SIMPSON THACHER & BARTLETT LLP

STB DRAFT 12/3/11
PRIVILEGED, PERSONAL AND CONFIDENTIAL
December 3, 2011

TO:

The Board of Directors of the William J. Clinton Foundation
John Podesta

FROM:

Victoria B. Bjorklund
Jennifer I. Reynoso

RE:

Governance Review

I.

Introduction
We have been engaged to conduct a decadal governance review of the William J.

Clinton Foundation (the “Foundation”) and its relationship with its affiliates (collectively, the
“Charities”). This memorandum summarizes the results of our governance review, including our
interviews with members of the Boards of Directors and staff of the Charities, and our review of
certain governing and other documents of the Charities.
Specifically, our review started on October 27, 2011. We conducted our first
interview on November 1, 2011 and the last on November 17, 2011. We conducted 38
interviews, 25 in-person and 13 by telephone. We met with, among others, the President, Bruce
Lindsey, John Podesta, members of the Foundation’s Board of Directors (the “Board”), members
of the Immediate Office of the President, the Chief Financial Officer and Chief Operating
Officer of the Foundation, heads of the Clinton Global Initiative, Inc. (“CGI”), the Clinton
Health Access Initiative, Inc. (“CHAI”) and the Alliance for a Healthier Generation, Inc. (the
“Alliance”), as well as individuals from marketing, scheduling, advance, correspondence, and
other areas.

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We showed interviewees our list of 22 questions. We indicated that their names
would not be attached to any specific responses. We asked interviewees to rate the effectiveness
and efficiency of the Foundation’s operations; the effectiveness of the process determining
operational priorities; the effectiveness of the budget and employee review processes; where they
saw the Foundation in ten years; who they saw as having substantial influence over the
Foundation; whether they had disclosed actual or potential conflicts of interest; and what
changes in operations or governance they would recommend.
We also requested and reviewed numerous documents received from Scott
Curran, Assistant General Counsel, including, among others, the Articles of Incorporation and
By-Laws for each of the Charities, as well as the Foundation’s Employee Handbook, Global
Code of Conduct, Conflict-of-Interest Policy, Board minutes, financial statements, and IRS
Forms 990.
II.

Executive Summary
Almost all interviewees:
1. stressed the need for a stronger Board and stronger management;
2. stressed the need for the Board and the managers to meet, lead and
manage;
3. called for strategic planning;
4. called for sustainability planning; and
5. called on the Foundation to develop the infrastructure of a best-in-class
charity.
When we asked interviewees to rate the effectiveness and efficiency of the

Foundation’s operations on a scale of 1 to 10, many elected to give different ratings for
effectiveness and efficiency. They rated the effectiveness in the 7-to-8 range based on the
number of people receiving life-saving drugs through CHAI, the agreements negotiated by the
Alliance with the beverage companies, and/or the commitments made through CGI. However,
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these same interviewees rated the current efficiency of the Foundation at a low 1-to-4 level.
They called for the Charities to develop the infrastructure necessary to support a best-in-class
organization. The rapid growth of the Foundation and the Charities, their substantial programs,
and their high profile are all reasons governance should be enhanced at this time.
Therefore, we recommend the following:
1. Reinvigorate the Boards of the Charities by adding new, experienced directors
and create appropriate committees.
2. Create and execute more Board oversight, planning, accountability, and CEO
and COO supervision of operations.
3. Manage conflicts of interest.
4. Review and upgrade management practices.
5. Improve internal controls, including expense reimbursement procedures.
Each of these recommendations is discussed below.
III.

Legal Duties and Responsibilities of the Board of Directors and Officers
A.

