For the Public Benefit 041812
They’re all around us, non-profits for the public benefit
Analysis and opinion from the Fringe Editor
The Fringe Editor is not an attorney, and this column is not intended to be legal advice. However, the FE has been on committees, boards and commissions for over 20 years and has attended countless very frightening board member training sessions.
There is scarcely an aspect of our lives which isn’t at least occasionally touched by a non-profit corporation.
The discriminating features of a non-profit are the idea of “benefit” and the fact that board-members and other governors of the corporation can not profit from their participation. In exchange, the corporation pays no or fewer taxes.
The types of NPO or Non-Government Organizations are sometimes described as “public benefit”, “mutual-benefit” and “religious”. There are non-profits which work in civil rights causes, women and children’s issues, rural issues, firearms ownership, firearms dis-ownership, property rights, religious activities, lawyers- almost every imaginable concern or interest has a non-profit or many non-profits to serve it. Non-profits are typically for religious, professional, charitable, or service purposes. The National Rifle Association, the Brady Campaign, YMCA, Boys and Girls Club, Red Cross, United Way, Hell’s Angels, the North American Man/Boy Love Association, and The Nature Conservancy are all non-profits. Most private foundations are non-profits.
Hell’s Angels is a mutual benefit non-profit. We couldn’t use an actual photo of Hell’s Angels because those bad asses will come by your house with an attorney if you infringe on their copyright. Instead, enjoy this nostalgic moment from when Nicholson could still seem tough.
Brown signed into law bills which create two new corporate forms, the benefit corporation enjoys tax exempt status but must submit to a third party to determine whether or not the “benefit” has actually accrued to the target beneficiaries. The second, the “flexible purpose” corporation is not tax exempt. Both are creatures born purely of politics, the first proposed by the corporation that would become the likely “third party” and the second by a coven of corporate attorneys.
The great majority of non-profits serve an identified or an imagined group, and are intended to benefit that group. The law is quite specific in the need for this “benefit” but much less specific about how that benefit is to be measured, and therein lies the skid. Many locals will think of High Sierra Rural Alliance and recent questions about the “benefit” it brings the county. Indeed, the question of constituency and benefit is rich meat for lawyers.
Many locally wonder who High Sierra Rural Alliance claims as its benefit group, since it doesn’t have regularly scheduled public meetings, it doesn’t respond to criticism, and it functions by suing the county and local people. This is not the official logo of HSRA, but we’ll make it available should they wish to adopt it.
The rules are much more clear when it comes to the use of money, not surprisingly, since the enabling government (there are federal and state guidelines for non-profits) loses money on non-profits, at least if they are properly run. There are strict controls on how the funds may be used, what political activities it can fund, and what income is actually not taxed. Board members of a non-profit are personally liable for the fiscal and liability issues; it might be flattering to be a board member on a non-profit but it can also be personally costly.
Ideally, a non-profit starts with a recognized need and a target service group. Then, a mission statement is crafted. That mission statement is, in theory, a permanent guiding light, a navigational aid to the agency. Unfortunately, times change, funding changes, the target population changes and so the non-profit, in order to stay in business, often changes or re-defines the mission statement. That is often a sign that a non-profit is in trouble, or at least going through change.
The mission statement is then the object of the by-laws and/or articles of incorporation, which in turn are the basis for policy as described by the governing board, and then put in to practice by staff, with a lead staff person, typically an executive director or other hired person.
That person is not a member of the board, since they are typically paid. They do not, or at least should not, set the actual goals or policies, but the executive director has advantages over the board in that subordinate staff are used to taking orders, and the board members rely on that position for information. Since the position is paid and the staff member is nothing more than a bureaucrat, the problems of bureaucracies often arise, and unless the executive director is very professional or the board very aware, it is easy for an ED to become problematic. When that happens the governing board is required to provide correction or replacement.
