Making the rounds at law schools for Good Counsel: Meeting the Legal Needs of Nonprofits, I’m heartened to meet so many students interested in serving on charities boards in their communities. My recent talk at Harvard Law School about how law students and young lawyers can start preparing for the trustee role is available here.
Although nonprofit organizations can make a big impact, they tend to have tiny or nonexistent legal teams. Even for the lucky few charities with a lawyer in-house or close by, it’s impossible for one attorney to know enough about all the different areas of law to be able to address all the organization’s needs. Fortunately, there is plenty of good will in the legal profession for good causes. Pro bono legal services are quite literally yours for the asking. Here’s how.
And here’s more.
In the nonprofit setting, misconceptions about corporate governance abound. Are board members primarily fundraisers? Cheerleaders? A rubber stamp to legitimize the actions and decisions of the executives? Do they run the organization to the extent staff is unable? Are they window-dressing to spruce up the organization’s letterhead? If they are rich or famous, must they attend board meetings? How do they know whether they are doing a good job, or when it is time to go? Despite nonprofit and for-profit corporations’ common ancestry and legal underpinnings, nonprofit corporate governance places heightened demands on trustees: a larger mix of stakeholders, a more complex economic model, and a lack of external accountability. This post, excerpted from Lesley Rosenthal‘s Good Counsel: Meeting the Legal Needs of Nonprofits and originally appearing in the Harvard Corporate Governance Forum, explores how substituting a charitable purpose for shareholders’ interests affects the board’s role.
In organizations of all kinds, good governance starts with the board of directors. The board’s role and legal obligation is to oversee the administration (management) of the organization and ensure that the organization fulfills its mission. Good board members monitor, guide, and enable good management; they do not do it themselves. The board generally has decision-making powers regarding matters of policy, direction, strategy, and governance of the organization.
The board of a well-governed nonprofit organization, like the board of a well-governed profit-making company, will do all of the following:
- Formulate key corporate policies and strategic goals, focusing both on near-term and longer-term challenges and opportunities.
- Authorize major transactions or other actions.
- Oversee matters critical to the health of the organization— not decisions or approvals about specific matters, which is management’s role—but instead those involving fundamental matters such as the viability of its business model, the integrity of its internal systems and controls, and the accuracy of its financial statements.
- Evaluate and help manage risk.
- Steward the resources of the organization for the longer run, not just by carefully reviewing annual budgets and evaluating operations but also by encouraging foresight through several budget cycles, considering investments in light of future evolution, and planning for future capital needs.
- Mentor senior management, provide resources, advice and introductions to help facilitate operations.
Similar to for-profit corporations, the power to control and oversee the management of the affairs and concerns of a nonprofit corporation is set forth in its corporate charter. Generally speaking, state law permits both kinds of corporations to self-direct significant allocations of power and responsibility, and then requires them to follow their own corporate governance and operational policies. The familiar fiduciary duties of care, loyalty, and – sometimes – obedience, undergird these requirements in both sectors.
In a well-governed organization of either the for-profit or nonprofit kind, the board does not permit executives to run and dominate board meetings, set agendas, or determine what information will be provided to board members. Under the leadership of an active and functioning board chair, there is adequate opportunity at board meetings for members to receive and discuss reports from not only the chief executive, but also, as appropriate, directly from other executives, in-house and outside professionals, and independent consultants if necessary. Time should be reserved for executive sessions, at which management should be excluded so that its performance may be fully and freely discussed.
Mission is what distinguishes nonprofits from their for-profit cousins: Nonprofits have missions instead of owners or shareholders. While the prime directive for board members of for-profit organizations is to ensure the highest possible value for owners, by contrast, nonprofit board members’ prime directive is mission fulfillment.
Board independence and board attention are of paramount importance in good nonprofit governance. The independence of the board is key because of the non-distribution constraint – nonprofits exist to serve the public interest, not to benefit owners or other private parties. Business or family relationships between the organization or its executives and a board member or her firm are frowned upon and should be strictly scrutinized under a conflict of interest policy administered by independent directors. Even absent outright business or family relationships, a common shortcoming of nonprofit boards is that they are too small, too insular, or too deferential to the founder or chief executive.
