Want to improve non-profit governance? Lots of people do and they prove it by making all sorts of proposals. But holding directors responsible is on absolutely nobody’s agenda. Directors can ignore the financial statements. They can miss all the meetings. They can approve transactions evidencing blatant conflicts of interest while ignoring statutorily-mandated validation procedures. They can refuse to even acknowledge internal controls. But there is no liability for simply neglectful behavior—this is a generalization; the laws in your jurisdiction may differ. Now, we aren’t suggesting there should be liability for decisions that turn out to be bad (unless there is criminal intent or gross negligence). But at some point, the law should hold people accountable for pure neglect.
Why the resistance to mandating that directors act responsibly? “Everybody knows that if there...
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is any possibility that a director will be held liable, nobody will serve as a volunteer director.” That’s the gospel. Nobody is willing to question something that is so obvious. But is it so obvious? We don’t think so and are more than willing to question this fundamental assumption.
Take the trustees of the Tampa Museum of Art. When the Museum wanted
to expand recently, it sought funding from the City of Tampa to the
tune of $29.8 million, according to a February 27, 2005 article in the
Tampa Bay Business Journal (“Museum Trustees Take It Personally” by Margie Manning). The
Museum had raised $31 million as part of a capital campaign and hoped
to raise another $20 million. Yet, Mayor Pam Iorio of Tampa wasn’t
satisfied that there was sufficient private support for the project.
Mayor Iorio literally asked the Museum’s trustees to guarantee their
decision process as a condition to financial participation by the City.
Specifically, she asked the trustees to PERSONALLY guarantee the
Museum’s operating losses through 2015 with a $9.0 million guarantee.
Given the old saw about directors refusing to serve if they are held to
ANY level of accountability, we would have expected the entire board of
trustees to resign on the spot. That didn’t happen. So you might
assume all the trustees engaged in a lengthy debate that went on for
days, if not months. That didn’t happen. Did they spend hours in
their lawyers’ offices discussing asset protection trusts? Apparently
not. Rather surprisingly, they quickly agreed to the guarantees.
The Tampa Bay Business Journal paints a picture of a well-conceived project so we aren’t talking about a liability predicated on pure neglect—which should be the least threatening basis for imposing liability on directors. We are talking about whether the business judgment of the trustees was any good. Even we are opposed to imposing liability on directors for good faith decisions that turn out to be bad ones in hindsight. Yet the Museum’s trustees were willing to walk right into the liability buzz saw. To us, this suggests that the “unwilling to serve” line is more myth than reality.
There will be some that say that these are just a bunch of rich people who would have donated that sort of money to the Museum over the next ten years. MoMA’s recent fundraising experience suggests that there is some truth in that perception. At the same time, it is one thing to give money to build a building. It strikes us as quite different to pick up the pieces of a bad decision. If the operating deficits materialize, does the Museum then dig a $9 million hole in the Museum’s lobby and name it after the trustees? People like to fund successes. They don’t like to fund disasters and that is exactly what the Museum’s trustees agreed to do.
It may come as a surprise following our comments so far, but we disagree with the Mayor's demand to the trustees. It is clearly a good decision and a creative one when it comes to fiscal responsibility, but it confuses fundraising and governance. People should be on boards not as a reward for raising money, but because they bring something to the table when it comes to governance. We would have much preferred the Mayor demanding guarantees from financially-able people, but not necessarily from the trustees. The result may have been the same, but the two should not have been linked.
As a sidebar, those who fear non-profit director liability should take a look at the case law coming out of the Delaware courts, the corporate governance bell cows of the judicial world. As we understand recent developments, Delaware, in holding corporate directors liable for gross negligence, is beginning to treat outright neglect as gross negligence, thereby bringing directors into the exceptions to the existing liability shield. Will this trend jump the fireline, setting non-profits ablaze?
Finally, would a smaller pool of volunteer directors necessarily be a bad thing? We don’t think so if that forced a consolidation of charities providing duplicative and inefficient services. Presumably board sizes would also shrink, eliminating fifty-person boards that prove to be inefficient and unwieldy.
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FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL
ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD
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