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Purpose - The purpose of this article is to analyze the
commonalities of various change and transition models
developed over time to assist with and support managing
organizational change. Design/methodology/approach - The
article provides an examination of change and transition models
through a review of relevant literature and the comparison of
different models. Findings - Each change and transition model
has similar methods of handling change. Their unique methods
and strategies provide additional insights into possible
applications to most organizations. In some cases, models could
be combined to form new models to best fit the circumstances
of the organization. Practical implications - This comparison
can assist individuals in evaluating and selecting the model
based on organizational need while remembering to focus on
both the physical and the emotional changes in an organization.
Originality/value - The article shows that human resource
managers can benefit from learning the commonalities between
change and transition models when considering what will work
for their organization in conjunction with the review of a
number of well known and relevant models.

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Introduction
Change is evident everywhere from the simplest everyday
changes to the most difficult situations encountered by human
resource (HR) managers as management grapples with
reorganizations, downsizing and/or cutbacks. A crucial factor in
the effectiveness of an organization is the ability to adapt to
change ([14] French and Delahaye, 1996). According to [7]
Bridges and Mitchell (2000) "Business conditions change and
yesterday's assumptions and practices no longer work".
While it may seem uncommon to some, most businesses are told
they have to change everything from the way they think to the
way they work ([24] Nortier, 1995). [31] Wagar (2000) provides
a bit of history by reminding us of how downsizing became an
obsession in the 1990s, the phrase "lean and mean" became a
primary focus of most businesses at that time. Whether the
success of downsizing tactics worked is not the topic for
discussion here, however, the tactics employed at the time are
part of this comparison. Today's economic crisis has also added
the new dimension of change needing to be immediate instead
of over a period of time. Add increased global competition,
outsourcing, fast changing and new technologies and you have a
recipe for massive confusion to those involved in such a volatile
environment.
Literature review
When beginning a review of studies surrounding change models,
it was discovered that much time and energy has been devoted
to bring about a better understanding of change as it relates to
organizations. While this topic has been looked at from various
disciplines, this article will only touch on some of the many
change and transition models, which organizations have to
choose from as they work through their particular organization
change.
An awareness of the need for change is the beginning of the

whole change process ([1] Armstrong, 2006). A complete
assessment of the current situation is necessary to begin the
process of implementing any kind of change in an organization.
Unfortunately, this kind of assessment may take longer than
management or stakeholders have if the situation is very
serious. What happened to bring about the need for change?
What kind of issues and problems have occurred to bring about
this crisis are questions which need to be answered as this helps
to determine the best course of action to follow. Which change
and/or transition model will fit the organization?
Another facet within change models are the individuals involved
in working together to implement change. [30] Ulrich and
Brockbank (2005) provide some insights to this element of the
equation by pointing out how "high-performing HR
professionals make change happen successfully and thoroughly
with their most critical contribution being to make sure the
change happens quickly". Just how involved the HR
professional has to be for a successful change is up to the
organization. There are a variety of reasons their involvement is
imperative to the success of any type of change. Additionally,
their familiarity with the organization's culture and employees
becomes a great asset to the individuals responsible for
organizing changes. This is most significant in a change process
as follow through skills become extremely valuable and adds to
the facilitation of all types of organizational change.
Taking a step back to change itself, various studies have
revealed additional strategies concerning the very nature of
change and how it relates to organizations. [16] Kanter (1985)
relates how organizations have to be able to adapt to change or
face the possibility of losing out to competition. [16] Kanter
(1985) further expounds on how some in top management
attempt to force change by just simply dictating it, changing
polices without warning and expecting their middle management
to take charge and make the change work. These experiences
reflect how strategic-planning models are only a piece of the
change process, which usually results in some sort of

modifications to work with an individual organization.
[8] Burke (2004) looks at where the organizational development
field is in 2004, and expresses how difficult it is to move
forward without the knowledge of what is coming. [8] Burke's
(2004) review of what is now known (in 2004) evaluates change
processes and points out some of the change models which will
be covered further in this article. Additionally, change effort is
now enhanced with the aid of training and feedback. [8] Burke's
(2004) comments bring out how any value-based change effort
requires effective leadership and a business structure which
includes strategy, mission plans and a model. When a change
model is used in conjunction with the business structure it has a
better chance of success and is part of the eight-step change
model from [17] Kotter (1995) where "to work together as a
team united in the vision," is necessary for success.
[2] Axelrod (2001) reminds us of how change management and
models came to the point of unleashing the power of employees.
Previous studies conducted by Kurt Lewin during World War II
revealed how allowing input from employees when changes
were needed added to acceptance of the changes with a bonus of
increased productivity. These studies were conducted with
surveys and working together to review the collected data which
resulted in better change solutions. [2] Axelrod (2001) further
explains there needs to be a new paradigm involving more
people and widening the circle of involvement.
[10] Dannemiller and Norlin (2001) have developed a different
approach altogether calling it a whole-scale change where the
business comes together to connect the collective wisdom of the
organization creating the one brain and one heart methodology.
This process brings in individuals from all levels of the
organization to create the alignment needed for success. The
additional touch of requiring high performance brings this
model in line with another change model introduced by [25]
Quinn (2006).
Following the path of working together, [28] Schein(2004) uses
the term "culture" and shows how it is extremely important to

investigate and study the culture of an organization in order to
work with them in a more cohesive manner. This very notion of
knowing the culture of the organization is the responsibility of
the leaders in order to determine how to lead or [28] Schein
(2004) says the "culture will lead them" making any change
model more difficult to implement.
[13] Evans and Ward (2004) remind us how managers are in the
position of needing to "be prepared for two types of change-
planned and imposed". New managers are under pressure to
make a good impression and feel like they have to implement
change correctly and operating under an unexpected or forced
change can cause great difficulties with staff. While change can
be risky and is time-consuming, careful preparation can enhance
the process. Managers tackle the situation of how most people
do not enjoy change, but somehow, because change must
happen, individuals will adjust over time with the right people
in management.
[4] Beer et al. (1990) conducted studies of change programs
with 12 different companies and discovered how most do not
work unless everyone is involved and on board. [4] Beer et al.
(1990) determined that "effective corporate renewal starts at the
bottom, through informal efforts to solve problems". Their
studies revealed how senior officials can be committed to
change and have to foster a climate of change instead of
mandating the changes from the top as may have been done in
the past. They also discovered how all departments and mangers
need to be involved or the whole process can break down.
Additional organizational change studies were conducted by
[12] Dunphy and Stace (1993) to show how no one model is
universally applicable. They point out how "turbulent times
demand different responses in varied circumstances, so
managers and consultants need a model of change that is
essentially a situational or contingency model". [11] Dunphy
and Stace (1988) developed a contingency model using a
combination of leadership styles and different types of changes.
Identifying the optimum mix of leadership and change styles,

while considering the organization, is what makes the change
successful.
[7] Bridges and Mitchell (2000) provide what they call a new
model for change. They remind us how, over the years, a large
amount of time and effort has been spent in studying the
management of change and yet it seems to have fallen short in
providing the much needed solutions to the economical
situations organizations find themselves in today as they work
through a variety of necessary changes for survival. While
change is not an easy or simple process, many still operate
today as if it is and fail to understand why a business is unable
to create a plan and follow it through successfully. [7] Bridges
and Mitchell (2000) point out "most leaders imagine that
transition is automatic - that it occurs simply because the
change is happening. But it doesn't". The human element of
change needs to be addressed for change to be successful.
[19] Kotter and Cohen (2002) have put together a collection of
success stories using Kotter's famous eight-step change model
from 1996 as well as situations which could be considered
failures. In the book, [19] Kotter and Cohen (2002) point out
the reasons for success are "[b]ecause their most central activity
does not center on formal data gathering, analysis, report
writing, and presentations ... instead, they compellingly show
people what the problems are and how to resolve the problems".
It is this kind of process that goes a long way into creating
successful organizational changes. This change model will be
discussed in this article.
Change and transition models
Lewin
One of the earliest change models was developed by Kurt
Lewin. According to [9] Burnes (2004) and [1] Armstrong
(2006) this model is referred to as the "3-Step Model"
developed in 1947 and referenced in his Field Theory in Social
Science ([21] Lewin, 1951). This model breaks change down
into three steps: unfreezing, changing, and refreezing, [1]
Armstrong (2006) provides greater detail to this process as

follows:
- Unfreezing - is altering the present stable equilibrium which
supports existing behaviors and attitudes. This process must
take account of the inherent threats that change presents to
people and the need to motivate those affected to attain the
natural state of equilibrium by accepting change.
- Changing - developing new responses based on new
information.
- Refreezing - stabilizing the change by introducing the new
responses into the personalities of those concerned ([1]
Armstrong, 2006).
This could be compared to overcoming bad habits by replacing
them with new and better habits. The individual, like an
organization, has to be resolved and committed to make the
change and do what is necessary regardless of any
inconveniences involved in the process. The end goal is to
succeed with the change.
[9] Burnes (2004) points out that Lewin is one of the early
pioneers of group dynamics and how individuals will usually go
along with the group norm whether it is a positive or negative
situation or actions. [1] Armstrong (2006) adds how "Lewin
suggests a methodology for analyzing change which is called
'field force analyses'" and involves the following:
- Analyzing the restraining or driving forces will affect the
transition to the future state; these restraining forces will
include the reactions of those who see change as unnecessary or
as a constituting a threat.
- Assessing which of the driving or restraining forces are
critical.
- Taking steps both to increase the critical driving forces and to
decrease the critical restraining forces ([1] Armstrong, 2006).
How does this apply to an organizational change? [26] Ritchie
(2006) sheds some light on how an organization can apply this
to a change situation. The unfreezing is the time process
required to prepare for change, to help the staff accept the
coming change, and break down the status quo found through

the evaluation completed leading up to the realization that
changes were necessary for survival. This will force the
organization to take a hard and difficult look at their very
essence. [26] Ritchie (2004) calls this a "controlled crisis"
which adds the needed motivation to make a change.
Once the change is set in motion, individual workers may have
to find new ways to accomplish their jobs, whether they are the
same jobs in new locations or new jobs in the same locations.
Once the workers have accepted these changes they easily
support and adjust to the change. In [15] Johnson's (1998) Who
Moved My Cheese?, the character Haw realizes he needs to
move on and accept his situation making the best of it, while
Hem refuses to change and just remains in his same state. This
is often what happens in an organization when certain
individuals refuse to accept the changes while others move on
and work through them.
[26] Richie (2004) states refreezing is at the point when there is
a new stable organization, people are accepting the
reorganization by working through the new methods and ways
of accomplishing daily tasks. Once this occurs, confidence in
the business increases and there is usually a new sense of hope
and the future looks brighter for all in the new organization. It
is at this point when refreezing should take place. A celebration
of the new organizations should be held. This allows everyone
to feel appreciated for their part in the success of the change.
(Remembering change is cyclical and may have to be addressed
again in the future.)
Beckhard
Richard [3] Beckhard (1969) developed a change program,
which incorporates the following processes (as cited in [1]
Armstrong, 2006):
- Setting goals and defining the future state or organizational
conditions desired after the change.
- Diagnosing the present condition in relations to these goals.
- Defining the transition state activities and commitments
required to meet the future state.

- Developing strategies and action plans for managing this
transition in the light of an analysis of the factors likely to
affect the introduction of change.
Depending on the circumstance, an organization may receive the
latest quarterly reports and realize that change is required in
order to survive or successfully contend with their existing or
future competition. A business's staff can work together to plan
and implement change using this program.
To breakdown this change program further, [27] Rouda and
Kusy Jr (1995) provide Beckhard's definition of organizational
development; it is "[a]n effort, planned, organization-wide, and
managed from the top, to increase organization effectiveness
and health through planned interventions in the organization's
process, using behavioral-science knowledge". This explanation
provides additional insights in how the change program can be
used in a business setting.
Looking at this change program with this added definition helps
to show how it can be applied in a business or organizational
setting when change is imminent. According to [27] Rouda and
Kusy Jr (1995), this model:
[t]akes a long-range approach to improving performance and
efficiency in an organization by looking at the total
organization, adding the necessary support from top
management by implementing it themselves along with tying it
to the bottom-line. Next apply incremental changes over a
period of time while involving the individuals in the business
providing them an opportunity to make a positive contribution.
Additionally, [23] Marshak (2004) states "The whole idea of
planned change assumes, in essence, that it is possible to
determine rationally how to initiate and implement actions to
achieve and then maintain a predetermined, desired future
state". While these steps are not always applied in the correct
order, they all need to happen for change to be successful.
Thurley
A third change model described in [1] Armstrong (2006) was
introduced by K. Thurley (1979) and has five main strategies to

managing change: "Directive, bargained, hearts and minds,
analytical and action-based". Each strategy has advantages and
disadvantages for all parties involved. The primary starting
point is to recognize the need for change in an organization. An
in depth review of each strategy is valuable when determining if
and when there is any commonality with each of the change
models discussed in this article exists and whether access to
particular strategies will aid or hinder the success of the
organizational change. Both [1] Armstrong (2006) and [22]
Lockitt (2004) provide ample explanations of each strategy.
- Directive - "the imposition of change in crisis situations or
when other methods have failed. This is done by the exercise of
managerial power without consultation" ([1] Armstrong, 2006).
"The advantage here is that change can be undertaken quickly,
however, the disadvantage is it does not take into consideration
any views, or feelings, of those involved in the change" ([22]
Lockitt, 2004).
- Bargained - "this approach recognizes that power is shared
between employer and the employed and that change requires
negotiation, compromise and agreement before being
implemented" ([1] Armstrong, 2006). "[w]illingness by senior
managers to negotiate and bargain in order to effect change.
This approach acknowledges that those affected by change have
the right to have a say in what changes are made, with
disadvantages being the additional time to effect change" ([22]
Lockitt, 2004).
- Hearts and minds - "an all-embracing thrust to change the
attitudes, values and beliefs of the whole workforce. This
normative approach seeks commitment and a shared vision but
does not necessarily include involvement or participation" ([1]
Armstrong, 2006). This strategy allows "full support of the
changes being made and a shared set of organizational values
that individuals are willing and able to support. Again the
advantage is the positive commitment to the changes being
made with the disadvantages being that it takes longer to
implement" ([22] Lockitt, 2004).

- Analytical - "a theoretical approach proceeds sequentially
from the analysis and diagnosis of the situation, through the
setting of objectives, the design of the change process, the
evaluation of the results and, the determination of the objectives
for the next stage in the process" ([1] Armstrong, 2006).
- Action-based - "this recognizes that the way managers behave
in practice bears little resemblance to the analytical, theoretical
model. The distinction between managerial thought and
managerial action blurs in practice to the point of invisibility.
What managers think is what they do. Real life often results in a
'ready', 'aim', and 'fire' approach" ([1] Armstrong, 2006). "This
strategy stresses full involvement of all those involved, and
affected by, the anticipated changes. Benefits of this approach
are that any changes made are more likely to be supported due
to the involvement of all those affected, the commitment of
individuals and groups within the organization as they all feel
ownership over the changes being made, the disadvantages are
the time it takes before changes are made" ([22] Lockitt, 2004).
Each of these strategies can be analyzed extensively, used
independently or in combination in a manner appropriate for an
organization. There may be situations arise which may require
methods from one strategy mixed with methods from a different
strategy to support a successful model for a particular business.
[22] Lockitt (2004) points out how "the skill of effective change
management is to recognize what strategies to employ, when,
where and how to use them in order to be most effective", this
can be an individual from human resources, management or a
hired change agent.
Often change models neglect the transition that is required to
occur within the individuals in the organization during the
actual change process. It is important to include this human
element in the change process. [24] Nortier (1995) explains how
[5] Bridges (1986) "considers transition as a dynamic in three
stages". [7] Bridges and Mitchell (2000) have labeled these
three stages as:
Endings, the neutral zone (explorations), and new beginnings.

