Should trustees be remunerated?
Recently the 87 years old Sir Dorabji Tata Trust was in the news for alleged violation of the Income tax Act 1961 and paying its Managing/Executive trustee annual remuneration of Rs. 2.66 Crores. Soon thereafter, the Managing/Executive trustee put in his resignation and stepped off the Board. However, the debate continues whether it is ‘good governance best practice’ to remunerate a member of the governing board of a nonprofit/charitable organisation.
The position under law
In our opinion, while the law permits ‘reasonable remuneration’ to any member of the governing board, whether managing trustee, executive trustee or otherwise, what is ‘reasonable’ is difficult to define. What a charity’s Governing Board may consider as ‘reasonable’, may not be considered as ‘reasonable’ by the Assessing Officer at Income tax.
It is also important to ascertain whether the organisation’s own charter (the Trust Deed in case of the trust, or the Memorandum of Association & Rules in the case of a society or the Memorandum of Association & Articles in the case of a Section 8 company) allows members of the governing board to be remunerated and if in the affirmative, then, up to what extent?
The argument for remuneration
We are increasingly moving towards professionalisation and corporatism of the voluntary sector and one major justification put forth by new age corporate professionals is that one should remunerate in order to attract the right candidates on the Board who can then impact the nonprofit’s performance and ensure that Donors/Grant-makers get a better return on their social/philanthropic investment.
However, these corporate professionals forget that there are significant differences between the responsibilities of nonprofit and for-profit organisations. For-profits engage in trade, commerce and business in order to earn financial return for their shareholders. Nonprofits operate to achieve their philanthropic mission without the motivation of financial gain. Nonprofit organisations do not have shareholders. Instead, nonprofits owe allegiance to donors, grant makers, beneficiaries and to the general public, which perceives nonprofits to be driven by the spirit of volunteerism.
Even in the USA, the tax authorities require that if a board member is paid more than US $ 600 (about Rs. 42,600.00) annually, the nonprofit must issue them an IRS Form 1099.
An IRS publication ‘Governance and Related Topics – 501(c)(3) Organisations (2008)’ states: “Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service. … Charities may pay reasonable compensation for services provided by officers and staff.”
How much do charity CEO earn?
In the USA, IRS requires charitable organisations to file income tax returns using the IRS Form 990. Nonprofit income tax returns are public record in the USA and watchdog groups review income tax returns and other public records to gather information about CEO salaries, annual budgets, income and expenditures. Organisations are required to publish the CEO’s salary information as a public service to advance transparency in nonprofit governance and to provide information for people making charitable donation decisions. The watchdog groups compare charities and CEO salaries using the organisations’ financial data and other points of reference.
Top Earners in the USA
The top earners list is limited to the highest-paid charity CEOs with no further comparison or ranking. The lists often include annual budget amounts and other financial information for perspective.
Charity Watch’s list of top 25 earners, published in 2012, leads off with more than $2.2 million for the CEO of the American Cancer Society. Annual salaries of the remaining CEOs on the list range from about $700,000 to more than $2 million. A few of the top-paying charities are AARP, National Rifle Association, American Red Cross, Boy Scouts of America and Jewish Federations of North America.
The governing board of a nonprofit has a fundamental, legal responsibility to exercise due diligence and perform his/her duty as a person of prudence with full accountability and transparency. Referred to as the board’s “fiduciary” responsibility, the board must ensure that the organisation is appropriately stewarding the resources entrusted to it and following all legal and ethical standards.
When a member of the governing board of a tax-exempt charity/nonprofit receives remuneration or compensation for services rendered he/she becomes vulnerable to allegations of conflict of interest and greater scrutiny by regulating authorities. A clear conflict of interest arises when a board member’s duty of loyalty to the nonprofit comes into conflict with a competing personal or financial interest.
Ideally, the governing board of a nonprofit/charity should not be compensated or remunerated for services rendered. However, the CEO or Executive Director who is not a member of the governing board may be suitably remunerated. This ensures that the Board plays it’s “governance role” with full independence and the CEO/ED plays his/her “management role” with the necessary check and balance system in place.