USA Office Aperio 59 Lincoln Park, Suite 250 Newark, NJ 07102 973.624.3244 www.aperio.us

Canadian Office Aperio 215 Spadina Avenue, Suite 420 Toronto, ON M5T 2C7 416.304.0016 www.aperio.ca

UK Office JPA 32 - 36 Loman Street, London, UK SE1 0EE +44 (0) 207 922 7746 www.jpa-group.com

Emerging Principles of Governance

2 of 10 Aperio

Table of Contents 1  PURPOSE .............................................................................................................................................................. 3 2  EMERGING TRENDS IN NOT-FOR-PROFIT GOVERNANCE.................................................................. 3 

2.1  TEN EMERGING PRINCIPLES OF GOVERNANCE OF NONPROFIT CORPORATIONS (BASED UPON THE SURBANES-OXLEY ACT) .............................................................................................................................................................. 3 2.2  PROPOSED GOVERNANCE STANDARDS IN AUSTRALIA..................................................................................... 5 2.3  OECD PRINCIPLES OF GOOD GOVERNANCE .................................................................................................... 7 

2.3.1  Principle IV – Disclosure and Transparency .......................................................................................... 8 2.3.2  Principle V. The responsibilities of the board ........................................................................................ 9 

3  CONCLUDING MATERIAL ............................................................................................................................ 10 3.1  FURTHER READING ........................................................................................................................................ 10 

3 of 10 Aperio

1 Purpose This review is intended to provide background material for the ongoing development of governance structures that will support the new strategic plan. This review is not intended to be all encompassing nor should it be viewed as legal advice. The principles and examples offered are intended to spark debate and discussion within the Board of Directors in preparation for a governance development session. As these principles and examples are reviewed, the reader is encouraged to reflect upon how these principles might be used within the context of governing your organization and what competencies might be required to support these principles.

2 Emerging Trends in Not-for-Profit Governance Recent developments and scandals within the for-profit sector have encouraged closer scrutiny of the governance within that sector. Numerous jurisdictions have responded with new legislation (Surbanes-Oxley Act), particularly in the United States. Recent Canadian developments have also increased the pressure within the Canadian context to legislate increased accountability. Governance trends within the not-for-profit sector tend to be informed by the developments within the corporate sector. As a result, many look to these recent legislative changes in an effort to predict the future trends that will affect the governance practice within the not-for-profit sector.

2.1 Ten Emerging Principles of Governance of Nonprofit Corporations (based upon the Surbanes-Oxley Act)

The following is an excerpt from an article written by Thomas Silk (Thomas Silk practices law with Silk, Adler & Colvin, a San Francisco firm specializing in the law of nonprofit organizations. He is the editor of Philanthropy and Law in Asia (1999), and he has contributed chapters to Serving Many Masters: The Challenges of Corporate Philanthropy (2003) and The Jossey-Bass Handbook of Nonprofit Leadership and Management (2004). Copyright 2004 by Thomas Silk). He proposes a set of not-for-profit principles that he believes will emerge from the environment of increased corporate scrutiny.

1. The board of directors of a nonprofit corporation must engage in active, independent, and informed oversight of the activities of the corporation, particularly those of senior management.

2. Directors with information and analysis relevant to the board’s decision-making

and oversight responsibilities are obligated to disclose that information and

4 of 10 Aperio

analysis to the board and not sit passively. Senior management should recognize and fulfill an obligation to disclose – to a supervising officer, to a committee of the board, or to the board of directors – information and analysis relevant to such person’s decision-making and oversight responsibilities.

3. Every nonprofit corporation should have a nominating/governance committee

composed entirely of directors who are independent in the sense that they are not part of the management team and they are not compensated by the corporation for services rendered to it, although they may receive reasonable fees as a director. The committee is responsible for nominating qualified candidates to stand for election to the board, monitoring all matters involving corporate governance, overseeing compliance with ethical standards, and making recommendations to the full board for action in governance matters.

4. Every nonprofit corporation with substantial assets or annual revenues should

develop and implement a three-tier annual board evaluation process whereby the performances of the board as a whole, each board committee, and each director are evaluated annually. The board should also develop and implement a process for review and evaluation of the chief executive officer on an annual basis.