Often, in the whole course of action, whether using a change
model or not, the benefits of a change are presented, plans are
designed and implemented in coordination with managers,
policies, technical changes and budgets leaving out one of the
most important aspects, the individuals who will be affected by
the changes ([24] Nortier, 1995).
Bridges
Another thought on this is provided by [6] Bridges (1991) in the
statement "it isn't the changes that do you in, it is the
transitions". In an earlier paper by [5] Bridges (1986), he also
points out how "change is the current corporate landscape is the
rule rather than the exception". It is worth noting that in 2009
this is still the rule. Further explanations of the three stages are
as follows:
- The Ending Phase - Saying goodbye to the way things were, a
particular job, associates, a location, even a manager or
supervisor can all be changed when realignment happens in an
organization.
- The Neutral Zone - New environment, new responsibilities,
the rules have changed, there are different people to work with
and report to, this can all be unsettling as one explores and
experiments in this new setting.
- New Beginnings - This period requires the final adjustment to
new ways of doing many different tasks or even similar tasks
but in handling them in a new manner ([7] Bridges and Mitchell,
2000).
The last phase is often when individuals lose it all hope; they
freeze and cannot move forward. This is mentioned earlier in
this article in reference to Who Moved My Cheese? ([15]
Johnson, 1998). Three of the four characters eventually make it
to this last phase, but one, Hem, is unable to move beyond his
fears, and eventually, he is left behind. Organizational change
models need to incorporate transitions in their plans to improve
the success rate of their upcoming change.
Kotter
[20] Kotter (2007) states "Leaders who successfully transform

businesses do eight things right (and they do them in the right
order)". Kotter's original article by the same title published in
1995 soon became a must read for organizational leaders
planning and implementing change. [18] Kotter (1996) states
while change efforts have helped improve some organizations in
the competitive markets, many situations have been
disappointing and the results have been disastrous for the
employees and those in charge. Kotter points out "the biggest
mistake people make when trying to change organizations is to
plunge ahead without establishing a high enough sense of
urgency in fellow managers and employees". The thought that
this could not happen to our organization is one of the main
causes of failure while instituting organizational change. Some
changes take years and even after a number of years, they may
fail for a variety of reasons.
[1] Armstrong (2006) goes through his eight steps as follows:
1. Establishing a sense of urgencya. Examining market and
competitive realitiesb. Identifying and discussing crises,
potential crises, or major opportunities2. Forming a powerful
guiding coalitiona. Assembling a group with enough power to
lead the change effortb. Encouraging the group to work together
as a team3. Creating a visiona. Creating a vision to help direct
the change effortb. Developing strategies for achieving that
vision4. Communicating the visiona. Using every vehicle
possible to communicate the new vision and strategiesb.
Teaching new behaviors by the example of the guiding
coalition5. Empowering others to act on the visiona. Getting rid
of obstacles to changeb. Changing systems or structures that
seriously undermine the visionc. Encourage risk taking and non-
traditional ideas, activities and actions6. Planning for and
creating short-term winsa. Planning for visible performance
improvementb. Creating those improvementsc. Recognizing and
rewarding employees involved in the improvements7.
Consolidating improvements and producing still more changea.
Using increased credibility to change systems, structures and
polices that don't fit the visionb. Hiring, promoting and

developing employees who can implement the visionc.
Reinvigorating the process with new projects, themes and
change agents8. Institutionalizing new approachesa.
Articulating the connections between the new behaviors and
corporate successb. Developing the means to ensure leadership
development and succession ([1] Armstrong, 2006).
It is interesting to note here how Kotter has managed to bring
together the change models and transitions into an eight step
process. In The Heart of Change ([19] Kotter and Cohen, 2002)
these eight steps are linked to 34 real life organizations located
throughout the world. The book is structured around these
specific eight steps because "this is how people experience the
process" ([19] Kotter and Cohen, 2002). Both books provide
case studies showing what works and what usually does not
work. [20] Kotter (2007) also reviews what happens when these
eight steps are not followed in the correct order or in the correct
way. The old adage of "this is the way we do things around
here" is very difficult to overcome, but is very necessary to
change when dealing with having to change a culture.
[20] Kotter (2007) states "his basic goal has been the same: to
make fundamental changes in how business is conducted in
order to help cope with a new, more challenging market
environment". This goal is evident as [20] Kotter (2007)
reviews what happens when these steps are not followed:
1. Not establishing a Great Enough Sense of Urgencya.
Transformation or changes begin but are frozen and can't move
forwardb. Complacency has set in preventing any change from
going forward2. Not creating a powerful enough guiding
coalitiona. When just a few people are not supported by more
along the way, their efforts are lost, major players need to be
involved or the change will never get off the ground3. Lacking
a visiona. Without a clear vision, the whole effort can fall apart
as individuals struggle to be a part of something not understood
by the larger population4. Under communicating the vision by a
factor of tena. Everyone needs to be kept in the loop throughout
the whole process using every possible means of communication

available from meetings to emails and everything else in
between. The management and the employees need to be in sync
with each other, lack of communication can prevent major
successes causing the whole plan to fail5. Not removing
obstacles to the new visiona. Everyone has to be working
together to make this new vision a reality, keeping those who
refuse to change need to be replaced or it will fail.6. Not
systematically planning for, and creating, short-term winsa.
Change takes time; people lose momentum and need to be
congratulated when evidence shows that the changes are going
forward successfully7. Declaring victory to soona. Some
changes can take anywhere from five to ten years, premature
victory celebrations can kill momentum and ruin the whole
change8. Not anchoring changes in the corporations culturea.
Making the new changes the way things are now done shows
that the change is most likely to stay, however, if this is not
happening and most things beyond the surface don't really
change then the change has failed ([20] Kotter, 2007).
It is crucial for successful change to help individuals adjust to
the ever-changing business world and keep communication lines
open at all times while maintaining the organization's vision
during the change process. When these strategies are
implemented, taking everyone into consideration, than change is
more likely to be completely successful.
Commonalities
Conclusions
Table I [Figure omitted. See Article Image.] shows clearly there
are significant commonalities between these particular change
and transition models. It is interesting to note that is while they
are not all lined up they each handle change in a similar
fashion. All these models are just guides to assist organizations
through the world of constant change which exists today. While
no one exact and perfect model exists for everyone, each has
positive ways to handle change and can be adapted according to
the organization. It must also be remembered that change is
constant. If an organization makes a set of changes successfully,

it should be noted that one [18] Kotter's (1996) eight steps is to
keep improving, going forward with new and more innovative
ways to compete in the market by adding new products, always
looking for new ways to handle situations and keep the vision
going by adding new people as the organization continues to
grow.
[29] Senge (1990) points out how "from an early age we are
taught to break apart problems, to fragment the world". If
problems are broken down too soon or too quickly perspective
is lost and there are times when stepping back and seeing the
whole situation first is very beneficial and usually necessary. In
an organizational environment, creating a sense of urgency or
mandating a directive because market forces have caused great
economic upheaval, it is prudent to step back, take a look at the
whole situation, analyze the problems, develop a plan of action
with support and proceed to unfreeze, work with the employees,
managers, directors and stockholders in creating a complete
environment where everyone feels ownership of the both the
problems and the solutions. This creates a solid foundation for
any organization to handle the unexpected challenges brought
on by a global market and fast-paced technological advances.
This article has provided a commonality view of change and
transition modes in hopes of presenting additional insights into
how they are still relevant today in dealing with the ever-
changing organization world. Managing change is definitely a
challenge but not impossible, linking together possible solutions
can only lead to improved ways to handle changes and
transitions and open up the possibility of new and improved
methods not yet discovered.
References
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a821c755d5d7%40sessionmgr4 (accessed 27 July 2008).
3. Beckhard, R. (1969), Organizational Development: Strategies
and Models, Addison-Wesley, Reading, MA.
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Human Resource Management, 10th ed., Cambridge University
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3rd ed., John Wiley & Sons, Inc, Danvers, CT, pp. 3-23.
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Appendix
Corresponding author
Claire V. Brisson-Banks can be contacted at: [email protected]
AuthorAffiliation
Claire V. Brisson-Banks, Family History Library, Salt Lake
City, Utah, USA
Illustration
Table I:
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Copyright Emerald Group Publishing Limited 2010
English
Arabic
English
Arabic
A Guide for Charities and Foundations, 2015 EDITION 1

A B R I D G E D P R O O F 1 ( 0 2 . 5 . 2 0 1 5 )2 0 1 5 E D
I T I O NP R I N C I P L E S F O R G O O D . C O M
PRINCIPLES
FOR GOOD GOVERNANCE
AND ETHICAL PRACTICE
A GUIDE FOR CHARITIES AND FOUNDATIONS
1602 L STREET NW, SUITE 900
WASHINGTON, DC 20036
INDEPENDENTSECTOR.ORG
Principles for Good Governance and Ethical Practice2
Principles for Good Governance and Ethical Practice
A Guide for Charities and Foundations
ISBN - 978-0-9861548-1-2
Copyright © Independent Sector 2015

Independent Sector
1602 L Street NW, Suite 900
Washington, DC 20036
independentsector.org
Need Help?
To accompany the Principles, Independent Sector has carefully
curated the Principles Resource
Center – a comprehensive digital collection of resources
designed to further guide your
organization.
Begin with a comprehensive organizational assessment. After
answering a series of questions, IS
will present a score and a correlating set of recommendations
for better aligning your organization
with the Principles. The recommendations will help you
navigate more than 300 valuable resources
from across the sector to help you reach your goals. The

Principles Resource Center also provides
in-depth historical information about the development of the
Principles.
Access the Principles Resource Center at
PrinciplesForGood.com.
Chair
Samuel Worthington, President and CEO, InterAction
Members
Diana Aviv, President and CEO, Independent Sector
Judy Branzelle, Chief Legal Officer and General
Counsel, Goodwill Industries International, Inc.
Ronna Brown, President, Philanthropy New York
Virginia Esposito, President, National Center for Family
Philanthropy

Emily Greer, Chief Administrative Officer, ALSAC, Inc./
St. Jude’s Research Hospital
Philip Hackney, Professor, LSU Law Center, Louisiana
State University
Larry Hausner, former CEO, American Diabetes
Association
Darrell Kirch, President and CEO, Association of
American Medical Colleges
Susan H. Lau, Vice President, Member Services,
National Health Council
Cynthia Lewin, Executive Vice President and General
Counsel, AARP
James Lum, Chief Financial Officer, GuideStar USA, Inc.
Jill Manny, Professor, New York University School
of Law and Executive Director, National Center on
Philanthropy and the Law

Rebecca Masisak, CEO, TechSoup Global
William Miller, President, The Wallace Foundation
Una Osili, Director of Research, Lilly Family School of
Philanthropy, Indiana University
Celia Roady, Partner, Morgan, Lewis & Bockius LLP
Max Stephenson, Director, Institute for Policy and
Governance, Virginia Tech
Herman Art Taylor, President and CEO, BBB Wise Giving
Alliance
Anne Wallestad, President and CEO, BoardSource
Andrew Watt, President and CEO, Association of
Fundraising Professionals
Angela Williams, Executive Vice President, General
Counsel and Chief Administration Officer, YMCA of the
USA
Donor-Advised Fund Working Group

Diana Aviv, President and CEO, Independent Sector
Ronna Brown, President, Philanthropy New York
Fred Goldberg, Jr., Partner, Skadden, Arps, Slate,
Meagher & Flom LLP & Affiliates
Emily Greer, Chief Administrative Officer, ALSAC, Inc./
St. Jude’s Research Hospital
State University
Emily Lam, Partner, Skadden, Arps, Slate, Meagher &
Flom LLP & Affiliates
Jill Manny, Executive Director, National Center on
Philanthropy and the Law, New York University School
of Law
Celia Roady, Partner, Morgan, Lewis & Bockius LLP
Lorie Slutsky, President, The New York Community
Trust

Sterling Speirn, President, Stupski Foundation
Overhead Working Group
State University
Larry Hausner, former CEO, American Diabetes
Association
James Lum, Chief Financial Officer, GuideStar USA, Inc.
Rebecca Masisak, CEO, TechSoup Global
Herman Art Taylor, President and CEO, BBB Wise Giving
Alliance
Samuel Worthington, President and CEO, InterAction
2014 INDEPENDENT SECTOR
ETHICS AND ACCOUNTABILITY ADVISORY COMMITTEE

PANEL ON THE NONPROFIT SECTOR, 2004-2007
Co-Conveners
Lorie A. Slutsky, President, The New York Community Trust,
New York, NY
M. Cass Wheeler, Chief Executive Officer, American Heart
Association, Dallas, TX
Panel Members
Susan V. Berresford, President, Ford Foundation, New York,
NY
Paul Brest, President, William and Flora Hewlett Foundation,
Menlo Park, CA
Linda Perryman Evans, President and CEO, The Meadows
Foundation, Dallas, TX
Jonathan F. Fanton, President, John D. and Catherine T.
MacArthur Foundation, Chicago, IL
Brian Gallagher, President and CEO, United Way of America,
Alexandria, VA

Robert Greenstein, Executive Director, Center on Budget and
Policy Priorities, Washington, DC
Steve Gunderson, President and CEO, Council on Foundations,
Washington, DC
Stephen B. Heintz, President and CEO, Rockefeller Brothers
Fund, New York, NY
Wade Henderson, Executive Director, Leadership Conference on
Civil Rights, Washington, DC
Dorothy A. Johnson, Trustee, W.K. Kellogg Foundation, Grand
Haven, MI
Valerie Lies, President and CEO, Donors Forum of Chicago,
Chicago, IL
Paul Nelson, Former President, Evangelical Council for
Financial Accountability, Winchester, VA
William D. Novelli, CEO, AARP, Washington, DC
Jon Pratt, Executive Director, Minnesota Council of Nonprofits,
St. Paul, MN

John R. Seffrin, President and CEO, American Cancer Society,
Atlanta, GA
Sam Singh, Former President and CEO, Michigan Nonprofit
Association, Lansing, MI
Edward Skloot, Former Executive Director, Surdna Foundation,
New York, NY
William E. Trueheart, President and CEO, The Pittsburgh
Foundation, Pittsburgh, PA
William S. White, President, Charles Stewart Mott Foundation,
Flint, MI
Timothy E. Wirth, President, United Nations Foundation,
Washington, DC
Gary L. Yates, President and CEO, The California Wellness
Foundation, Woodland Hills, CA
Raul Yzaguirre, Former President and CEO, National Council of
La Raza, Washington, DC

Executive Director
Diana Aviv, President and CEO, Independent Sector,
Washington, DC
TABLE OF CONTENTS
Preamble p.04
1. Legal Compliance and Public Disclosure p.09
Principles 1-7
2. Effective Governance p.19
Principles 8-20
3. Strong Financial Oversight p.31
Principles 21-26
4. Responsible Fundraising p.37
Principles 27-33
Glossary p.44

Staff p.48
Acknowledgements p.49
For Further Info p.49
Charitable nonprofit organizations in the United
States—educational, charitable, civic, and religious
institutions of every size and mission—represent the
most widespread organized expression of Americans’
dedication to the common good. The creation of
these voluntary, often grassroots organizations to
accomplish some public purpose is a distinguishing
feature of our national life. Since the 1835 publication
of Alexis de Tocqueville’s Democracy in America,
they have been recognized internationally as a source
of social cohesion, a laboratory of innovation, and
a continually adaptable means of responding to
emerging ideas, needs, and communal opportunity.
Individuals have continued to use their First

Amendment freedoms of speech and association to
create and energize organizations that define common
needs, rally popular support, and pursue innovative
approaches to public problems. These nonprofits have
been a source of national achievement on many fronts.
The variety of purposes, forms, and motivating
beliefs that make up the charitable community in the
United States is one reason why it has consistently
earned widespread support from large numbers of
Americans. In recent decades, the percentage of survey
respondents expressing confidence in the ethics and
honesty of U.S. charities and voluntary organizations
overall has hovered around two-thirds.1 For individual
charitable organizations, responses are even more
favorable, some reaching above 70 percent. In 2012,
26.5 percent of adult Americans—about 64.5 million of
them— gave 7.9 billion hours of volunteer time worth
$175 billion.2 In 2013, individual donations totaled
more than $240.6 billion, which came on top of the
$94.57 billion given by corporations, foundations, and
bequests.3
Preserving this diversity, adaptability, and capacity for
innovation for the purpose of improving life and the
natural world depends in large part on maintaining

the public’s trust. The public has high expectations
for both the ethical standards and the impact of the
1 Independent Sector, Keeping the Trust: Confidence in
Charitable Organizations in an Age of Scrutiny, August 2002, p.
2.
2 Corporation for National and Community Service http://
www.nationalservice.gov/impact-our-nation/research-and-
reports/
volunteering-america (accessed 10/28/14)
3 Giving USA (2014) reported in Forbes http://www.forbes.
com/sites/tomwatson/2014/06/17/annual-philanthropy-numbers-
on-
the-rise-u-s-giving-nears-pre-recession-levels/ (accessed
10/28/14)
country’s 1.44 million charitable organizations,4
but often has trouble distinguishing one nonprofit
from another. Unethical or improper conduct by
an individual organization, though rare, can thus
jeopardize the human and financial support on
which countless other activities rely. Yet government
attempts to prevent such abuses, if not carefully

pursued, can themselves diminish the unique value
that charitable organizations bring to American life.
Too heavy a regulatory hand, or too uniform and
inflexible a set of legal restraints, could stifle the
very creativity and variety that makes charitable
nonprofit activity worth protecting and encouraging.
Government appropriately sets rules for the
organizations and activities that are exempt from taxes
and eligible to receive tax-deductible contributions:
for example, government has determined that such
contributions may not be used for partisan political
activities or the private benefit of the donor. At the
same time, government has wisely avoided intruding
on how organizations pursue their missions, manage
their programs, and structure their operations so long
as those organizations file their annual information
(Form 990) returns5 and are accountable to their
boards.
Charitable organizations have long embraced the
need for standards of ethical practice that preserve
and strengthen the public’s confidence. Many such
systems in fact already exist, though before the Panel
on the Nonprofit Sector’s 2007 Principles,6 none had
applied to the entire range of American charitable
organizations.