Introduction
The Foundation is an Arkansas Nonprofit Corporation. As an Arkansas Nonprofit

Corporation, the Foundation is subject to the Arkansas Nonprofit Corporation Act of 1993. The
Foundation is authorized to do business in New York, and therefore we would expect that the
New York State Attorney General would argue that the Foundation is subject to certain
provisions of the New York Not-for-Profit Corporation Law. 1 The Foundation is exempt from

1

Section 1318 of the New York Not-For-Profit Corporation Law (the “NPCL”) states that unless
otherwise provided, the directors and officers of a foreign corporation conducting activities in
New York are subject, to the same extent as directors and officers of a domestic corporation, to
the provisions of Section 719 (Liability of directors in certain cases) except subparagraph (a)(4)
thereof, and Section 720 (Action against directors and officers for misconduct). This Section
will not apply to the Foundation if its principal activities are conducted outside New York; the
greater part of its property is located outside of New York; and less than one half of its revenues
for the preceding three fiscal years was derived from sources within New York. See Section
1321(a)(3) of the NPCL.
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federal income taxation under section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the “Code”) and classified by the Internal Revenue Service (the “IRS”) as a public
charity and not as a private foundation.
B.

Legal Duties
In general, the members of the Board of Directors of the Foundation act as

fiduciaries on its behalf. Therefore, certain legal standards, known as “duties” govern the
conduct of those directors with respect to the Foundation. Arkansas law provides that a director
shall discharge his or her duty as a director: (1) in good faith; (2) with the care an ordinarily
prudent person in a like position would exercise under similar circumstances; and (3) in a
manner the director reasonably believes to be in the best interests of the corporation. 2 In general,
a director of the Foundation who violates his or her fiduciary duties could be found liable in a
legal action brought by the corporation, by someone representing the interests of the corporation
(e.g., another director or officer) or by the Arkansas or possibly the New York Attorney General.
We are not authorized to practice law in Arkansas, but we believe that Bruce Lindsey can advise
on the scope of fiduciary duties and director liability under Arkansas law.
C.

Responsibilities of the Foundation’s Directors
In general, the Foundation’s directors, rather than its officers or key employees,

are responsible for the oversight of, and setting the policies governing, the operations of the
Foundation. The Foundation’s officers and employees then carry out the daily operations of the
Foundation within the parameters and policies established by the Board. Examples of the
directors’ oversight and decision-making responsibilities include:
amending the Foundation’s By-Laws;
electing directors and officers on an annual basis, as required by the
Foundation’s By-Laws;
2

Ark. Code Ann. Section 4-33-830(a). The NPCL uses similar language. See Section 717(a).

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accepting the report of the Foundation’s external, independent auditors;
approving fundamental transactions, including acquisitions or sales of the
Foundation’s property;
establishing policies and procedures, and approving annual budgets and
fiscal controls;
periodically reviewing financial statements, budgets, and projections;
approving new program initiatives or major modifications to existing
programs;
determining, modifying, or clarifying the Foundation’s mission;
ensuring that adequate resources exist to carry out the Foundation’s
mission and programs;
determining the compensation and reviewing the performance of
compensated officers;
selecting, replacing, evaluating the performance of, and determining the
compensation of key employees; and
participating in strategic planning discussions.

D.

Responsibilities of the Foundation’s Officers
In general, the Foundation’s officers exercise the responsibilities delegated to

them either through the Foundation’s By-Laws or by the Board through the adoption of
resolutions. The responsibilities of the Foundation’s officers (i.e., Chair, Chief Executive
Officer, Chief Financial Officer, and Secretary) are set forth in Article II, Section 1 and Article
III, Sections 4 to 6 of the Foundation’s Amended and Restated By-Laws. We propose below
engagement of a strong Chief Operating Officer, and we note that the President title is also
available.
IV.

Governance Recommendations
Based on our interviews and document review, we propose below our governance

recommendations for the Foundation. These recommendations apply equally to each of CGI,
CHAI and the Alliance.
A.

Board of Directors
1.

