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The Nature Conservancy, responding to criticism that some of its activities departed from its true mission, is conducting an overhaul of its top governance. Like other organizations, the world’s largest environmental group is finding that nonprofits are being subjected to the kind of scrutiny faced by publicly held companies. A panel of experts recently recommended that the Conservancy establish governance and audit committees to increase oversight and “transparency,” and to standardize practices among its local affiliates around the world. It had already approved an earlier recommendation by forming an 11-member executive committee, an adjunct to its 36-member board, to play an active role in its affairs. The Conservancy’s mission is to protect environmentally important areas by buying land or through other conservation measures. It owns or has conserved more than 100 million acres globally. INNER WORKINGS PROBED Last year The Washington Post published a series of news stories that prompted a congressional investigation into the Conservancy’s inner workings. The newspaper accused the Conservancy of abandoning its mission by pursuing profitable ventures and conducting questionable transactions with directors and officers. The Post pointed out that drilling on the Texas coast killed endangered birds and that the Conservancy had loaned $1.5 million to its president. Another dubious transaction, according to the newspaper, occurred when the Conservancy purchased 9,500 barren acres for $7.5 million from Georgia Pacific in 2000. Georgia Pacific’s chairman sat on the Conservancy’s board, said The Post, spurring a conflict of interest governed by the Internal Revenue Service (IRS). Through tax laws and legislation applicable to foundations, the federal government plays a small role compared to the states in governing nonprofits. For example, the Sarbanes-Oxley Act of 2002 does not apply to nonprofits. A month after the articles appeared, the Conservancy’s board of directors prohibited land transactions with directors and officers and implemented new procedures to assure that all land purchases conformed to its mission. It banned loans to employees and said it would not start new oil drilling or mining projects on its lands. A few months later, it established the special panel, whose members included Derek Bok, former president of Harvard University, and Thomas Tierney, former CEO of Bain & Co., to overhaul its corporate governance. Ira Millstein, a leading voice on corporate governance, was named chairman. Millstein, a senior partner at Weil, Gotshal & Manges, began his work in the field in 1974 when he worked as an antitrust lawyer focusing on industry concentrations. Corporate governance “was a kind of boring subject to most people” at the time, he said in a recent interview. Through his access to boards of directors, he discovered that most directors languished in a state of inertia, approving executive decrees with little scrutiny. Over the next three decades, he played a leading role in redefining the role of directors — promoting an active board that would temper executive actions in favor of shareholder interests. He turned to the nonprofit sector in the 1990s when then New York City comptroller Alan Hevesi tapped Millstein to study nonprofit organizations spending billions of private and public dollars to conduct city services. The report told a damning tale: nonprofit boards regularly performed worse than their for-profit counterparts. Sen. Charles Grassley, R-Iowa, whose Finance Committee is in the early stages of an investigation of the Conservancy, has suggested that the panel’s recommendations may serve as a blueprint for future legislation. His efforts are one of several swirling among legislative chambers. THE HOT ISSUE In the words of several observers, corporate governance is now the hot issue in the nonprofit world. That is partly because the outcry over corporate governance has spilled over into the nonprofit arena. Regulations on board liability by the IRS also went into effect in 2001, said Marcus Owens, former director of exempt organizations at the IRS and currently at Caplin & Drysdale, the Conservancy’s primary outside counsel. The IRS plays a role in overseeing nonprofits because of their federal tax-exempt status. In recent years, New York Attorney General Eliot Spitzer has steered his Charities Bureau to intensify its scrutiny of dubious organizations and proposed new legislation. In February, Spitzer’s office, in a settlement with the Grand Marnier Foundation, required board members to return $1.5 million in excessive wages and permanently barred several directors — including the founder — from serving on the board. According to the attorney general’s office, six of the board members received annual salaries in excess of $50,000 “for rendering the most basic services.” The Charities Bureau says it has filed five additional lawsuits against unscrupulous nonprofit boards. NEW YORK LAW Like most states, New York has specific laws that govern nonprofits but many of the corporate governance standards applicable to for-profit boards (namely, the duty of care and duty of loyalty) apply to nonprofit boards as well, according to lawyers. Spitzer has proposed legislation that would encourage nonprofits to establish audit committees, require accurate financial reporting, and mandate that interested directors and officers who conduct transactions with the organization “establish that the contract or transaction was fair and reasonable.” The legislation is pending. California and Massachusetts have also proposed comprehensive legislation, said experts. And industry associations like Independent Sector and the Council on Foundations have released guidelines of what they consider best practices, encouraging the formation of executive and independent audit committees, limitations of conflicts of interests among officers and directors, accurate financial reporting, and other safeguards borrowed from the Sarbanes-Oxley Act. Regardless of the nature of the reforms, Millstein said, the key to a successful board remains focus. Board members often treat their positions like a “feather on a cap,” he said, but rarely play an active role in managing the organization. He recommended that directors move beyond their traditional role of fundraising and monitor managerial decisions to assure the organization succeeds in completing its mission. If the nonprofit is a medical school, for example, then directors should focus on its main goal of training future doctors, he said. Millstein sits on the board of the Albert Einstein College of Medicine. Structural changes play an important but limited role, according to Millstein, who also teaches corporate governance at Yale’s business school. Non-profits will remain largely unregulated, he said, because enforcement bodies remain tiny (New York’s Charities Bureau, one of the largest in the nation, employs only 21 attorneys) even if legislatures pass new laws. Plus, with no shareholders or analysts to monitor nonprofit boards, Millstein said, nonprofits are apt to be more susceptible to wrongdoing or negligence. TAILORING REFORMS With more than $3 billion in assets, the Nature Conservancy had the means to form a high-priced panel to issue a detailed set of recommendations. Few other nonprofits enjoy this luxury. Toni Thomas, head of the New York City Bar Association’s committee on nonprofits confirmed that she and her colleagues at the association have seen increased demand for corporate governance advice from large charities in the past two years. Lawyers foresee a dramatic increase for their services if New York and one of the other five states considering reforms enact legislation. Independent Sector’s CEO Diana Aviv said that when lawyers do speak to clients, they should hold a firm grasp of the corporate governance measures evoked in Sarbanes-Oxley and clearly communicate the importance of instituting these measures to executives. Sarbanes-Oxley does not apply to nonprofits but serves as a model, said Aviv. Voluntary compliance with corporate governance reforms will improve operations, she said. “It’s not only an inoculation against potential lawsuits.” Thousands of smaller nonprofits, however, will struggle to conform to proposed legislation or less dramatic changes, according to experts. A survey of 300 nonprofit conducted by Grant Thornton, an accounting firm, found that 62 percent responded that they have had no discussions on the reforms outlined in Sarbanes-Oxley. Of those that did, a majority collected more than $10 million in annual revenues. “A one size fits all” framework will not work, said E. William Bates II, a partner at King & Spalding’s New York office, describing the needs and limitations of smaller nonprofits. Experts said that many small organizations lack the resources to seek outside expertise and must depend on free seminars and workshops. Industry insiders urged changes in proposed legislation. In New York, the Legislature has amended Spitzer’s initial proposal by raising the threshold level of applicability thereby exempting smaller organizations, according to Thomas. RAISING AWARENESS With these concerns and acknowledged limitations of government enforcement in mind, Millstein has turned his efforts to raising awareness among nonprofit boards. “We’re in a period of conscious raising,” he said, that emphasizes the organization’s specific mission, board independence, and active participation in organizational decisions rather than relying exclusively on structural reforms. “The overall objective is to get boards to wake-up and fulfill their mission.”

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