Nonprofit Agency Governance and Executive Compensation, 74721-74723 [E5-7439]

Agencies

• Committee for Purchase From People Who Are Blind or Severely Disabled

[Federal Register Volume 70, Number 241 (Friday, December 16, 2005)]
[Proposed Rules]
[Pages 74721-74723]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-7439]


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COMMITTEE FOR PURCHASE FROM PEOPLE WHO ARE BLIND OR SEVERELY DISABLED

41 CFR Parts 51-2, 51-3, and 51-4


Nonprofit Agency Governance and Executive Compensation

AGENCY: Committee for Purchase From People Who Are Blind or Severely 
Disabled.

ACTION: Advanced notice of proposed rulemaking: Request for comments 
and notice of public hearings.

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SUMMARY: The Committee for Purchase From People Who Are Blind or 
Severely Disabled (the Committee) is considering revising its 
regulations regarding: The qualifications required of both central 
nonprofit agencies and nonprofit agencies to participate in the Javits-
Wagner-O'Day (JWOD) Program, and the guidelines under which executive 
compensation will be considered as either influencing or not 
influencing a fair market price. The Committee wants to ensure that 
Federal customers continue to receive high value products and services 
from JWOD affiliated central nonprofit agencies and nonprofit agencies 
and believes that these two areas merit further review at this time.
    Prior to initiating any formal rulemaking, the Committee is seeking 
further information and suggestions on: alternative approaches to 
determine that central nonprofit agencies and nonprofit agencies are 
initially qualified to participate in the JWOD Program and then 
qualified to continue to participate in the Program, and alternative 
approaches and mechanisms to assess that the fair market price set by 
the Committee and paid by Federal departments and agencies is not 
burdened inappropriately by excessive executive compensation costs.

DATES: The Committee will hold three public hearings. Hearings will be 
held on Thursday, January 12, 2006, in Arlington, VA; Thursday, January 
19, 2006, in Dallas, TX; and Thursday, January 26, 2006, in San 
Francisco, CA. Written comments from those that do not attend the 
hearings are also welcomed and must be received by January 31, 2006. 
The Committee will not consider comments pertaining to these hearings 
that are received after January 31, 2006.

ADDRESSES: The specific locations and times where the hearings will be 
held are:

1. Thursday, January 12, 2006, from 2 p.m. to 5 p.m., Crystal Gateway 
Marriott, 1700 Jefferson Davis Highway, Arlington, VA 22202.
2. Thursday, January 19, 2006 from 10 a.m. to 1 p.m., Red River 
Conference Room (7th Floor, Room 752). Earl Cabell Federal Office 
Building, 1100 Commerce Street, Dallas, TX 75242.
3. Thursday, January 26, 2006, from 10 a.m. to 1 p.m., California/
Nevada Room, Phillip Burton Federal Building, 450 Golden Gate Avenue, 
San Francisco, CA 94102.

    The Committee office is located at Jefferson Plaza 2, Suite 10800, 
1421 Jefferson Davis Highway, Arlington, VA 22202-3259.

FOR FURTHER INFORMATION CONTACT: For information about the hearings, 
submitting requests to testify, or submitting written comments contact 
Stephanie Hillmon, Assistant General Counsel, by telephone (703) 603-
7740; by facsimile at (703) 603-0030; by e-mail at 
RulesComment@jwod.gov; and by mail at the Committee for Purchase From 
People Who Are Blind or Severely Disabled, 1421 Jefferson Davis Hwy., 
Suite 10800, Arlington, VA 22202-3259. Office hours are between 7:30 
a.m. and 5 p.m., eastern standard time, Monday through Friday except 
Federal holidays.

SUPPLEMENTARY INFORMATION: Pursuant to its statutory authority to 
determine suitability and the fair market price, the Committee plans to 
issue regulations that ensure that only qualified central nonprofit 
agencies and nonprofit agencies participate in the JWOD Program and 
that the fair market price charged to Federal customers is both 
reasonable and appropriate.