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Board Size

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The current Foundation Board is very small and is comprised solely of “insiders.”
This is also the case for the CGI Board, although the CHAI Board has added some independent
directors. The Alliance Board, which currently consists of three Foundation representatives and
three AHA representatives, is supposed to elect three independent directors. This has not yet
occurred. Many interviewees expressed the view that the Foundation and the other Charities
would benefit from outside perspectives and experience. They indicated that increasing the size
of the Boards could also help with fundraising. (Advisory Boards could also bring outside
perspectives and expertise.)
The Nonprofit Panel Report3 states “A knowledgeable, committed board of
directors is the strongest protector of a charitable organization’s accountability to the law, its
donors, consumers of its products and services, and the public.” 4 Failures by boards of directors
in fulfilling their fiduciary responsibilities may arise when a board leaves governing
responsibility to a small number of people, some of whom may have conflicts of interest that can
mar their judgment . The Nonprofit Panel Report recommended that Congress take action to
require that at least one-third of the members of a public charity’s governing board be
independent, with certain exclusions. It indicated that independent board members should be
defined as individuals: (1) who have not been compensated by the organization within the past
3

The Panel on the Nonprofit Sector was an independent effort by charities and foundations to
ensure that the nonprofit community remains a vibrant and healthy part of American society.
Formed by Independent Sector in October 2004, at the encouragement of the U.S. Senate
Finance Committee, the Panel submitted a series of recommendations for Congress to improve
the oversight and governance of charitable organizations and for individual nonprofit
organizations to ensure high standards of ethics and accountability. The Panel issued a report to
Congress and the nonprofit sector, Strengthening Transparency, Governance, and Accountability
of Charitable Organizations, in June 2005 (the “Nonprofit Panel Report”), and followed up with
a supplemental report by the same name in April 2006 (the “Nonprofit Panel Supplemental
Report”).
4

Nonprofit Panel Report at 75.

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twelve months, including full-time and part-time compensation as an employee or as an
independent contractor, except for reasonable compensation for board service; (2) whose own
compensation, except for board service, is not determined by individuals who are compensated
by the organization; (3) who do not receive directly or indirectly, material financial benefits (i.e.,
service contracts, grants, or other payments) from the organization except as a member of the
charitable class served by the organization; and (4) who are not related to (as a spouse, sibling,
parent, or child) any individual described above. The Nonprofit Panel Report also recommended
that every charitable organization review its board size periodically to determine the most
appropriate size to ensure effective governance and to meet the organization’s goals and
objectives. All boards should establish strong and effective mechanisms to ensure that the board
carries out its oversight functions and that board members are aware of their legal and ethical
responsibilities in ensuring that the organization is governed properly.
The Wall Street Journal recently reported that the average size of a public charity
board is 16.1 members. 5
Recommendation: Small insider boards may have been appropriate when
the Foundation and the other Charities were first formed, but are not considered good
practice for public charities of their current size and complexity. We recommend
reinvigorating the Board by adding new experienced directors and expanding the number
to at least 8 directors. We recommend that the Board seek directors with varying skill sets
(e.g., financial management, strategic planning, fundraising). If the Board chooses not to
expand, we recommend that the Board at least appoint an Advisory Board comprised of
members with varying skill sets.

5

Shelly Banjo, “Before You Join That Board,” Wall Street Journal, Nov. 28, 2011.

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2.

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Audit Committee

The Board needs some members with strong financial know-how to participate in
the annual audit process. The Nonprofit Panel Report recommends that every charitable
organization have some Board members with financial expertise. The Report recommends that
charitable organizations that prepare audited financial statements establish a separate audit
committee to manage the audit process. Members of the audit committee should not receive
compensation from the organization. Responsibilities of the audit committee should include:
selecting, retaining, evaluating, and terminating the independent auditor; periodically reviewing
the terms of the auditor’s engagement; overseeing the auditor’s performance; reviewing the
annual audit report; reviewing the adoption and implementation of internal controls; reviewing
any whistleblower complaints involving financial matters; and reviewing any conflict-of-interest
transactions.
Recommendation: We recommend that the Board appoint an Audit
Committee consisting of independent directors with strong financial know-how.6
Recommendation: We recommend that the Audit Committee be responsible
for retaining and terminating the independent auditor; periodically reviewing the terms of
the auditor’s engagement; overseeing the auditor’s performance; reviewing the annual
audit report; reviewing the adoption and implementation of internal controls; reviewing
any whistleblower complaints involving financial matters; and reviewing any conflict-ofinterest transactions. We recommend that the Audit Committee report back to the Board
two times a year, first after the audit plan is approved and second after the audit report is
received.

