The Nonprofit FAQ
| Is it common practice for board members to be compensated? |
| Jeffrey Dean Hochderffer asked this question in January 1999. It was answered by Put Barber. There is further discussion of the rules and practices related to this topic below. Most nonprofits operate with entirely volunteer boards. Carter McNamara asked on February 5, 2010: Has anyone heard of a situation where a Board member is paid a "sitting fee" to be on the Board? Michael L. Wyland of Sumption & Wyland replied: A "sitting fee?" Amusing description. I know that for non-501(c)3 nonprofts, it's not uncommon for board members to receive expense reimbursement and stipends of some sort (usually a per-meeting stipend). Some 501(c)3's pay stipends or other compensation. Private foundations do this (and are often criticized for it). Some public charities serving poorer clientele (e.g., Head Start, where 50%+1 of Policy Council members must be consumers) pay stipends in lieu of expense reimbursement for transportation and child care. These stipends are usually small ($50 range?) and hardly constitute excessive compensation or private inurement." Terrie Temkin, Ph.D., noted: Francie Ostrower did a study for the Urban Institute. Approximately 2% of boards in the US pay their board members. The only behavior it influences is attendance. It has no effect on governance. (Access the cited study online http://www.urban.org/url.cfm?ID=411479">here.) Nathan Garber also replied: It is also common in the Association sector (501(c(6)s) for directors to receive some form of remuneration, especially when they must give up paid work to attend board meetings. Sometimes (most often during the start-up period) the chief staff member and founder may be a voting member of the board. Organizations often move away from that pattern as they grow. In some contexts it is frowned upon or forbidden for board members to be compensated. I think some states limit board compensation in their nonprofit incorporation statutes and I know some federated campaigns (like United Way) will not include organizations with compensated board members as "members." For more information about nonprofit boards of directors, visit the BoardSource website at http://www.boardsource.org . Beverly Santicola wrote to CharityLaw (a service of CharityChannel.com) on October 27, 2007: I am working with a very efficient and effective nonprofit organization which has only 4 board members. The founder really does not want to expand the size of the board because he has seen too many nonprofit boards in chaos. The organization has been in existence for 9 years and completely lead by volunteer board leadership. This year three new programs were launched and the organization needs to hire the founder to serve as a paid Executive Director and Program Director (20 hours a week for each role). The board members do not want the founder to step off the board to accept the paid position because he is the one that created the magnificent program and it would not be what it is without him. While they realize he cannot vote on his pay or anything that relates to his position, can he legally remain on the board? Charles M. (Chip) Watkins of Webster, Chamberlain & Bean in Washington, DC, offered this explanation: In the U.S. (unlike the U.K.), the rule in all states is that a Board member (director) may also be employed or otherwise paid for services rendered to a charity, including specifically for service as a director. However, state nonprofit corporation laws often have provisions that govern how the Board considers and approves such arrangements.See, e.g., Va. Code Sec. 13.1-870 and 871:
A. A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation. B. Unless a director has knowledge or information concerning the matter in question that makes reliance unwarranted, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by: 1. One or more officers or employees of the corporation whom the director believes, in good faith, to be reliable and competent in the matters presented; 2. Legal counsel, public accountants, or other persons as to matters the director believes, in good faith, are within the person's professional or expert competence; or 3. A committee of the board of directors of which the director is not a member if the director believes, in good faith, that the committee merits confidence. C. A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section. D. A person alleging a violation of this section has the burden of proving the violation. § 13.1-871. Director conflict of interests. A. A conflict of interests transaction is a transaction with the corporation in which a director of the corporation has an interest that precludes him from being a disinterested director. A conflict of interests transaction is not voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true: 1. The material facts of the transaction and the director's interest were disclosed or known to the board of directors or a committee of the board of directors and the board of directors or committee authorized, approved or ratified the transaction; 2. The material facts of the transaction and the director's interest were disclosed to the members entitled to vote and they authorized, approved or ratified the transaction; or 3. The transaction was fair to the corporation. B. For purposes of subdivision A 1, a conflict of interests transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the disinterested directors on the board of directors, or on the committee. A transaction shall not be authorized, approved, or ratified under this section by a single director. If a majority of the disinterested directors vote to authorize, approve or ratify the transaction, a quorum is present for the purpose of taking action under this section. The presence of, or a vote cast by, a director who is not disinterested does not affect the validity of any action taken under subdivision A 1 if the transaction is otherwise authorized, approved or ratified as provided in that subsection. C. For purposes of subdivision A 2, a conflict of interests transaction is authorized, approved, or ratified if it receives the vote of a majority of the votes entitled to be counted under this