Public Hearings:

    Requests to testify must be received at the Committee office at 
least one week prior to the hearing date. Requests to testify should 
also indicate which hearing will be attended. Persons interested in 
providing oral testimony are encouraged, but not required, to submit 
written comments a week in advance of the hearings and testimony will 
be limited to the matters contained in this notice. The Committee staff 
will moderate the hearings. In the event that more people ask to 
testify than can be accommodated in the time allowed, the Committee 
will hear testimony from a cross-section of those wishing to testify, 
as determined by the Committee staff. Only one person from a particular 
organization may testify. Oral testimony shall not exceed 5 minutes.
    The public hearings and comment period are for the purpose of 
gathering information about implementing better mechanisms to ensure 
that only qualified central nonprofit agencies and nonprofit agencies 
participate in the JWOD Program and that the fair market

[[Page 74722]]

price established by the Committee is not affected by inappropriate 
executive compensation costs. The Committee plans to develop 
regulations that will achieve these objectives. The hearings are not 
intended as a forum for presentation or discussion of other issues to 
include the Committee's authority, redundancy, and similar issues. 
Testimony will only be heard and comments will only be considered that 
address the questions listed in this notice. In preparing testimony or 
written comments, the public is asked to address the questions 
presented below:

Background Information

    The Committee administers the JWOD Act, which leverages the Federal 
procurement system to provide employment for over 45,000 persons who 
are blind or have other severe disabilities. In Fiscal Year 2004, 
Federal customers purchased over $2 billion of goods and services from 
about 650 participating nonprofit agencies nationwide. The Committee 
anticipates additional growth in both the numbers of people employed 
through the program and in the dollar value of Federal funds used to 
purchase goods and services. The Committee strongly believes that 
accountability, stewardship, and value form the foundation for 
maintaining and growing employment opportunities for people who are 
blind or have other severe disabilities. With the increasing size, 
scope, and complexity of the JWOD Program, the Committee believes it is 
appropriate to review its regulations and policies to insure proper 
accountability standards, provide effective stewardship, and 
demonstrate a strong value proposition for Federal customers.
    As established in 41 U.S.C. 47(a)(2), the Committee determines the 
suitability of products and services which, if added to the Committee's 
Procurement List, must be purchased by Federal departments and agencies 
requiring those items or services. Under the Committee's regulations, 
41 CFR 51-2.4(a), there are currently four criteria used to assess the 
suitability of a proposed product or service: (1) The potential for 
employing people who are blind or severely disabled; (2) the 
qualifications of the nonprofit agency; (3) the capability of the 
nonprofit agency to meet Government quality standards and delivery 
times; (4) and the level of impact on the current or most recent 
contractor if the product or service were to be added to the 
Procurement List. The Committee has statutory authority to determine 
which central nonprofit agencies and nonprofit agencies are qualified 
to participate in the JWOD Program. The Committee is considering 
revising its regulations concerning the qualifications required of both 
designated central nonprofit agencies and all other nonprofit agencies 
to participate in the JWOD Program. The Committee is interested in 
identifying and applying qualification standards through which central 
nonprofit agencies and participating nonprofit agencies would 
demonstrate good governance practices and therefore be qualified to 
participate in the Program.
    If a proposed product or service is determined to be suitable, the 
Committee has the sole responsibility under the JWOD Act to set the 
fair market price to be paid by the Government customer. The Committee 
is also seeking information on suggested criteria to identify and 
evaluate the impact of executive compensation costs on any proposed or 
recommended fair market price.

