The National Association of Attorneys General (NAAG), in conjunction with the National Association of State Charity Officials (NASCO), hosted its annual conference to discuss the state of charities and a variety of issues affecting this segment of the nonprofit sector. Although the second day of the two-day conference is open only to attorneys general and government staff, the first day was open to the public. In this first session, topics included governance issues, state regulatory updates, ethical challenges, and other operational and programmatic considerations. The following is a summary of some of the main lessons learned from various panels on the public day.
Regulatory Priorities and Recent Enforcement Actions
Several regulators from state attorney general offices provided updates on recent enforcement actions and outreach activities in their respective states. These regulators focused on cases related to the sale of substantial charitable assets, transactions with for-profit companies, donor intent and modification of a gift's original purpose or restrictions following COVID-19, and duties of trustees of asset-holding charitable trusts. In short, there appeared to be clear agreement among states that the need to safeguard charitable assets is a paramount concern.
For example, many states have statutes that require nonprofits to notify the state attorney general office and/or receive approval prior to engaging in a sale of all or substantially all of the nonprofit's assets. The panel highlighted one action related to the sale of assets from a nonprofit organization to a for-profit company and emphasized the importance of valuations and appraisals of the assets being sold. Another state regulator spoke about the uptick in self-reporting by nonprofit board members who have notified attorney general offices of instances of concern within the nonprofit, including situations when board members have been denied financial information or reports about the nonprofit. As part of state attorney general investigations into these complaints, they have allowed the board members who originally reported the alleged misconduct to participate in their investigations as informed members of the board.
In short, in a time when enforcement by the Internal Revenue Service in the nonprofit sector appears to have diminished, state regulators may be picking up the slack by actively monitoring nonprofit organizations' activities, particularly with regard to the use of charitable assets.
Cinematic Lessons in Governance
Core governance issues are not just for academics. Popular culture can impart, in subtle ways, wise lessons for nonprofit organizations navigating these types of challenges. This panel presented nonprofit management lessons learned from both the big and little screens; three examples stood out.
First, the storyline of Spider-Man popularized the phrase "with great power comes great responsibility." As applied to nonprofit governance obligations, it is true that members of a nonprofit's board of directors cannot act individually, but individually each must act to ensure fiduciary duties are met. To this end, directors must act collectively to guide and manage a nonprofit's operations, but each of them has an individual responsibility to ensure they understand how to effectuate their duties of care, loyalty, and obedience owed to the organization they serve.
This leads to a second lesson, derived from Professor Dumbledore's line in the Harry Potter series: "It takes a great deal of bravery to stand up to your enemies, but a great deal more to stand up to your friends." The duty of loyalty a board member owes is to the organization they serve. Private foundations and public charities must pay careful attention to the self-dealing prohibition and excess benefit transaction rules, respectively. And nonprofits should be mindful of state law add-on rules defining the scope of impermissible self-dealing transactions. Board members need to be aware of how these types of transactions and other conflict-of-interest issues arise, how to navigate these, and how far beyond the individual director the rules may apply (familial relations, business contacts, etc.).
A third cinematically inspired governance lesson comes from the heart-warming television character Ted Lasso. Although Ted was hired to coach an English soccer team with the clandestine intent that he would fail, his management and delegation skills, coupled with his ability to hold others accountable, led to his unexpected success. To this end, when your nonprofit wishes to delegate certain authority to others, it needs to do so while exercising reasonable care. That is, before delegating authority, a nonprofit must define the scope of that delegation and assess whether the person receiving the delegation is indeed the appropriate individual for the task. At the end of the day, before your organization's board delegates power, it should ensure that any delegation is done in an appropriate, reasoned, and tailored way.
Fostering a Purpose-Driven Board
National trends indicate that nonprofit boards are increasingly disconnected from the communities they serve and in general lack racial and ethnic diversity. Encouraging a purpose-driven mind-set among board directors can begin to close these gaps.
A purpose-driven board is achieved by ensuring that all directors understand that their role is to advance the purposes of the organization, not to simply perpetuate its existence. In practice, this means that when making decisions, board members should constantly ask values-based, generative questions, such as: Who are we? What's important to us? What impact do we want to have today and five years from now? Rather than focusing on the organization alone, board members should consider the needs of the surrounding community, the ecosystem of like-minded nonprofits, and how society is served by the organization's purpose.
The presentation's discussion also focused on the importance of recruiting a diverse board of directors that is representative of the community served by the organization. Under this model of engagement, nonprofit organizations may consider reframing the criteria for board membership to emphasize commitment to the organization and a willingness to devote time and energy to pursuing its purpose rather than, for example, meeting certain fundraising metrics as a condition to continued service.