The pages that follow set forth a comprehensive
set of principles that are an updated version of the
Panel’s work. Their purpose is to reinforce a common
understanding of transparency, accountability, and
good governance for the sector as a whole—not only to
ensure ethical and trustworthy behavior, but equally
important, to spotlight strong practices that contribute
to the effectiveness, durability, and broad popular
support for charitable organizations of all kinds.
4 Nonprofit Sector in Brief 2014, Urban Institute http://
www.urban.org/center/cnp/almanac/sector-in-brief.cfm
(accessed
10/28/14)
5 Public charities with annual revenues of $50,000 are
subject to different requirements. Please see page 54 of the
Reference Edition for details.
6 Independent Sector, Principles for Good Governance and
Ethical Practice, October 2007.
PREAMBLE
http://www.nationalservice.gov/impact-our-nation/research-and-

reports/volunteering-america
http://www.forbes.com/sites/tomwatson/2014/06/17/annual-
philanthropy-numbers-on-the-rise-u-s-giving-nears-pre-
recession-levels/
recession-levels/
recession-levels/
http://www.urban.org/center/cnp/almanac/sector-in-brief.cfm
http://www.urban.org/center/cnp/almanac/sector-in-brief.cfm
Toward a Balanced System of Law and Self-
Governance
Any approach to preserving the soundness and integrity
of the nonprofit community must strike a careful
balance between the two essential forms of regulation—

that is, between prudent legal mandates to ensure that
organizations do not abuse the privilege of their exempt
status, and, for all other aspects of sound operations,
well-informed self-governance and mutual awareness
among nonprofit organizations. Such a balance is
crucial for ensuring that frameworks of accountability
and transparency are core pillars of our charitable
nonprofit community, affording organizations the
support they need to pursue their various callings and
the flexibility they need to adapt to the changing needs
of their communities, their fields of endeavor, and the
times.
The Panel on the Nonprofit Sector
In September of 2004 Senators Grassley (R-IA) and
Baucus (D-MT) encouraged Independent Sector
to convene an independent panel on the nonprofit
sector to consider and recommend actions that
would strengthen good governance, ethical conduct,
and effective practice of public charities and private
foundations. In response, Independent Sector
convened the Panel on the Nonprofit Sector which
engaged thousands of people involved with charities
and foundations to address concerns shared by
nonprofit organizations, members of the public,

Congress, and federal and state oversight agencies
about reports of illegal or unethical practices by
some charitable organizations and their donors.
Their Strengthening the Transparency, Governance,
and Accountability of Charitable Organizations
report, issued to Congress in June 2005, with a
supplemental report issued in 2006, offered more
than 100 recommendations for improving government
oversight, including new rules to prevent unscrupulous
individuals from abusing charitable organizations for
personal gain. The Pension Protection Act of 2006
enacted many of these recommendations into law.
The Panel was equally committed to formulating
effective, broadly applicable methods of self-regulation,
and in October 2007, it issued the Principles for
Good Governance and Ethical Practice, A Guide for
Charities and Foundations. The work of the Panel
was premised on a belief that the best bulwark against
misconduct will always be well-informed vigilance
by members of the nonprofit community themselves,
including a set of principles they could adopt or adapt,
promote sector-wide, and improve over time. These
principles should be clear enough to be practical and
readily implemented in a wide variety of organizations,

but flexible enough to allow each organization’s
governing board and management to adapt them to
the dictates of that organization’s scope and mission.
Widespread use of such principles would enable
organizations to improve their operations by learning
from each other. Critically, it would also provide a
common yardstick by which members of the public can
evaluate how to direct their support.
Developing Sector-Wide Principles to
Support Self-Regulation
Among the earliest efforts to self-regulate date back
to 1918, when a coalition of nonprofits established the
National Charities Information Bureau to help the
public learn about the ethical practices and stewardship
of organizations that raise money from donations.
Since that time, many excellent systems of self-
regulation have been in use in various subsets of the
charitable sector, each tailored to the goals, resources,
and challenges of its particular field and constituency.
In developing the 2007 Principles, the Panel conducted
extensive research. It commissioned two studies to
review, analyze, and find patterns among 50 existing
systems, including selections from both the nonprofit

and for-profit sectors.7 It established an advisory
committee on self-regulation, composed of 34 leaders
from charities, foundations, and academia, who after
extensive deliberation, developed a comprehensive
set of principles drawn from current systems and
incorporating the advice of experts in nonprofit law and
governance.
This first set of draft principles was circulated for public
comment in early 2007. After considering the resulting
feedback, the committee and the Panel made revisions
and released a second draft for a longer comment
period. The wide-ranging reaction to both drafts
demonstrated a broad interest across the nonprofit
community in creating a common set of standards or
guideposts with regard to the elements of transparent,
accountable, and ethical conduct. The resulting
feedback further strengthened the Panel’s final set of
principles.
Since their publication in 2007, the Principles have
been distributed and/or downloaded over 200,000
7 Independent Sector, Principles for Good Governance and
Ethical Practice: Reference Edition, October 2007.

times. A 2010 evaluation of the Principles8 found
that the Principles were considered to be a valuable
resource that is being used to strengthen governance
and ethical practice. The Principles are used by
nonprofit organizations, by consultants, lawyers, and
accountants who focus on good governance and ethical
practice in organizations and as educational materials
in graduate courses, and by the IRS as part of their
training for oversight officials.9
A New Look at the Principles
In 2014, Independent Sector convened an advisory
group of 21 sector leaders to consider whether updates
to the 2007 Principles were warranted. The impetus
for doing so was two-fold. First, seven years since
publication of the Principles in 2007, the charitable
sector has experienced many significant changes in
the environment in which it works and those changes
have raised questions about whether the principles
adequately addressed some of the emerging issues.
Secondly, with such broad-based reliance on these
principles, IS deemed it good practice to revisit the

recommendations to be sure that the thinking remains
relevant today.
The advisory group recommended a series of
updates that are reflected in this 2015 edition of the
Principles. Some reflect changes in the law since
the 2007 Principles were issued. Others reflect new
circumstances in which the sector functions, and new
relationships within and between the sectors.
Revisions to the 2007 Principles
Following are highlights of the revisions reflected in
this 2015 edition.
Code of Ethics
All nonprofit organizations (including small ones)
should have a board-approved code of ethics (principle
#2); board members should sign the code of ethics
at least once, although the frequency and format of
reaffirming their commitment to the code should be
decided upon by the organization; and organizations
8 Independent Sector Good Governance and Ethical Practice
(Formative Evaluation Research Associates), Nov. 2010.
9 In 2011, Sarah Hall Ingram, former Commissioner of the

Tax Exempt and Government Entities Division of the Internal
Revenue
Service, so reported to Independent Sector CEO Diana Aviv
during a
presentation at Georgetown University.
should decide for themselves whether volunteers
(aside from board leadership) need to sign the code.
Furthermore, the code should be accompanied by
specific policies and procedures describing how it
will be put into practice and how violations will be
addressed.
Whistleblower
Principle (#4) notes that some offenses require
immediate reporting while others may warrant
investigation first, and encourages an organization to
have a clear process to decide whether, how, and when
to report. Human resources violations should only be
subject to whistleblower policies and protections when
other human resources processes fail to appropriately
handle the violations. The Principles encourage wide
distribution of the whistleblower policy.
Risk Tolerance & Mitigation in Response to

Technology Advances
It is the board’s responsibility to decide the level of risk
that the organization is comfortable with, including
risk regarding its finances, its operations, and its
reputation, although there are other areas in which
staff are also involved. Updated principles recognize
the importance of protecting an organization’s data
along with its business records, property, program
content, integrity, and reputation (#5, 6, & 21). To
mitigate risk, an organization should maintain
emergency preparedness and disaster response plans;
secure and back up data and electronic files; protect
against outside manipulation of data; have clear and
explicit privacy policies that indicate how data will
be used and kept secure; and seek permission to use
all individual identifying information (photographs,
fingerprints, biometric data, social security numbers,
etc.).
Nonprofits Taking Up New Business or
Earned Income Opportunities
Principle on board’s stewardship (#19) calls on board
and staff: to ensure any new business opportunity
furthers an organization’s mission; to weigh financial
returns against resources it may draw away from

primary organization functions; and to regularly check
back on whether such ventures are serving intended
goals. Principle on role of boards (#8) calls on boards
to ensure that activities of chapters, branches, or
affiliates are consistent with the organization’s overall
values and mission.
Transparency vs. Privacy
Updated principles recognize the important balance
between organizations being highly transparent, and
appropriately protecting individual privacy. Principles
(#6, 7, & 33) urge that organizations are transparent
to ensure that the public has an understanding of an
organization’s mission, purpose, and activities. For
example, it is best practice for an organization to have
an online presence with information that is timely
and clear. This increases public trust and enables
the organization to demonstrate impact and how
it stewards public funding. At the same time, this
proclivity towards transparency needs to be balanced
by valid privacy concerns to protect clients, consumers,

employees, and volunteers, bearing in mind physical
risk, integrity of personnel, privacy of children, and
prohibitive costs.
Executive Compensation
Principle (#13) calls on the full board to evaluate,
thoroughly understand, and approve the compensation
of the CEO annually in advance of any change in
compensation. If a committee is designated to
review the compensation and performance of the
CEO, the committee findings and recommendations
should be reported to the full board. In determining
compensation, the board or committee should seek
objective external data to support its decisions.
Overhead Costs
An important reframing of our principle of overhead
costs (#24) describes administrative expenses as an
integral component of program support – rather than
costs that detract from program resources.
Our previous language juxtaposed the two, urging
organizations to spend a significant percentage on
programs while also providing sufficient resources for
administration and fundraising. Our new language
calls on an organization to spend a significant

amount of its budget on programs while ensuring
that the organization has sufficient administrative
and fundraising capacity to deliver those programs
responsibly and effectively. The principle also retains
reference to the 65% threshold that watchdog groups
recommend as a minimum to be spent on program
activities.
Fundraising
Fundraising principles (#27-33) are reframed to
incorporate new references to online platforms,
mobile giving, social media, and crowdsourcing. They
emphasize the importance of ensuring that prospective
donors receiving such online communications know
how to contact the organization for more information.
They also raise the caution of online fundraising
channels providing easy opportunities for fraudulent
solicitations, and urge organizations to take steps to
counter these. Principles emphasize the importance
of providing training and supervision for fundraisers,
the handling of donor data, and how to take control of
the organization’s brand if online platforms are raising
funds for the particular organization without their
permission.

Using and Adapting the Principles
The following pages set forth 33 principles of
sound practice that should be considered by every
charitable organization as a guide for strengthening its
effectiveness and accountability.
Given the wide, necessary, and rich diversity of
organizations, missions, and forms of activity that
make up the nonprofit community, it would be unwise
to attempt to create a set of universal standards to
be applied uniformly to every member. While some
principles reflect legal requirements, most reflect
standards that are recommended to every charitable
organization as guideposts for adopting specific
practices that best fit its particular size and charitable
purpose. Many of the principles do not prescribe a
practice, but recommend factors that an organization
should consider in arriving at its own conclusions.
Organizations can use these principles to evaluate their
current practices.
Self-regulation begins with embracing good
governance. Every charitable organization, by federal
and state law, must have a board of directors or, if it is
established as a charitable trust, one or more trustees.
The board sets the organization’s broad policies
and oversees its operations, including its financial

policies. The board also has a responsibility to create
an environment in which there is open and robust
deliberation of the issues on which it takes action.
Whether or not the organization has paid staff, the
board bears the primary responsibility for ensuring
that the organization lives up to its legal and ethical
obligations to its donors, consumers, and the public.
For organizations that do have staff, the chief staff
officer, in partnership with the board, has responsibility
for overseeing or carrying out many of the activities
implied by these principles. It is therefore to the
boards and chief executives of nonprofit organizations
that this document is particularly, though not
exclusively, addressed.
The 33 principles that follow are organized under four
main categories:
1. Legal Compliance and Public Disclosure (principles
1-7, pages 9-18)—responsibilities and practices, such
as implementing conflict of interest and whistleblower

policies, that will assist charitable organizations in
complying with their legal obligations and providing
information to the public.
2. Effective Governance (principles 8-20, pages
19-30)—policies and procedures a board of directors
should implement to fulfill its oversight and
governance responsibilities effectively.
3. Strong Financial Oversight (principles 21-26, pages
31-36)—policies and procedures an organization
should follow to ensure wise stewardship of charitable
resources.
4. Responsible Fundraising (principles 27-33, pages
37-43)—policies and procedures organizations that
solicit funds from the public should follow to build
donor support and confidence.
It is advisable that an organization’s boards conduct a
thorough discussion of the complete set of principles,
and determine how the organization should apply each
to its operations. It is possible that after this review,
a board may conclude that certain principles do not
apply to its organization. Developing a transparent
process for communicating how the organization

has addressed the principles, including the reasons
that any of the principles are not relevant, is likely to
foster a greater appreciation of the diverse nature of
the sector and a deeper respect for the board’s good
stewardship.
A reference edition of the 2015 Principles is available
at www.independentsector.org/principles and includes
legal background on each principle and a glossary
of terms. Two studies on self-regulation systems
commissioned by the Panel on the Nonprofit Sector to
inform its work were included in the 2007 Principles
Reference Edition and are also available online.
They included a review of more than 50 existing
self-regulation systems and standards that were
shared with the Panel’s Advisory Committee on Self-
Regulation.10
Independent Sector also offers information on its
website to assist organizations in finding tools and
other resources for applying these principles. That can
be found at www.independentsector.org/principles
A Process of Continuing Vigilance and
Adaptation
Strengthening ethics and accountability is an organic

process that requires an ongoing commitment by
boards and staff of individual organizations and by
the entire nonprofit community. Over time, discussion
within organizations and across the community may
well result in refinement of the principles presented
here. Such discussions would provide a further
demonstration of the value to the whole sector of
coming together to improve its work.
For organizations whose practices do not currently
meet the standards recommended by the Principles,
and for existing systems of self-regulation that fall
short as well, reaching those levels may take some
time. Yet even the process of striving toward these
standards will strengthen the organization and its
ability to serve its community.
THE KEY IS TO BEGIN THAT
PROCESS TODAY.
10 FDR Group, “Self-Regulation in the Nonprofit Sector:
A Portrait of Current Issues in the Field” and National Center
on
Philanthropy and the Law, “Study on Models of Self-Regulation
in the
Nonprofit Sector”, Principles for Good Governance and Ethical

Practice:
Reference Edition, Independent Sector, October 2007.
SECTION ONE
LEGAL
COMPLIANCE
AND PUBLIC
DISCLOSURE
9
PRINCIPLE 01

A charitable organization must comply with all applicable
federal laws
and regulations, as well as applicable laws and regulations of
the states
and the local jurisdictions in which it is formed or operates. If
the
organization conducts programs outside the United States, it
must also
abide by applicable international laws, regulations, and
conventions.
Charitable organizations (other than churches) must
apply to the Internal Revenue Service for recognition
as tax-exempt organizations under section 501(c)
(3) of the federal tax code that are eligible to receive
tax-deductible contributions. They must then file
annual information returns (IRS Form 990) and
abide by the rules and reporting requirements set
for such organizations by the federal government.
They must also abide by state and local laws
regarding governance, protection of charitable assets,
solicitation of charitable contributions, taxes, and
a range of other requirements that apply to both
for-profit and nonprofit employers and providers of

various types of services. An organization’s governing
board is ultimately responsible for overseeing and
ensuring that the organization complies with all of
its legal obligations and for detecting and remedying
wrongdoing by management. While board members
are not required to have specialized legal knowledge,
they should be familiar with the basic rules and
requirements with which their organization must
comply and should secure the necessary legal
and financial advice and assistance to structure
appropriate monitoring and oversight mechanisms
and manage charitable assets responsibly.
There are many resources listed at www.
independentsector.org/principles to help charitable
organizations and their boards understand how their
operations may be affected by the law. The Internal
Revenue Service provides a number of resources
regarding federal laws on its website (http://www.
irs.gov/Charities-&-Non-Profits). Many state
attorneys general and charity officials also maintain
helpful websites with information on charitable
solicitation requirements and other rules applicable
to organizations operating in their states.

Many national, state, and regional associations of
nonprofit organizations provide online tools and
resources that offer guidance on legal requirements
and best practices for nonprofit organization
management and governance. Organizations
may also find it helpful to consult with state and
local chapters of bar associations for referrals to
individuals or firms offering low-cost or pro bono
legal assistance.
http://www.independentsector.org
http://www.independentsector.org/principles
http://www.independentsector.org/principles
http://www.irs.gov/Charities-&-Non-Profits
http://www.irs.gov/Charities-&-Non-Profits
PRINCIPLE 02
A charitable organization should formally adopt a written code
of ethics
with which all of its directors or trustees, staff, and volunteers
are

familiar and to which they adhere.
Adherence to the law provides a minimum standard
for an organization’s behavior. Each organization
should also create or adopt a written code of ethics that
outlines the values that the organization embraces,
and the practices and behaviors its staff, board,
and volunteers are expected to follow, such as the
confidentiality and respect that should be accorded
to clients, consumers, donors, volunteers, and board
and staff members. The code of ethics should be
accompanied by specific policies and procedures
that describe how it will be put into practice and how
violations will be addressed.
Both the board and the staff should be engaged in
developing and implementing a code of ethics that fits
the needs and character of the individual organization.
The board should approve the final document. New
board members, employees, and volunteers should
receive a full orientation to the code and all related
policies, including processes for addressing violations.
Adherence to the code should be incorporated into

the ongoing work of all staff and volunteers of the
organization. Organizations should consider requiring
every board member, employee, and volunteer to
review and sign a copy of the code when they join the
organization and to reaffirm their commitment by
signing the code again on an annual or other regular
basis.
PRINCIPLE 03
A charitable organization should adopt and implement policies
and
procedures to ensure that all conflicts of interest (real and
potential),
or the appearance thereof, within the organization and the
governing
board are appropriately managed through disclosure, recusal, or
other
means.
Board members and officers have fiduciary duties
under the laws of most states, including a “duty of
loyalty” that requires them to put the interests of
the charitable organization they serve above their

personal interests and the interests of any other person
or organization. When a board or staff member, or
someone they are close to, such as a family member
or business associate, has a potential financial or
personal interest in a matter before the organization
they serve, those conflicting interests must be
managed appropriately to protect the organization
and the interested parties from illegal or unethical
actions. Federal and some state laws prohibit or
regulate certain transactions between charitable
organizations and certain insiders and parties related
to those insiders. Insiders include officers, directors,
and certain parties closely related to them. A full
list of the types of persons that are considered to
be insiders is provided in the reference edition of
these Principles. Other transactions may give the
appearance of impropriety, but an independent review
might ascertain that they are consistent with the
best interests of the organization. Establishing and
enforcing a written conflict-of-interest policy can help
an organization avoid or manage real or perceived
conflicts of interest that could affect the decisions of
board members, staff leaders, and other employees.