Qualified Agencies Have Good Governance Practices

    There are a number of criteria and tests that are widely considered 
as benchmarks of good nonprofit agency governance practices. The 
Committee believes the following to be representative of such ``best 
practices'' but not all-inclusive:
    (1) The board of directors (the board) should be composed of 
individuals who are personally committed to the mission of the 
organization and possess the specific skills needed to accomplish the 
mission.
    (2) Where an employee of the organization is a voting member of the 
board, the circumstances must insure that the employee will not be in a 
position to exercise ``undue influence.''
    (3) The board should have no fewer than five unrelated directors. 
Seven or more directors are preferable. The board chairperson should 
not also be serving as the nonprofit agency's CEO/President.
    (4) The organization's bylaws should set forth term limits for the 
service of board members.
    (5) Board membership should reflect the diversity of the 
communities served by the organization.
    (6) Board members should serve without compensation for their 
service as board members. Board members may be reimbursed only for 
expenses directly related to carrying out their board service.
    (7) The full board or some designated committee of the board should 
hire the executive director, set the executive's compensation, and 
evaluate the director's performance at least annually. In cases where a 
designated committee performs this responsibility, details should be 
reported to the full board.
    (8) The board should periodically review the appropriateness of the 
overall compensation structure of the organization.
    (9) The full board should approve the findings of the 
organization's annual audit and ``management letter'' and approve a 
plan to implement the recommendations of the management letter.
    (10) Nonprofits should have a written conflict of interest policy. 
The policy should be applicable to board members and staff, who have 
significant independent decision-making authority regarding the 
resources of the organization. The policy should identify the types of 
conduct or transactions that raise conflict of interest concerns, 
should set forth procedures for disclosure of actual or potential 
conflicts, and should provide for review of individual transactions by 
the uninvolved members of the board of directors.
    (11) The accuracy of the agency's financial reports should be 
subject to audit by a Certified Public Accountant. The board of 
directors should have at least one ``financial expert'' serving;
    (12) Nonprofit agencies should periodically conduct an internal 
review of the organization's compliance with existing statutory, 
regulatory and financial reporting requirements and should provide a 
summary of the results of the review to members of the board of 
directors.
    (13) Nonprofit agencies should prepare, and make available annually 
to the public, information about the organization's mission, program 
activities, and basic audited (if applicable) financial data. The 
report should also identify the names of the organization's board of 
directors and executive management staff.
    (14) Executive compensation paid to the Chief Executive Officer 
(CEO)/President and ``highly compensated individuals'' must be 
monitored by the board of directors. The full board should approve all 
compensation packages for the CEO/President and all highly compensated 
employees through a ``rebuttable presumption'' process to determine 
reasonableness.
    The Committee is seeking further information and perspective in the 
following areas related to governance practices:
    (1) Are these criteria comprehensive and inclusive enough to 
effectively evaluate that a nonprofit agency demonstrates good 
governance practices

[[Page 74723]]

and should be deemed qualified to participate in the JWOD Program?
    (2) Are there additional criteria that should be used, or 
substituted for the above, to evaluate evidence of good governance 
practices by nonprofit agencies in the Program?
    (3) Should accreditation by one or more state or national 
organizations be recognized as evidence of a nonprofit agency adhering 
to good governance practices without further review by the Committee?
    (4) Should different benchmarks be used for nonprofit agencies that 
are state, county, or local government agencies, or should they be 
exempt from any Committee regulations in this area?
    (5) Should the size and/or the annual revenue of the nonprofit 
agency be a factor or factors in assessing appropriate governance 
practices?
    (6) What is the best way to ensure that only qualified central 
nonprofit agencies and nonprofit agencies, with an internal structure 
that minimizes opportunities for impropriety, participate in the JWOD 
Program?
    (7) What if any enforcement mechanisms should be adopted to ensure 
only the qualified central nonprofit agencies and nonprofit agencies 
participate in the JWOD Program?
    (8) What steps will the nonprofit agencies and central nonprofit 
agencies need to take to avoid conflicts of interest among its board 
members?
    (9) What steps will the nonprofit agencies and central nonprofit 
agencies have to take to demonstrate financial responsibility?