5. Each board of directors is responsible for overseeing corporate ethics. Ethical

conduct, including compliance with the requirements of law, is vital to a corporation’s sustainability and long-term success. To establish an ethical corporate culture, the board should consider the following actions:

a. Communicate to personnel at all levels of the corporation a strong, ethical

“tone at the top,” set by the board, the chief executive officer, and other senior management, establishing a culture of legal compliance and integrity;

b. Assign to the chief executive officer or other officer the specific task of serving as compliance officer;

c. Adopt a Conflicts of Interest policy; d. Include ethics-related criteria in employee qualification standards and in

employees’ annual performance reviews. 6. An independent auditing firm should audit every nonprofit corporation with

substantial assets or annual revenue annually. The corporation should change auditing firms or the lead and reviewing audit partner periodically to assure a fresh look at the firm’s financial statements. The audit committee should be composed of completely independent directors and should set rules and processes for complaints concerning accounting and internal control practices. It is responsible for hiring, setting compensation, and overseeing the auditor’s activities.

5 of 10 Aperio

7. The chief executive officer and the chief financial officer of every nonprofit corporation should review annual information returns filed by the nonprofit organization with appropriate agencies.

8. Any lawyer providing legal services to a nonprofit corporation who learns of

evidence that the lawyer reasonably believes indicates a material breach of fiduciary duty or similar violation should report that evidence to the chief executive officer of the nonprofit corporation and, if warranted by the seriousness of the matter, to the board of directors.

9. Every nonprofit corporation should adopt a written policy setting forth standards

for document integrity, retention, and destruction.

10. Every nonprofit corporation should adopt a written policy to permit and encourage employees to alert management and the board to ethical issues and potential violations of law without fear of retribution.

2.2 Proposed Governance Standards in Australia The following guidelines have been developed with broad national input in Australia. They are recognized as leading edge and have been proposed as a framework for international standards. In the original form, these principles relate to for-profit corporation. They have been modified below to inform the developments of not-for-profit governance:

1. Lay solid foundations for management and oversight by recognizing and publishing the respective roles and responsibilities of board and management. The company’s framework should be designed to:

a. Enable the board to provide strategic guidance for the company and effective oversight of management

b. Clarify the respective roles and responsibilities of board members and senior executives in order to facilitate board and management accountability to both the company and its members

c. Ensure a balance of authority so that no single individual has unfettered powers.

2. Structure the board to add value by designing a board of an effective

composition, size and commitment to adequately discharge its responsibilities and duties. An effective board is one that facilitates the efficient discharge of the duties imposed by law on the directors and adds value in the context of the particular company’s circumstances. This requires that the board be structured in such a way that it:

a. Has a proper understanding of, and competence to deal with, the current and emerging issues of the business

6 of 10 Aperio

b. Can effectively review and challenge the performance of management and exercise independent judgment

Ultimately, the members elect the directors. However the board and its delegates play an important role in the selection of candidates for member vote.

3. Promote ethical and responsible decision-making by actively promoting ethical and responsible decision-making. The company should:

a. Clarify the standards of ethical behavior required of company directors and key executives (that is, officers and employees who have the opportunity to materially influence the integrity, strategy and operation of the business and its financial performance) and encourage the observance of those standards

b. Publish its position concerning the issue of board and employee ethical behavior.

4. Safeguard the integrity in financial reporting. This requires the company to put in

place a structure of review and authorization designed to ensure the truthful and factual presentation of the company’s financial position. The structure would include, for example:

a. Review and consideration of the accounts by the audit committee b. A process to ensure the independence and competence of the company’s

external auditors. Such a structure does not diminish the ultimate responsibility of the board to ensure the integrity of the company’s financial reporting.

5. Make timely and balanced disclosure. This means that the company must put in

place mechanisms designed to ensure that: a. All members/stakeholders have equal and timely access to material

information concerning the company – including its financial situation, performance and governance

b. Company announcements are factual and presented in a clear and balanced way. “Balance” requires disclosure of both positive and negative information.

