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Vol. 32, No. 1

Good Governance: In a new day, bars move toward new controls and policies

by Robert J. Derocher

Teresa Schmid has spent more than two decades in a variety of positions at several bar associations, often working closely with lawyer members on a number of financial issues. In her current post as executive director of the State Bar of Arizona, Schmid oversees more than 100 employees and a $10-million-dollar budget for the 18,000-member organization.

So, imagine her surprise a year or two back when the bar’s Finance Committee asked her to leave the room during a discussion with the bar’s independent auditors.

“That sent chills to your spine,” Schmid says. “This is an entire change of the existing mindset. You ask, ‘So, what is the relationship between the board of directors and the executive director?’ ”

That question and others related to a bar’s finances and operations are being raised more often as nonprofit associations face greater scrutiny from federal and state regulators. The increasingly long arms of the Sarbanes-Oxley Act and the Internal Revenue Service are prompting nonprofits to adopt tighter operating controls, ranging from conflict of interest plans to stricter policies on budgets, audits, and fundraising.

Bar associations are no exception. While many bars have had such control policies in place, others have not, and many are taking second looks in light of the increasing interest from the government. Many bar leaders say they’re confident in their organization’s approach to good governance but are open to ideas on how to improve, since nobody is really looking to make themselves a target of a Securities and Exchange Commission investigation or an IRS audit.

Increased attention on nonprofits

Congress and President Bush crafted and approved the Sarbanes-Oxley Act in 2002, just a year or so after the spectacular scandals at former corporate titans such as Enron, WorldCom, Arthur Andersen, and Tyco, among others. That didn’t give nonprofits a lot of time to figure out just how the legislation might or might not affect them.

As a result, many companies—both public and private—as well as nonprofits, have been struggling to determine their responses to the legislation, according to Jim Quaid, a certified public accountant and a director of the Chicago accounting firm of Ostrow, Reisin, Berk & Abrams. He has more than 15 years’ experience working with nonprofits, and serves on the Illinois Attorney General’s Charitable Trust Advisory Council.

Currently, there are just two provisions in Sarbanes-Oxley that directly affect nonprofit associations, Quaid says: They must provide for retention of electronic documents and must not alter or destroy them for a period of time, and they must provide whistle-blower protection and not retaliate against any employee who reports potential illegal activity.

While Sarbanes-Oxley applies specifically to publicly traded companies, many provisions of the act have had a cascade effect, working their way down to privately held firms and nonprofits wary of similar provisions applying to them in the future. The negative press and resulting backlash generated by financial irregularities at nonprofits such as the United Way and the American Red Cross have also contributed to the increased concern, Quaid says.

Additionally, Quaid notes, many bar associations have members who either work for or who do business with large, publicly held companies that are well versed in Sarbanes-Oxley and the need for compliance.

“Many of the 175 members of our house of delegates are Sarbanes-Oxley experts,” says Jim Ayers, treasurer of the New York State Bar Association, and former chair of a special committee that looked at Sarbanes-Oxley’s impact on the association. “They deal with this stuff all the time.”

Also of growing concern to nonprofits is public accessibility of information, says Cynthia Richers Rowland, chair of the ABA Section of Business Law Committee on Nonprofit Corporations. GuideStar, a nonprofit information clearinghouse on nonprofit organizations, regularly posts IRS Form 990 filings on its Web site ( detailing salaries, benefits, and expenses of nonprofits. It’s been particularly noted by bar foundations, she says, which do a lot of charitable work and fundraising in the community.

“That’s been the biggest watershed for charities. What had been closely held information became available for the world to see on the Internet,” she says. “Nonprofits are ‘owned’ by the public, so they are expected to be transparent.”The IRS itself has added to the level of scrutiny by stepping up examinations and audits of nonprofits, Quaid and others say. This year, the IRS began requiring nonprofits to state on the 990 form whether they had a written conflict of interest policy in place.

“If you check, ‘No,’ ” Quaid says, “you’re more than likely going to get a letter from the IRS saying, ‘Why not?’ They’ve been on the warpath with many nonprofits. They’ve increased their personnel on the tax-exempt side of the house. They are taking a closer look at the 990 [forms], especially in the area of executive compensation.”

Some bar executives are also noticing more direct comments from their auditors, questioning some practices and pointing bars more toward the need to follow the intent of Sarbanes-Oxley provisions.

“A big thing that’s new is fraud in the organization,” Schmid says. “Now you hear from your auditors, ‘What are the opportunities for fraud? How will you address them?’ ”

In her role as associate executive director of the Connecticut Bar Association, Janis C. Jerman has worked closely with the bar’s auditors—and she has noticed their caution in regard to Sarbanes-Oxley. “In the past few years, I’ve seen the comments change to, ‘You really need to do this,’ whereas before, it was, ‘This would be a really good idea if you did this,’ ” she says.

Judy A.C. Edwards, executive director of the Multnomah Bar Association in Portland, Ore., has more than 20 years of experience working with nonprofits. She, too, has noticed the increased focus, and what that means for her and her employees.

