PF tax return; Calendar of board meetings; and Grants history and annual reports. With a board handbook to refer to, trustees will stay more informed on policies and will more likely adhere to them. For more on board handbooks, see ASF s primer Bringing on the Board at www.smallfoundations.org (available November/December 2005). One last TIP: Be sure the board reviews and, if appropriate, revises policies periodically. For policies to work, they should continue to serve your foundation and its mission rather than your foundation simply serving the policies! DISCLAIMER: The Association of Small Foundations cannot be held liable for the information provided in this primer. We strongly encourage you to consult your attorney to ensure compliance with federal and state laws and regulations. 22

IV. Additional Resources Policies General 2005-2006 Foundation Operations and Management Survey. Association of Small Foundations. www.smallfoundations.org. Foundation in a Box. Association of Small Foundations. www.foundationinabox.org. New Foundation Guidebook: Building a Strong Foundation. Association of Small Foundations, 2003. Policy Sampler: A Resource for Nonprofit Boards, Kathleen Fletcher. BoardSource, 2000. www.boardsource.org. Sample Policies, Association of Small Foundations. www.smallfoundations.org. Stewardship Principles for Family Foundations Database, Council on Foundations, 2005. http://bestpractices.cof.org/family/. Attending Fundraisers Member Q&A: Tickets to Fundraisers, Association of Small Foundations Newsletter, Fall 2004. Board Membership and Meetings Family Advisor: Board Composition. Council on Foundations. www.cof.org. Nonprofit Board Answer Book: Practical Guidelines for Board Members and Chief Executives, Robert Andringa and Ted Engstrom. BoardSource, 2001. Conflict of Interest Conflicts of Interest: Common and Worthy of Consideration, Association of Small Foundations Newsletter, Fall 2005. Managing Conflicts of Interest: Practical Guidelines for Nonprofit Boards, Daniel Kurtz. Includes diskette with sample forms. BoardSource, 2001. Sample Conflict of Interest Policies, Association of Small Foundations. www.smallfoundations.org. 23

Discretionary Grants Member Q&A: Discretionary Grants, Association of Small Foundations Newsletter, Winter 2004. Personnel Management Assistance for Nonprofits, Free Management Library. www.mapfornonprofits.org. Society for Human Resource Management. www.shrm.org. Records Retention Hands on: Keep, File, Toss? Jane C. Nober. Foundation News & Commentary, March/April 1998. Member Q&A: Public Disclosure Rules, Association of Small Foundations Newsletter, Summer 2005. What Records Should Your Foundation Keep? Association of Small Foundations Newsletter, Fall/Winter 2001. Spending and Investments Creating and Using Investment Policies. BoardSource, 1997. Fashioning an Investment Strategy, Jason Born. Splendid Legacy: The Guide to Creating Your Family Foundation, National Center for Family Philanthropy, 2002. www.ncfp.org. Investment Issues for Family Funds: Managing and Maximizing Your Philanthropic Dollars, National Center for Family Philanthropy, 1999. www.ncfp.org. Sample Investment Policies, Association of Small Foundations. www.smallfoundations.org. Trustee Compensation, & Travel and Expense Reimbursement Board Compensation: Reasonable and Necessary? Jason Born. Passages Series, National Center for Family Philanthropy, 2001. Contemplating Trustee Compensation, Association of Small Foundations Newsletter, Spring 2005. Council on Foundations Annual Salary Survey. www.cof.org Trustee Compensation for Small Foundations, ASF primer, 2005. 24

4905 Del Ray Avenue, Suite 200 Bethesda, MD 20814 toll-free: 888-212-9922 fax: 301-907-0980 www.smallfoundations.org Check out other titles in the ASF Primer Series Awarding Grants to Individuals Basics of Proposal Review Bringing on the Board: Practical Steps for Orienting Foundation Board Members Communicating with Grantees: Building Effective Relationships Throughout the Grantmaking Process Connecting to Your Family s Foundation: A Primer for the Next Generation Effective Governance for Unstaffed Foundations Funding and Engaging in Advocacy: Opportunities for Small Foundations How Technology Can Help You Manage Your Foundation How to Start a Private Foundation International Grantmaking: Opportunities for Small Foundations Keeping Good Records: Small Foundations Guide to Staying Organized Legal Essentials for Small Foundations Making Plans for Succession: What Founders Need to Know Policymaking Made Clear: Eleven Foundation Policies Your Board Should Consider Protecting Your Small Foundation With Insurance Trustee Compensation for Small Foundations Involving Children in Philanthropy Primers listed below available in 2006 - final titles TBD Options in Philanthropy Recruiting Board Members Investment Primer Series The Association of Small Foundations (ASF) is a membership organization of nearly 3,000 foundations with few or no staff. ASF enhances the power of small foundation giving by providing the donors, trustees, and staff of member foundations with peer learning opportunities, targeted tools and resources, and a collective voice in and beyond the philanthropic community. Foundations with few or no staff represent half of all foundation giving in the United States.