Conflict-of-interest policies should address the
disclosure and management of situations that give the
appearance of a conflict as well as those that involve
an actual conflict where a board or staff member has
a direct or indirect financial interest in transactions
with the organization. Board members and anyone in
a position to influence decisions of the organization
should be required to disclose any situation in which
they or someone they are close to would benefit or be
harmed financially by the organization’s action. They
should also be encouraged to disclose any interest they
have in a transaction or matter before the organization
where that interest could be reasonably viewed by
others as affecting the objectivity or independence of
the decision maker.
Federal law does not require organizations to have a
conflict of interest policy, but the IRS requires most
nonprofits to report on their annual Form 99011
whether or not the organization has and regularly

enforces such a policy and if so, how it is enforced.
Some states do require such policies or procedures
to manage conflicting interests. For example, New
York State requires every nonprofit to adopt a conflict
of interest policy that defines situations that present
a conflict of interest, the process by which board
and staff members must disclose such conflicts, and
the actions that should be taken once a conflict has
been identified. New York prohibits individuals with
a conflict of interest from voting on or improperly
influencing deliberations and decisions on matters
in which they have a conflicting interest, and
organizations must document how such conflicts were
discussed and resolved.
Once a conflict of interest policy is developed, all
board and senior staff members should be required
to sign it and to disclose any material conflicts of
interest, including any family or business relationship
they have with any other board or staff member,
both at the time they join the organization and at the
beginning of each new board year (as well as promptly
disclosing anything new that arises during the year).
Most nonprofits are required to disclose on their

annual Form 990 any family or business relationships
between or among board members, officers, and key
employees. Organizations should also be mindful of
potential conflicts that can accompany a contribution
or a request from a significant contributor, which are
often addressed through a gift acceptance policy (see
principle #30).
PRINCIPLE 04
A charitable organization should establish and implement
policies and
procedures that enable individuals to come forward with
information
on illegal practices or violations of organizational policies. This
“whistleblower” policy should specify that the organization will
not
retaliate against, and will seek to protect the confidentiality of,
individuals who make good-faith reports.
Every charitable organization, regardless of size,
should have clear policies and procedures that allow
staff, volunteers, or clients of the organization to
report suspected wrongdoing within the organization
without fear of retribution. These policies— sometimes

known as “Whistleblower Protection Policies” or
“Policies on Reporting of Malfeasance or Misconduct”
— generally address suspected incidents of theft;
financial reporting that is intentionally misleading;
improper or undocumented financial transactions;
improper destruction of records; improper use of
assets; violations of the organization’s conflict-of-
interest policy; and any other improper occurrences
regarding cash, financial procedures, or reporting. If
an organization does not have a separate grievance
policy with protected reporting procedures to
11
11 Throughout this document, unless otherwise stated, a
reference to the 990 refers just to the Form 990. There may be
different
requirements for organizations filing Forms 990-EZ, 990-PF, or
990-N.

address violations of personnel policies, it should
consider incorporating such procedures in its broader
whistleblower policy. Information on these policies
should be widely distributed to staff, volunteers,
clients, and others (such as vendors and consultants)
as appropriate. Discussion of the policy should be
incorporated both in new employee orientations
and ongoing training programs for employees and
volunteers. Some federal and state laws protect
individuals working in charitable organizations
from retaliation for engaging in specified whistle-
blowing activities, and states may also require that
certain organizations have and enforce whistleblower
policies.12
A whistleblower policy should be tailored to the
nonprofit’s size, structure, and capacity, and it must
reflect the laws of the state in which the nonprofit is
organized or operates. All policies should specify the
individuals within the organization (both board and
staff) or outside parties to whom such information
can be reported. Small organizations with few or no
paid staff may wish to designate an external advisor
to whom concerns can be reported without threat

of retaliation. This is a particular concern for family
foundations whose board members and staff may not
feel comfortable sharing concerns about suspected
illegal or unethical practices directly with another
family member or close associate of the family. Larger
organizations should encourage employees and
volunteers to share their concerns with a supervisor,
the president or executive director, the general
counsel, the chief financial officer and/or other senior
managers of the organization, and should also provide
a method of reporting confidentially to either a board
member or an external entity or individual specified
by the organization. Some large organizations have set
up computerized systems that allow for anonymous
reports, and a number of private companies offer
12 See e.g. Sarbanes-Oxley Act § 1107, which makes it a crime
to knowingly take any action harmful to a person with the intent
to
retaliate against that person for providing a law enforcement
officer
with truthful information relating to the commission or possible
commission of any federal offense.
anonymous reporting services via a toll-free telephone

number, email address, or intranet site.
It is equally important that the organization have
clear procedures to investigate all reports and take
appropriate action. While steps must be taken to
protect the anonymity of reporters as much as
possible, reports must include sufficient information
to enable an investigation. Reports of certain types
of alleged offenses, such as abuse of a client, may
require immediate reporting to appropriate legal
authorities and suspension, with or without pay, of
the accused volunteer or employee, while the matter is
being investigated. In other cases, the board or senior
management may wish to investigate allegations
before reporting to government authorities to protect
against or to minimize the risk of unsubstantiated
accusations against an innocent individual. Some
cases, even those involving substantiated violations,
may not require reporting beyond the board and senior
management.
Charitable organizations that must file an annual
Form 990 information return are required to report
whether they have a whistleblower policy, and whether
they became aware of a material diversion of the

organization’s assets during the year, as well as any
corrective actions undertaken to address such issues
if they arose. Boards of directors should have a clear
process by which they decide whether, how, and when
they should report other proven incidents of fraud,
theft, or wrong-doing to relevant public and internal
audiences, including, but not limited to, the IRS, state
regulators, law enforcement, donors, consumers,
employees, and volunteers. The process should
include a review of legal obligations, implications for
the organization’s reputation, and consideration of
whether the information may become public through
public reports or private communication.
PRINCIPLE 05
A charitable organization should establish and implement
policies and
procedures to protect and preserve the organization’s important
data,
documents, and business records. 13

13
13 Examples of important documents may include all tax
filings, articles of incorporation, documentation relating to
contributions and
grants, and any evidence of transactions with related parties.
Charitable organizations are required to maintain their
organizational documents, board minutes and policies,
and materials related to their state and federal tax-
exempt status permanently. Other documents related
to the governance, administration, fundraising, and
programs of the organization, including employment
and volunteer records, must be kept in paper or
electronic form for specific periods, depending on
applicable laws and reporting requirements. When
those documents and key financial and program data
are maintained electronically, the organization must
take appropriate action to protect that information
from unauthorized access or manipulation.
A written data and document-retention policy,
consistently monitored over time, is essential for

protecting key organizational documents and records,
as well as protecting the privacy of individual clients,
consumers, employees and volunteers. The policy
should address the length of time specific types of
documents and data must be retained, as well as
when it is permissible or required to destroy specific
types of documents. It should include guidelines for
backing up and archiving paper and electronic data
and documents (including e-mail messages), as well
as procedures for verifying their security from theft,
manipulation, or destruction.
Board members, staff, and volunteers should be
thoroughly familiar with the policy and informed of
their responsibilities in carrying it out. Board members
and senior staff managers should ensure that there
is an ongoing process for ensuring compliance with
the policy and for updating procedures as necessary.
The Form 990 requires organizations to report
whether they have a written document retention and
destruction policy.
Federal and some state laws prohibit the destruction,
alteration, mutilation, or concealment of records

related to an official legal proceeding. Policies
should outline specific procedures to ensure that
any destruction of documents or data is immediately
halted if an official investigation of the organization is
underway or anticipated.
PRINCIPLE 06
A charitable organization’s board should ensure that the
organization
has adequate plans to protect its assets — its property,
documents
and data, financial and human resources, programmatic content
and
material, and its integrity and reputation — against damage or
loss.
The board should review regularly the organization’s need for
general
liability and directors’ and officers’ liability insurance, as well
as take
other actions necessary to mitigate risks.

The board members of a charitable organization are
responsible for understanding the major risks to
which the organization is exposed, reviewing those
risks on a periodic basis, and ensuring that systems
have been established to manage them. Establishing
and implementing sound policies and procedures for
the organization’s governance, financial operations,
employee and volunteer management, fundraising
activities, and program administration is a key part of
avoiding many of the legal and operational risks that
face charitable organizations. The board is responsible
for approving those policies and reviewing them
periodically to ensure they are up-to-date and properly
enforced.
The board’s responsibilities include establishing the
level of risk tolerance for the organization concerning
its finances, its operations, and its reputation. Board
members then work closely with staff to outline
the areas where managing risk is solely a staff
responsibility, such as the hiring and supervision of
staff, and those where both groups share responsibility
for determining whether it is appropriate or necessary
for the organization to assume certain risks, such

as deciding to launch a new program effort. Given
the high level of risk exposure associated with fraud
and mismanagement of financial resources and
inappropriate fundraising activities, boards should
pay particular attention to the recommendations
listed under STRONG FINANCIAL OVERSIGHT and
RESPONSIBLE FUNDRAISING.
Many charitable organizations maintain extensive
records regarding donors, employees, volunteers,
clients, and consumers of goods and services, including
data used to document the impact of their services on
individuals and groups. Loss or outside manipulation
of such data could expose those individuals and the
organization to significant risk. Organizations that
gather personal information from donors, individuals
who receive or purchase their goods and services, or
other visitors to their websites should have a privacy
policy that informs those individuals what information
is being collected about them, how that data will be
used and kept secure as well as how to inform the
organization if the individual does not wish personal
information to be shared. Organizations that gather
personally identifiable information about individuals,

including photographs, fingerprints, or other biometric
data, should ensure that they have the appropriate
permissions and protections in place. Individuals’
rights to access and control their personal information
is protected under federal and state laws. There
are also laws that specify rules and conditions for
gathering and using information from and about
children and other protected populations.
The level of risk to which the organization is exposed
and the extent of the review and risk management
process it may employ will vary considerably
based on the size, programmatic focus, geographic
location, and complexity of its operations. While
larger organizations may require more extensive risk
management programs, all organizations should
have emergency preparedness and disaster response
plans in case of natural or man-made disasters or
other crises that may affect their facilities, programs
and operations. Every organization should have
procedures for backing up, preserving, and protecting
electronic and print documents and information
vital to its governance, financial, and programmatic
operations, including personal data it may collect
about employees, volunteers, donors, consumers, and

other individuals.
Organizations that employ staff should have written
personnel policies that conform to federal and state
laws and that reflect the values of the organization.
They should develop appropriate procedures to
protect the health and safety of employees and
volunteers while they are at work or participating in
an event sponsored or conducted by the organization.
Organizations providing services to vulnerable
individuals should ensure that appropriate screening,
training, and supervision procedures are in place to
minimize safety risks to their consumers and clients,
as well as to paid and volunteer staff.
Board members may be personally liable for fines and
other penalties as a result of certain legal violations,
such as failure to pay required payroll and other
taxes or approval of excess benefit or self-dealing
transactions. Federal and some state volunteer liability

laws provide some protection for board members
who are not compensated, other than receiving
reimbursement of expenses, and who act in good
faith. Nonetheless, while it is rare for a charitable
organization and its board to be the target of a lawsuit,
each organization should nonetheless take steps to
protect its assets in such an event. The board should
consider including indemnification provisions in
the organization’s governing documents, based on a
review of the laws of the states in which it is based or
operates. The board should also assess periodically the
organization’s need for insurance coverage based on
its program activities and financial capacity. Insurance
is only one risk management strategy, however. Other
strategies should also be considered to protect an
organization’s assets, such as establishing reserve
funds to absorb minor losses, borrowing from lenders,
and negotiating with third parties to assume certain
losses.
PRINCIPLE 07
A charitable organization should make information about its
operations,

including its governance, finances, programs, and activities,
widely
available to the public. Charitable organizations also should
consider
making information available on the methods they use to
evaluate the
outcomes of their work and sharing the results of those
evaluations.
Providing clear, timely information about an
organization’s mission, how it operates and manages
its finances, and the results of its work can have
a powerful influence on the level of public trust
and support that organization enjoys. Charitable
organizations (other than churches) recognized by the
IRS are required to file an annual information return
(Form 990 series) with the IRS, a version of which
they must also make available for public inspection.
The IRS may assess fines on organizations that file
late or incomplete returns. The IRS must revoke the
tax-exempt status of any organization that fails to file
a required return for three consecutive years. Beyond
these legal requirements, each organization must
weigh the value of greater transparency in garnering

more support for its work versus the costs of gathering
and producing information and the potential risks to
staff, volunteers, and clients in sharing specific types of
information.
For many private foundations and many public
charities, the annual IRS information return serves as
a primary source of information about their finances,
governance, operations, and programs for federal
regulators, the public, and many state charity officials.
Copies of the returns (not including information
on donors to public charities and selected other
proprietary information) are available online through
such providers as GuideStar, the Foundation Center,
the National Center for Charitable Statistics, and the
websites of many state charity offices. Many charitable
organizations are legally required to make their three
most recently filed Form 990s and their applications
for tax-exempt status, if after 1987, available to the

public for inspection and copying at their offices
or on a readily-accessible website. Organizations
should ensure that their returns are posted on their
own or another readily-accessible website soon after
the returns have been filed with the IRS to provide
prospective donors and the public with the most
current information available.
Annual information returns, while helpful, provide
a limited, and often dated view of an organization.
Therefore charitable organizations should strongly
consider offering additional information about what
they do and how they operate through a website
or other online vehicle, or through an electronic or
printed annual report. Regardless of the format,
this resource should provide information about the
organization’s mission and vision, its board and
senior staff members, program activities, and current
financial information including, at a minimum, its
total income, expenditures, and ending net assets.
Such reports or online resources need not be elaborate
and can direct the reader to other readily available
documents (such as the Form 990 return or audited
financial statements) for further information. Online
resources can generally be updated as new information

is available. Organizations that choose to produce
printed reports may decide to produce a new narrative
every two or three years, while ensuring that readers
have access to information on any intervening changes
in its board and staff or programs and its current
financial statements through an attachment, an online
resource, or other notice.
An organization’s website or other online presence can
be a key vehicle for transparency and accountability
and communicating the organization’s work and
progress. In addition to the information cited
above, websites should provide links directly to or
instructions on how to request the organization’s
most recent IRS Form 990 return and other financial
statements, key organizational policies such as its
code of ethics and policies on conflicts of interest,
whistleblower protection, and travel policy. If the
website provides a mechanism that enables visitors to
make online contributions, the organization should
ensure that it includes appropriate information about
how and where their donation will be processed and
how the contributors’ information will be protected.
For more information, see Principle #33.

Information on an organization’s results and how they
are measured can be an especially valuable means
of explaining its work and offering an accounting to
donors and the public. Nonetheless, such information,
and the ability to provide it, will vary considerably
from one organization to another. To the extent
evaluation or information on outcomes is available,
some version of it should be included in annual
reports, websites, and other forms of communication.
More information about program evaluation is
provided in Principle #19.
SECTION TWO
EFFECTIVE
GOVERNANCE
19

PRINCIPLE 08
A charitable organization must have a governing body that is
responsible for reviewing and approving the organization’s
mission
and strategic direction, annual budget and key financial
transactions,
compensation practices and policies, and fiscal and governance
policies.
The board of directors bears primary responsibility
for ensuring that a charitable organization fulfills its
obligations in accord with relevant law, its donors,
staff and volunteers, clients, and the public at
large. The board sets the vision and mission for an
organization and establishes the broad policies and
strategic direction that enable it to fulfill its charitable
purpose. The board must protect the assets of the

organization and provide oversight to ensure that its
financial, human, and material resources are used
appropriately to further its mission and to establish a
level of risk tolerance appropriate for its operations.
The board is also responsible for setting policies and
procedures to ensure that the activities and operations
of any affiliates, chapters, or branches subject to
its direct or indirect control are consistent with the
organization’s values and mission.
In smaller, un-staffed organizations, the board
generally has a direct role in overseeing and delivering
programs and services. When the board determines
the organization should add paid staff, the board
is responsible for selecting, overseeing, and, if
necessary, terminating the chief executive officer.
The board may hire independent consultants to assist
in its governance responsibilities, such as legal and
financial advisors, auditors, or in larger organizations,
compensation consultants to assist in establishing the
fairness of compensation paid to the chief executive
and other key staff. The chief executive officer is
responsible for hiring and supervising all other staff
and consultants within the budget approved by the

board.
PRINCIPLE 09
The board of a charitable organization should meet regularly
enough to
conduct its business and fulfill its duties.
Regular meetings provide the chief venue for board
members to review their organization’s financial
situation and program activities, establish and
monitor compliance with key organizational policies
and procedures, and address issues that affect the
organization’s ability to fulfill its charitable mission.
Charitable organizations should ensure that their
governing documents satisfy legal requirements in
establishing rules for board activities, such as quorum
requirements and methods for notifying board
members of forthcoming meetings. The board should
establish and implement an attendance policy that
requires its members to attend meetings regularly.
Given the time and expense involved in traveling to
meetings, some boards may choose to conduct their

business through conference calls or forms of online
communication that permit members to hear and
be heard by all other participants. If state law allows
such alternative meeting methods, the organization’s
governing documents should specify types of board
meetings and communications permitted.
Boards often form standing and ad-hoc committees
and authorize them to handle assigned tasks between
full board meetings. The organization’s governing
PRINCIPLE 10
The board of a charitable organization should establish its own
size
and structure and review these periodically. The board should
have
enough members to allow for full deliberation and diversity of
thinking
on governance and other organizational matters. Except for very
small

organizations, this generally means that the board should have
at least
five members.
The size of a board depends on many factors, such as
the age of the organization, the nature and geographic
scope of its mission and activities, whether it is an
all-volunteer organization or there is paid staff, and its
funding needs. Although a larger board may ensure a
wide range of perspectives and expertise, a very large
board may become unwieldy and end up delegating
too much responsibility to an executive committee or
permitting a small group of board members to exercise
substantial control. Conversely, smaller boards may
elicit more active participation from each member,
but they should consider whether their members
collectively offer the full range of knowledge and
experience necessary to inform their decisions, and,
if not, provide opportunities to confer with outside
experts or advisory groups on specific matters.
documents should specify whether the board may
create one or more such committees. In most

states, the law prohibits boards from delegating
certain responsibilities, such as dissolving the
organization; electing or removing directors; and
amending the organization’s governing documents.
However, committees may investigate and make
recommendations on any of these issues, subject to the
full board’s consideration and decision.
Keeping clear, concise minutes of board and
committee meetings is a critical form of organizational
record-keeping. Minutes should accurately convey
the decisions and actions taken at a meeting and
provide sufficient documentation to address any
future questions or challenges about how a particular
decision was reached. Organizations must report on
their IRS Form 990s whether they maintained minutes
of meetings held and actions taken by the board and
committees acting on behalf of the board.
Every board needs to establish a process to discuss
its governance responsibilities without the CEO
present, and then to communicate the results of such
discussions to the CEO in a clear, timely manner.
Most nonprofit boards include the chief staff officer

and other senior staff in meetings to address key
organizational business, and then conduct a part of
the meeting in “executive session” with only specific
staff or outside advisors invited by the board in
attendance. The regular board meeting minutes
should reflect when the board went into an executive
session, the general purpose of the session, and any
key actions or decisions made during that session. For
example, the minutes might reflect that the board met
in executive session to review the performance and
compensation of the chief executive. The board should
keep minutes of its executive sessions, including any
specific decisions and actions it took regarding the
compensation and performance of the chief executive,
although those minutes do not have to be made
available to non-board members. These minutes are
usually kept by the secretary of the board.
While many charitable organization governing boards
find it prudent to meet at least three times a year to
fulfill basic governance and oversight responsibilities,
some with strong committee structures, including
organizations with widely dispersed board
membership, hold only one or two meetings of the full
board each year. Foundations that make grants only

once per year may find that one annual meeting is
sufficient.
PRINCIPLE 11
The board of a charitable organization should include members
with the
diverse background (including, but not limited to, ethnicity,
race, and
gender perspectives), experience, and organizational and
financial skills
necessary to advance the organization’s mission.
Boards of charitable organizations generally strive
to include individuals with expertise in budget and
financial management, investments, personnel,
fundraising, public relations and marketing,
governance, advocacy, and leadership, as well
as members knowledgeable about the charitable
organization’s area of expertise or programs, or who

have a special connection to its constituency. Some
organizations seek to maintain a board that respects
the culture of and reflects the community served
by the organization. Boards are encouraged to be
inclusive of and sensitive to diverse backgrounds when
recruiting members, in addition to recruiting board
members with expertise and professional or personal
experiences that will be beneficial to the organization.
The full board is responsible for ensuring that the
organization conducts its financial matters legally,
ethically, and in accordance with proper accounting
rules. To assist the board in fulfilling that duty, it
should make every effort to ensure that at least one
member has “financial literacy” — that is, the ability to
understand nonprofit financial statements, to evaluate
the bids of accounting firms that may undertake an
audit or review, and to assist other members in using
and interpreting relevant data to make sound financial
decisions. If the board finds itself unable to recruit
members with such skills, it should contract with or
seek the pro bono services of a qualified accountant,
other than its auditor, to assist it with its financial
responsibilities.

