DATELINE: April 27, 2009, Chicago
We certainly have enjoyed many events at Jazz at Lincoln Center (JLC), including Marcus Roberts multiple times (at Dizzy’s and the Allen Room), a Gil Evans tribute in the concert hall, and most recently Roseanne Cash and Rodney Crowell in the Allen Room. You certainly can’t beat the views and the music ain’t bad either, which is why we were sad to read in today’s New York Post that JLC’s board is suing a member of its board...
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to collect $327,000 in unpaid funds that the board member allegedly pledged to JLC. Isabel Vincent and Kathianne Bonielo, Rhapsody in ‘$ue’ At Jazz Hall: Lincoln Center Deadbeat Donor (Apr. 26, 2009).
We suspect that the problem JLC is facing is not unique. In fact, we’ve wondered with the sudden and steep decline in the stock market what donors who once were über rich would do as fortunes based on record stock market valuations dropped to 1/10th of what they once were worth. In the heady days of 2003 through 2007, a $20 million pledge was easy to make if you were worth $500 million, but what is someone supposed to do after they are forced to downsize from an estate in the Hamptons to a two bedroom co-opt on the upper-east side without servants?
If the donor was smart, they had their lawyer draft the pledge so that the pledge was non-binding letter of intent rather than a legally binding agreement. Alternatively, the donor might have pledged 10,000 shares of restricted Company XYZ stock rather than a specified amount of cash. By couching the pledge in terms of shares of stock, the donor shifted the risk of market declines to the charity. The donor might still have to turn over 10,000 shares of GM or Citicorp, but the charity had the problem if the stock was worth $2 share a share rather than the $50 or $100 per value at the time the pledge was made.
Both donors and charities should recognize that circumstances do change over a five- or ten-year period. Charities would be well counseled not to agree to pledges that call for payment terms that go out more than three years, particularly if the charity is planning to finance a large capital expenditure like a new building. In the case of large capital projects, pledge payments should be linked or time to coincide with construction draws. Under no circumstances should the shovel break the surface unless at least 33% to 40% of the pledge proceeds are in hand. Charities also should consider background and credit checks.
While the donor in this case should have his day in court, we commend JLC for filing suit. Too many charities and their boards are reluctant to sue despite the fact that a legally binding pledge is an asset. Like all assets, the board is required to maximize its value. Simply writing off the pledge without regard to its collectibility strikes us as a breach of duty.
We are particularly intrigued to see JLC sue a board member, but if you think about it, the decision makes perfect sense. If board members are not going to honor their commitments, then why should others who have made pledges? Although some will disagree, we believe the bylaws should make failure to timely pay a pledge (or at least renegotiate the pledge) a basis for the automatic removal of a board member. While we are not fans of membership on boards being conditioned on minimum levels of contributions, fundraising boards are a reality. No institution should want someone on the board that it is forced to sue. Yet, without automatic removal, the delinquent board member may be able to disrupt board meetings and business until his term expires in a year or two. Imagine trying to get the delinquent board member to sign a written consent resolution, which many states require to be unanimous. In the case of JLC, the allegedly delinquent donor already has resigned from the board.
Probably the most telling aspect of the Post’s story was in the last line, where the donor, asked for comment, told the Post:
This is a philanthropic commitment, not a mortgage on a house.
Sorry, but if the pledge was legally binding, it is no less an obligation than a mortgage on a house. Institutions should read that comment several times. Organizations, who rely on large pledges must educate rather than trick donors. A pledge is a legal obligation. More important, a pledge is an asset that the institution relies on. Donors need to understand that they are on the hook. We suspect that some institutions are at fault when donors treat pledge obligations lightly. It is always easier for people to promise more if they don’t have to deliver today. If the fundraisers are using high-pressure tactics and a pledge is one way to stop the pressure without paying the cash, the institution is partly at fault when people try to back out of their commitment at a later date. Institutions might be better off taking a cash donation today and asking again in a year than having resentful donors. No doubt some fundraisers will dispute this.
Although we think people should pay their obligations, the article reports that the donor was forced to pullback on his charitable work because of the economy. He claims that JLC and he are trying to work out a solution. Although the donor probably is embarrassed by the coverage, we suspect that he is in good company. Fortunately for others, many boards are reluctant to file suit.
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