“I think the financial reviews we’ve had ask a lot more questions and put more demands on our staff—which I think is good,” she says. “Whenever you handle other people’s money, you have to be careful.” The bar recently arranged to have monthly bank statements faxed to the homes of the bar association and bar foundation presidents to make sure they are kept up to date on bar finances.At the New York County Lawyers Association and Foundation in New York City, a code of conduct policy was adopted for all staff and members in light of the recent nonprofit scandals, along with a record retention and whistle-blower policy.

“None of the policies created difficulties for staff; we held training sessions to educate them about why the policies were adopted and how they worked in practice,” says Marilyn Flood, counsel to the NYCLA and executive director of the NYCLA Foundation. “No volunteer leader or member has expressed any concern with the policies. Rather, we are proud that we have a portfolio of good governance documents, and encourage other bar associations to follow suit.”All this attention means that “nonprofits are definitely taking things more seriously,” Rowland adds. “It’s certainly made them more conscious of what they need to do.”

An eye on the trends

Whether they view it as a necessity or just a best business practice, many bar associations are making changes to their financial policies and conflict of interest provisions, while also keeping a close eye on trends and talking with colleagues.A year ago, the Connecticut bar formed a task force on governance whose work included a complete review of the bar’s rules and bylaws, with an eye toward changes geared to satisfy some of the intent of Sarbanes-Oxley. As a result, the bar’s house of delegates in June approved the changes that establish a whistle-blower provision and a conflict of interest policy for staff, as well as a separate audit committee.

“I think they understand that the provisions of Sarbanes-Oxley affect us,” Jerman notes. “It’s one of the pluses of having attorneys as members.”

After a year-long special committee review of the effects of Sarbanes-Oxley, the NYSBA this year laid the foundation for establishment in 2008 of a separate audit committee that will appoint and oversee the bar’s independent auditor, review and oversee internal financial controls, and establish and oversee a whistle-blower provision.

The special committee, chaired by Ayers, also tightened the bar’s chain of command and emphasized the need for the bar’s executive committee to take a greater role in overseeing the bar’s financial affairs.

“I think most people felt that the review process was a very beneficial one for the association to go through,” Ayers says. “I think it’s a very healthy exercise—and bar associations are well suited to undertake this review.”

Also in New York, the NYCLA issued a report outlining a series of “best practices” recommendations for all nonprofits to follow. The association already follows many of those practices, such as having an audit committee and a conflict of interest policy, Flood says.

The State Bar of Arizona adopted a new financial policy manual in 2005 under the guidance of former bar president Helen Perry Grimwood, a certified public accountant. The bar also has a conflict of interest policy in place.

The Delaware County (Pa.) Bar Association in suburban Philadelphia recently created a committee specifically to oversee the quarterly financial reviews done by the DCBA’s accounting firm, according to Executive Director Elizabeth Price. “It makes us sit up and listen,” she notes.

At the Multnomah bar, the board’s bylaws were revised last year to include conflict of interest provisions. Additionally, all nominees for the bar’s board of directors must sign a document agreeing to “prepare for and actively participate in board and committee meetings, including reviewing and being knowledgeable about all materials mailed to you,” a provision aimed at making sure board members know their fiduciary oversight responsibilities, Edwards says.

Bar leaders say they are also actively talking with each other and watching other associations and organizations to learn more about future approaches. Schmid, for example, is monitoring actions in states such as California and New York, where Sarbanes-Oxley-type provisions governing nonprofits have been enacted. “We should expect to have similar attention to nonprofits in other states soon,” she says.

Also keeping an eye on the news is the Connecticut bar’s Jerman, who has been following this topic via the National Association of Bar Executives’ online discussion groups and by using the ABA Division for Bar Services’ Bar Cat online research tool.

“I’ve been to seminars with insurers and banks, and I’ve talked to law firms who have worked with nonprofits,” Jerman adds. “There’s going to be a lot of things that could affect us in the future.”

More changes coming?

Just what those things might be is still a matter of discussion, as state and federal regulators continue to assess and fine-tune legislation. Clare Golla, a former nonprofit executive who is now a nonprofit market strategist for ShoreBank in Chicago, thinks it is wise for nonprofits to emulate many Sarbanes-Oxley provisions.

“I think there’s a general trend toward professionalization of the nonprofit sector,” she says. “Now, it’s big business.”

More and more states are taking a closer look at nonprofits in the wake of financial scandals and, particularly, details of lucrative compensation packages for nonprofit executives, Quaid says. That trend, he adds, seems unlikely to abate.

Many bar leaders say they’re preparing for the scrutiny, even if it means a change in the ways that things were traditionally done. “We’re gradually becoming more comfortable with it,” Schmid says. “We still work on the reporting roles, but that’s because there aren’t a lot of models out there.”

