Webster’s dictionary defines a volunteer as someone who renders a service “while having no legal concern or interest.” This definition comes to mind whenever I read of malfeasance in the management of philanthropic organizations—most of which are governed by volunteer boards.
Recent examples include criminal charges in Pennsylvania against officials of the Allegheny Health, Education and Research Foundation (the parent of Allegheny General Hospital) alleging use of donor restricted charitable endowment funds to pay operating expenses as the foundation slipped into insolvency. In 1994 the United Way of America was rocked when its president was indicted for use of United Way funds for his personal benefit. In 1997 the Attorney General of New York took action against the president of Adelphi University and several trustees as a result of mismanagement which saw the president’s compensation skyrocket and trustees reaping financial benefits from dealings with the University.
It’s enough to make you wonder if the traditional model of a voluntary governing board made up of community leaders is an anachronism in the complicated and rapidly evolving environment in which philanthropic organizations operate. Consider, or rather reconsider, the following three aspects of the traditional nonprofit governance model.
1. Lack of ‘Interest’
First, volunteer directors do not have the type of interest or stake which in the business world affixes the attention of fiduciaries to the organizations they manage. Volunteer directors are not elected by and answerable to shareholders, and they do not have the motivating self-interest of people who sit on the boards of their own or family businesses. They are not directly selected by and reportable to private beneficiaries as are the trustees of a private trust. They do not even have the same basic economic interest as staff members who draw a paycheck from the organization. Yet these same people are expected to prepare for and attend meetings, analyze financial statements, and hopefully devote a significant measure of attention to assessing an organization’s management and pondering its prospects. Relying on the wisdom in the adage that “you get what you pay for,” charities should consider paying fees to directors in return for the talent they are expected to bring to the table.
2. Volunteer Protection Legislation
I have my doubts about the utility of the “volunteer protection” legislation adopted in several states and by the federal government. These statutes, which take varied forms, are designed to exculpate “volunteer” directors unless their behavior is egregious—more than mere negligence. While in principle these laws serve the useful purpose of encouraging volunteerism in a litigious society, they can unwittingly lead to the distorted notion that directors don’t have to be as careful as they otherwise would be. The problem is real: I have heard directors comment that they need not spend any more time or effort on a troublesome issue because “we can’t be sued for that anyway.” The folks running little leagues certainly deserve a break, but perhaps stricter standards of care should apply to organizations with revenues, assets, or employees above certain thresholds, to activities such as the patient services side of healthcare, or to specific board activities such as endowment management and expenditure policies.
3. Donor Standing
In many places, including my own state of Connecticut, donors do not have “standing” to bring suit against a charity or a board that allegedly is using a gift contrary to the donor’s intentions. That leaves the Attorney General as the only person outside the organization who may bring a claim. This in turn can contribute to a sense of “immunity” on the part of board members who know there are fewer outsiders to whom they are answerable. Legislation could be adopted permitting significant donors to sue when the terms of their gifts are violated. For example, gifts subject to use restrictions (or permanent endowment) that account for more than a certain percentage of endowment assets or operating revenue could be placed in this special class.
I’ve been told by friends in the philanthropic world that I shouldn’t try to fix something that “ain’t broke.” The counterpoint they offer is that volunteers are the sine qua non of the nonprofit sector, and that their emotional or personal interest is sufficient to ensure careful attention to their obligations. Similarly, broadly drafted volunteer protection legislation is necessary to keep a steady flow of volunteers in the pipeline. Giving donors the legal authority to enforce the conditions of their gifts could force boards constantly to be looking over their shoulders or make them vulnerable to “donor gadflies.”
The traditional model has many strengths, but the way it handles board governance and donor standing are not among them. New developments (everything from “venture philanthropy” to for-profit joint ventures) will put enormous pressure on philanthropic boards in the years to come. Some tweaking of the system is in order.
John M. Horak is an attorney with the firm Reid and Riege, P.C., in Hartford, Connecticut, and is a director of the Yankee Institute for Public Policy at Trinity College.