subsection. The votes controlled by a director who is not disinterested may not be counted in a vote of members to determine whether to authorize, approve, or ratify a conflict of interests transaction under subdivision A 2. The director's votes, however, may be counted in determining whether the transaction is approved under other sections of this Act. A majority of the members, whether or not present, that are entitled to be counted in a vote on the transaction under this subsection constitutes a quorum for the purpose of taking action under this section. However, the law governing your charity will be the law of the state where the charity is incorporated. So the charity should become familiar with that state's rules before approving the transaction. Related to this, if the organization does not have a conflict of interest policy, it should adopt one before approving this transaction. If the organization has no other resources, the IRS has sample conflict of interest policy that is included in the instructions to IRS Form 1023: http://www.irs.gov/pub/irs-pdf/i1023.pdf (beginning on page 25). It can be easily modified to align with your state's law and Sec. 4958 (discussed below), as well. In addition, of course, Sec. 4958 of the Code imposes a 25% excise tax on transactions in which an insider is paid more than the fair market value of the services he or she renders to a charity (an "excess benefit transaction"). The tax is 25% of the amount by which the payment exceeded fair market value, and if the insider doesn't repay the amount of the excess to the charity, then an addition tax equal to 200% of the amount of the excess benefit is imposed. Both taxes are imposed on the insider who benefitted. A third tax, equal to 10 percent of the benefit, is imposed on the directors who approved the transaction, if they knew it to be an excess benefit transaction when they approved it. The regulations under Sec. 4958 include a "safe harbor" procedure, which, if followed by the disinterested members of the Board in approving the compensation arrangement with their colleague, will create a presumption that the transaction is not an excess benefit transaction, shifting the burden of proof to the IRS. To ensure that the transaction is approved in compliance with both state law and the safe harbor in sec. 4958, I recommend that the charity retain legal counsel and perhaps a compensation consultant. All this legal mumbo-jumbo aside, it appears that this organization may need some development in the direction of institutionalizing its governance, management, and programs so that it can survive its founder (if that is the plan). Obviously, this isn't the forum for that, but I thought the point should be made. Yes, larger boards can be chaotic, but small boards dominated by a founder can be supine. A well-developed board of 7-11 people, who understand and properly fulfill their roles as governors, not managers, is a wonder to behold! Drake Turrentine, the CLO & Secretary of Special Olympics International, Washington, DC, added Generally, there is no legal prohibition against a charity's Board having a compensated Chair, although it is unusual ande frowned upon by some watchdog groups. Set out at the bottom of this e-mail are the Better Business Bureau Wise Giving Alliance's Standards of Charitable Accountability (http://www.give.org/standards/index.asp) applicable to charitable Boards, including its prohibition of compensated chairs (Standard 4). Special Olympics has a compensated chair (not the founder, but a member of the founder's family and highly valued by the Special Olympics movment and our Board). We have imported from the for-profit corporate world the concept of having a Lead Director as long as we have a compensated Chair. Lead directors are used by many public corporations when the Chair is an inside executive. Under our Bylaws, whenever the Chair is compensated, the Board must elect an independent (i.e., non-compensated volunteer) Lead Director. The Lead Director chairs the Executive Committee and the Compensation Committee (which does not include any compensated Director) as well as the Board whenever it discusses certain matters involving the Chair. The Wise Giving Alliance has reviewed our use of Lead Director, and we are optimistic they are close to accepting that as compliant with Standard 4. As has already been pointed out, it is crucial that the Board comply carefully with the IRS's intermediate sanctions regs in order to protect both the charity and the chair. Susan D. Smith, a Consultant in Philanthropy from Barneveld, NY, commented further: The easy answer to your question - this isn't about law, per se; it's about what the organization's articles of incorporation and bylaws say about the ED or any other paid staff serving as Board members. The more troubling aspects of what you are asking in this specific situation, have to do with
I'm not a big fan of permitting paid staff - including executive directors - to have a seat on the Board, as you can tell. It is asking for trouble, sooner or later. Some Boards do permit ED's or other paid staff to serve "ex officio" - that is, they have a seat at the Board table because of the position they occupy within the organization. If this Board wants to make the ED position "ex officio" then they need to consider whether or not they wish that to be the case for any executive director who may come along for this organization - not merely for this one individual. The Board also needs to decide whether or not the ED, if he/she serves ex officio, would or would not enjoy other Board privileges, including voting. That presents problems, not just for issues regarding the ED's position. It also presents potential conflicts because this person is a founder/director who is perceived as being the whole show for this organization. I doubt the other Board members are going to challenge anything that this individual says or does, even if challenge is necessary. So - legal? Yes, assuming the laws of the state in which this agency is incorporated permit it and the bylaws describe how it will work. Desirable? No. Posted 1/6/99; 2007 question and comments added 10/28/ 2007; further discussion, 2/5/2010 -- PB |