Board members of foundations often feel that they should have some right to remuneration, even if it is only an expense allowance. How does that work? In the previous column, I pointed out that there is no objection whatsoever to granting an attendance fee and/or an expense allowance. But, such remuneration also raises questions. For instance the question about the tax consequences, as well as the amount of the expense allowance. Thirdly, who exactly determines the amount of this remuneration? The question whether you can also be paid extra for additional services as a board member is also interesting. And to conclude, there’s the question whether someone can be an employee and a board member of a foundation at the same time. This column discusses those five questions.
For tax purposes, only realistic expense allowances are accepted. A kilometer allowance of ANG 1.50 per kilometer is not realistic, nor is an allowance for telephone expenses of ANG 400 per month. A deduction for private use will be applied at least, but the surplus may also be considered income. In that case, income tax must be paid. In addition, some foundations provide general remunerations , ranging from some hundreds of guilders to several times this amount. Insofar as taxes are concerned, the board members are compensated quite often by grossing up these amounts or by paying net amounts. This could lead to serious problems with the tax authorities for both the persons involved and the foundation itself. Partly because the social insurance contributions to be paid also depend on the total income of each board member individually. This leads to considerable administrative work for the foundation. It is therefore recommended to consult a tax attorney first.
Secondly, the amount of the remuneration. It is good to realize that it is never enough. The accountant who also is the treasurer of the foundation will never be able to charge his hourly rate. You are doing it for the good cause, for the honor, for the experience or whatever. You are not doing it for the money. Then you should take a normal job. Therefore, the remuneration should always be somewhat symbolic.
Thirdly, the question as to who determines the amount of the remuneration. In principle, the board of the foundation holds all the power. The bylaws usually do not mention anything about the remuneration. Sometimes, the bylaws state that only expense allowances may be granted. The board therefore determines the amount of its own remuneration. This could be a conflict of interests. Outsiders can easily say that the board is enriching itself at the expense of the often subsidized resources. This may not be the case, but that appearance should be avoided. Conducting an independent study on a reasonable remuneration is a good solution. The size, turnover and number of staff members in the foundation will be considered, as well as the average time spent by the board members. In case of one or more permanent subsidy providers, it is wise to consult with these donors as well. It should be noted that this is easier for associations, as – in principle – its members’ meeting determines the amount of the director’s remunerations.
Fourthly, there is the question whether board members providing additional services to the foundation based on their specific expertise, may be remunerated for this in line with market conditions. They may indeed. The question is, however, whether this is wise. In my opinion, it isn’t. If the accountant-treasurer prepares the financial statements of the foundation and receives a separate remuneration for this in addition to his director’s remuneration, a conflict of interests will arise. What should you do when there are errors in the financial statements? Would that be the fault of the board member (and therefore of the entire board), or the fault of the client of the board? The same applies to the lawyer on the board and to the plumber. If they perform work for the foundation in a professional capacity, they should do so for free. Otherwise, the foundation would do well to engage a third party. This is more expensive, but also more transparent.
Fifthly, the question whether a board member of a foundation can also be an employee of that foundation. That is not possible, as this could lead to a particularly undesirable conflict of interests. A foundation may have a director, but that director would then be an employee of the foundation. The board of the foundation acts as an employer with respect to the director. You cannot be employer and employee at the same time. The director may receive a salary in line with market conditions, for that matter. In this situation, the director/employee receives a much higher remuneration than the board members. In case you find this undesirable as a board member (“the director earns much more than I do, but I am actually much more competent and also his boss”), it is best to retire. You are better of without people with $-signs in their eyes on your board. If they are only in it for the money, they should look for a paid job.
Do you have a question about corporate governance yourself? Please e-mail it to firstname.lastname@example.org and perhaps your question will be discussed in the next blogpost.