The Non-Profit Organization Arena: The Name Of The Game Is Accountability

Tuesday, January 1, 2008 - 00:00

Editor: Please tell us about your professional experience.

Chopko: Prior to joining Stradley Ronon, I was General Counsel at the U.S. Conference of Catholic Bishops for 23 years. This organization is the vehicle through which the bishops coordinate public policy and speak to Congress, the courts and the public. Among other things, I was called upon to file amicus briefs on a variety of matters in many federal courts, including the United States Supreme Court. In addition, I was on the front lines in defending the tax exemption of the Catholic Bishops, and, of course, I saw the emergence and evolution of a number of crises relating to sexual abuse during my tenure there.

Over the course of my career in the religious organizations arena, I have seen some very significant developments. The most important is the growth of regulation. I have seen a transition from a regulatory regime where the government had to justify its regulations by a compelling interest standard to one where the religious organizations cannot usually prevail due to the neutrality of the rules. As with non-profit organizations generally, the natural protections society afforded religious organizations have eroded. Today, all non-profits are closely regulated, and, as a general proposition, I would say they must comply with many of the same standards that govern for-profits.

Editor: What do you see as the principal challenges for non-profits today?

Chopko: There has been a dramatic increase in accountability in recent years. This is driven from a number of different sectors, including the IRS, the state attorneys general, the press, major donors and the general public. These are constituencies who want to know where the money is going, how it is spent, how much actually gets to the desired beneficiaries and so on. I also think the Internet has had a remarkable influence on the ways in which non-profit organizations are scrutinized. In any event, they are subject to greater pressure than ever before to account for their activities, and some of this pressure is being transformed into laws and regulations.

Editor: The difference between political activity and fair comment on matters of public concern has always been a murky area. Is the IRS going to shed some light on the subject?

Chopko: That is a very good question. Public charities are going to receive considerable attention, I think, over the next year or so with respect to their political activities. With a presidential election in the offing, the ways in which at least some public charities have sought to get around a variety of limitations and restrictions on their political activities in recent years are not going unnoticed.

At present, the IRS regulates under a very vague standard that maximizes its regulatory discretion. For my public charity clients I attempt to draw the line between issues and people. That is, the organization can speak to issues - provided this is not a substantial amount of its charitable activities - but it cannot speak for or against people running for office. Candidates for public office are off limits.

Educating people about issues of public interest, however, is entirely legitimate, but, within the limits of substantiality. Here again, the IRS holds all the cards. The case law indicates that five percent of an organization's activities is insubstantial, but that 15 percent is substantial. Where the line is drawn between those two figures is very difficult to say and there is pressure on the IRS to raise the limit toward the high end. One way around the problem is a 501(h) election, which permits some 501(c)(3) public charities (but not churches) to quantify the amount spent on their legislative activities and file reports thereon with the IRS. So long as the amount is within the 15 percent limitation they have a safe harbor.

Editor: One issue on people's minds today is Sarbanes-Oxley and its impact on non-profit governance.

Chopko: That is a major concern for many of our non-profit organization clients. Notwithstanding the fact that only a very few of the provisions of Sarbanes-Oxley are expressly applicable to non-profits, the principles underlying the statute constitute a sort of compendium of best practices in corporate governance, and those principles are encouraged across the board. The accounting profession has also promoted a variety of Sarbanes-Oxley standards, and their adherence has resulted in the statute's application to a much wider audience than the publicly traded companies.

What this means is, in the competition for donors, many charities have voluntarily acceded to the provisions of Sarbanes-Oxley. This constitutes a problem of some magnitude for smaller charities and community-based organizations, which often do not possess the resources to have audit committees, whistle-blower hotlines and some of the other practices that larger agencies can adopt. Nevertheless, the pressure is there. By contrast, some of the principles are easy to adopt, such as conflicts of interest policies for boards.

Editor: Another concern is how effective the nonprofit organization is in its mission. Can you comment on that?

Chopko: In the competition for a finite amount of donor dollars, the charity that is effective in accomplishing its mission - and knows how to convey that effectiveness to the donors - is going to succeed. A number of charities have begun to ask the right questions internally. A recent study funded in part by The World Bank has referred to charitable effectiveness as a return on investment. That is an interesting way for charities to look at what they do, but in effect a consideration for exemption from taxation and for being able to hold themselves out as recipients of tax-deductible contributions is by delivering services that other organizations or government cannot provide, or at the least, cannot provide without spending a great deal of money. The use of volunteer labor, for example, permits charities to provide homebound senior citizens with services that would otherwise cost the taxpayers an extraordinary amount in subsidized care facilities or through additional medical and other expenses borne by other providers. Similarly, job-training programs run by charity volunteers not only lift people off of government assistance but provide them with an opportunity to become productive. This is personally enriching for them and allows them to pay taxes, which lightens the burden for everyone. Moving people from dependent to independent status is something that charities do far more effectively than any other type of organization. With respect to a return on investment, this type of activity strengthens the bonds of community by providing a vehicle for people to help others within the community. I think this is a timeless message and one of the principal reasons that the non-profit sector exists.

Editor: Do you have any advice to nonprofit board members?

Chopko: I think that non-profit boards are really on the front lines of some of the trends we have discussed, including accountability and the standards set by Sarbanes-Oxley. Board members, whether of large or small non-profits, must take their obligations seriously. That means asking the hard questions and holding the management team's feet to the fire if necessary. Over the next few years, I predict a growth in legal requirements to make sure that the board members receive the information and disclosure tools they need whether by way of case law, regulation or statute, to enable them to be more informed when doing their jobs. Editor: Is the increased exposure to liability - something that Sarbanes-Oxley has engendered - making it difficult for non-profits to recruit good people for their boards?

Chopko: I have not seen any reluctance on the part of candidates for non-profit board positions to serve as a consequence of increased exposure to liability. If there is an issue here, it has to do with the time commitment. Nevertheless, it is incumbent on people who serve to take a hard look at whether the organization is operating appropriately and, of course, to accept the fact that being on a charitable board entails a real commitment of time and talent. The charities must realize that the competition for good people for their boards is very intense.

Editor: The IRS has issued a set of best governance practices. Is this unusual?

Chopko: Extremely. The IRS is moving out of literal compliance with the tax code into the area of best practices, and the agency is not doing this in any half-hearted, tentative way. I think the intention here is to help board members do their job, and the IRS list addresses the charity's need for a full disclosure of its activities, its fundraising policies, its compensation practices and its mission. The IRS goes on to indicate that their decision to audit a charity's operations will be influenced by whether the organization has voluntarily adopted best governance practices. This is another example of pressure for accountability in the sector.

Editor: As we head into an election year, would you share with us your thoughts on political activities by charities?

Chopko: The IRS has an ongoing project that looks at political activity by charities. This was originally set up to respond to complaints about political activity during the 2004 and 2006 elections. The 2008 election will not be any different. At the same time, the IRS is engaged in an educational effort to encourage organizations to be compliant and guide them through the next election cycle.

There are some interesting First Amendment issues here. One strand of legal thought holds that if the organization wishes to be tax-exempt, there are certain conditions that must be followed, one of which is refraining from political activity in endorsing or opposing candidates for election to public office. The other strand says that the government does not have the right to condition one benefit - tax-exemption - on the surrender by an organization of its constitutional rights. The tension here is palpable. Traditionally a church sermon has been regarded as protected activity, and the IRS is going to have some difficulty in censoring that speech. If, however the church begins to write editorials, take out ads and publicly endorse candidates, I think it is asking for an IRS inquiry.

Please email the interviewee at mchopko@stradley.com with questions about this interview.