Organizations should also consider the requirements
of current and prospective funding sources regarding
the composition of their boards. For example, some
government grants require that a board’s membership
include a specific number of representatives of the
populations served by the organization.
Some private foundations wish to involve family
members on the boards of their foundations to ensure
that the donors’ philanthropic tradition will continue
through future generations. If family members do not
have the necessary expertise and experience to play the
needed governance role, however, the board may wish
to bring in advisors. Such boards should also consider
the advantages of diversity and the perspective offered
by representatives from outside the family.
PRINCIPLE 12

A substantial majority of the board of a public charity, usually
meaning
at least two-thirds of its members, should be independent.
Independent
members should not: (1) be compensated by the organization as
employees
or independent contractors; (2) have their compensation
determined by
individuals who are compensated by the organization; (3)
receive, directly
or indirectly, material financial benefits from the organization
except as a
member of the charitable class served by the organization; or
(4) be related
to anyone described above (as a spouse, sibling, parent or
child), or reside
with any person so described.14
Board members who are not encumbered by having
a personal financial interest in the organizations
they oversee will generally find it easier to exercise
their “duty of loyalty” that requires that they put the
interests of the organization above their personal
interests and make decisions they believe are in the
best interest of the organization. Organizations are

expected to make a reasonable effort to determine
which of their board members are “independent”
based on the IRS definition, and to report the number
of such members on the annual information returns
they file with the IRS. In addition, most nonprofits
are required to report whether any of their officers,
directors, trustees, or key employees had a family
or business relationship with another individual in
one of those leadership positions. The IRS does not
consider board members to lack independence simply
because they contribute to the organization, receive
financial benefits from the organization as a member
of the class served by the organization, are reimbursed
for expenses associated with fulfilling their board
responsibilities, or are compensated for their work as
a board member. (For a more complete discussion of
board compensation, see principle 20.)
The founders of a nonprofit corporation sometimes
initially turn to family members and business partners
to serve on its board of directors, but interlocking
financial relationships can increase the difficulty of
exercising the independent judgment required of
all board members. It is therefore important to the

long-term success and accountability of charitable
organizations that a sizeable majority of the
individuals on their boards be free of financial conflicts
of interest. Some states laws establish a minimum
number of independent members for nonprofit
organizations boards.
Some charitable organizations may not find it
appropriate or feasible to adopt this principle. This
includes private foundations, certain medical research
institutions, and certain institutions that operate
under specific legal restrictions regarding self-dealing
transactions, and other charitable organizations whose
articles of incorporation or trust instruments include
special stipulations regarding board composition.
For example, an organization established under the
auspices of a religious institution may be required to
include clergy or other paid representatives of that
institution on its board. A supporting organization
may be required to have representatives of its
supported organizations on its board.
When a charitable organization determines that
having a majority of independent board members is
not appropriate, the board and staff should evaluate

their procedures and meeting formats to ensure that
board members are able to fulfill their responsibilities
to provide independent, objective oversight of
management and organizational performance.
14
14 States may vary greatly regarding board independence
requirements. A state survey of charitable regulations is
available on the
Independent Sector website and outlines specific requirements
on a state level.
PRINCIPLE 13
The board should hire, oversee, and annually evaluate the
performance
of the chief executive officer of the organization. It should
conduct
such an evaluation prior to any change in that officer’s
compensation,

unless there is a multi-year contract in force or the change
consists
solely of routine adjustments for inflation or cost of living.
Boards of directors possess the authority to delegate
responsibility for maintaining the daily operations of
the organization to a chief executive officer. One of the
most important responsibilities of the board, then, is
to select, supervise, and determine a compensation
package that will attract and retain a qualified chief
executive. The organization’s governing documents
should require the full board to evaluate the
performance and thoroughly understand and approve
the compensation of the chief executive annually and
in advance of any change in compensation. The board
may choose to approve a multi-year contract with
the CEO that provides for increases in compensation
periodically or when the executive meets specific
performance measures, but it is important that the
board institute some regular basis for reviewing
whether the terms of that contract have been met. If
the board designates a separate committee to review
the compensation and performance of the CEO, that
committee should be required to report its findings
and recommendations to the full board for approval

and should provide any board member with details,
upon request. The board should then document
the basis for its decision and be prepared to answer
questions about it.
The annual performance evaluation process provides
an opportunity to clarify goals and expectations of the
board and the CEO, identify and address challenges,
and recognize and reward achievements. The process
is frequently led by the board chair, but it can also be
delegated to an executive or personnel committee, as
long as all members have an opportunity to provide
input and vote on any final decisions. The findings
are generally communicated as part of a conversation
with the CEO, but it is important to have the review’s
conclusions in writing and that document should be
shared with the full board. Many tools and resources
to assist in the evaluation process are listed at www.
independentsector.org/principles.
When determining the reasonableness of the
compensation package paid to the chief executive,
the board should ensure that the individuals involved
in crafting the compensation recommendation

do not have a conflict of interest. The board or its
committee should examine the compensation paid
by similarly situated organizations, both taxable and
tax-exempt, for functionally comparable positions.
Many professional associations prepare regular
surveys that can be useful in evaluating compensation,
or the committee may turn to surveys compiled by
independent firms or actual written offers from similar
organizations competing for the executive’s services.
Some organizations may find it difficult to locate salary
surveys or other data to establish comparable values
for executive compensation within their geographic
area or field of operation, but boards should still seek
objective external data to support its compensation
decisions.
When governing boards use compensation consultants
to help determine the appropriate salary for the chief
executive, the consultant should report directly to the
board or its compensation committee and should not
be engaged in other business with or have any conflicts
of interest with regard to the chief executive.
While governing boards are responsible for hiring
and establishing the compensation of the CEO, it is

the chief executive’s responsibility to hire and set the
compensation of other staff, consistent with guidelines
set by the board. If a CEO finds it necessary to offer
compensation that equals or surpasses his or her own,
in order to attract and retain certain highly qualified
and experienced staff, the board should review the
compensation package to ascertain that it does not
provide an excess benefit to that staff member.
There are some circumstances in which it is
appropriate for the final decision on officer
compensation to be made by the board (or
applicable board committee) based on the CEO’s
recommendation. This procedure may help ensure
that the compensation decision qualifies for the
rebuttable presumption of reasonableness under
the intermediate sanctions rules in IRC § 4958.15 In
addition, some state laws require that the CEO and
CFO compensation be set by the board or board
committee.16

Most charitable organizations must report on their
annual IRS information return the compensation
paid to the CEO, officers, directors, and certain key
employees. They are also required to describe on
that annual information return the process used to
determine the compensation for the chief executive,
officers, and key employees and whether that process
included review and approval by independent persons
and use of comparability data. The IRS also asks
reporting organizations whether their organization
engaged in an excess benefit transaction with a
disqualified person during the taxable year.
The board or a designated compensation committee
should also review the personnel policies and overall
compensation program, including salary ranges and
benefits provided for particular types of positions, to
assess whether the compensation program complies
with organizational values (including values of
diversity and inclusiveness) and is fair, reasonable, and
sufficient to attract and retain high-quality staff.
1516

15 See Treas. Reg. § 53.4958-6.
16 See California Nonprofit Integrity Act of 2004, Government
Code section 12586(g).
PRINCIPLE 14
The board of a charitable organization that has paid staff should
ensure
that the positions of chief staff officer, board chair, and board
treasurer
are held by separate individuals. Organizations without paid
staff
should ensure that the positions of board chair and treasurer are
held
by separate individuals.
Concentrating authority for the organization’s
governance and management practices in one or two
people removes valuable checks and balances that help
ensure that conflicts of interest and other personal
concerns do not take precedence over the best interests
of the organization. Some state laws require that the
offices of president and treasurer be held by different
individuals. Both the board chair and the treasurer

should be independent of the chief staff executive
to provide appropriate oversight of the executive’s
performance and to make fair and impartial judgments
concerning the executive’s compensation.
When a board’s membership deems it is in the best
interests of their charitable organization to have the
chief executive officer serve as its chair, they should
appoint another board member (sometimes referred
to as the “lead director”) to handle issues that require
a separation of duties, such as facilitating an executive
session of the board to review key governance matters
or to review the responsibilities, performance, or
compensation of the chief executive. The board should
also consult with legal counsel regarding any state or
local laws prohibiting one individual from serving in
both roles.
PRINCIPLE 15

The board should establish an effective, systematic process for
educating and communicating with board members to ensure
they
are aware of their legal and ethical responsibilities, are
knowledgeable
about the programs and activities of the organization, and can
carry out
their oversight functions effectively.
Regardless of their prior board experience or
training, every board member should receive a copy
of the organization’s governing instruments with an
orientation to the organization’s governing policies
and practices, finances, and program activities.
Every member should be made aware of the broad
oversight responsibilities of the board and of the
specific legal and ethical responsibilities of individual
members. The board should establish and include
in the orientation process clear guidelines for the
duties and responsibilities of each member, including
meeting attendance, preparation and participation;
committee charters and assignments; and the kinds
of expertise board members are expected to have or
develop in order to provide effective governance. Every
member should receive information and training in

any specific protocols the board follows for conducting
meetings, such as Robert’s Rules of Orders. The
board should establish and approve charters for each
of its standing committees. These should outline
the responsibilities, length of service, and authority
granted to the committee. The board should also
clearly communicate the duties and authority of
any ad hoc committees or other convening vehicles
they appoint to provide advice or reach decisions on
organizational matters, although a full charter may not
be necessary for these entities.
Members should be made aware of the need for their
active preparation and participation in board meetings
and their personal liability for the board’s actions — or
for its failure to take action — and of the protections
available to them. Charitable organizations, if needed
and funds permit, should provide opportunities for
board members to obtain special training or advice
on legal and financial issues and responsibilities. It is
also advisable for an attorney or insurance expert who
is knowledgeable about board liability to explain the
legal protections available to board members, as well
as the options for insurance.

The ongoing process of board education includes
ensuring that members have received and reviewed
sufficient information on the issues to be addressed
at each board meeting. Agendas and background
materials should be distributed far enough in advance
of all board meetings so that all members can
reasonably be expected to read and consider the issues
prior to attending the meeting.
PRINCIPLE 16
Board members should evaluate their performance as a group
and as
individuals no less frequently than every three years, and should
have
clear procedures for removing board members who are unable to
fulfill
their responsibilities.
A regular process of evaluating the board’s
performance can help to identify strengths and
weaknesses in processes and procedures, provide
insights for strengthening orientation and educational
programs and the conduct of board and committee

meetings, and identify means to improve interactions
between board and staff leadership. Many boards
will find it helpful to conduct such a self-assessment
annually; others may prefer a schedule that coincides
with the terms of board service or regular long-range
PRINCIPLE 17
Governing boards should establish clear policies and procedures
setting the length of terms and the number of consecutive terms
a
board member may serve.
Every charitable organization should determine
whether its best interests are served by limiting the
length of time an individual may serve on its board.
Some organizations have found that such limits help in
bringing fresh energy, ideas and expertise to the board
through new members. Others have concluded that
term limits may deprive the organization of valuable

experience, continuity and, in some cases, needed
support. They believe organizations should rely solely
on rigorous procedures for evaluating board members
and removing those who are not able to fulfill their
governance responsibilities effectively. Some family
foundations may decide not to limit board terms if
their donors expressed a wish that family members
continue serving as long as they are willing and able.
Organizations that do limit the terms of board service
should consider establishing a staggered term process
that provides a continual flow of new participants
while retaining a cadre of more experienced members.
Many organizations find it useful to establish policies
making board members eligible for re-election after
taking a year or more off. It is always valuable to
find ways in which members who have completed
their service can continue to be engaged in the
organization’s programs and services.
Organizations that choose not to limit the terms of
board service should consider establishing a regular
process whereby board members actively reflect on
their own performance and ability to fulfill their board

responsibilities and renew their commitment to
continue serving on the board. Some organizations
create an alumni council or honorary board to provide
an easy option for board members who feel it is time
to leave active service but still wish to be involved in
the organization. Others specify the age at which a
member must retire from the board.
Whether or not the organization establishes board
term or age limits, it is always helpful to have a
process for involving prospective board members on
committees or task forces until there is an appropriate
opening on the board.
planning cycles. A number of available print and
online tools, ranging from sample self-assessment
questionnaires to more complex evaluation
procedures, can help an organization design a board
evaluation or self-assessment process that best meets
its needs.
Many boards assign responsibility for oversight of the
board evaluation and development function to their
executive committees or to a separate governance or
board development committee. Board members with

this responsibility should be empowered to discuss
problems of attendance or other aspects of board
performance with individual members to ascertain
whether the problem can be corrected or the individual
needs to resign or be removed from the board. The
process for removing a non-performing board member
is typically outlined in the organization’s bylaws and
generally requires the action of the full board or,
if the organization has members, the action of its
membership.
PRINCIPLE 18
The board should review organizational and governing
instruments no
less frequently than every five years.
Regular reviews of the organization’s articles
of incorporation, bylaws, and other governing

instruments help boards ensure that the organization
is abiding by the rules it has set for itself and
determine whether changes need to be made to those
instruments. The board may choose to delegate
some of this deliberation to a committee, but the full
board should consider and act upon the committee’s
recommendations. Charitable organizations are
required to report any significant changes to their
governing documents and policies on the annual
information returns they file with the IRS, and they
may be required to report such changes to state
regulatory bodies as well.
Most state laws permit the state attorney general to
file suit asking the court to hold a board accountable
for failure to abide by the requirements set forth in
its charter documents. If it becomes impractical or
no longer feasible to carry out the purposes of the
organization as outlined in its articles of incorporation,
the board should take appropriate action to amend
that document and to file the revised articles with state
officials, as required. In some instances, a charitable
organization may need court approval to modify its
organizing documents.

PRINCIPLE 19
The board should establish and review regularly the
organization’s
mission and goals and should evaluate, no less frequently than
every
five years, the organization’s programs, goals, and activities to
be sure
they advance its mission and make prudent use of its resources.
As stewards of the public’s trust and the resources
invested in an organization, board members have
an obligation to ensure that the organization uses
its resources as effectively as possible to advance its
charitable mission. Every board should therefore
set strategic goals and review them annually,
generally as part of the budget review process.
This assessment should address current needs and
anticipated changes in the community or program
area in which the organization operates that may
affect future operations. It should also consider the
financial and human resources needed to accomplish
the organization’s goals and mission. Such periodic

performance reviews and assessments are a common
feature of many self-regulation, accreditation, and
funding programs in which nonprofit organizations
participate.
Although discussions of individual program activities
and accomplishments are typical of most board
meetings, these are not a substitute for a more rigorous
periodic evaluation of the organization’s overall impact
and effectiveness in light of the goals and objectives
the board has approved.
Because organizations and their purposes differ,
it is incumbent on each organization to develop
its own process for evaluating effectiveness. Most
organizations should have at least an informal review
of their progress on goals and objectives annually, but,
because of the time and cost involved, they may choose
to conduct a more rigorous evaluation less frequently.
Even for organizations whose work is not properly
measured in one-year increments, such as scientific
research or youth-development programs, interim
benchmarks can be identified to assess whether the

PRINCIPLE 20
Board members are generally expected to serve without
compensation,
other than reimbursement for expenses incurred to fulfill their
board-
related duties. A charitable organization that provides
compensation
to its board members should use appropriate comparability data
to
determine the amount to be paid, document the decision, and
provide
full disclosure to anyone, upon request, of the amount and
rationale for
the compensation.
The vast majority of board members serve without
compensation, although some organizations reimburse
travel costs and other expenses necessary to ensure
board members are able to participate in board

functions. In fact, board members of public charities
often donate both time and funds to the organization,
a practice that supports the sector’s spirit of giving and
volunteering.
When organizations find it appropriate to compensate
board members due to the nature, time, or
professional competencies involved in the work, they
must be prepared to provide detailed documentation
of the amount of and reasons for such compensation,
including the responsibilities of board members and
the services they provide. The amount of compensation
for each board member, and whether a board
member received a grant or other assistance from the
organization, must be reported on the organization’s
IRS Form 990. Any compensation provided to
board members must be reasonable and necessary
to support the performance of the organization in
its exempt function. Compensation paid to board
members for services in the capacity of staff of the
organization should be clearly differentiated from any
compensation paid for board service.
Board members of charitable organizations are

responsible for ascertaining that any compensation
they receive does not exceed the compensation
provided for positions in comparable organizations
with similar responsibilities and qualifications.
When they establish their own compensation, board
members generally cannot be considered independent
authorizing bodies and therefore generally cannot
avail themselves of the legal protections accorded
to such bodies. Nonetheless, boards that do provide
compensation for some or all of their members should
seek independent data, such as surveys available from
national and regional associations or compensation
consulting firms, to substantiate the reasonableness
of the compensation they provide, and should review
compensation decisions on an annual basis.
work is moving in the right direction. It is important
to acknowledge that some organizations are tackling
intractable and other problems, challenges, and
opportunities that do not readily provide evidence
significant progress from year to year, yet they are
nonetheless being effective and contributing to better
overall outcomes.
When an organization considers taking on a new

business or earned income opportunity, the board and
staff should examine whether and how that activity
will further the organization’s mission and how it will
fit in with the organization’s overall revenue mix and
staffing allocations. Income derived from activities
unrelated to the organization’s charitable mission may
be subject to an unrelated business income tax and, if
sufficiently substantive, could have ramifications for
the organization’s tax-exempt status. It is important
to weigh the potential financial returns from a new
business venture against the time and resources it may
draw away from the organization’s primary program
and management functions. The board should
establish regular check-points to evaluate the progress
of new ventures it decides to undertake and assess
whether those ventures are appropriately advancing
the goals they were intended to serve as well as the
impact they are having on the organization’s overall
services and programs.

