Scrutiny Prompts Many Foundations to Make Governance Changes

By Ian Wilhelm

A majority of foundations are strengthening governance practices as a result of increased scrutiny by federal and state regulators, a new study suggests.

The study, which surveyed chief executives and board members at 53 of the nation's wealthiest foundations, says 42 of the funds in recent years have established a conflict-of-interest policy, formed an audit committee, or made other changes in how the organization is governed.

The changes are similar to ones that publicly traded companies must follow under the Sarbanes-Oxley Act, a federal law enacted three years ago to regulate businesses.

Several members of Congress have called for legislation that would require tighter financial management and governance at foundations that would be similar to the rules established by the law.

The study, which was conducted by the Center for Effective Philanthropy, a nonprofit research organization in Cambridge, Mass., identifies other factors that foundation board members say would help them be more effective and improve their oversight of grant makers.

According to the center's survey, which received responses from 546 board members, the largest percentage of trustees (24 percent) said boards are most effective when they include people who have a diverse mix of strengths, such as nonprofit-management experience and personal connections that could benefit a grant maker.

Trustees ranked that idea as a better predictor of board effectiveness than good relationships with the chief executive, the degree to which the board is involved in long-term strategy, and other factors.

A substantial portion of board members said their skills have not been used fully. On a scale of 1 to 7, 34 percent of the trustees awarded a rating of 5 or lower to their satisfaction with how the board uses their talents and skills. Almost 25 percent said that they wanted to do more.

The survey also found that board members who are compensated — a practice that has increasingly been criticized in the foundation world — spend 33 percent more time working on grant-maker activities outside of board meetings than those who are not paid.

Of the 53 foundations surveyed, 23 compensate all or some of their board members, and the level of compensation ranges from a few thousand dollars to more than $100,000.

The report, "Beyond Compliance: The Trustee Viewpoint on Effective Foundation Governance," is available on the center's Web site at http://www.effectivephilanthropy.org.

Reprinted with the permission of The Chronicle of Philanthropy, http://philanthropy.com.