6

The Board Agenda for the 2009 Board meeting notes that an audit committee was established
in December 2008. It is unclear to us who the members of this committee are.

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3.

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Board Chair

The Board does not appear to have a Chair. A Board Chair generally is
responsible for working with the CEO and COO to plan and set the agenda for each Board
meeting. The Board Chair presides over Board meetings and ensures that Board meetings are
efficient and effective working sessions. Between Board meetings, the Board Chair is the
primary liaison with the CEO and COO. The Board Chair often leads the evaluation of the
CEO’s and COO’s performance. The Chair can also ensure that procedures are in place for the
recruitment, training, and evaluation of Board members.
Recommendation: We recommend that the Board appoint a Chair. We
recommend that the Chair work with the CEO and COO to plan and set the agenda for
Board meetings.
4.

Board Meetings

The Board has only met once a year. While it approves the annual budget, it does
so mid-way through the budget year. In addition, the Board is not involved in strategic or budget
planning. The main planning meeting appears to occur in December, but it is a staff meeting, not
a Board meeting.
In 2007, the Board adopted a Governance Policy. It requires that the Board meet
two times a year and that each director attend at least two meetings in person. The Governance
Policy also requires that the Board approve an annual budget and formally review the CEO’s
performance every two years.
The Foundation’s outside auditors noted as a material weakness the lack of Board
meetings and that Board minutes are not signed. This weakness was not corrected even after
being noted by the auditors. In addition, minutes appear to have been cloned from one year to
the next.
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The Wall Street Journal reports that the average number of board meetings for a
public charity is 7.4 meeting per year, each lasting an average of 3.4 hours.7 We believe that one
meeting a year is inadequate for public charities of this size and complexity.
Recommendation: We recommend that the Board meet at least on a
quarterly basis. We recommend that Board decisions taken by resolution be clearly
recorded in Board meeting minutes, separate and apart from Board discussions. We also
recommend that the Board meeting minutes record any follow-up to items discussed by the
Board at prior meetings and whether actions were taken by the Board on previouslydiscussed items.
Recommendation: We recommend that one meeting be designated the
“Annual Meeting,” and we recommend that the Board annually elect directors and officers
at this meeting.
Recommendation: One of the most important functions of the Board is to
ensure proper oversight of the financial matters of the Foundation. Therefore, we
recommend that the Board review and approve an annual budget prior to or at the
beginning of each calendar year and that the Board periodically compare actual to
budgeted revenues and expenses. We recommend that the Board devote time at each
meeting to the presentation of financial reports and information and that the discussion of
this information be recorded in more detail in the Board meeting minutes.
5.

Strategic Planning

We were informed that the Board has not been involved in strategic planning and
program evaluation. We were also informed that the Board is not always informed of or given
7

Shelly Banjo, “Before You Join That Board,” Wall Street Journal, Nov. 28, 2011.

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an opportunity to discuss and pre-approve major new programs and material changes in existing
programs. In our interviews, numerous interviewees commented that they believe that the Board
needs to take a more active role in overseeing and managing the Foundation and its finances,
programs, and activities.
We were told that the Board has not engaged in any succession planning and has
not discussed the Foundation’s sustainability if the President is no longer involved.
The current lack of strategic planning leads to confusion about priorities and
missed opportunities as well as duplicative or wasteful work and expenses. Before adding new
programs or initiatives, the Board and management need to evaluate whether these additions will
enhance or negatively impact existing programs and initiatives. A strategic planning process will
enable the Board to establish measurable goals and objectives that advance the Foundation’s
mission. Evaluation will then measure progress towards those goals and objectives. The
strategic planning process must also address the long-term viability of the Foundation.
Succession planning should be addressed even if no changes are currently planned. Strategic
planning should address short, medium, and long-term goals.
Recommendations: We recommend that the Board, together with the
Foundation’s management, engage in a strategic planning process. We recommend that
the Board be presented with information regarding and pre-approve all major new
program initiatives and any material changes to existing programs of the Foundation. We
recommend that the Board periodically evaluate the effectiveness of existing programs and
initiatives and consider transferring or phasing out programs that do not advance the
current mission.
Recommendation: We recommend that the Board engage in succession
planning.
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6.