SECTION THREE
STRONG
FINANCIAL
OVERSIGHT
31
PRINCIPLE 21
A charitable organization must keep complete, current, and
accurate
financial records and ensure strong financial controls are in
place. Its
board should receive and review timely reports of the
organization’s
financial activities and should have a qualified, independent

financial
expert audit or review these statements annually in a manner
appropriate to the organization’s size and scale of operations.
Complete and accurate financial statements are
essential for a charitable organization to fulfill its
legal responsibilities and for its board of directors to
exercise appropriate oversight of the organization’s
financial resources. A board that does not have
members with financial expertise should retain a
qualified paid or volunteer accounting professional to
establish whether financial systems and reports are
organized and implemented appropriately.
Having financial statements prepared and audited
in accordance with generally accepted accounting
principles and auditing standards improves the quality
of the information and provides external input on
the strength of financial controls that help prevent
mismanagement or fraud. Each organization must
ensure that it has its annual financial statements
audited or reviewed as required by law in the states
in which it operates or raises funds or as required
by government or private funders. When an audit
is not legally required, a financial review offers a

less expensive option that still provides the board,
regulators, and the public with some assurance of
the accuracy of the organization’s financial records.
Many smaller organizations that have opted to work
with an independent accountant have noted that the
accountant provided invaluable guidance.
The IRS Form 990 asks organizations to report
whether their financial statements were compiled,
reviewed, or audited by an independent accountant,
and whether they have an audit committee to oversee
the audit process and select an independent auditor.
Every charitable organization that has its financial
statements independently audited, whether or not it is
legally required to do so, should consider establishing
an audit committee composed of independent board
members with appropriate financial expertise. The
audit committee should meet directly with the auditors
in executive session, unfiltered by the organization’s
paid staff, thereby reducing possible conflicts of
interest and providing the board greater assurance
that the audit has been conducted appropriately. If
state law permits, the board may appoint non-voting,
non-staff advisors rather than board members to the

audit committee, or invite a financial expert to serve in
an advisory non-voting basis.
Organizations with small boards of directors or limited
organizational structures may choose not to delegate
the audit responsibility to a separate committee and
instead have the full board handle audit related issues.
Audit committees may also be inappropriate for
charitable organizations that are organized as trusts
rather than as corporations.
PRINCIPLE 22
The board of a charitable organization must institute policies
and
procedures to ensure that the organization (and, if applicable,
its
subsidiaries) manages and invests its funds responsibly, in
accordance
with all legal requirements. The full board should review and

approve the
organization’s annual budget and should monitor actual
performance
against the budget.
Overseeing an organization’s financial management
is among the most important responsibilities of the
board of directors. Board members should establish
clear policies to protect the organization’s financial
assets and ensure that the organization has strong
internal controls that ensure no one person bears
the sole responsibility for receiving, depositing,
and spending its funds. Day-to-day accounting and
financial management should be the task of staff or, in
the case of organizations with no or one staff member,
designated volunteers who have the necessary time
and skills. The board is responsible for reviewing
practices and reports to ensure that those staff or
volunteers are adhering to the board-approved
policies.
The organization’s annual budget should reflect
the programs and activities the organization will
undertake in the coming year and the resources
it will need to raise or generate to support those

activities. Careful review of regular financial reports
showing both budgeted and actual expenditures
and revenues will permit the board to determine
whether adjustments must be made in spending to
accommodate changes in revenues. Financial reports
should also reflect how the organization has adhered
to any restrictions placed on funds by donors or grant
programs.
Prudent financial oversight requires that the board
look beyond monthly or annual financial reports to
consider how the organization’s current financial
performance compares with that of previous years
as well as to gauge its future prospects. If the
organization’s net assets have been declining over a
period of years, or if future funding seems likely to
change significantly, the board may need to take steps
to achieve or maintain stability.
Whenever possible, an organization should generate
enough income to create cash reserves for its future.
When an organization has built sufficient reserves to
allow for investments, the board is responsible for
establishing policies that govern how the funds will

be invested and what portion of the returns, if any,
can be used for immediate operations or programs.
The boards of organizations with sizeable reserves or
endowments generally select one or more independent
investment managers to handle the organization’s
investments. In those cases, the board or a committee
of the board should monitor the outside investment
manager(s) regularly.
PRINCIPLE 23
A charitable organization should not provide loans (or the
equivalent,
such as loan guarantees, purchasing or transferring ownership of
a
residence or office, or relieving a debt or lease obligation) to
directors,
officers, or trustees.
The practice of providing loans to board members and
executives, while infrequent, has created both real
and perceived problems for public charities. While
there may be circumstances in which a charitable
organization finds it necessary to offer loans to staff
members, there is no justification for making loans

to board members. Federal laws prohibit private
foundations, supporting organizations and donor-
advised funds from making loans to substantial
contributors, board members, organization managers,
and related parties. Many states also forbid such loans
or allow them only in very limited circumstances.
When a charitable organization deems it necessary
to provide loans, including salary advances, to an
employee — for example, to enable a new employee to
purchase a residence near the organization’s offices —
the terms of such loans should be clearly understood
and approved by the board. Board members
should consult with legal counsel about any special
requirements under state or federal law that could
affect such loans, including any requirements that
loans and advancements be treated as compensation.
Such loans and advances must be reported on the
organization’s Form 990.

PRINCIPLE 24
A charitable organization should spend a significant amount of
its
annual budget on programs that pursue its mission while
ensuring that
the organization has sufficient administrative and fundraising
capacity
to deliver those programs responsibly and effectively.
Charitable organizations have an obligation to devote
their resources to the charitable purposes for which
they were granted tax exemption, including ensuring
that they have appropriate management and support
services in place to oversee and deliver their programs
and services effectively, while also adhering to relevant
legal and ethical requirements.
Administrative activities include financial and
investment management, personnel services,
recordkeeping, risk management, soliciting and
managing contracts, legal services, and supporting
the governing body of the organization. Not only do
these elements ensure that the organization complies

with all legal requirements, but they also help provide
complete, accurate, and timely information to donors,
the public, and government regulators.
Charitable organizations rely on other supporting
services to carry out their missions. Most public
charities have fundraising operations to encourage
potential donors to contribute money, materials
and other assets and to ensure that donors receive
necessary reports about how their contributions were
used. Some public charities also rely on membership
development activities to solicit prospective members,
collect membership dues, and ensure that members
receive promised benefits. Private foundations and
some public charities also have expenses associated
with making grants and contributions to other
organizations and individuals.
Qualified personnel are crucial for providing
programs, recruiting and managing volunteers, raising
funds, and ensuring proper administration. The
costs of compensating personnel, including salaries
and benefits, must be allocated to the particular
functions they perform for the organization based on

appropriate records.
Charitable organizations are required to report
separately on their annual IRS Form 990 the amounts
they expend on program services, the management
and governance of the organization, and fundraising
activities. The percentage of an organization’s budget
spent on direct program services and the percentage
used to manage and govern an organization and to
raise the necessary revenues to support its programs
and operations will vary substantially depending on
its age, size, and type. For example, an organization
may devote more resources to raising funds when it
is launching a new program or preparing to purchase
or upgrade a building. Similarly, an organization
may make a greater investment in administrative
operations when it is adding new information
technology or hiring and training staff and volunteers
to offer new or expanded services. Some self-
regulation systems and “watchdog” organizations
recommend that public charities spend at least 65
percent of their total expenses on program activities.
This standard is reasonable for most organizations, but
there can be extenuating circumstances, such as those
cited above, that require an organization to devote

more resources to administration and fundraising.
Boards should review budget, financial, and
program outcome reports to determine whether the
organization is allocating its funds appropriately and
making the investments in program, administrative,
and fundraising activities necessary to fulfill its
charitable mission.
PRINCIPLE 25
A charitable organization should establish clear, written
policies
for paying or reimbursing expenses incurred by anyone
conducting
business or traveling on behalf of the organization, including
the types
of expenses that can be paid for or reimbursed and the
documentation
required. Such policies should require that travel on behalf of
the
organization is to be undertaken cost-effectively.

A charitable organization’s travel policies should
be unambiguous and easy to follow, and should
reflect the organization’s principled judgment about
what it considers “reasonable” expenditures for
individuals who travel to conduct business on its
behalf. These policies should include procedures for
properly documenting expenses incurred and their
organizational purpose.
As a general practice, travel policies should ensure
that the business of the organization is carried out
in a cost-effective manner. Decisions on travel
expenditures should be based on how best to further
the organization’s charitable purposes, rather than
on the title or position of the person traveling.
Charitable funds generally should not be used for
premium or first-class travel, but boards should retain
the flexibility to permit exceptions when they are
in the organization’s best interest. Such exceptions,
if any, should be explicit, consistently applied, and
transparent to board members and others associated
with the organization.

An organization’s policies should reflect the
requirements and restrictions on travel expenditures
imposed under current law. Payments of travel,
or entertainment expenses for federal, state or
local government officials must be reported on the
organization’s annual IRS Form 990. Some travel
expenses may be considered as part of reportable
compensation, such as the cost of leasing vehicles on
behalf of key employees if the vehicles are used for
personal purposes (such as commuting). The detailed
guidance provided in IRS Publication 463: Travel,
Entertainment, Gift and Car Expenses should serve
as a guide for managers of charitable organizations
in avoiding lavish, extravagant, or excessive
expenditures.
PRINCIPLE 26
A charitable organization should neither pay for nor reimburse
travel
expenditures for spouses, dependents or others who are
accompanying
someone conducting business for the organization unless they,
too, are
conducting such business.

If, in certain circumstances, an organization deems
it proper to cover expenses for a spouse, dependent,
or other person accompanying someone on business
travel, the payment generally must, by law, be treated
as compensation to the individual traveling on behalf
of the organization. This principle need not apply
to de minimis expenses such as the cost of a meal
at organization functions for which participants are
invited to bring a guest.
SECTION FOUR
RESPONSIBLE
FUNDRAISING
37

PRINCIPLE 27
Solicitation materials and other communications addressed to
donors
and the public must clearly identify the organization and be
accurate
and truthful.
A donor has the right to know the name of anyone
soliciting contributions, the name and location of the
organization that will receive the contribution, a clear
description of its activities, the intended use of the
funds to be raised, contacts for obtaining additional
information, and whether the individual requesting
the contribution is acting as a volunteer, employee
of the organization, or hired solicitor. Descriptions
of program activities and the financial condition of
the organization must be current and accurate, and
any references to past activities or events should be
dated appropriately. Charitable organizations should
be sure that all of their online, mobile, and print
communications and any online or mobile fundraising
platforms they use to process contributions include

current, correct information on how anyone can
contact the organization directly for more information.
(A Donor Bill of Rights, created by the Association
of Fundraising Professionals and endorsed by many
organizations, is available at http://www.afpnet.org/.)
If an organization is not eligible to receive tax-
deductible contributions, it must disclose this
limitation at the time of solicitation. Similarly, a
charitable organization that the IRS has recognized
as eligible to receive tax-deductible contributions
should clearly indicate in its solicitations how donors
may obtain proof of that status. The organization is
required to provide a copy of the IRS letter awarding
or confirming its tax-exempt status to anyone who
requests it, or it may choose to post its determination
letter on its website.17 If the solicitation promises
any goods or services to the donor in exchange for
contributions, the materials should also clearly
indicate the portion of the contribution (that is, the
value of any goods or services provided) that is not tax-
deductible.
Social media and online fundraising channels offer

many opportunities for charitable organizations
to raise funds and generate support for their work.
These channels also provide easy opportunities for
inappropriate or fraudulent solicitations in the name
of a charitable organization. Charitable organizations
should counter attempts by others to use their name
and reputation, or a similar name and purpose to
misdirect donors, by providing warnings on their
solicitation materials and encouraging donors to email,
call or visit the organization if they have any question
about either the charity or a fundraising solicitation.
For more information about supervision and oversight
recommended for online and mobile fundraising
campaigns and platforms, see Principle 31.
17 An exception is provided for organizations that applied
for exemption prior to July 15, 1987, and that no longer have a
copy
of their exemption letter. The IRS will issue a letter to
charitable
organizations requesting confirmation of their tax-exempt
status,
often to satisfy donor requests.
http://www.nonprofitpanel.org

PRINCIPLE 28
Contributions must be used for purposes consistent with the
donor’s
intent, whether as described in the relevant solicitation
materials or as
specifically directed by the donor.
When a donor responds to a charitable solicitation
with a contribution, he or she has a right to expect
that the funds will be used as promised. Solicitations
should therefore indicate whether the funds
they generate will be used to further the general
programs and operations of the organization or to
support specific programs or initiatives. A donor
may also indicate through a letter, a written note
on the solicitation, or a personal conversation with
the solicitor or another official of the charitable
organization how he or she expects the contribution to
be used.

Before accepting a gift, the organization should review
whether the gift is consistent with the organization’s
gift acceptance policy (see Principle #30) and should
ascertain whether the donor has stipulated any specific
terms for the use of the gift. If the organization will
be unable or unwilling to comply with any of the
terms requested by a donor, it should negotiate any
necessary changes prior to concluding the transaction.
Particularly in the case of substantial contributions,
the recipient should develop an agreement that
specifies any rights it may have to modify the terms
of the gift if circumstances warrant. Some charitable
organizations include provisions in their governing
documents or board resolutions indicating that the
organization retains “variance powers,” the right to
modify conditions on the use of assets. Such powers
should be clearly communicated to donors through a
written agreement.
If the organization accepts a gift that the donor expects
will be maintained in a separate account or fund over
which the donor expects to have advisory privileges
as to the distribution or investment of those funds,
it may be defined as a sponsoring organization of a

donor advised fund.18 In such cases, organizations
should consult with legal advisors regarding specific
Form 990 and other reporting requirements and rules
applicable to sponsoring organizations that hold donor
advised funds particularly with regard to transactions
with donors, either directly or by organizations
receiving gifts from a donor-advised fund.
In some cases, an organization may not receive
sufficient contributions to proceed with a given project
or it may receive more donations than it requires to
carry out that project. If the organization is unable or
unwilling to use the contribution as stated in its appeal
or in the donor’s communication, it has an obligation
to contact the donor and request permission to apply
the gift to another purpose or offer to return the gift.
Charitable organizations should strive to make clear
in materials that solicit contributions for a specific
program how they will handle such circumstances.
18 Internal Revenue Code section 4966(d)(2) defines a
donor-advised fund as a fund or account that is owned and
controlled
by a sponsoring organization, separately identified by reference
to contributions of a donor or donors, and to which the donor or

a
designated advisor has or reasonably expects to have advisory
privileges with respect to the distribution or investment of the
assets
in the fund. The definition specifically excludes a fund or
account
that makes distributions only to a single identified organization
or
governmental entity or that makes grants for travel, study, or
similar
purposes provided that certain conditions are met.
PRINCIPLE 29
A charitable organization must provide donors with specific
acknowledgments of charitable contributions, in accordance
with
IRS requirements, as well as information to facilitate the
donors’
compliance with tax law requirements.

Acknowledging donors’ contributions is much more
than a tax requirement, it is a critical part of building
donors’ confidence in and support for the activities
they help to fund. Organizations should establish
procedures for acknowledging all contributions in
a timely manner, whether by mail or electronically.
Donors must have written documentation to claim
a tax deduction for charitable contributions on their
annual income tax returns, and that documentation
must come from the charitable organization for gifts of
$250 or more. Charitable organizations are required
to make a good faith estimate of the value of any goods
and services (such as a meal at a fundraising banquet)
the donor received in exchange for a contribution
of more than $75. IRS publication 526 provides
more information on the requirements for charitable
organizations, including exceptions for benefits
considered to be insubstantial, certain membership
benefits, and intangible religious benefits.
In addition to thanking donors for their contributions,
such acknowledgements should indicate how the
donor can find more information on the activities
they support through a website, print publications

or visits to an organizational office. It is often helpful
to provide regular email or newsletter updates so
that donors can receive ongoing information about
how their contributions made a difference through
the organization’s work. Many organizations also
choose to include in the acknowledgement an easy
way for donors to indicate that they do not wish their
names or contact information to be shared outside the
organization and how they can “opt out” of receiving
communications from the organization going forward.
Acknowledgements of other gifts of property and other
non-cash contributions should include a description,
but not the value, of the item or items contributed.
Specific rules apply to the deductions taxpayers are
permitted to claim for various types of non-cash gifts,
such as donations of motor vehicles, appreciated art,
or non-publicly held stock. Organizations that accept
such gifts should consult with qualified legal and
accounting professionals regarding their obligations.
They are also advised to alert donors to the IRS rules
for substantiating such claims and encourage them
to seek appropriate tax or legal counsel when making
significant non-cash contributions.

PRINCIPLE 30
A charitable organization should adopt clear policies, based on
its
specific exempt purpose, to determine whether accepting a gift
would
compromise its ethics, financial circumstances, program focus,
or other
interests.
Some charitable contributions have the potential to
create significant problems for an organization or a
donor. Knowingly or not, contributors may ask a charity
to disburse funds for illegal or unethical purposes, and
other gifts may subject the organization to liability
under environmental protection laws or other rules.
Donors may also face adverse tax consequences if a
charity is unable to use a gift of property in fulfilling its
mission and must instead sell or otherwise dispose of
the property soon after its receipt.