Another frequent error of nonprofit boards is inviting new members because of their marquee name within a certain field of endeavor (e.g., a famous dancer on the board of a dance organization) or their means and inclination to donate, without due consideration to the person’s ability and availability to fulfill fiduciary duties, providing the critical oversight function. The governing body of a nonprofit must be made up entirely of people in a position to govern it—setting the strategic direction of the organization and overseeing management’s execution of the mission. Wealthy or prominent persons— donors, artists, scientists, public officials, and others—with an interest in the organization’s program but lacking the time, availability, or expertise to provide meaningful oversight may serve the organization in a non-fiduciary capacity, such as an honorary or advisory board, donors’ circle, or professional council.
Governance is more complex in charitable nonprofits for a number of reasons. Public charities (501(c)(3) organizations) are intended to serve a public purpose, and the board must bear in mind that broad interest. Depending on its mission, history, and geographic reach, a nonprofit may also have specific stakeholders or different groups of stakeholders, some or all of whom may be represented by categories of board members under the organization’s by-laws. The interests of the organization’s ultimate clients, who may be indigent or otherwise disadvantaged, are another important consideration. The organization’s management and workforce may be paid less than their for-profit peers for similar work – if at all – further complicating the board’s oversight duties. In addition, nonprofit trustees may feel role-strain – or worse – because of real or perceived obligations to interact with, attract – or even be – charitable donors. These additional factors make nonprofit board decision-making arguably a much more complex process than the straightforward mandate of maximizing return.
Moreover, nonprofits’ economic models may be more complex than for-profits’ models, including a dynamic blend of earned revenue (ticket sales for a symphony, fee-for-service billings by a hospital, tuition payments to a university) and contributed income (annual fundraisers, “Friends of” membership groups, end-of-year solicitations, capital campaigns). Wealthier nonprofits with endowments can also count on a stream of revenues from investments. In harsh economic climates, however, there is a high correlation between reduced contributions and weaker investment returns. Compounding the difficulty, hard times on the revenue side often coincide with heightened demand for organizations’ services, particularly social services, increasing expenses and creating cash crunches, trouble balancing budgets, or even persistent deficits. Savvy nonprofits have added “third streams” of revenue to supplement and diversify traditional two sources. Entrepreneurial initiatives may include leveraging real estate or other assets, monetizing treasure troves of intellectual property know-how, or engaging in joint ventures with fellow nonprofits or even commercial entities. In envisioning and evaluating such enterprises, board and management must observe regulatory requirements and consider tax implications. In lean years and in growth years, the board must be deeply engaged in overseeing the organization’s investments, its other sources of revenue and expense, and the planning of new initiatives.
What happens when board members fail? In theory, the mechanism in a for-profit corporation for correcting errant board members is straightforward: if the investors don’t like what the directors are doing, they vote them out of office. But in the absence of investors, nonprofit boards must be self-correcting. No one has ever made a tender offer because a nonprofit was inefficient. Moreover, governmental agencies regulating the sector tend to be small and under-resourced, making it highly unlikely that any but the most obvious misconduct will be detected and corrected from the outside. Unless board members are doing something illegal or are term-limited out of office, they may serve in perpetuity, giving them ultimate power over the organization. In this regard, nonprofit trusteeship is a unique and privileged role.
By a number of measures, nonprofit and for-profit board governance are similar: the board’s oversight role, its decision-making power, its structural place within the organization, and its members’ legal duties. The similarities end, however, where shareholder interest in maximizing returns gives way to mission fulfillment, a multiplicity of stakeholders, more complex business models, and self-accountability rather than external accountability.
Good Counsel: Meeting the Legal Needs of Nonprofits
by Lesley Rosenthal
(John Wiley & Sons 2012)
As I embarked on writing Good Counsel: Meeting the Legal Needs of Nonprofits, well-meaning and concerned folks cited at least three reasons why no one had written such a book before, and (implicitly) why I shouldn’t try: it’s too dangerous, too hard, too scary.