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Oversight of CEO

The Board does not appear to supervise, set compensation for, or evaluate the
CEO. Although the Governance Policy requires that the CEO’s performance be formally
evaluated every two years, we believe the last formal evaluation may have occurred in 2007. 8
The Board does not appear to set the CEO’s salary.9
Charitable organizations are permitted to pay reasonable compensation for
services provided by board members, officers, and staff. Reasonable compensation is defined as
the amount that would ordinarily be paid for like services by like enterprises (whether taxexempt or taxable) under like circumstances. The IRS Form 990 asks whether independent
persons reviewed the compensation of the CEO and other officers based on comparability data
and contemporaneously recorded the deliberation and decision. On the 2010 Form 990, which is
a public document, the Foundation, CGI, and CHAI all responded that no such independent
review had occurred. In addition, Schedule J of the Form 990 asks whether the Foundation uses
any of the following to establish the compensation of the Foundation’s CEO: (i) compensation
committee; (ii) independent compensation consultant; (iii) Form 990 of other organizations; (iv)
written employment contract; (v) compensation survey or study; and/or (vi) approval by board or
compensation committee. The Foundation and CHAI responded that they used a compensation
survey or study and approval by the Board to establish CEO compensation. CGI responded that
none of these methods were used to establish CEO compensation. See Appendix A. 10

8

The tab for this in the Foundation Board book was blank, and the minutes do not reflect a
performance review.

9

We were also told that at CHAI, Ira Magaziner set his own salary.

10

We did not receive copies of any compensation surveys or studies and therefore question how
the process reported on the Forms 990 was conducted by the Boards.
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A charitable organization can establish a rebuttable presumption that
compensation is reasonable by following a three-step procedure: (i) having compensation
reviewed and approved by independent members of the board or a committee; (ii) basing
compensation on comparables (that is, compensation paid by similar organizations for similar
services); and (iii) contemporaneously documenting the board’s or committee’s decision in
minutes. The Nonprofit Panel Report recommends that charitable organizations incorporate into
their bylaws, articles, charter, or other appropriate governing documents a requirement that the
full board approve, annually and in advance, the compensation of the CEO unless there is a
multi-year contract in force or there is no change in the compensation except for an inflation or
cost-of-living adjustment.11
Comparability data can be obtained by consulting compensation surveys, such as
the annual GuideStar Nonprofit Compensation Report or the Professionals for Nonprofits NY
Salary Survey, or the Forms 990 of other similar public charities (which are publicly available at
www.GuideStar.org). The individual whose compensation is being approved should not be
present during the discussion or vote on his or her compensation. The meeting minutes should
document that the board (or committee) reviewed compensation comparability information and
that any individuals whose compensation was being approved were not present during the
discussion or vote. We can provide model resolutions that can be used by the Board (or a
committee of the Board) annually to approve the compensation of the Foundation’s CEO, other
compensated officers, and key employees.
Recommendation: One of the most important functions of the Board is to
supervise, set compensation for, and evaluate the CEO. Therefore, we recommend that the
Board annually review the performance of the CEO. Because we believe it is a good
11

Nonprofit Panel Report at 67.

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governance practice and consistent with the “rebuttable presumption of reasonableness”
rules of Code section 4958, we recommend that (a) the Board (or a committee) set the
compensation annually of the Foundation’s CEO, (b) in doing so, the Board (or committee)
obtain and review comparability data showing the compensation paid by similarly-situated
public charities to individuals holding similar positions, and (c) document the Board’s or
the committee’s decision in the minutes.
B.

Conflicts of Interest
1.