PRINCIPLE 31
A charitable organization should provide appropriate training
and
supervision of the people soliciting funds on its behalf to ensure
that
they understand their responsibilities and applicable federal,
state, and
local laws, and do not employ techniques that are coercive,
intimidating,
or intended to harass potential donors.
Staff, volunteers, donors, and other stakeholders
can be valuable allies in raising funds to support the
charitable organization’s work, but without proper
training and oversight support, they can also mislead
or misdirect donors and put the organization’s
reputation at risk. A charitable organization should
provide careful training and supervision of all those
who solicit donations on its behalf to make sure
they understand their legal and ethical obligations,
as well as procedures to follow in representing the
organization and working with donors. Training

courses and materials are often available through local
nonprofit education programs and associations of
professional fundraisers. It is particularly important
that fundraisers are respectful of a donor’s concerns
and do not use coercive or abusive language or
strategies to secure contributions, misuse personal
information about potential donors, pursue personal
relationships that are subject to misinterpretation
by potential donors, or mislead potential donors in
other ways. All those who solicit contributions on the
organization’s behalf, including volunteers, should
be provided with clear materials and instructions on
what information to provide to prospective donors,
including the organization’s name and address, how
the donor can learn more about the organization, the
purposes for which donations will be used, whether all
or part of the donation may be tax-deductible, and who
the donor can contact for further information.
If a charitable organization decides to use an outside
professional fundraising firm or consultant, it should
have a clear contract — as required by law and guided
by good practice — that outlines the responsibilities of
the organization receiving the funds and of the firm or

consultant. The contract should stipulate that donor
lists will be treated as the proprietary information of
the organization and should specify how information
about donors will be handled and protected, and how
funds will be transmitted to the organization. The
fundraiser must agree to abide by any registration
and reporting requirements of the jurisdictions in
which fundraising will be conducted, as well as federal
The policy should address how the organization will
address relationships and sponsorship offers from
businesses and other organizations to ensure that
all communications with customers and prospective
donors are clear and accurate, and that the terms
of any payment to the charitable organization and
any related tax consequences (such as payment of
unrelated business income tax for advertising provided
to the business sponsor) are clearly understood
by both parties. The policy should discuss how
contributions will be disclosed to the public and should
stipulate that the organization will retain complete
control over use of its name and logo and of all content
related to a sponsored event or program activity. The
board and staff leaders should also consider how
affiliation with a particular business or product might

affect the organization’s reputation with donors and
the public.
A gift-acceptance policy provides some protection for
the board and staff, as well as for potential donors,
by outlining the rules and procedures by which an
organization will evaluate whether it can accept a
contribution even before an offer is actually made.
The policy should make clear that the organization
generally will not accept any non-cash gifts that are
counter to or outside the scope of its mission and
purpose, unless the item is intended for resale or
would otherwise produce needed revenue. It should
list any funding sources, types of contributions,
or conditions that would prevent the organization
from accepting a gift. Charities should also consider
establishing rules and procedures for determining
whether a gift is acceptable and should identify
circumstances under which a review by legal counsel
or other experts would be required before accepting a
gift.

restrictions on telephone, email, or fax solicitations.
The charitable organization should verify that the
outside solicitor is registered as required in any state
in which the solicitor will be seeking contributions.
Many charitable organizations contract with third-
party fundraising platforms to accept and process
donations online or through mobile technologies.
Just as with any outside fundraiser, the charitable
organization should have a written contract with such
entities that details any fees that will be charged to
the donor or the charitable organization, how the site
will protect donors’ information, how contributions
will be transmitted to the charitable organization, and
whether the site has a privacy policy and process for
preventing solicitation fraud.
Because some individuals may launch online and
peer-to-peer (“crowdsourcing”) fundraising campaigns
without the beneficiary organization’s knowledge,
many charitable organizations have established
written policies regarding who is permitted to raise

funds on their behalf and the process for requesting
and receiving authorization to do so from the charity.
Charitable organizations that regularly solicit funds
from the general public should routinely conduct
website searches to identify whether and how their
names are being used. If a charitable organization
finds that others are soliciting contributions on its
behalf, it should contact the soliciting individual
or organization to determine whether the donors’
information and contributions are being appropriately
transferred to the charitable organization. If the
charitable organization does not choose to be listed
on a site or included in a campaign for any reason,
it should send a written request that its name be
removed and notify relevant charitable solicitation
regulators of any problems.
In general, those soliciting funds on behalf of charities
should refrain from giving specific legal, financial, and
tax advice to individual donors. Rather, when such
questions arise, fundraisers should encourage donors
to consult their own legal counsel or other professional
advisors before finalizing a contribution.
PRINCIPLE 32

A charitable organization should not compensate internal or
external
fundraisers based on a commission or a percentage of the
amount
raised.
Compensation for fundraising activities should reflect
the skill, effort, and time expended by the individual
or firm on behalf of the charitable organization. Many
professional associations of fundraisers prohibit their
members from accepting payment for fundraising
activities based on a percentage of the amount of
charitable income raised or expected to be raised.
Basing compensation on a percentage of the money
raised can encourage fundraisers to put their own
interests ahead of those of the organization or the
donor and may lead to inappropriate techniques that
jeopardize the organization’s values and reputation
and the donor’s trust in the organization. Percentage-
based compensation may also lead to payments that
could be regarded by legal authorities or perceived
by the public as “excessive compensation” compared
to the actual work conducted. Percentage-based
compensation may also be skewed by unexpected or

unsolicited gifts received by the charitable organization
through no effort of the fundraiser.
A similar logic applies to employees. Some charitable
organizations choose to provide bonuses to employees
for exceptional work in fundraising, administrative, or
program activities. If so, the criteria for such bonuses
should be clearly based on the quality of the work
performed, rather than on a percentage of the funds
raised.
Some online and mobile fundraising platforms and
credit card providers charge charitable organizations
transaction fees for processing donations that is often
based on a percentage of the donation or transaction,
but these fees should not be viewed or treated as
fundraising compensation. Charitable organizations
should ensure that the fees are reasonable and
comparable to those charged similar organizations and
businesses, whether they are applied to contributions
or payments for services.

PRINCIPLE 33
A charitable organization should respect the privacy of
individual
donors and, except where disclosure is required by law, should
not sell
or otherwise make available the names and contact information
of its
donors without providing them an opportunity at least once a
year to
opt out of the use of their names.
Preserving the trust and support of donors requires
that donor information be handled with respect and
confidentiality to the maximum extent permitted
by law. Charitable organizations should disclose to
donors whether and how their names may be used,
and provide all donors, at the time a contribution is
made and in any future solicitations, an easy way to
indicate that they do not wish their names or contact
information to be shared outside the organization.19
In all solicitation and other promotional materials,

organizations should also provide a means, such as a
check-off box or other “opt-out” procedure, for donors
and others who receive such materials to request
that their names be deleted from similar mailings,
faxes or electronic communications in the future. The
organization should immediately remove a donor’s
name from any lists upon request and should ensure
that at least once a year all donors are provided
information about how they may request that their
names and contact information not be shared outside
the organization.
19 IS position on donor disclosure to 501c4 organizations and
related issues can be found at
http://www.independentsector.org/
is_positions
Organizations that gather personal information
from donors and other visitors to their websites
should have a privacy policy, easily accessible from
those websites, that informs visitors to the site what
information, if any, is being collected about them,
how the information will be used, how to inform the
organization if the visitor does not wish personal

information shared, and what security measures the
charity has in place to protect personal information.
In addition, the board of directors should adopt and
enforce a policy stipulating that all information about
donors is to be treated as the proprietary information
of the organization, and not of internal or external
fundraisers. The policy should further stipulate
that such information cannot be sold, shared, or
otherwise transferred to another organization without
clear written permission of both the donor and the
organization.
GLOSSARY
501(c)(3).
See Section 501(c)(3)
Annual Information Return.
See Form 990, Form 990-EZ,

Form 990-N, and Form 990-
PF.
Appraisal.
An assessment of the fair
market value of any type of
property (clothing, household
goods, art, land) by an
authorized person.
Audit.
See Financial Audit.
CEO or Chief Executive
Officer.
The highest ranking staff
member or volunteer of
the organization. Some
organizations refer to this
position as the executive
director or the president.
This report also uses “chief
staff officer” to refer to
the highest ranking paid
employee.

Charitable Organization.
Any tax-exempt organization
recognized under Section
501(c)(3) of the Internal
Revenue Code. In this report,
charitable organization refers
to both public charities and
private foundations.
Community Foundation.
A charitable organization that
generally holds a number of
permanent funds created
by many separate donors,
including donor-advised
funds, all dedicated to the
long-term charitable benefit
of a specific community
or region. A community
foundation is generally
recognized as a public
charity, and is therefore
not subject to the more
stringent rules that apply to

private foundations. Typically,
a community foundation
provides grants and other
services to assist other
charitable organizations in
meeting local needs, and
also offers services to help
donors establish endowed
funds for specific charitable
purposes.
Compensation.
All forms of cash and non-
cash payment provided in
exchange for services. In
reporting compensation
paid to a board member or
employee, organizations are
expected to include salary or
wages, bonuses, severance
payments, and deferred
payments; retirement
benefits, such as pensions or
annuities; fringe benefits; and

other financial arrangements
or transactions treated as
compensation (for example:
personal vehicle, meals,
housing, personal and family
educational benefits, low-
interest loans, payment of
personal or spousal travel,
entertainment, or other
expenses, and personal
use of the organization’s
property).
Compensation Committee.
A committee authorized by
the governing board to review
and make recommendations
or decisions regarding
the compensation of the
chief executive officer and
often for other persons
in a position to exercise
substantial control of the
organization’s resources.
Conflict of Interest Policy.

A conflict of interest arises
when a board member or
staff person’s duty of loyalty
to the charitable organization
overlaps with a competing
personal interest he or she
may have in a proposed
transaction. Some such
transactions may violate
legal requirements; some are
unethical; and others may
be undertaken in the best
interest of the charitable
organization as long as
certain clear procedures
are followed. A conflict
of interest policy helps
protect the organization by
defining conflict of interest,
identifying the classes
of individuals within the
organization covered by the
policy, facilitating disclosure
of information that may help

identify conflicts of interest,
and specifying procedures
to be followed in managing
conflicts of interest.
Corporate Foundation.
A private foundation
that receives its primary
funding from a profitmaking
business. The foundation is
a separate, legal charitable
organization even though it
often maintains close ties
with the founding company,
and it must abide by the
same rules and regulations
as other private foundations.
Also known as a company-
sponsored foundation.
Disqualified Person. For
public charities, a disqualified
person is someone who, at
any time during the five-
year period ending on the

date of the transaction in
question, was “in a position
to exercise substantial
influence over the affairs of
the organization.” Certain
members of a disqualified
person’s family fall into
this category, as does
any entity in which one or
more disqualified persons
together own, directly or
indirectly, more than a 35
percent interest. Disqualified
persons of public charities
recognized as “supporting
organizations” also include
substantial contributors
and their family members.
Disqualified persons of
donor-advised funds held
by public charities include
donors, investment advisors,
and their family members.
For private foundations, the

definition of a disqualified
person includes all of the
above as well as substantial
donors, owners of more than
20 percent of a corporation,
trust, or partnership that is a
substantial contributor to the
foundation, and certain family
members of any of these
persons. Certain government
officials are also considered
disqualified persons of
private foundations. See also
Substantial contributor.
Donor-Advised Fund.
Section 4966(d)(2) of the
federal tax code defines a
donor-advised fund as a fund
or account that is owned and
controlled by a sponsoring
charitable organization, is
separately identified by
reference to contributions
of a donor or donors, and

to which the donor (or an
advisor designated by the
donor) has or reasonably
expects to have advisory
privileges regarding the
distribution or investment
of the assets in the fund.
The tax code specifically
excludes a fund or account
that makes distributions
only to a single identified
organization or governmental
entity or that makes grants
for travel, study, or similar
purposes provided that
certain conditions are met.
The Pension Protection Act
of 2006
(P.L. 109-280) enacted
new restrictions on the
administration of donor-
advised funds.
Due Diligence.

The degree of prudence
that a reasonable person
is expected to exercise
in reviewing a particular
transaction or investment
opportunity before deciding
to act. See also Fiduciary
Duty.
Excess Benefit Transaction.
An economic benefit
provided by a public charity
to a disqualified person
that is determined to be in
excess of the value of the
services or property received
in exchange by the public
charity. See also Disqualified
Person, Intermediate
Sanctions.

Excise Tax. A tax that
applies to a specific type
of income, activity, good, or
service. For example, private
foundations are subject to an
excise tax on net investment
income. An excise tax
may also be imposed on
charitable organizations and
their managers, and other
disqualified persons that
engage in certain prohibited
activities or approve of
prohibited transactions,
such as excess benefit
transactions.
Fair Market Value.
The IRS defines fair market
value as “the price that
would be agreed on between
a willing buyer and a willing
seller, with neither being
required to act, and both
having reasonable knowledge

of the relevant facts.” If
there is a restriction on the
use of the property (such as
a conservation easement),
“the fair market value price
must reflect that restriction.”
(IRS publication 561,
Determining the Value of
Donated Property.)
Fiduciary Duty.
The legal responsibility for
investing money or acting
wisely on behalf of another.
Members of the governing
board of a charitable
organization have a fiduciary
duty to act in the best
interests of the organization.
Financial Accounting
Standards Board (FASB). A
professional standards board
created by accountants

to establish standards of
financial accounting— known
as Generally Accepted
Accounting Principles or
GAAP—and reporting in the
private sector, including
charitable organizations.
FASB is officially recognized
as authoritative by the
Securities and Exchange
Commission and the
American Institute of
Certified Public Accountants.
FASB operates under the
auspices of the Financial
Accounting Foundation,
a public charity, and its
work is primarily funded
by mandatory fees paid by
issuers of securities.
Financial Audit.
A formal examination of
an organization’s financial
records and practices by

an independent, certified
public accountant with the
objective of assessing the
accuracy and reliability
of the organization’s financial
statements. An audit must
follow standards set forth
by the American Institute of
Certified Public Accountants
to be accepted universally.
Financial Review.
An examination of an
organization’s financial
records and practices by an
independent accountant with
the objective of assessing
whether the financial
statements are plausible.
A financial review does not
involve the extensive testing
and external validation
procedures of an audit and
generally provides less
credibility than an audit. A

review offers a lower- cost
method of providing some
assurance to board members
and other managers of
an organization that the
financial systems and
statements are in reasonable
order.
Form 990 Series.
Used in this report to refer
to the four forms (Form
990, Form 990-EZ, Form
990-N, and Form 990-PF)
filed annually with the
Internal Revenue Service by
charitable organizations. By
law, a charitable organization
must make its forms (with
required schedules attached)
publicly available.
Form 990.
The IRS form that tax-exempt
organizations (other than

private foundations) that
have annual revenues of
$200,000 or more or total
assets of $500,000 or more
must file annually to report
on their financial and program
operations. Religious
congregations and specific
related institutions, specified
government agencies, and
other organizations identified
by the IRS are exempt from
this filing requirement.
Form 990-EZ.
The IRS form that tax-exempt
organizations (other than
private foundations) that
have annual revenues of
more than $50,000 but less
than $200,000 and total
assets below $500,000
must file annually to report
on their financial and program
operations. Religious

congregations and specific
related institutions, specified
government agencies, and
other organizations identified
by the IRS are exempt from
this filing requirement.
Form 990-N.
Public charities with annual
revenues of up to $50,000
are required to electronically
file Form 990-N, an annual
notice that indicates its
legal name; mailing address;
web site address; taxpayer
identification number; name
and address of a principal
officer; evidence of the
continuing basis for the
organization’s exemption
from filing Form 990; and,
upon termination, notice of
that termination. There are no
monetary penalties for failure

to file the notice, but failure
to file the annual notice for
three consecutive years will
result in revocation of tax-
exempt status.
Form 990-PF.
The IRS form that all private
foundations are required
to file annually to report on
their financial and program
operations.
Form 1023
Application for Recognition
of Exemption Under Section
501(c)(3). The IRS form filed
by organizations to obtain
recognition of exemption
from federal income tax
under section 501(c)(3) of
the Internal Revenue Code.
Its filing is mandatory for
all charitable organizations
that want to be tax-

exempt, except for religious
congregations, certain
organizations affiliated with
religious congregations, and
charitable organizations that
have gross receipts in each
taxable year of normally not
more than $5,000.
Form 8282.
The IRS form that charitable
organizations must file if they
sell or dispose of donated
property valued at $5,000
or more (based on the value
claimed by the donor on Form
8283) within two years of
receiving the donation.
Form 8283.
The IRS form that taxpayers
must file with their annual
tax return if they claim
deductions for non-cash
contributions with a total

value of $500 or more.
If the value of any single
donated item or collection
of items exceeds $5,000,
the taxpayer must have the
Form signed by the appraiser
who certified the value of the
property and the charitable
organization that received
the donation.
Generally Accepted
Accounting Principles
(GAAP).
The accounting principles
set forth by the Financial
Accounting Standards Board
(FASB) and the American
Institute of Certified Public
Accountants (AICPA)

that guide the work of
accountants in reporting
financial information
and preparing audited
financial statements for
organizations.
Intermediate Sanctions. The
name given to Section 4958
of the Internal Revenue Code
that allows the IRS to impose
penalties on the persons
(individuals or entities) who
benefit from or approve an
excess benefit transaction,
rather than penalizing the
organization. Prior to the
passage of this law in 1996,
the IRS’s only penalty for
such transactions was to
revoke the tax-exempt
status of the organization,
thus these “intermediate
sanctions” offer penalties
that stop short of this severe

sanction on the organization.
Intermediate sanctions
rules apply to all 501(c)
(3) organizations (except
private foundations) and
to organizations exempt
from taxes under section
501(c)(4) of the Internal
Revenue Code. See also
Excess Benefit Transactions;
Rebuttable Presumption.
Lead Director.
A board member appointed
by the board to serve as chair
during a particular board
discussion or meeting to
handle issues in which the
chairperson has a conflict of
interest.
Non-Operating Foundation.
A private foundation that
furthers its charitable

purposes primarily by making
grants to support charitable
programs conducted by
other organizations. See also
Operating Foundation.
Office of Management
and Budget (OMB) Circular
A-133.
The instructions provided by
the Office of Management
and Budget (OMB) regarding
audits of states, local
governments, and nonprofit
organizations that receive
federal funding. Under OMB
Circular A-133, nonprofit
organizations that receive
$750,000 or more in federal
funds grants per year
must have their financial
statements audited.
Operating Foundation.
A private foundation that

uses the bulk of its income,
usually earned from assets
contributed by a single
individual, family, or company,
to provide charitable services
or to run charitable programs
of its own, as opposed to
making grants to other
organizations. See also Non-
Operating Foundation, Private
Foundation, Public Charity.
Premium Travel. According
to federal regulations,
premium travel is any class of
accommodation above coach
or economy class, such as
first or business class.
Private Foundation.
A charitable organization
under IRS Section 501(c)
(3), typically established by
a single individual, family,
or company, that receives

most of its support from
its founders or from
investment income earned
by an endowment. Private
foundations are subject to
substantially more restrictive
rules than public charities
governing their operations,
and their donors receive
less favorable tax treatment
for contributions. If a public
charity fails to meet its
“public support test” of
receiving at least one-third
(or in some cases 10% public
support if certain facts and
circumstances are present)
of its income from the public
in the form of contributions
and grants, it is generally
reclassified as a private
foundation. See also Public
Charity.

