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Protecting Your Organization’s Good Name

By Tom Watson on January 30, 2008No Comment

Many organizations have been engaging in enterprise-wide risk assessments over the past several years to evaluate environmental, regulatory, governance, financial, and programmatic risks. Most recently, there has been a significant focus by many organizations in assessing reputational risk.

What is reputational risk and how should it be assessed?

Reputational risk assessment is a comprehensive review of what an organization is doing to protect and enhance its reputation and what an organization may be doing, in fact or in appearance, which may damage its reputation. Reputational risk can be measured, for example, by how a newspaper or a watchdog agency may interpret and publicize certain practices.
Reputational risk assessment must be measured on several levels including, but not limited to, the following:

1) Governance. Effective governance requires that well-thought-out by-laws and board policies be put in place, including appropriate conflict-of-interest statements. Board members need to ensure that conflicts do not arise in fact or in appearance. They must always act in the best interests of the not-for-profit organization and avoid “self-benefit.”

Many not-for-profit boards have added “moral clauses” to their by-laws or board policies whereby board and committee members are automatically suspended if they are indicted of a crime and removed from the board or committee if they are convicted. 

2) Executive compensation. Improper handling of executive compensation has damaged the reputation of many not-for-profit organizations.

Failure to comply with the Internal Revenue Service’s (IRS) Intermediate Sanctions Regulations and the improper reporting of executive compensation on Form 990’s have been two problem areas. Hiding executive compensation by “spreading” that compensation over affiliated organizations or by not fully disclosing all executive bonuses and perks have been examples of other improper practices.

3) Employee practices. Employee practices that result in a hostile work environment or cause poor employee morale can impact an organization’s reputation. Implementing a whistle-blower policy and “upward feedback” of management helps to reduce the risks in this area. Each non-profit’s work environment should help facilitate the mission of the organization and demonstrate proper social responsibility.

4) Fiscal transparency. Fiscal transparency is essential for an organization to foster a sense of trust and effective stewardship.

5) Compliance with donor restrictions. Compliance with donor restrictions is imperative to protect the reputation of the organization and safeguard compliance with federal, state and local laws. To ensure compliance, proper communication between an organization’s development and accounting functions must exist. Donor funds should be closely tracked and spent in accordance with the donors’ intent. 

Some development functions have expanded the documentation on their pledge forms to avoid confusion as to donors’ intent. Some pledge forms also include a “morals clause” that may stipulate one or more of the following:

  • For name signing opportunities (schools, buildings, halls, etc. named after the donor), the organization reserves the right to remove the donor’s name with no requirement to return the funds to the donor if that individual is convicted of a crime.
  • If contributions were paid from illegally obtained funds, the not-for-profit organization reserves the right to return those funds to their rightful owner or to an appropriate governmental authority.

6) Effective internal controls and procedures. Effective internal controls and procedures are essential for proper stewardship over assets and adequate financial reporting.  Some of the key controls to closely monitor are: sufficient segregation of duties, appropriate fraud prevention and detection controls, and adequate backup and training of personnel.  Internal controls and procedures should also be well documented. 

7) Asset protection. Asset protection is important to ensure proper stewardship. Organizations should track and closely manage expensive equipment, such as computers, printers and copy machines.  Adequate insurance coverage should also be maintained, including director and officer liability insurance. 

8) External communications. Clear, concise and truthful external communications are essential to protecting an organization’s reputation. Messages which are vague, contradictory or inaccurate can seriously damage an organization. Carefully crafted communications and effective use of the media are important elements in protecting and enhancing an organization’s image. “Think straight, talk straight,” is the motto here.

9) Regulatory and tax compliance. Regulatory and tax compliance is extremely important to ensure adequate funding and avoid significant reputational damage. Organizations must navigate through a myriad of federal, state and local laws and regulations and must ensure that compliance with these laws and regulations is closely monitored.

The IRS Form 990 is a public document that is easily accessible to view on sites such as GuideStar.  Boards and executives should consider the following with regard to the Form 990:

  • Ensure full compliance with IRS instructions in preparing the Form 990.
  • Understand that this document is very important in how the general public, IRS, grant agencies, and others perceive your organization.
  • Consider outsourcing the preparation of the Form 990 to an external accounting firm if your personnel are not expert at understanding its instructions and preparing the return.
  • Audit and finance committees should carefully review the Form 990’s with the same standard of care that they do for the annual financial statement audit. This committee review should be performed in advance of the Form 990 being filed.

Protecting and enhancing the reputation of a not-for-profit organization is critical in today’s world. Performing a reputational risk assessment as part of a board or management retreat or as a key part of strategic planning will benefit an organization’s long-term viability.  Reputational risk assessment also involves an ongoing monitoring process to ensure that the organization’s reputation is protected and enhanced. Not-for-profit organizations cannot effectively achieve their missions if their reputations are not in good standing.

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