The governing board is key to the success of the non-profit and members bear legal and fiscal responsibility for the operation of the non-profit. If someone dies, if someone claims sexual harassment, if someone steals, if an upper level staff member is revealed as unqualified, it is the board, collectively and often individually who must answer for the lack of policies and oversight.
In general, except for “client board members” or “parents’ representatives,” of charitable organizations, board members should not be the recipients of the services provided by the non-profit; they legally should not benefit from its operation.
In the ideal non-profit the board of directors is elected by the membership. In truth, it’s very difficult to get people to come to meetings, so often the board ratifies its own members. However, that isn’t the idea for a non-profit in service to a large constituency, or a “captive” constituency where the users of the services of the non-profit aren’t easily able to go elsewhere.
The Nature Conservancy is a general benefit non-profit in benefit to the environment, and that’s the troubling part. TNC is somewhat responsive to its membership base, but unfortunately those are mostly muirists who support TNC to get a warm fuzzy feeling of saving something. Local efforts to influence TNC have been only somewhat successful. Independence Lake, photo by FOIL.
The issues of competency and responsibility of board members can be quite specific. The board chair, for example, is generally expected to direct and approve the agenda, to coordinate the annual evaluation of the chief executive officer or executive director, is charged with working between meetings with the ED to clarify and help execute board policy, conducts board self-assessment, leads the search for new executive staff and board members, and speaks when a spokesperson for the board is required. Failure to professionally execute those duties can leave the board chair open to recall or even legal actions from other board members.
The board chair is expected to provide direction to but not collude with staff to pre-arrange the outcome or restrict the information or participation of board members. Indeed, one of the signs of a “rogue” or “empire building” executive director is that they take over the responsibility of the board chair and other board members, they create policy, recruit new board members and otherwise usurp the duties and responsibilities of the board. None the less, the board members remain legally responsible. Empire building is always a risk, and as a result it’s difficult to know how to much pay staff.
Sierra County Fire Safe and Watershed Council was initially an organ of the county, and then became a general benefit non-profit though it originally intended a broad membership, making it almost like a mutual benefit corp, but that structure was changed for some good and not so good reasons; the good reason: the public never came to meetings. However, doing away with membership and member elected directors has left the Council somewhat more insular in the view of some. See more on the Council in this week’s Board Notes. This photo shows a new board member and an executive staff member. The board member was previously a client of the Council, but, ideally, is no longer eligible.
There are several ways of measuring parity with wages in other non-profits, but in the long run the organization wants to pay well enough to attract and keep qualified staff, but not so well that staff start forming a “posse” to overcome the board.
A good non-profit has transparency, that is, it conducts its business in public. It posts its agenda publicaly and in advance of the meeting, and the public is welcome. It responds to public inquiries, to the press and to local supervisors. It’s often a good idea to have a “citizens’ advisory committee”, which can be composed of some beneficiaries of the system, and just interested people. The CAC doesn’t mandate to the Board, but they can report, help fundraise, take board designated committee assignments and so on. The CAC increases public input and helps ensure transparency.
The problem is often that of funding. Ideally, the board members are people with skills pertinent to the work of the board; an attorney, a sociologist, a doctor or psychologist, these are often found on boards who perform charity work and oversee the services provided to specific populations. For many poor, service and charity oriented non-profits board members are also fund raisers. On most non-profits, even though the board member can be reimbursed for travel and other costs, board members are expected to return the value to the organization as “in-kind” funding. Where the funding comes primarily from government or other dedicated funds, the organization is likely to have “in-kind” costs, which represent the organization’s contribution to the effort or project. Funding is a complex issue for non-profits, because grant funders tend to change their emphasis over time, or the non-profit finds its clientele changing, or the non-profit leadership decides to pursue similar but previously un-tapped client sources. For example, a non-profit servicing the elderly in one capacity might decide to add a legal program to provide free or reduced legal services to the elderly. The organization would have to assess this activity and perhaps change its mission statement, and add staff, and seek new funding sources, and so on. Eventually, the tail might wag the dog and the legal effort, under an aggressive board member or eager paid administrative staff, might eventually make significant decisions for the old non-profit, or it might break away and seek status as an independent service provider. This can happen in any kind of non-profit.