The “too-dangerous” crowd, personified by some of the most successful leaders of nonprofit turnarounds on several continents, worried that legal information in non-lawyers’ hands would result in the unlicensed practice of law by a bunch of irresponsible, budget-strapped do-it-yourself nonprofiteers. Who knows what kinds of mission mischief non-lawyers would make with their newfound knowledge – the legal equivalent of sewing your own sutures! Fortunately my own boss, the President of Lincoln Center, and several of my other mentors before him, including a former Bar Association president and a federal judge, helped forge my conviction that the law belongs to the people. They encouraged my desire to put it into plain English for all to know.
The “too-hard” folks, also well meaning, recognized the enormous variety of laws that commonly arise in nonprofits and thought it impossible to provide a general overview in one volume. I know what they meant: the tangle of specialized state and federal laws that make our sector one of the most highly regulated in the whole economy, such as state nonprofit corporations laws, Section 501(c) of the internal revenue code, IRS rules, regulations and expectations surrounding the tax exemption and good governance, multi-level filing and disclosure requirements, pension, endowment and investment laws, lobbying restrictions, and a web of 50 different states’ fundraising laws. Many fine books have been written on each of these subjects, but rare is the legal resource that touches upon them all. Then, the skeptics continued, there are also general business laws that apply to these organizations – contract law, labor and employment laws, intellectual property laws, consumer regulatory laws, real estate laws, building codes and more. And business laws apply to the nonprofit sector in weird ways not necessarily intended by lawmakers, forcing volunteer-driven organizations, for example, to think long and hard about how to structure their activities to comply with minimum wage and hours laws. Pile on top of all of those layers the additional specialized laws that apply to the wide world of nonprofits, such as FDA regs for blood banks, student privacy laws for higher ed, permitting and accreditation for hospitals and mental health facilities and so on, and the whole enterprise of writing a book about the legal context of nonprofits threatens to die under its own weight.
The “too-scary” people are the most sympathetic people of all. They are the good-hearted lawyers who are already serving as counsel, as board members – or as both simultaneously – to nonprofit organizations. Their values may line up perfectly with the mission of the organization they serve – an elder care lawyer, for example, serving on the board of a community-based senior center, a real estate lawyer counseling a neighborhood development organization, a sports and entertainment lawyer doing board duty on her town’s local Little League or scout troop – but their legal expertise may be far afield of the legal issues facing the organization. It scares them to no end when a legal question arises in the boardroom and all eyes turn toward them. UBIT – what’s that? Conflict of interest policy pertaining to co-investment interests? Ugh. Section 501(h) election for lobbying activities? Isn’t this meeting almost over? They could have just begged off answering these questions – that’s not my area of law, you see, you wouldn’t ask a dermatologist about your chest pains, would you? – if only Good Counsel didn’t exist to connect the dots between the law they do know and the law they need to know to better serve their favorite charity.
Good Counsel is intended – charitably – to defy all three objections. In 300 pages it places the law of nonprofits in the hands of board members that oversee and executives that actually run the organizations – CEOs, CFOs, program managers and staff, fundraisers, personnel directors, communications professionals, operations and facilities managers and more. Does it answer every question? No. Does it sensitize non-lawyers to common legal issues in the highly regulated context in which they operate? I sure hope so.
Lawyers who make their living practicing in this field needn’t worry that this one volume will displace them; to the contrary, placed in the right hands, the book will generate more sophisticated questions and ultimately more and better client relationships. Corporate and transactional lawyers who have not yet found an outlet for their volunteer yearnings – because it seems that most pro bono projects are more aligned with the skills of litigators, not business lawyers – may feel empowered to see how readily they can translate what they know to the legal needs of prospective nonprofit corporate clients.
Law school deans concerned about the criticism being leveled at the entire enterprise of legal education may find a path forward in Good Counsel. With case studies, work plans and focus questions following each chapter, the book lays out a path for law students supervised by clinical professors to engage with a particular nonprofit organization and assess its legal needs – growing the students’ legal skills and stretching their capacities as counselors in ways that will serve them well even if they do end up in private practice after graduation, as most do.