Webster’s dictionary defines a volunteer as someone who renders a service “while having no legal concern or interest.” This definition comes to mind whenever I read of malfeasance in the management of philanthropic organizations—most of which are governed by volunteer boards.
Recent examples include criminal charges in Pennsylvania against officials of the Allegheny Health, Education and Research Foundation (the parent of Allegheny General Hospital) alleging use of donor restricted charitable endowment funds to pay operating expenses as the foundation slipped into insolvency. In 1994 the United Way of America was rocked when its president was indicted for use of United Way funds for his personal benefit. In 1997 the Attorney General of New York took action against the president of Adelphi University and several trustees as a result of mismanagement which saw the president’s compensation skyrocket and trustees reaping financial benefits from dealings with the University.
It’s enough to make you wonder if the traditional model of a voluntary governing board made up of community leaders is an anachronism in the complicated and rapidly evolving environment in which philanthropic organizations operate. Consider, or rather reconsider, the following three aspects of the traditional nonprofit governance model.
1. Lack of ‘Interest’
First, volunteer directors do not have the type of interest or stake which in the business world affixes the attention of fiduciaries to the organizations they manage. Volunteer directors are not elected by and answerable to shareholders, and they do not have the motivating self-interest of people who sit on the boards of their own or family businesses. They are not directly selected by and reportable to private beneficiaries as are the trustees of a private trust. They do not even have the same basic economic interest as staff members who draw a paycheck from the organization. Yet these same people are expected to prepare for and attend meetings, analyze financial statements, and hopefully devote a significant measure of attention to assessing an organization’s management and pondering its prospects. Relying on the wisdom in the adage that “you get what you pay for,” charities should consider paying fees to directors in return for the talent they are expected to bring to the table.
2. Volunteer Protection Legislation
I have my doubts about the utility of the “volunteer protection” legislation adopted in several states and by the federal government. These statutes, which take varied forms, are designed to exculpate “volunteer” directors unless their behavior is egregious—more than mere negligence. While in principle these laws serve the useful purpose of encouraging volunteerism in a litigious society, they can unwittingly lead to the distorted notion that directors don’t have to be as careful as they otherwise would be. The problem is real: I have heard directors comment that they need not spend any more time or effort on a troublesome issue because “we can’t be sued for that anyway.” The folks running little leagues certainly deserve a break, but perhaps stricter standards of care should apply to organizations with revenues, assets, or employees above certain thresholds, to activities such as the patient services side of healthcare, or to specific board activities such as endowment management and expenditure policies.
3. Donor Standing
In many places, including my own state of Connecticut, donors do not have “standing” to bring suit against a charity or a board that allegedly is using a gift contrary to the donor’s intentions. That leaves the Attorney General as the only person outside the organization who may bring a claim. This in turn can contribute to a sense of “immunity” on the part of board members who know there are fewer outsiders to whom they are answerable. Legislation could be adopted permitting significant donors to sue when the terms of their gifts are violated. For example, gifts subject to use restrictions (or permanent endowment) that account for more than a certain percentage of endowment assets or operating revenue could be placed in this special class.
I’ve been told by friends in the philanthropic world that I shouldn’t try to fix something that “ain’t broke.” The counterpoint they offer is that volunteers are the sine qua non of the nonprofit sector, and that their emotional or personal interest is sufficient to ensure careful attention to their obligations. Similarly, broadly drafted volunteer protection legislation is necessary to keep a steady flow of volunteers in the pipeline. Giving donors the legal authority to enforce the conditions of their gifts could force boards constantly to be looking over their shoulders or make them vulnerable to “donor gadflies.”
The traditional model has many strengths, but the way it handles board governance and donor standing are not among them. New developments (everything from “venture philanthropy” to for-profit joint ventures) will put enormous pressure on philanthropic boards in the years to come. Some tweaking of the system is in order.
John M. Horak is an attorney with the firm Reid and Riege, P.C., in Hartford, Connecticut, and is a director of the Yankee Institute for Public Policy at Trinity College.
