Principal Nonprofit Corporate Law Trends and Developments

Transcription

1 Principal Nonprofit Corporate Law Trends and Developments NAAG/NASCO Regulation and Oversight of Nonprofit Organizations Conference October 3, 2011 Silver Spring, MD Michael W. Peregrine McDermott Will & Emery LLP Boston Brussels Chicago Düsseldorf Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2010 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

2 Where I Want to Go 1. To share a perspective on the leading corporate and governance law trends and indicators affecting nonprofit organizations in 2011 (to date). 2

3 Where I Want to Go (cont d) 2. To offer suggestions on ways in which corporate counsel may work with charity regulators in effectively and efficiently responding to those trends and indicators. This is especially the case as: Calls for greater corporate accountability arise across the commercial sector. Economic volatility places greater stress on nonprofit assets. The state and federal Government debt reduction debate portend additional challenges to nonprofits. 3

4 Where I m Coming From 1. The organization, governance and business practices of nonprofit organizations are now permanently established as front burner legal feasibility issues. Developments of note continue to occur at an extraordinary pace. The media is increasingly attuned to issues affecting the nonprofit sector. 4

5 Where I m Coming From (cont d) 2. This is, in part, because of: a. Continuing corporate/governance controversies involving high profile nonprofit organizations; b. A perspective that existing statutes and regulations may be insufficient to provide effective oversight of nonprofit organizations, particularly those that are structurally and/or financially sophisticated; c. New, budget-related legislative pressure on favored status tax (and other) of nonprofits; d. Increasing competition between charitable organizations serving similar missions, and the legal and financial implications arising therefrom; 5

6 Where I m Coming From (cont d) e. Increasing incidents of waste and defalcation committed by nonprofit executives and concern with lack of appropriate asset protection and preservation; f. Increasing board/level pressures to maintain revenue stability while pursuing the charitable mission; g. Continuing regulatory concern with the executive compensation practices of nonprofit organizations; h. A legislative and regulatory concern that the oversight practices must be improved, in order to address issues related to abuse and mismanagement of charitable assets; 6

7 Where I m Coming From (cont d) i. An increasing willingness of third parties and interest groups (e.g., social policy organizations and labor unions) to challenge the business practices of nonprofit organizations; j. The continued focus of the IRS on corporate governance of tax-exempt, nonprofit corporations; k. The increased emphasis on cooperation between state charity officials and the IRS; AND l. The profound operational, governance, compliance and regulatory challenges to nonprofits and to nonprofit regulators from a volatile economy. 7

8 Where I m Going Today To comment on emerging nonprofit corporate law and governance trends, through the following hypothetical fact pattern, virtually ripped from the headlines and your presenter s odd imagination 8

9 First: The Handouts; How to Obtain Copies of Referenced Cases and other Developments; Peregrine s Mailing List 9

10 INTRODUCTION Welcome to the American Association for Awkward and Anti-Social Symptoms 10

11 The Founder and Board Chair 11

12 The Spokesperson 12

13 Act I The CEO s Compensation Arrangement 13

14 The CEO 14

15 A Concern? The Perfesser s Perspective: High compensation should not be a concern when verified as reasonable, merited and appropriately approved by independent directors/ RPR satisfaction. Consideration by board of Dodd/Frank compensation concepts? 15

16 Act II The CEO s Board Governance Streamlining Initiatives/ Director Compensation 16

17 A Concern? The Perfesser s Perspective: None of the streamlining efforts are, in and of themselves, contrary to law. Taken collectively, however, they may undermine the ability of the board to exercise effective oversight in certain situations. Reasonable director compensation, appropriately determined, can be a valuable governance tool. 17

18 Act III The Donation Dust-Up 18

19 The Donor 19

20 The Disaffected Board Member 20

21 A Concern? The Perfesser s Perspective: Mr. Haskell has paid his debt to society. His money is good and his intentions pure (I think). The Board must balance stewardship, corporate morality and organizational reputation. Mr. Cleaver breached his duty of confidentiality by his disclosures; there was no breach of duty or illegality involved in accepting the donation. Next time, adopt a Gift Acceptance Policy! 21

22 Act IV Iron-Fisted Executive Control 22

23 A Concern: Perfesser Peregrine s Perspective: The CEO should be commended for requiring chapters to comply with these compliance guidelines, even if not all are relevant to nonprofits. She sets the requisite tone at the top regarding organizational compliance. This is critical for system-wide preservation of charitable assets. 23

24 Act V The Chapter s Governance Structure 24

25 Senior Leadership 25

26 The Board 26

27 The Board (cont d) 27

28 A Concern? Perfesser Peregrine s Perspective: Independence notwithstanding, a majority of the board is beholden to a dominating, controlling board chair. The entire leadership structure is entrenched, with limited perspective and capability to exercise oversight and constructive skepticism. Intra-board conflicts are rampant. 28

29 Act VI Pursuing the Separate Charitable Purpose 29

30 A Concern? Perfesser Peregrine s Perspective: The actions of senior leadership are a violation of their duty of loyalty to the unified charitable purposes of the Association and the Chapter, and may in certain instances constitute fraud. Leadership has failed its duty to position the board to act in an informed manner. The board is negligent in its oversight. 30

31 Act VII The New Investment Strategy (The Plot Thickens) 31

32 The New Advisor 32

33 Outside Counsel 33

34 A Concern? Perfesser Peregrine s Perspective: Tough call. Mr. Gordon and his firm are registered with the CTFC and apply detailed risk management strategies. A meritorious argument exists that the investments are consistent with UPMIFA but the Committee s oversight and conflict controls are lacking. No reliance can be made on Mr. Chiles advice. 34

35 Act VIII Pushing the Edge of the Envelope (A Sense of Desperation Arrives) 35

36 The Donor 36

37 The Compliance Officer 37

38 A Concern? Perfesser Peregrine s Perspective: Possibly a criminal conversion by the CEO. A breach of the duty of loyalty likely exists. Lack of internal anti-fraud controls by the Chapter Board. Potential gross negligence/bad faith by the Chapter Board Chair. Potential gross negligence by the Chapter Board. 38

39 An Epilogue; The Reviews Come In 39

40 Epilogue Sometimes things are exactly what they seem they are...and sometimes they are not. Strong corporate governance is the key to effective legal compliance by charities, but large gaps exist amongst charity boards regarding compliance and governance sophistication. Legislation and regulation must be flexible enough to recognize that charities may operate through legal enterprises and structures large and small; as charities adapt their structures to business and economic realities, so must regulation. There is no inherent risk to charitable assets as charitable organizations adopt certain appropriate governance and compensation models of similarly sized business corporations. 40

41 Epilogue (cont d) Regulation should provide incentives for informed risk taking by boards, and disincentives for uninformed and biased dice rolls. When charities suffer material financial loss from corporate action or inaction, it may in limited circumstances be fair to ask, Where was the board? Free-lancing with the charitable mission is not acceptable. The need for a measured level of state and federal charity regulatory oversight has never been greater _1 41