And the legal profession, which despite the canon of lawyer jokes is as public-spirited as any I know, may find that Good Counsel can be used to foster and strengthen more pro bono relationships between lawyers and organizations. There is a great deal of goodwill for nonprofit organizations among public-spirited lawyers. I know, because I have been both a purveyor and voracious consumer of pro bono legal services, that there is more time and willingness to serve among the legal profession than has been fully tapped to date. A pilot program of the New York State Bar Association and the New York Attorney General’s Office Charities Bureau has adopted Good Counsel as a training resource for that very purpose: to help launch up to 50 new pro bono relationships between lawyers and charities in the initial pilot year of a program called Charity Corps: Lawyers Helping Nonprofits.
Far too many of our nation’s one million public charities lack regular access to counsel. At the same time, good-hearted lawyers are floundering in their efforts to help their favorite nonprofits, or are afraid to try because they think the field is so distant from subject matter they know. Law students graduate in debt up to their ears but lacking the practical skills they need to begin servicing clients after law school. Good Counsel is a playbook, intended for all three audiences.
And while I admit it was a little hard, scary and dangerous, ultimately there were far more supporters than skeptics for this project. I invite readers – lawyers, nonprofit leaders, and academics – to take a look and let me know if it works.
Schedule of upcoming Good Counsel events in NYC, LA, Detroit, Miami, Philadelphia, Boston, DC and Buffalo, NY available on www.facebook.com/GoodCounselBook or at the book’s website, www.goodcounselbook.com.
Available for purchase at http://www.amazon.com/dp/1118084047/ref=rdr_ext_tmb
Review copies for academics, media, upon request to email@example.com
Appearing in this week’s Crains New York Business:
Nonprofits Have Big Role in State
As Governor-Elect Andrew Cuomo and legislators shape their plans for New York next year, they should pay close attention to the state’s vibrant not-for-profit sector, as it is the standard-bearer for innovation and service to the state and its people. The 80,000 not-for-profit organizations in the state play crucial roles: leading efforts to prevent or cure disease, alleviate poverty, advance education, address environmental and social concerns, and ennoble through culture.
New York’s robust charitable sector, including such powerhouses as Columbia University, Sloan-Kettering, the Red Cross, the Ford Foundation and Lincoln Center, as well as community-based organizations, such as local drug-prevention programs, small community theaters and religion-based charities, help fuel the state’s economy, generating over $150 billion in revenue annually and employing hundreds of thousands of New Yorkers. Second in size only to the government as an employer in the city, the nonprofit sector provides more jobs than the financial and insurance industries combined.
Working together, state government and nonprofits can help maintain our state’s primacy as innovator, incubator and magnet for investment. Here’s how.
* Adjust taxes to encourage more giving. For example, reward taxpayers for increases in year-over-year charitable giving and incentivize artists to donate their work to charity auctions in support of good causes.
* Promote regulatory, administrative and legislative reforms that make it easier to start and operate nonprofits, especially in high-tech, medical research and green industries.
* Encourage and facilitate partnering among nonprofits and between them and for-profit businesses. For instance, provide a clearinghouse so that environmental groups can pair up with green-tech businesses or so arts-in-education organizations can collaborate with founders of charter schools.
* Incentivize nonprofits to hire recent college graduates to fill needed roles while they learn important lessons about professional development and social responsibility.
* Rearrange state budgets with existing charitable resources in mind. For example, recalibrate school aid and Medicaid expenditures so that public spending on students, the elderly and the disabled complements and stimulates private nonprofit resources and support.
* Safeguard against encroachments on sales- or property-tax -exemptions, which would hurt already-stretched hospitals, elder-care facilities and YMCAs.
* Promote visibility for worthy nonprofits by providing voluntary check-offs on state tax forms.
* Include nonprofit destinations in the state’s promotion of tourism and convention activity.
* Make nonprofits part of New York’s federal lobbying strategy.
