A Better IRS Code

In a public company, the board of directors is responsible for representing the needs of shareholders. The board ensures that the company makes decisions in the best interest of the owners. Nonprofit boards serve the same purpose, but their shareholders include every taxpayer who is subsidizing the nonprofit by allowing it to be exempt from taxes. In this sense, the public owns the nonprofit, and nonprofit boards represent the public’s interest.

For a company listed on NYSE or NASDAQ, the shareholders appoint board members in a general meeting or through a proxy statement. This is designed to limit the ability of insiders to stack the board or remove its independence. This is not the common practice of nonprofit boards, where the sourcing and election of board members is often done by a small group of insiders. This presents governance challenges, including the fact that, on average, 86 percent of board members are white.

As a result of this, we fail to have diverse boards that truly represent the owners of nonprofit organizations—that is, the community. It is a significant barrier to effective governance. It limits the ability of boards to ask tough questions and act in the best interest of the community, especially if those actions aren’t in the best interest of the organization.

The IRS could make one change that would radically shift this dynamic. For nonprofits with budgets of $1 million annual revenue or more, the IRS should require that all vacant board seats be publicly posted at least 60 days prior to any new member election. This proposed rule—I’d call it the Board Election Transparency Rule (BETteR)—would ensure that members of the community seeking to join the board have an opportunity to apply. Organizations such as BoardSource and LinkedIn could serve as platforms to promote these opportunities to the public.

If the IRS were to adopt BETteR, it would have a number of broader benefits to the sector and society. It would:

1. Raise awareness about board service in the community
2. Help fill the estimated 2 million open board seats in America today
3. Increase competition for board seats
4. Incentivize nonprofits to develop board case statements and role descriptions

Unlike many of the proposed changes to the IRS code that would damage the sector (such as eliminating charitable deductions), this one would make the sector stronger and better. Let’s begin a dialog about how to improve the sector, not constrain it.

Read more stories by Aaron Hurst.