Academic journal article Journal of Corporation Law

The Fiduciary Duties of Nonprofit Directors and Officers: Paradoxes, Problems, and Proposed Reforms

Academic journal article Journal of Corporation Law

The Fiduciary Duties of Nonprofit Directors and Officers: Paradoxes, Problems, and Proposed Reforms

Article excerpt

Harvey J. Goldschmid*

I. INTRODUCTION: PARADOXES AND PROBLEMS

A. Paradoxes

Consideration of the fiduciary duties of directors and officers of nonprofit institutions1 necessitates grappling with a series of problematic paradoxes. Nonprofit directors and officers generally operate under the same legal standards under state law in terms of managerial obligations and the duties of loyalty and care as their for-profit peers. However, in contrast to the for-profit world, the law plays little role, other than aspirational, in assuring accountability in the nonprofit sector. Moreover, the roles of directors of nonprofit institutions are more demanding and complex than those of their for-profit peers,2 but almost all evidence suggests that nonprofit directors provide less oversight, less effective participation in decision-making, and in general, less effective governance than their peers in comparable for-profit corporations.3 Perhaps the central paradox of nonprofit corporate governance, particularly for friends and admirers of the nonprofit sector like me, is the fact that the nation's nonprofit institutions are the recipients of so much public and private largess-in terms of gifts, grants, tax benefits, volunteer efforts, and other subsidies-and yet are subjected to so few accountability constraints.

There would be no reason for concern about these paradoxes, particularly about the relative absence of accountability constraints, if one could assume that a personal sense of responsibility, pride, decency, peer pressures, and similar factors were making the nonprofit governance system work effectively. But there is much evidence, largely anecdotal, to the contrary. A recent piece in the Harvard Business Review began: "Effective governance by the board of a nonprofit organization is a rare and unnatural act."4 Similarly, Professor James J. Fishman concluded:

Because nonprofits tend to have many directors who are on the board for "window dressing" only, a common phenomenon of nonprofit boards is directors who do not direct. The "figurehead" directors assume non-involved roles on the board, rarely attending meetings, and certainly never involving themselves in oversight responsibilities. They are corrosive to nonprofit corporations in that they allow employees or fellow directors to dominate the organization.5

Although serious empirical evidence is not available, it seems entirely likely that ineffective nonprofit corporate governance has had a significant negative impact on the capacity of nonprofit corporations to carry out their missions.6 Of even greater concern are recent well-publicized scandals in the duty of loyalty area.7 Improper self-dealing and other duty of loyalty violations threaten to undermine the trust and goodwill necessary for the nonprofit sector to function successfully. The following review of three recent serious governance failures, by different types of nonprofit corporations, illustrates the cost to the nonprofit community of the absence of accountability constraints.

B. Problems: United Way, Adelphi, and Nonprofit Conversion Transactions Illustrate Reasons for Concern

In December 1991, officers of the United Way of America (UWA) learned that two reporters from The Washington Post were investigating allegations that then-UWA President William Aramony was misusing funds and resources to enhance his personal lifestyle.8 According to the Executive Summary of a report later prepared for the Board of Governors of UWA: "[I]t was alleged that Mr. Aramony used UWA funds, both directly and through the use of organizations which had been spun off from UWA operations, to rent limousines, to take transatlantic flights on the Concorde, and to reward friends and family members with jobs, board memberships, and consulting contracts."9 Aramony, who had been chief staff officer10 or president of UWA from 1970 until his resignation in February 1992, was ultimately indicted, convicted,ll and most of his conviction was affirmed on appeal. …

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