Conflict-of-Interest Policies

The Foundation has a Conflict-of-Interest Policy applicable to directors, officers,
and key employees (the “Board Conflict Policy”), and a separate policy for employees (the
“Employee Conflict Policy”). 12 It appears that neither policy has been implemented, and the
Board Conflict Policy may need revision to address the issues raised by interviewees. That is, it
appears that conflicts are not timely disclosed. While conflicts may be disclosed on the annual
questionnaire, they have not been disclosed at the time the individual learns of matter in which
he has an interest. In addition, when staff becomes aware of conflicts, they are unsure how to
raise and clear these conflicts. Finally, Board members do not appear to be following the policy
when they become aware of conflicts.
The Board Conflict Policy requires the Board or a committee to appoint a
disinterested person or committee to investigate alternatives to the proposed interested
transaction or arrangement. If a more advantageous transaction or arrangement is not reasonably
possible under circumstances not producing a conflict of interest, the Board or committee shall
determine by majority vote whether the transaction or arrangement is in the Foundation’s best

12

CGI has adopted the Foundation’s Conflict-of-Interest Policy.

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interest, for its own benefit and whether it is fair and reasonable. The Board Policy also requires
the covered individuals to sign and return an annual conflict of interest disclosure questionnaire.
The questionnaire asks whether the individual has an ownership or investment interest in, or has
a compensation arrangement with, any entity or individual with which the Foundation has
negotiated a transaction or arrangement. The individual also agrees (a) to disclose any financial
interest at the Foundation’s request and (b) if the individual learns of any matters in which he has
a financial interest, to disclose immediately to the CEO of the Foundation.
In addition, some interviewees reported conflicts of those raising funds or donors,
some of whom may have an expectation of quid pro quo benefits in return for gifts.
The Arkansas Nonprofit Corporation Act of 1993 defines a conflict of interest as a
transaction with the corporation in which a director has either a direct or indirect interest.13 A
direct interest would involve a potential loss or benefit to the director herself. An indirect interest
occurs when another entity in which the director has a material interest or serves as an officer or
director is a party to the transaction. 14 In addition, the IRS Form 990, which is signed under
penalties of perjury and is publicly available, asks (a) whether the Foundation has a written
conflict-of-interest policy, (ii) whether directors, officers, and key employees are required to
annually disclose interests that could give rise to conflicts of interest, and (iii) whether the
Foundation regularly and consistently monitors and enforces compliance with its conflict-ofinterest policy. The Foundation indicated on its 2010 Form 990 that it has a written conflict-ofinterest policy, requires annual disclosure of potential conflicts of interest, and monitors and
enforces compliance with the policy. However, we did not find evidence of that enforcement.

13

Ark. Code. Ann. Section 4-33-831(a).

14

Ark. Code. Ann. Section 4-33-831(b).

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The Board has a fiduciary duty to act in the best interests of the Foundation, and
directors must put their duty to the Foundation before their individual and private interests. To
prevent abuse and protect the reputation of the Foundation, it is extremely important that the
Board be able to identify and address apparent and actual conflicts of the interest.
Recommendation: We recommend that the appropriate officer educate the
Board and staff as to proper and timely disclosure of conflicts of interest. Officers and
managers need to educate staff as to provisions of the Employee Conflicts Policy and how
to raise conflicts with managers as conflicts arise. The Board (or its Audit Committee) and
management need to timely address conflicts in accordance with the conflict-of-interest
policies. The Board should keep contemporaneous records of actions taken with respect to
actual or potential conflicts. In addition, we recommend that the Board Conflict Policy be
amended to cover all those who have substantial influence over the Foundation, not just
directors, officers, and those receiving compensation of more than $150,000 from the
Foundation.
Recommendation: We recommend that the Foundation establish a gift
acceptance policy and procedures to ensure that all donors are properly vetted and that no
inappropriate quid pro quos are offered to donors in return for contributions.

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2.

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CGI

Interviewees informed us that CGI offered approximately 1,298 complimentary
(unpaid) Memberships, compared with approximately 500 paying Members. Of the
complimentary Memberships, 160 were offered to celebrities and approximately 276 were coded
“discretionary.” At $20,000 per Membership, these “comp Memberships” represent a significant
value. Interviewees informed us that there is no transparency into how the comp list is
developed.
Recommendation: We recommend that all “comp Memberships” be vetted
by CGI Management to ensure that all such Membership offers are appropriate in that
they advance the interests of CGI rather than the personal or business interests of any
individual.
3.

