Health Care and Education & Workforce Development and Philanthropy and Sports Business

Paid boards spur not-for-profit debate: Critics: If directors won't give time, who will?

April 17, 2006

Indianapolis-based USA Funds is a large, complex organization, and members of its governing board are busy people.

Same goes for the NCAA, another local not-for-profit with a national reach, a nine-figure budget and directors who are anything but professional volunteers.

The two organizations have one key difference, though:

USA Funds pays its board members. The NCAA does not.

"It's simply the nature of the world," said Norm Lefstein, an Indiana University law professor who chairs the compensation committee at student-loan guarantor USA Funds. "If we didn't provide some compensation, we wouldn't get the kind of time commitment and attitude we get from a board like ours."

The NCAA has a different perspective.

Its independent directors-all of whom are college presidents-devote an "impressive" amount of time to the collegesports powerhouse, Chief Financial Officer James L. Isch said, and none expects compensation.

"It's never been considered, to my knowledge," Isch said simply.

Such paradoxes are fanning the flames for critics burning up over the controversial practice of paying not-for-profit directors, most often at health care organizations, private foundations and specialty agencies that operate like businesses-like USA Funds.

The fallout could affect the whole sector if supporters lack confidence in how a charity's resources are being used.

"If a board is not willing to volunteer, why should anyone else?" asked Daniel Borochoff, president of the Chicago-based American Institute of Philanthropy, a charity watchdog.

Almost a quarter of the 170 not-forprofit tax returns IBJ reviewed this year listed some sort of pay for directors or trustees, ranging from six-figure salaries for directors of a physicians' group to $112 in reimbursed expenses for a volunteer board member at a local foundation.

Officials cite the complexity of some organizations, saying that paying busy professionals to help govern not-forprofits ensures they devote ample time to the task.

Time commitments vary, but not-forprofit board members typically meet at least four times a year and periodically convene committees to discuss more specialized topics. Most directors are expected to review materials before meetings, so they arrive ready to make decisions.

Meeting attendance by paid board members is nearly always perfect, several directors told IBJ.

And they are indeed busy people-judges, attorneys, politicians, business executives, university presidents and even leaders of other not-for-profits.

Several familiar names were among the 230 paid directors listed on local organizations' most recent tax returns, including former Gov. Otis Bowen, Hunt Capital Partners Chairman Bill Hunt, former Indianapolis Museum of Art Director Bret Waller and former IUPUI Chancellor Gerald Bepko.

Mission or motivation?

Such examples are reason enough for Pablo Eisenberg to cry foul. The senior fellow at Georgetown University's Public Policy Institute is an outspoken critic of escalating compensation at not-for-profits.

Trustee pay is a particular hot button.

"Why pay the wealthy for what should be volunteer work?" he asked. "It's just another development that fudges the line between forprofits and non-profits. ... That's money that should be going to the mission."

Eisenberg led a research group that studied board compensation at foundations in particular. The group's 2003 report found that a "substantial majority" of the 238 foundations surveyed pay their boards something, even though "trustees in general spent very little time on foundation business."

He and his colleagues ultimately recommended limiting director pay to a flat $8,000 each year, something they said would allow boards to attract blue-collar members who can't afford to take time off work.

The U.S. Senate's Finance Committee included a similar idea as one of several possible policy changes floated a couple of years ago, but an advisory group of industry experts convened to respond to the proposals stopped short of endorsing it.

Rather than prohibiting board compensation outright, the national Panel on the Nonprofit Sector recommended revising not-for-profit tax forms so organizations would more fully explain why directors need to be paid.

"The Panel generally discourages payment of compensation to board members by charitable organizations," the group said in a report released last summer, but "in cases where compensation is deemed necessary ... charitable organizations should" go through a formal process to make sure pay is fair.

The recommended process, which includes reviewing compensation at comparable organizations, is similar to the procedure the IRS recommends boards follow when setting executives' salaries.

Paid directors contacted by IBJ said they take such steps, mindful of their responsibility to make the most of agency resources. But given the complexity of their organizations and the demands made of board members, they said it's a good investment.

Some experts agree.

"If you have a large economic entity and want the board to be active and engaged and take the time to truly oversee it ... you want people at a certain level of education and experience," said Marc Owens, a Washington, D.C., attorney who spent 10 years at the helm of the IRS' Exempt Organizations Division and now works with not-forprofits. "These people are active, they have their own careers. You could hope they would be willing to be engaged solely because of the spirit of it, or you could pay them.