But as long as IRS auditors, SEC investigators, and state attorneys general are out looking for impropriety—and since bar leaders are dedicated to rooting out such problems anyway—it seems likely that more good governance models will be emerging soon.



For nonprofits, if there is one absolute that has emerged from the Sarbanes-Oxley Act and the increased IRS scrutiny, it is this, according to CPA Jim Quaid: The buck stops at the boardroom.

“The board is ultimately the party responsible for the running of the organization,” notes Quaid, of Chicago’s Ostrow, Reisin, Berk & Abrams. “They’re the ones who would be held responsible.” No longer can board members sit idly by and not take an active role in the financial operations of the association, he says.

Key to that responsibility is to have active and knowledgeable audit and finance committee members who can make the board comfortable with the association’s finances, says Clare Golla, a former nonprofit executive, and now a nonprofit market strategist for ShoreBank in Chicago.

There are plenty of other things that board members and executive directors can do to protect against loose governing rules or a potentially damaging IRS audit, Quaid and others say.

“We strongly urge organizations to get an outside audit, even if they’re smaller,” Golla says. “It’s an added level of comfort.” It might also be a good idea to reach out to state and local CPA associations for assistance, she adds.

Audits can also be a money-saver, particularly for bar foundations that need to borrow money for special projects, such as buying or renovating their offices.

“The number one thing lenders want to see is the last couple of years of audit statements,” she says. “If they don’t have any, that sends up a red flag.”While Quaid is sympathetic to the added costs for such measures, he agrees with Golla that they can ultimately save money. “If there’s something an audit would have caught, I would hate to be on the other end of an IRS investigation,” he says.

Quaid adds that an audit firm can be a good resource for a bar association or foundation in ways that go beyond performing an audit. “Ask them to do a one-day training session with staff,” he suggests.

Cynthia Richers Rowland, chair of the ABA Section of Business Law Committee on Nonprofit Corporations, says it is critical for bars to have written conflict of interest, document retention, and whistle-blower policies in place. The committee currently has a working group looking at governance issues for nonprofits, with a goal of providing model acts and principles, as well as speaking out on legislation and regulations affecting nonprofits.

At press time, Rowland said the committee hoped to have a list of guidance policies by August. “We’d love to be a resource for local and state bar associations and foundations,” she adds.

The committee’s Web site is at Other sites that might also offer some insight into association and foundation governance include:

Internal Revenue Service’s Good Governance Practices for 501(c)(3) Organizations: Materials prepared by Quaid and Golla for a March 2007 ABA Bar Leadership Institute session: New York County Lawyers Association standards of governance:


—By Marilyn Cavicchia

At the same time they’re making sure all the relevant policies are up to date and on file, bars and other nonprofits should also take a hard look at their overall culture, said Nancy Axelrod, a consultant and principal at Washington, D.C.-based Nonprofit Leadership Services, who spoke at the ABA Bar Leadership Institute in March. Is the bar a place where elected leaders and staff are encouraged to ask questions—including the tough ones? Or is there a culture of “passivity and groupthink”?

The results of such “passivity and groupthink” can be devastating, she added, citing a study that found that companies such as Enron and Tyco had boards that met all the benchmarks that were then standard in terms of size, codes of ethics, and financial expertise.

Looking great on paper is not the same as doing a great job, Axelrod noted, adding that at these companies, it was possible to follow all the rules but not add much in the way of organizational intelligence (reliance on the organization’s values and mission) and contextual intelligence (awareness of what’s going on in the world, such as social changes).

“The problem is, we don’t often tap that wisdom,” said Axelrod, recalling her own early experience on a college board. She was excited at first, but soon found herself wondering, “What material difference has my presence made at this board meeting?”

To the list of fiduciary duties—duty of care, duty of loyalty, and duty of obedience—Axelrod would like to add what she called a “fourth D”: the duty of curiosity. In trying to be polite and achieve consensus quickly, she said, many boards don’t wholeheartedly invite or don’t allow sufficient time for questions and dissent.

Ideally, the president will know how to run a meeting in which all the board members are engaged and participating—which is what the fiduciary duties require, and also what board members themselves often expect. The problem, said Paul Greeley, president of Ashburn, Va.-based Association Consulting Services, who also spoke at the BLI session, is that not every leader inherently has these particular skills.

“Just because you’re outstanding in your field doesn’t mean you’ll be outstanding at running a board meeting,” he noted. This is one reason it’s essential for the president and the executive director to have a strong relationship that includes honest discussion and a shared understanding of best practices, Greeley and Axelrod said: It helps set the tone for the rest of the bar, including the board and how it will work as a group.

Also important, they said, is to realize that getting a good grasp on proper governance practices and procedures is not a one-time task. With all the different issues that can come up, the dramatic ways the board can change from one year to the next, and the still-evolving understanding of best practices for nonprofits, board members need opportunities to revisit and refresh their knowledge throughout the year.

“Governance is a process,” Axelrod noted. “Keep learning.”

[Want to learn more? The materials from this BLI session are at]