However, those receiving public money to provide services typically have a higher standard of reporting, and changing the organization too much might make it ineligible for old funding sources. Sometimes it is better to have a small, highly efficient non-profit with a tight focus on services and service population, than to have a non-profit for whom the accent is on “corporation”. Success can be bad for a non-profit, and many seem to thrive better when struggling for funds than when temporarily abundant funding drives the organization on to untried waters. New funding and new clients or services often require new staff and a re-examination of the primary purpose and beneficiaries of the non-profit.
Fundamentally, the challenges arise from the "agency problem" - the fact that the management which controls the charity is necessarily different from the people who the charity is designed to benefit. In a non-profit corporation, the "agency problem" is even more difficult than in the for-profit sector, because the management of a non-profit is not even theoretically subject to removal by the charitable beneficiaries. The board of directors of most charities is self-perpetuating, with new members chosen by vote of the existing members. Wiki, HERE
It’s difficult for a good executive director to stand at the helm and try to fulfill the mandates of the mission statement as interpreted by the board. It’s easy for an ambitious ED to mistake his or her role as navigator. Since the ED’s job relies on funding, they might attempt to lead the board policy toward funding which seems more reliable, and not focus on the intended mission statement or beneficiary groups. When the ED lobbies individual board members; when they, instead of the board, identify and recruit new board members; and when they provide inadequate information to the board, or try to sculpt board consensus, chances are they’ve lost sight of their role and need to be corrected, or replaced. It’s important to keep a bright line between the board and staff responsibilities.
The issue of who benefits becomes complicated, even though the public good is the justification for non-profit status.
Plumas Rural Services has a long history of providing general and charitable benefit to the area, but recently they diversified and purchased the Loyalton Cogen plant, pushing the organization into completely unfamiliar waters. The rationale was that local residents and families would benefit most from a thriving local industry, one that would generate green electricity and once again employ people in the woods, in trucks, at the plant and at the businesses which could thrive there using the heat and electricity from the plant. It’s a gamble for the agency, and something to hope for the East Side of the county; hopefully the gamble will pay off for everyone. Photo is link
As already mentioned, High Sierra Rural Alliance is a non-profit who has taken public money. High Sierra Rural Alliance seems, at least, to be the opposite of a good non-profit. It is a group which was formed to provide employment for the founders, already a corruption of the intention of the law. It bills itself as a group providing services to rural people, but its funding is not primarily from rural people. They are supposed to operate for the public good, but what public? Their board members were hand-picked, their meetings are not public. Their actions have prompted some to prepare to challenge their tax exempt status. Such a thing is difficult, but technically possible.
Even so, HSRA doesn’t pretend to take their authority from the people of the county, even though they claim to be “grass roots”. Other local non-profits do claim to represent county residents, and they take public money to do so. What is the standard of “public benefit” for those non-profits? Is it people of the United States, or the people of California, both of whom contribute public money to some local non-profits. Is it the people of the county, and if so, which ones, since the people of the county are not of a single voice. It would be possible to find a few local people who feel HSRA is doing a good job, and even just a few would make a lawsuit difficult. With other local non-profits who have a greater dependence on public money and a broader constituency, it might be easier (not legal advice!).
What choices are open to constituents of non-profits who want to provide feedback? Obviously, attend published board meetings and give your input to the board itself. After all, these are the people who are fiscally responsible, and whose job it is to monitor the functioning of the non-profit. If appealing to the board doesn’t work, it could be time to go to the attorney general, or maybe it’s time to organize local opposition. Create a competing non-profit, it’s easy, you can have it done for a few hundred bucks. Once you’ve done it, though, don’t forget the importance of structure: mission statement, by-laws supporting it, a board of directors with no connection to the services provided, board officers who understand and successfully carry out their roles, staff who take direction from the board, transparency, and constituency!