"Paying someone creates a higher focus."

Community contributions

Compensation can be a powerful motivator, to be sure.

"It becomes important when you're asking people to really work," said Thomas Chapman, chairman of Clarian Health Partners' board. "Clarian had $2.5 billion in gross revenue last year-that's a huge responsibility."

Large hospital systems, in particular, increasingly are compensating board members "in a token way," he said, to ensure that the organizations are governed by directors with a good range of skills.

Chapman, who is paid $470,000 as executive director of a health-related not-for-profit in Washington, D.C., made another $45,125 in 2004 for service to the Clarian board, according to the hospital system's most recent tax filing.

But not all Clarian board members are paid. Two of the 13 independent directors listed on the most recent tax return do not accept compensation: U.S. District Court Judge Sarah Evans Barker and Stephen Ferguson, chairman of Bloomingtonbased Cook Group Inc.

Federal judges are precluded from accepting outside income that isn't related to teaching or writing, Barker explained. And Ferguson doesn't think he should collect a paycheck, given the collaborative relationship between Clarian and Indiana University, where he serves as president of the board of trustees-for the princely sum of $50 per meeting.

"I feel like I serve because I'm on the IU board," he said. "I shouldn't receive compensation because of that."

IU President Adam Herbert was paid $2,500 in 2004 for his Clarian board service. His predecessor, current NCAA President Myles Brand, collected $32,750 from Clarian in the same period. Directors spend two to 10 hours a week on board business, according to the tax filing.

Ferguson doesn't begrudge his colleagues their compensation.

"They're all high-quality people who bring a lot to the board," he said. "There are tremendous expectations for very little money."

The expectations are no less lofty at cross-town competitor Community Health Network, which nevertheless relies on an unpaid board.

"We are a community-based organization and, as a result, our board of directors is very committed to being a volunteer board," said Jill Parris, the network's vice president of human resources. "They feel they're making a contribution to the community through their board service."

The compensation question comes up periodically, she said, but the answer has remained the same.

"They feel very strongly about that," Parris said. "They don't want to be paid."

Jury's still out

Directors at Lumina Foundation for Education, on the other hand, expect to be compensated, said board Chairman John Mutz. That's because most of them date back to the days of Lumina's predecessor, financial-services agency USA Group.

The assets of not-for-profit USA Group were sold to student-loan giant Sallie Mae in 2000, and the $770 million sale price was used to endow Lumina. The foundation changed its employee compensation structure as it made the transition to a more traditional philanthropic organization, but the board fees have remained.

"The jury is still out on compensating foundation boards," said Mutz, a former lieutenant governor who was paid $55,688 for spending eight hours a week on foundation business in 2004, according to Lumina's most recent tax return. "Over 40 percent of [foundations] our size pay their boards. I think we are in the mainstream of major foundations, and that's where we want to be."

Former USA Group subsidiary USA Funds, which kept its not-for-profit status and shares some board members with Lumina, likewise isn't budging. Board fees haven't increased in "a long period of time," the compensation committee's Lefstein said, and the workload hasn't eased, either.

USA Funds' board is made up almost entirely of attorneys and college administrators, including Butler University President Bobby Fong. He is paid $24,500 a year to be a trustee, augmenting the $266,193 he gets for his day job.

The full board meets four times a year and its four committees convene three or four times annually, said General Counsel David Boodt.

"We put in a good deal of time in advance, reading and understanding materials," said Lefstein, who collected $30,000 for what the organization said was 35 hours of work a year. "It's a fairly labor-intensive activity. I just don't think the board would operate as efficiently on a totally non-compensated basis."

Still, paying directors is a foreign concept at nearly all publicly supported notfor-profits-the agencies that are most likely to be harmed if the public loses faith in not-for-profits as a result of the compensation controversy.

Positions on their boards are almost universally considered volunteer posts, even at the most complex communitybased organizations.

"I have felt honored to be a part of [the board] and could not imagine receiving compensation for serving," said Peggy Boehm, chairwoman at Goodwill Industries of Central Indiana, which includes retail stores, job-training programs and charter schools among its operations.

"Board members are so committed to the Goodwill mission, I am sure all of us would agree that we would prefer that money be used for the mission rather than to compensate us."
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