Proposed JWOD Governance Standards Reconsidered
Independent Sector filed comments regarding a governance proposal of the Committee for Purchase From People Who Are Blind or Severely Disabled, which administers the Javits-Wagner-O'Day (JWOD) Act. The Committee is considering governance and executive compensation standards for nonprofit agencies awarded contracts under the JWOD program. While IS agreed with the Committee’s intention of ensuring that participants in the JWOD program meet the highest standards of governance and accountability, we raised concerns about both the particular criteria for assessing governance performance proposed by the Committee and the process that would be necessary to implement to review individual agencies’ performance against these criteria.
On December 16, 2005 the Committee issued an Advance Notice of Proposed Rulemaking (PDF) to gather information about qualification standards and executive pay before initiating a formal rulemaking. The Committee then plans to issue regulations that “ensure that only qualified nonprofit agencies participate in the JWOD Program and that the fair market price charged to Federal customers is both reasonable and appropriate.”
The Committee offers a list of 14 criteria that it considers benchmarks of best practices including:
• a written conflict of interest policy, (also proposed in 2004)
• no fewer than five unrelated directors, (new proposal)
• setting forth term limits for board members, (similar proposal in 2004)
• no compensation for board members other than reimbursement for expenses directly related to board service, (new proposal)
• financial reports audited by a CPA, (similar proposal in 2004)
• at least one financial expert serving on the board, (same proposal in 2004)
• compensation packages submitted to a “rebuttable presumption” process to determine reasonableness (gathering comparative salary data and reviewing all compensation including incentives, retirement plans and benefits) (similar proposal in 2004, but no set threshold this time)
It is not clear whether the Committee intends to make such practices mandatory. In its November 2004 proposed rule (subsequently withdrawn in July 2005), the Committee proposed requiring agencies to certify that they had met certain governance standards and pay requirements. In the current notice, the Committee asks for comments on: whether the listed criteria are comprehensive enough to demonstrate good governance practices; what is the best way to ensure that only qualified agencies participate in the JWOD program, with an “internal structure that minimizes opportunities for impropriety”; and what if any enforcement mechanisms should be adopted to ensure that only qualified agencies participate.
Unlike the November 2004 proposals, the current notice does not suggest limiting executive compensation to the highest federal SES annual pay ($207,000). With respect to the possible impact of executive compensation costs on fair market prices, the Committee asks for comments on whether there is a threshold “beyond which the compensation paid to executives in a JWOD-participating nonprofit agency should be considered as influencing a proposed fair market price determination”; if there should be a relationship between the compensation of line workers and highly compensated individuals; and ways to monitor executive compensation without placing an undue burden on agencies.
Written comments are due January 31, 2006. Public hearings will be held on January 12, 2006, in Arlington, VA; January 19, 2006, in Dallas, TX; and January 26, 2006, in San Francisco, CA. Requests to testify must be received by the Committee at least a week prior to the hearing date.
Text of the notice in the Federal Register (PDF)
Background
On July 1, 2005, the federal Committee for Purchase From People Who Are Blind or Severely Disabled withdrew the mandatory governance standards it had proposed in November 2004 for nonprofit agencies awarded contracts under the JWOD program. Those rules would have imposed stringent regulations on the nonprofits, including standards for boards of directors and limits on executive compensation.
In the July 1 notice, the Committee reported that it had received 167 written comments, including those submitted by Independent Sector, raising 106 different objections and only six submissions indicating full approval. Contrary to some of the objections expressed in comments, the committee concluded that it had authority to issue the rule, but decided to withdraw it because "the number and nature of the other issues raised in the comments justify extensive study and revision of the rule." The committee hopes to propose revised standards by the end of 2005.
Read the full notice in the Federal Register (PDF)
The Committee had proposed new mandatory governance standards for nonprofit agencies awarded contracts under the JWOD program. The new requirements would have included standards for boards of directors and limits on executive compensation.
While the notice issued on November 12, 2004 stated that the proposed standards are primarily based on common practice in nonprofit communities, there are a few areas where they are more stringent. Although the Committee acknowledged that the overwhelming majority of nonprofit agencies operate in an ethical and accountable manner, it proposed the standards based on recent accounts of “excessive compensation for nonprofit agency executives; a perceived lack of full disclosure in the financial reporting of nonprofits; and the absence of formal guidelines to establish independent boards of directors.” The stated purpose of the new rule was to “promote sound governance procedures…, effective and transparent administration of government contract funds, and continue to maintain a high level of public support for the JWOD Program's employment mission.”
Independent Sector submitted comments on February 10, 2005.
Summary of the 2004 Proposed Rule
Board of Directors
Nonprofits would be required to certify that their board of directors:
(1) Does not include family members of the nonprofit agency's management team;
(2) Has a Chairperson who is not also serving as nonprofit agency's Chief Executive Officer (CEO), President, Executive Director, or equivalent;
(3) Has an audit committee to oversee a) the nonprofit agency's financial affairs, and b) an independent auditing firm that conducts audits of the agency;
(4) Reviews and certifies executive compensation packages, and develops and implements an annual evaluation process for the Board or other governing authority, as well as for the nonprofit agency's CEO, President, Executive Director, or equivalent;
(5) Has adopted a conflict of interest policy which includes disclosure of all members' business relationships with the nonprofit agency;
(6) Turns over Board, or other governing authority, membership on a recurring schedule;
(7) Reviews and validates all Internal Revenue Service (IRS) Form 990s and all attachments, and certifies that such filings identify all sources of compensation income from the nonprofit agency and related entities;
(8) Has at least one financial expert serving; and
(9) Publishes and makes public the minutes of meetings of the Board, or other governing authority.
Compensation
In assessing the reasonableness of executive and other employee compensation, the Committee will consider:
(1) The size and complexity of the nonprofit agency's charter or mission;
(2) The mission area, geographic size, and financial condition of the nonprofit agency;
(3) The technical and professional qualifications required for positions in the nonprofit agency;
(4) Compensation packages paid at comparable nonprofit agencies;
(5) The percentage of the net revenues to the participating nonprofit agency realized from the JWOD Program paid to employees and to senior management;
(6) The extent to which the nonprofit agency's executive compensation packages exceed the total compensation offered to the typical, highest paid, senior executive service, career Federal government employee (currently about $207,000 per year)* ; and
(7) The median compensation package for the nonprofit agency's direct labor hour workers and how that median compares to the compensation packages offered to executives.
Certification
Nonprofit agencies participating in the JWOD Program must certify on the initial and annual certification forms whether or not the governance standards regarding boards of directors and compensation have been met.
Violations
Violations of the governance standards will be investigated by the appropriate central nonprofit agency (NIB or NISH), which will notify the participating nonprofit agency concerned and afford it an opportunity to submit a statement of facts and evidence. The central nonprofit agency will report its findings to the Committee, together with its recommendation. In reviewing the case, the Committee may request the submission of additional evidence or may conduct its own investigation. If a nonprofit agency fails to correct its violations of the governance standards, the Committee, after affording the nonprofit agency an opportunity to address the Committee on the matter, may terminate the nonprofit agency's eligibility to participate in the in the JWOD Program.
* The Committee would generally consider a nonprofit agency's executive compensation package unreasonable if it exceeds the total compensation offered to the typical, highest paid SES employee (about $207,000 per year) unless the nonprofit agency can provide adequate justification for the level of executive compensation to the Committee. The notice explains that the basis for this compensation comparison is that the JWOD program is a federal program using federal contract funds.
Last updated: February 1, 2006
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