Outside Employment

A number of Foundation employees reported to us that they have outside
employment. Many interviewees were unaware of the Foundation’s longstanding policy
regarding outside employment when we raised pre-approval with them. Numerous interviewees
reported confusion and a lack of transparency between Foundation roles and responsibilities and
outside roles and responsibilities of a variety of individuals. Interviewees also mentioned
instances in which gifts and other payments received by staff had not been properly disclosed.
The Foundation Code of Conduct has provided that employees wishing to obtain
additional employment outside of the Foundation must first secure the approval of their
immediate supervisor or their department, initiative or office head, which approval may be
granted or denied in the manager’s sole discretion, after consultation with the Director of Human
Resources or his/her designee. The Code of Conduct also provides that no employee shall
directly or indirectly engage in any outside business or financial activity that will, in any way,
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conflict with the interests of the Foundation, or that interferes with an employee’s ability to fully
perform his/her duties. 15 The prior policy also said that conducting conflicting activity “will
result in termination of employment.”16 In addition, an employee who receives honoraria or
other payments from a third party because of his/her relationship with the Foundation must
disclose such payments to the Legal Department. 17 Conflicts also include acceptance of gifts of
more than $100, or participation in any outside employment or business activity that conflicts
with the interests of the Foundation or interferes with the employee’s duties and responsibilities
to the Foundation.18
Recommendation: We recommend that the Board set “tone at the top” by
encouraging a culture of compliance. We recommend that the CEO direct the Director of
Human Resources to conduct regular training sessions regarding Foundation policies in
furtherance of the culture of compliance. We recommend that the Board direct
Foundation management to ensure that staff is aware of reporting lines and that managers
at all levels are aware of their responsibility to enforce policies.
C.

Management
Interviewees believe that the Foundation must have stronger management.

Interviewees reported a “leadership vacuum” at the Foundation because management is not
physically present in the New York office on a regular basis. We understand that the CEO and
General Counsel spends a substantial amount of time in Little Rock, the COO spends a
substantial amount of time in Haiti, the CFO is located in Little Rock, and the Assistant General

15

See Foundation Code of Conduct at 16.

16

See 2007 Foundation Employee Handbook at 9.

17

See Foundation Code of Conduct at 7.

18

See Foundation Code of Conduct at 7.

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Counsel is located in Chicago. Interviewees also reported that there is no clear “command and
control” structure. They also reported that senior and/or full staff meetings have not been held
on a regular basis for some time. The lack of strong management also results in lack of
communication between departments and initiatives. We were told that meetings among
initiatives are not held and initiatives are “siloed” from each other. Interviewees believe that
they could learn much from each other and “cross-pollinate” if they were to meet regularly.
Recommendation: We recommend that the Foundation hire and empower a
strong Chief Operating Officer based in New York on a full-time basis. (We also note that
the President title is available, if the Board determines this is appropriate.) We
recommend that the Board, the CEO, and the Director of Human Resources work to define
the role of the new COO (e.g., should the COO be responsible for operations and
administration, for strategy, for all internal functions) and determine the proper
relationship between the CEO and the COO. We also recommend that the COO job
description make clear that the COO is accountable for ensuring compliance with all
Foundation policies and creating a culture of compliance.
Recommendation: We recommend that the new COO and the Director of
Human Resources work to develop clear reporting lines for all Foundation employees.
Recommendation: We recommend that the new COO and the Director of
Human Resources develop and conduct regular staff meetings as well as management
training for all managers. We recommend that the COO communicate that managers are
responsible for compliance with all Foundation policies and that managers’ performance
will be evaluated on this basis. We recommend that the Board hold the CEO and the COO
accountable for improving management.

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D.