Effect of Executive Compensation on Fair Market Price Determinations

    Board involvement in setting the compensation of the CEO/President 
and other highly compensated employees is one of the benchmarks of 
effective nonprofit governance practices. In furtherance of assessing 
information used to set the initial fair market price for products and 
services added to the Procurement List, and then periodic adjustments 
to the price thereafter, the Committee is seeking information on the 
following:
    (1) What is the threshold beyond which the compensation paid to the 
executives in a JWOD-participating nonprofit agency should be 
considered as influencing a proposed fair market price determination? 
For example, if the agency receives more than a certain percentage of 
its total revenue from sales through the JWOD Program, is there a 
compensation level (total dollars paid or total dollars paid as a 
percentage of total revenue) at and above which fair market price 
impact would be deemed to occur?
    (2) Conversely, is there a point below which executive 
compensation, regardless of the dollar amount paid, would not be 
considered as influencing a recommended fair market price? Is such a de 
minimis test appropriate for large diversified nonprofits where total 
JWOD sales represent only a small percentage of total revenue?
    (3) Without regard to any analysis of JWOD-related revenue, is 
there an established benchmark or absolute dollar threshold above which 
compensation would be deemed as influencing a proposed fair market 
price?
    (4) Should receipt of documentation to support a ``rebuttable 
presumption of reasonableness'' serve to demonstrate that executive 
compensation does not by itself influence a proposed fair market price 
or any adjustment thereto?
    (5) To what extent should there be a relationship between the pay 
and compensation of line workers and highly compensated individuals?
    (6) At what point would be appropriate to begin a review of an 
executive compensation package even if the proposed price for a product 
or service would fall within a range that it could be considered as a 
fair market price?
    (7) What approaches are available to identity and monitor nonprofit 
agencies executive compensation that would provide such information to 
the Committee routinely but without placing an undue burden on 
agencies?

Definitions of Terms in Quotation Marks Above

    (1) A ``financial expert'' is a director that must understand GAAP 
and financial statements, have the ability to assess the general 
application of such principles in connection with the accounting for 
estimates, accruals and reserves, have experience preparing, auditing, 
analyzing or evaluating financial statements that present a breadth and 
level of complexity of accounting issues that are generally comparable 
to the breadth and complexity of issues that can reasonably be expected 
to be raised by the registrant's financial statements, or experience 
actively supervising one or more persons engaged in such activities, 
have an understanding of internal controls and the procedures for 
financial reporting, and have an understanding of audit committee 
functions.
    (2) A ``rebuttable presumption of reasonableness'' requires the 
maintaining a board of independent members, requires the Board of 
Directors to approve compensation arrangements for highly paid 
executives and individuals using independent comparative salary data 
gathered from similar organizations for similar executive positions, 
and documents all data used in decision making for compensation 
packages including all annual compensation, incentive compensation 
plans, long-term incentive plans, supplemental retirement plans, wrap-
around Section 401K plans, deferred compensation arrangements and 
benefits.
    (3) A ``highly compensated individual'' is an individual:
    (i) With a year's compensation in excess of $90,000.00; or
    (ii) Who had compensation within the previous year which was in 
excess of $90,000.00; or
    (iii) At the election of the employer had compensation in excess of 
$90,000.00 and was in the top 20 percent of employees by compensation 
for any year.
    (4) ``Undue influence'' is prohibited and occurs when an officer, 
director, or employee of the agency directly or indirectly takes any 
action to coerce, manipulate, mislead, or fraudulently influence the 
agencies' audit committee, Directors, CEO/President or any individual 
that has authority or power to influence the preceding persons.
    (5) A ``management letter'' is a technical letter, which is 
prepared by an auditor or audit committee.

Patrick Rowe,
Deputy Executive Director, Committee for Purchase From People Who Are 
Blind or Severely Disabled.
[FR Doc. E5-7439 Filed 12-15-05; 8:45 am]
BILLING CODE 6353-01-P