Public Charity.
A charitable organization,
recognized under IRS Section
501(c)(3), that generally
receives at least one-third
(or in some cases 10% public
support if certain facts and
circumstances are present)
of its support from a broad
segment of the general
public or from a governmental
unit. Federal tax laws define
four types of public charities:
(1) public institutions, such
as churches and religious
congregations, schools
and other educational
institutions, hospitals and
medical research institutions,
and governmental units; (2)
publicly-supported charities
that receive at least one-
third of their financial support
from qualifying contributions
and grants or from providing

program services to a broad
constituency; (3) supporting
organizations that are
organized and operated
exclusively for the benefit of
or to carry out the functions
of one or more publicly
supported charities; and
(4) public safety testing
organizations. There are
specific federal rules for
the operation of certain
public charities established
as medical research
organizations, charities that
operate as credit counseling
organizations, and certain
supporting organizations,
as well as for donor advised
funds held by a public charity.
Rebuttable Presumption.
A rule under intermediate
sanctions law that delineates

procedures a public charity
or Section 501 (c)(4)
organization must follow in
order for the IRS to presume
that the compensation
provided to a disqualified
person(s) in return for
services or property is
reasonable. The IRS may
“rebut” this presumption
by presenting evidence
showing the compensation
was excessive. The rules
call for compensation to be
approved in advance by the
board (or other authorized
committee) and further
specifies that the members
must not have a conflict of
interest with respect to the
transaction. The board must
use information such as
salary surveys, appraisals,
or other appropriate data to
help determine comparability

or fair market value of the
compensation, and it must
also document the basis for
its decision.
Revised Model Nonprofit
Corporation Act.
The Revised Model Nonprofit
Corporation Act was adopted
in 1987 by the American Bar
Association to encourage
all states to modernize
and harmonize their
laws governing nonprofit
corporations. The model act
lays out requirements for the
formation and dissolution of
a nonprofit corporation, as
well as for multiple aspects
of corporate governance,
including the duties of board
members. States may adapt
or use the model act when

drafting their own laws. It
has been adopted in whole or
modified form by 23 states
and the District of Columbia.
The original Model Nonprofit
Corporation Act (issued in
1952) has been adopted in
whole or in modified form by
six other states.
Sarbanes-Oxley Act of
2002.
Signed into law in July 2002
in response to corporate
scandals, the Sarbanes-Oxley
Act imposes obligations
and penalties on corporate
officers and directors of
publicly traded companies
and mandates increased
disclosure by corporations to
the Securities and Exchange

Commission.
Section 501(c)(3).
The section of the Internal
Revenue Code that defines
tax-exempt organizations
eligible to receive tax-
deductible contributions.
To qualify, an organization
must be operated exclusively
for charitable, religious,
educational, scientific, or
literary purpose, to name
a few examples. 501(c)(3)
charities are further defined
as public charities or private
foundations. See also Private
Foundation; Public Charity.
Section 509(a).
The section of the Internal
Revenue Code that defines
the rules for determining
that an organization is a
public charity (as opposed

to a private foundation) and
thereby eligible to receive
tax-deductible contributions
on more favorable terms.
Self-Dealing.
Any financial transaction
between a private foundation
and its disqualified
persons, other than
reasonable compensation
for services. Such self-
dealing transactions,
even those that provide a
below-market rate benefit
to a disqualified person, are
generally prohibited under
Section 4941 of the Internal
Revenue Code. See also
Disqualified Persons, Excess
Benefit Transaction.
Sponsoring Organization.
A sponsoring organization is a

public charity that maintains,
owns, and controls one or
more donor-advised funds.
See also Donor-advised fund;
Public Charity.
Substantial Contributor.
A substantial contributor
is generally defined as any
person who contributed or
bequeathed the greater of
$5,000 or 2 percent of the
total contributions received
by a charitable organization in
a given tax year. A substantial
contributor also includes
the original donor or creator
of a private foundation,
donor-advised fund, or
supporting organization. A
substantial contributor to a
private foundation, donor-
advised fund, or supporting
organization is deemed a
disqualified person. See also
Disqualified Person.

Supporting Organization.
A public charity that is
organized and operated to
support other specified
public charities, and is
therefore not required to
demonstrate that it receives
at least one-third of its
support from a number of
unrelated donors (as do
most other public charities).
There are three categories
of supporting organizations,
Type I, Type II, and Type III.
Each of these organizations
must meet a specific legal
test designed to ensure
that the organization(s)
being supported has some
influence over the actions of
the supporting organization.
Tax-Exempt Organizations.

Organizations that meet
an approved tax-exempt
purpose and thus do not have
to pay federal and/or state
income taxes, except with
respect to income earned
by a trade or business that
is unrelated to the purpose
for which the organization
was granted tax-exemption.
The Internal Revenue Code
defines more than 25
categories of organizations
that are exempt from
federal income taxes,
including charities, business
associations, labor unions,
fraternal organizations,
and many others. Whereas
other types of nonprofit
organizations benefit the
private, social, or economic
interests of their members,
charitable organizations
must benefit the broad public

interest and Congress has
therefore provided, with very
limited exceptions, that only
those charities organized
under section 501(c)(3)
are eligible to receive tax-
deductible contributions. See
also Charitable Organization,
Private Foundation, Public
Charity.
Uniform Prudent
Management of
Institutional Funds Act
(UPMIFA).
Model legislation approved
in July 2006 by the
National Conference of
Commissioners on Uniform
State Laws (NCCUSL) to
govern the management and
expenditure of investment
assets held by charitable
organizations. UPMIFA has
been adopted by 49 states

and the District of Columbia.
Uniform Prudent Investor
Act (UPIA). Model legislation
approved in 1994 by the
National Conference of
Commissioners on Uniform
State Laws to govern the
investment practices of
fiduciaries. UPIA is based
on the General Standard
of Prudent Investment set
forth in the 1992 [Third]
Restatement of Trusts; it
reflects modern portfolio
theory which has become
universally accepted.
The Uniform Trust Code
promulgated by NCCUSL in
2000, and amended several
times since, incorporates
UPIA wholesale as the
standard applicable to the
investment of trust assets.

UPIA has been adopted in
more than 40 states and the
District of Columbia.
Volunteer Protection Act of
1997, P.L. 105-19.
Federal law that limits
liability of uncompensated
volunteers, including board
members, for injuries caused
by negligent conduct of
the volunteer while acting
within the scope of authority
provided to him/her as a
volunteer of a governmental
agency or a charitable
organization. The Act does
not provide protection from
claims of gross negligence,
willful or criminal misconduct,
reckless misconduct,
or conscious, flagrant
indifference to the rights
or safety of the individual
harmed by the volunteer.

Whistleblower Protection
Policy.
A policy to encourage
staff and volunteers to
come forward with credible
information on illegal
practices or violations
of adopted policies of
the organization. The
policy specifies that the
organization will protect the
individual from retaliation.
It also identifies those
staff or board members or
outside parties to whom
such information can be
reported. Such policies may
be known by another name,
such as a policy on reporting
malfeasance or misconduct.

2015 INDEPENDENT SECTOR PRINCIPLES UPDATE STAFF
PANEL ON THE NONPROFIT SECTOR STAFF (2004-2007)
President and CEO
Diana Aviv
Project Director
Amanda Broun
Project Staff
Kendall Joyner
Marie LeBlanc
Communications Staff
Candy Hill
Ian Pullens
Blake Warenik
Project Consultant
Patricia Read, Pat Read Consulting
Executive Director
Diana Aviv

Project Director
Patricia Read
Assistant Project Director
Jennifer Chandler Hauge
Communications Staff
Patricia Nash Christel and Bill Wright
Additional support provided by Jennifer Frias
and Gudrun Hofmeister
Development Staff
Sherry Rockey, Deborah Briggs
Administrative Support
Gina Catedrilla, Staci Morgan
ACKNOWLEDGEMENTS
Publication and dissemination of the updated Principles was

made possible through the generous support of The
Andrew W. Mellon Foundation, Hogan Lovells, The James
Irvine Foundation, Lilly Endowment, Inc., Patterson
Belknap Webb & Tyler LLP, and The Wallace Foundation.
We would like to acknowledge and thank Randall Thomas,
former Research Assistant at the National Center on
Philanthropy and the Law, New York University School of Law,
who provided research and writing support for the
reference edition of the Principles for Good Governance and
Ethical Practice.
We offer our gratitude to Celia Roady, Partner, Morgan, Lewis
& Bockius, LLP, and Jill Manny, Executive
Director, National Center on Philanthropy and the Law, New
York University School of Law, for the countless
hours they contributed in reviewing documents that led to the
publication of this volume.
We would also like to acknowledge support of the law firm of
Hogan Lovells and the following members of the
firm who provided legal research for tools accompanying this
report: T. Weymouth Clark, Partner; Phillip Brown,
Allison Holt, Jenna Jacobson, Arthur Kim, Stephanie Lipscomb,
Edward Purdon, Uta Rawson, Scott Rissmiller,

and David Steenburg, Associates.
Independent Sector would like to acknowledge the work of the
Panel on the Nonprofit Sector, whose leadership
on the Principles for Good Governance and Ethical Practice in
2007 continues to guide charitable sector board
and staff members to higher standards of ethical practice and
governance. Their work was supported by charities,
private foundations, community foundations, corporate funders
and individuals beginning in 2004, and a
complete list of Panel funders is available online at
www.nonprofitpanel.org.
FOR FURTHER INFORMATION
Principles for Good Governance and Ethical Practice: Reference
Edition is also available for purchase
in digital form or hard copy at
www.independentsector.org/principles. It provides legal
background on each
principle with detailed footnotes and a glossary of terms.
Independent Sector, which provided leadership in convening
and supporting the Panel on the Nonprofit Sector
and continues to support the sector in its pursuit of the highest

standards of ethical practice, offers resources
through its programs and the Online Principles Resource Center
(www.independentsector.org/principles) to
facilitate putting these principles into practice.
http://www.nonprofitpanel.org
A B R I D G E D P R O O F 1 ( 0 2 . 5 . 2 0 1 5 ) 2 0 1 5 E D
I T I O NP R I N C I P L E S F O R G O O D . C O M
PRINCIPLES
FOR GOOD GOVERNANCE
AND ETHICAL PRACTICE
A GUIDE FOR CHARITIES AND FOUNDATIONS
1602 L STREET NW, SUITE 900
WASHINGTON, DC 20036
INDEPENDENTSECTOR.ORG

P a g e 1
GROUP 4
Yifan Li, Ashley Chui, Ke Zhang
OF INVESTING
ETHICS
P a g e 2
Misconception of the public
2008 Brookings Institution survey
NO Confidence in
Charitable
organization
33 %
10 %
Very good job

Spending money
wisely
P a g e 3
DISADVANTAGE
OF THE SECTOR
Business Model
Profitable incentive
Trust from the public
Continued maintenance
P R I N C I P L E 2 2
and procedures to ensure that the
organization (and, if applicable, its subsidiaries) manages and

invests its funds responsibly, in
accordance with all legal requirements. The full board should
review and approve the organization’s
annual budget and should monitor actual performance against
the budget.
P R O J E C T D E S C R I P T I O N
Page 5
Have a board-approved annual budget for its
current fiscal year, outlining projected expenses for
major program activities, fund raising, and
administration.
14 BUDGET PLAN
Make available to all, on request, complete annual
financial statements prepared in accordance with
generally accepted accounting principles.
11 AUDIT REPORT

10 ACCUMULATING FUNDS
Spend at least 65% of its total expenses on
program activities.
8 PROGRAM EXPENSE
POLICY
BBB WISE GIVING ALLIANCE
Avoid accumulating funds that could be used for
current program activities. To meet this standard,
the charity's unrestricted net assets available for
use should not be more than three times the size
of the past year's expenses or three times the size
of the current year's budget, whichever is higher.
P a g e 6
INVESTMENT POLICY
Money market funds
Equities

Fixed income
Guidelines for investing Donor restrictions Delegation of
Responsibilities
General economic conditions;
Possible effect of inflation or deflation;
Investment Considerations Expenditure considerationsPurpose
(Board, Oversight Committee,
Management)
Protecting the value
Growing those assets to increase their value
Maintaining access to the assets
Sufficient investment return
Donor’s intents should be respected
P a g e 7

MEET OUR STAKEHOLDERS
OUTSOURCED
FINANCIAL EXPERTS BOARD COMMITTEEDONORS
ROBUST
GOVERNANCE
STRUCTURES
SAVVY
INVESTMENT
STRATEGIES
P a g e 8
WHEN INVESTING
WHAT TO CONSIDER

P a g e 9
CAPACITY
OF THE ORGANIZATION
1
EXTERNAL
INTERNAL
Outsourcing Human Resource
Possible effect of inflation or deflation
Expected Tax Consequences
Human Resource
General financial portfolio

The role of investment
P a g e 10
Security Risk: the impact of certain risk factor
criteria as it applies to the investments held
by the institutional money managers.
RISK
2 Manager Risk: aware of the types/level of risk each individual
manager is bringing to the portfolio – and there should be
guidelines in place to manage those risks.
Return on Investment (ROI)
Invest conservatively for the lowest risks - Bonds
P a g e 11
Impact investing refers to
investments "made into companies,

organizations, and funds with the
intention to generate a measurable,
beneficial social or environmental
impact alongside a financial return."
IMPACT INVESTING
3Purpose vs. Outcome
Two of the main mantras for impact
investors are “outcome
measurement” and “intentionality.”
We say it is very important to
measure and prove outcomes; we
also say the investor and investee
should intend to achieve good things.
Weekly Prompt
P a g e 12
ACCOUNTABILITY
OF THE INVESTED BUSINESS

4
Before we invest,
we need to evaluate whether:
Accountability for the management
and optimization of the investment
portfolio is defined.
Individual performance
management is aligned with good
portfolio management practices
and Key Performance Indicators.
The invested company has financial transparency.
CASE STUDY
Gates Foundation to reassess investments
Launched in 2000
The largest private foundation in the US
Holding $38 billion assets

Mission:
Improve the quality of life for individuals around the world
Page 14
DUTY VIRTUECONSEQUENTIALIST
ANALYTICAL FRAMEWORK
41% of its assets (8.7 billion) invested in companies that failed
in social responsibility tests
Made only one-program related investment
Affect the organization’s
reputation
To boost the return of

investment Stay true to the mission
100% Mission alignment
Financial oversight
C O N C L U S I O N
Manage risk
Code of conducts/ policies
Transparency
Avoid conflict of interests
Ability to adopt innovative business model
P a g e 16

Question
Is it more important for nonprofits to invest for outcome
or for purpose?
Page 17
THANK YOU
Reference
https://ssir.org/articles/entry/amplifying_impact_with_mission_i
nvestments
https://ssir.org/articles/entry/arriving_at_100_percent_for_missi
on._now_what
https://www.councilofnonprofits.org/tools-
resources/investment-policies-nonprofits
https://ssir.org/mission_possible_how_foundations_are_shaping
_the_future_of_impact_investing?
ct=t(Newsletter_Mission_Possible1_12_2017)&mc_cid=0323bb

8f2e&mc_eid=3043387bf7
https://ssir.org/articles/entry/ethics_and_nonprofits
https://ssir.org/articles/entry/talking_about_ethics_in_impact_in
vesting
https://insights.som.yale.edu/insights/how-should-nonprofits-
invest
https://www.philanthropy.com/article/New-Nonprofit-Puts-
Money-Over/239635
https://www.give.org/for-charities/How-We-Accredit-Charities/
http://www.latimes.com/news/la-fi-gates11jan11-story.html
http://www.thenonprofittimes.com/wp-
content/uploads/2015/03/SEI-Nonprofit-Risk-
Management_JAN2014.pdf
https://www.law.umich.edu/clinical/internationaltransactionclini
c/Documents/May%2011%20Conference%20Docs/
NGO%20Ready.pdf
nvestments
on._now_what
_the_future_of_impact_investing?ct=t(Newsletter_Mission_Poss

ible1_12_2017)&mc_cid=0323bb8f2e&mc_eid=3043387bf7
vesting
invest
Money-Over/239635
c/Documents/May%2011%20Conference%20Docs/NGO%20Rea
dy.pdf
dy.pdf
Research topic: Ethics of investing in the nonprofit sector

Write a 12-15 double-spaced page paper, exclusive of
references, 12-point New Roman font, with one-inch margins on
each side. Topics selected should provide an opportunity for
research, analytical thinking, and persuasive argument.
USEFUL RESOURCES:
nvestments
on._now_what
vesting
invest
Money-Over/239635

dy.pdf
IS PRINCIPLE: NO. 22 (More principles in separate pdf)
and procedures to ensure that the organization (and, if
applicable, its subsidiaries) manages and invests its funds
responsibly, in accordance with all legal requirements. The full
board should review and approve the organization’s annual
budget and should monitor actual performance against the
budget.

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