6. Respect the rights of stakeholders and facilitate the effective exercise of those

rights. This means that a company should empower its stakeholders by: a. Communicating effectively with them b. Giving them ready access to balanced and understandable information

about the company and corporate proposals c. Making it easy for them to participate in general meetings.

7. Recognize and manage risk. Establish a sound system of risk oversight and

management and internal control. This system should be designed to: a. Identify, assess, monitor and manage risk

7 of 10 Aperio

b. Inform stakeholders of material changes to the company’s risk profile.

8. Encourage enhanced performance. Fairly review and actively encourage enhanced board and management effectiveness. This means that directors and key executives should be equipped with the knowledge and information they need to discharge their responsibilities effectively, and that individual and collective performance is regularly and fairly reviewed.

9. Remunerate fairly and responsibly. Ensure that the level and composition of

remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined. This means that companies need to adopt remuneration policies that attract and maintain talented and motivated employees so as to encourage enhanced performance of the company. It is important that there be a clear relationship between performance and remuneration, and that the policy underlying executive remuneration be understood by stakeholders.

10. Recognize the legitimate interests of stakeholders. Recognize legal and other

obligations to all legitimate stakeholders. Companies have a number of legal and other obligations to non-member stakeholders such as employees, clients/customers and the community as a whole. There is growing acceptance of the view that organizations can create value by better managing natural, human, social and other forms of capital. Increasingly, the performance of companies is being scrutinized from a perspective that recognizes these other forms of capital. That being the case, it is important for companies to demonstrate their commitment to appropriate corporate practices.

2.3 OECD Principles of Good Governance In 1998, the OECD produced five principles of good governance, particularly:

1. The corporate governance framework should protect shareholders’ rights. 2. The corporate governance framework should ensure the equitable treatment of

all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

3. The corporate governance framework should recognize the rights of stakeholders

as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

4. The corporate governance framework should ensure that timely and accurate

disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

8 of 10 Aperio

5. The corporate governance framework should ensure the strategic guidance of

the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

Although the OECD suggests that these principles can be readily modified to reflect the realities of other than publicly traded companies, only the last 2 can be easily adapted to the not-for-profit sector. The following outlines in further detail the last 2 principles, again modified to reflect the not-for-profit sector.

2.3.1 Principle IV – Disclosure and Transparency The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. Disclosure should include, but not be limited to, material information on:

1. The financial and operating results of the company. 2. Company objectives.

3. Major share stakeholders

4. Members of the board and key executives, and their remuneration.

5. Material foreseeable risk factors.

6. Material issues regarding employees and other stakeholders.

7. Governance structures and policies.

Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit. An independent auditor should conduct an annual audit in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented. Channels for disseminating information should provide for fair, timely and cost efficient access to relevant information by users.

9 of 10 Aperio

2.3.2 Principle V. The responsibilities of the board The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

1. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.

2. Where board decisions may affect different shareholder groups differently, the

board should treat all shareholders fairly

3. The board should ensure compliance with applicable law and take into account the interests of stakeholders.

4. The board should fulfill certain key functions, including:

a. Reviewing and guiding corporate strategy, major plans of action, risk

policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

b. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

c. Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.

d. Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

e. Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.

f. Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.

g. Overseeing the process of disclosure and communications.

5. The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management.

a. Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration.

b. Board members should devote sufficient time to their responsibilities.

6. In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information.

10 of 10 Aperio

3 Concluding Material During a governance development session, the Board will reflect upon the examples above and then develop governance principles. In addition, the Board will identify the Board competencies and management competencies required to support these principles.

3.1 Further Reading The following links offer further commentary on the emerging trends in not-for-profit governance:

1. Australian developments http://www.governance.com.au/ 2. OECD developments

http://www.oecd.org/department/0,2688,en_2649_34813_1_1_1_1_1,00.html Industry Canada also offers a primer for directors of Not-for-profit corporations at http://strategis.ic.gc.ca/epic/internet/incilp-pdci.nsf/en/h_cl00688e.html. Recent research in Canadian governance in the non-profit sector can also be found at: http://www.cvsrd.org/eng/docs/Policy%20and%20Practice/National%20Study%20of%20Board%20Governance.pdf