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Lack of Internal Controls
The Foundation’s auditors have, in 2009 and 2010, indicated that material

weaknesses exist including variously in segregation of accounting duties, review of journal
entries, audit adjustments and financial statement preparation, and lack of Board meetings. The
auditors also noted that books are kept on a cash, not an accrual basis. These issues do not
appear to have been addressed by the Board. Separately, interviewees reported their belief that
certain employees abuse expense privileges (e.g., charging the Foundation and President for
personal expenses) and do not follow the Foundation’s travel expense policy. The Foundation’s
travel expense policy requires that employees use the lowest commercial class airfare (unless the
airtime exceeds 14 hours and the employee is required to report to work the next day) and the
lowest available rates when making hotel and lodging reservations. 19 These problems were
mentioned by numerous interviewees. In addition, on Schedule J of the 2010 Form 990, the
Foundation reports that it provides companion travel but that it does not follow a written policy.
Public charities are permitted to pay for or reimburse ordinary and necessary
expenses incurred in carrying out activities, including the costs of travel. Expenses for
transportation, lodging, and meals must be documented to establish that they were incurred in
connection with the work of the organization and not the personal activities of the individual.
The law requires that these expenses not be “lavish or extravagant under the circumstances,”
though “lavish” and “extravagant” are not defined in the tax code or in regulations. Travel
expenses that are paid for or reimbursed but that are not properly documented, are “lavish or
extravagant,” or are for non-business companions must be treated as additional taxable
compensation to the individual benefiting from them. The law requires public charities intending
to treat an expenditure as compensation to provide contemporaneous written substantiation by
19

See Foundation Code of Conduct, Addendum II at 29-30.

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reporting the amounts on a Form W-2, a Form 1099, or a Form 990, or otherwise documenting
such compensation in writing; otherwise, federal tax law requires that such compensation be
treated as an “automatic excess benefit.” Board members and executives of charitable
organizations who receive excessive travel benefits are subject to penalties unless they correct
the transaction by returning the excess benefit amount to the charity. See Appendix B. Excess
benefit transactions must also be self-reported on the annual information return (Form 990),
which is signed under penalties of perjury and filed with the IRS and publicly available on the
web.
The Nonprofit Panel Report recommends that charitable organizations that pay for
or reimburse travel expenses of board members, officers, employees, consultants, volunteers, or
others traveling to conduct the business of the organization establish and implement policies that
provide clear guidance on their travel rules, including the types of expenses that can be
reimbursed and the documentation required to receive reimbursement. Such policies should
require that travel on behalf of the charitable organization is to be undertaken in a cost-effective
manner. The travel policy should be provided to and adhered to by anyone traveling on behalf of
the organization. Charitable organizations should not pay for or reimburse travel expenditures
(not including de minimis expenses of those attending an activity such as a meal function of the
organization) for spouses, dependents, or others who are accompanying individuals conducting
business for the organization unless they, too, are conducting business for the organization.
One of the primary duties of the board of directors of a charitable organization is
to ensure that all financial matters of the organization are conducted legally, ethically, and in
accordance with proper accounting rules.
Recommendation: We recommend that the new COO work with the CFO
and the Foundation’s auditor to review and propose to the Audit Committee improved
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internal controls. We recommend that the Audit Committee present those
recommendations to the full Board for approval.
Recommendation: We recommend that the CFO or his designees review all
expenses to ensure that they comply with the Foundation’s policies. We recommend that
the COO work with the Director of Human Resources to educate staff as to the
Foundation’s expense policies. We encourage training of all employees as to expense
reimbursement procedures.
Recommendation: We recommend that the Board adopt a policy prohibiting
spousal or companion travel, unless there is a business purpose for such person’s travel.
We note that the provision or reimbursement of travel expenses for spouses or companions
of directors, officers, and other key employees, if not treated as compensation, is an
automatic excess benefit for the person receiving the benefit, and such person will be
subject to penalties.
*

*

*

The recommendations above apply equally to each of CGI, CHAI and the
Alliance. We would be happy to discuss and answer any questions you may have regarding this
memorandum.
VBB
JIR
Appendix A
Appendix B
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we
inform you that any tax advice contained in this communication (including any enclosures) was
not intended or written to be used, and cannot be used, for the purposes of (i) avoiding taxrelated penalties under federal, state or local tax law or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed herein.

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