The public’s trust in state government may be at a low ebb, but public support for nonprofits endures. By recommitting himself to the well-being of our valuable nonprofit institutions, Mr. Cuomo can take important steps toward reclaiming the state’s role as a national beacon and perpetuate its highest ideals.
Lesley Friedman Rosenthal is vice president and general counsel of Lincoln Center for the Performing Arts.
This weekend I participated in a historic vote by the NYS Bar Association’s House of Delegates to endorse gay marriage legislation. NYSBA is among the first statewide bar associations to back gay marriage and to urge the state legislature to enact the necessary amendment of state law to allow same-sex couples to marry and to recognize marriage if contracted elsewhere. Of particular interest is that just a few years ago this same organization passed a resolution taking a neutral stance as among three alternatives: gay marriage, civil unions and domestic parnership registries. Since 2005 the thinking of the vast majority of the members of the House has shifted to such an extent that the resolution endorsing gay marriage as the only acceptable guaranty of equal rights passed by a near-unanimous voice vote.
Many who spoke in favor of the resolution yesterday had voted against the much milder 2005 version. Influential, of course, have been the six states that have adopted gay marriage legislation since then. Also crucial was a report by the NYC Bar Association in 2007 that identified 1,324 ways in which New York State law benefits spouses only and are therefore denied to same sex-couples. The examples range from the mundane to the profound, e.g., laws which:
*Ensure that a spouse may not be disinherited and that he or she may take a share of a deceased spouse’s estate against the decedent’s will;
*Ensure that a child born to a married couple is legally presumed the natural child of the husband and wife for all purposes, including custody, visitation, and child support, even if the child was conceived through artificial insemination by a third party or born prior to the parents’ marriage;
*Award priority in public housing assignments and numerous other benefits to the surviving spouse of a deceased veteran;
*Enable spouses of military servicemembers to attend New York community colleges at the same cost as New York residents; and
*Require a spouse to continue supporting his or her ex-spouse even after divorce if the other spouse would otherwise be incapable of self-support and therefore likely to become a public charge.
Without civil marriage, these matters must be arranged for law-by-law or even family-by-family.
The NY State Assembly has already passed gay marriage legislation, but the State Senate – long a more conservative body (and at the moment a non-functioning one) – has taken the Bar Association’s neutrality on the topic as a signal that its members need not follow suit.
Yesterday’s vote sends a strong signal that gay marriage is not just a social issue but an important legal matter as well, and the only way to grant full equality to same-sex couples and their families.
Excerpts from Judicial Questionnaire filled out by Judge Sotomayor and released today to the public:
* * *
Q. The American Bar Association’s Commentary to its Code of Judicial Conduct states that it is inappropriate for a judge to hold membership in any organization that invidiously discriminates on the basis of race, sex, religion, or national origin. Indicate whether any of these organizations listed in response to 11a above currently discriminates or formerly discriminated on the basis of race, sex, religion, or national origin either through formal membership requirements or the practical implementation of membership policies. If so, describe any action you have taken to change these policies and practices.
A. None of the organizations [I belong to], other than the Belizean Grove, discriminates on the basis of race, sex, religion, or national origin. The Belizean Grove is a private organization of female professionals from the profit, non-profit and social sectors, but I do not consider the Belizean Grove to invidiously discriminate on the basis of sex in violation of the Code of Judicial Conduct.
* * *
Q. List Conferences, Symposia, Panel events participated in since ascending to Federal Bench
A. [among many others] I introduced guest speaker Antonin Scalia at an event at Hofstra Law School
* * *
A. [Feb. 09]: I moderated the “Confirmation Battles and Presidential Nominations” panel at the 2009 Federalist Society Student Symposium on Separation of Powers in American Constitutionalism.
* * *
Q. Published court decisions?
A. [among others] dissented in a child custody case under the Hague Convention; her questionnaire notes that her dissent was “favorably discussed” in subsequent legal opinions in the United Kingdom and South Africa. See Sonderup v. Tondelli,  1 SA 1171 (CC) at 22-24 (S. Afr.); In re D (A Child),  1 A.C. 619, 628-29, 634-35 (H.L.).
* * *
Q. Details of finances
A. [Provided, right down to the dentist bill]
* * *
Q. Describe your experience in the entire judicial selection process, from beginning to end (including the circumstances which led to your nomination and the interviews in which you participated). List all interviews or communications you had with anyone in the Executive Office of the President, Justice Department, or outside organizations or individuals at the behest of anyone in the Executive Office of the President or Justice Department regarding this nomination, the dates of such interviews or communications, and all persons present or participating in such interviews or communications. Do not include any contacts with Federal Bureau of Investigation personnel concerning your nomination.
A. I was contacted by Gregory Craig, White House Counsel, on Monday, April 27, 2009, with respect to the possibility of a future Supreme Court vacancy. Between that date and the present, I have had frequent telephone conversations with Cassandra Butts, Deputy White House Counsel, including near daily phone calls after Justice Souter on May 1, 2009 announced his intention to resign at the end of the current Supreme Court term. On May 14, 2009, I was interviewed in person at my office by Leslie Kiernan, an attorney at Zuckerman Spaeder LLP. I was interviewed by telephone on Saturday, May 16 by Gregory Craig, Cynthia Hogan, Counsel to the Vice President, Ron Klain, Chief of Staff to the Vice President, David Axelrod, Senior Advisor to the President, Daniel Pfeiffer, White House Deputy Communications Director and Cassandra Butts. I was interviewed on Thursday, May 21, 2009 by members of the Administration including Gregory Craig, Cassandra Butts, Associate Counsel to the President Susan Davies, Chief of Staff Rahm Emanuel, David Axelrod, Ronald Klain, and Cynthia Hogan. Finally, I was interviewed by the President on May 21, 2009, and by the Vice President by telephone on Sunday, May 24, 2009. I have also had numerous phone conversations with different groupings of the individuals listed above. Other individuals have at times participated in these conversations, including Trevor Morrison, Associate Counsel to the President, Alison Nathan, Associate Counsel to the President, and Diana Beinart, Tax Counsel.
Upon review of Judge Sotomayor’s so-called reversal rate, it appears she’s doing better than her peers on average. According to the New York Law Journal, which runs a monthly column called “2d Circuit Roundup,” since 2002 the High Court has taken up 35 cases from the Second Circuit; of those, it has reversed, vacated or remanded for future consideration 26, or about 74%. For cases where Sotomayor was the principal drafter of the opinion, the record is 60% reversed, 40% affirmed. According to SCOTUSblog, in 2008, for example, the Court reversed 75.3 percent of the cases it considered. So she’s doing better than her court and better the rest of the federal judiciary.
(Pity poor Justice Alito, whose 3rd Circuit decisions had a reversal rate of 100% when GWB nominated him in ’05.)
Also let’s bear in mind that cert is granted only rarely and not as of right (unlike, for example, the court where Judge Sotomayor sits, where the judges must hear every case that one litigant decides to appeal). Thus there is likely to be a higher proportion of reversals of the cases they do hear; otherwise, they wouldn’t have been able to garner the 4 votes necessary to grant the cert petition in the first place.
In all but one of the decisions for which she wrote the opinion later reviewed by SCOTUS, she wrote for a unanimous panel (one was 2-1). That places her in the mainstream at least among her fellow 2d Cir judges. Being a consensus builder will certainly be a helpful trait when she gets to the High Court.
Similarly the decision in the New Haven firefighters case — and the decision to submit a short, unsigned opinion — was unanimous among the three judges on that panel, as tempting or convenient as it may be to attribute the decision to her (the LA Times referred to it as “one of her key appellate court rulings”), or to speculate that she was the prevailing force behind the opinion or the decision to submit it unsigned. (The move to reconsider it failed before the Second Circuit, 7-6).
In 11 years on the Second Circuit, only one opinion authored by Judge Sotomayor went up to SCOTUS where she did not write for a unanimous panel. The High Court’s decision was 5-4 to UPHOLD. Clearly she’s able to make tough calls, form a consensus, and stick to her guns.
None of this will stop the hazing for fun and profit until the hearings in July, of course. And if you subscribe to Mark’s theory, it’s just as well.