BoardSource Leadership Forum – Part III: Nonprofit Governance Challenges

Extra Extra
At the BoardSource Leadership Forum, Thomas K. Hyatt, SNR Denton, presented the session “Ripped from the Headlines! Nonprofit Governance Challenges from Front Page News” using seven news headlines from the last year as case studies of compliance “war stories.” Hyatt notes these headlines represent a range of governance challenges from “good efforts gone wrong” to “cautionary tales of conduct to be avoided.” This post shares some of the general takeaways from the discussion and provides additional links for more information.

1. Beth Israel Deaconess Medical Center
As reported by the Boston Globe, “AG urges Beth Israel to rethink CEO’s fitness.”

  • Board members have fiduciary duties of care, loyalty, and obedience (often considered a subset of the duty of loyalty). Hyatt describes the duty of care as challenging that which does not make sense or is unclear, and asking the right questions.
  • Anonymous letters reporting complaints or alleging serious issues are not uncommon to nonprofits. The duty of care suggests that nonprofit boards cannot simply ignore anonymous letters; there should at least be some consideration whether it is something that needs to be discussed further.

For further commentary, please see the Nicholas A. Mirkay’s post, “Beth Israel – A Case Study in Board Governance and AG Oversight,” on the Nonprofit Law Prof Blog and the Massachusetts Attorney General’s Office press release “Attorney General’s Office Completes its Review of Actions by Beth Israel Deaconess Medical Center Board of Directors.”

2. Stevens Institute of Technology
As reported by, “Stevens Institute of Technology improves reputation under N.J.-imposed financial oversight.”

  • Don’t wait until an Attorney General steps in to implement best practices for board governance.
  • Use rebuttable presumption procedures for setting executive compensation; do not simply defer all authority to the board. Hyatt suggests that nine out of ten times, a dysfunctional board is ‘under the hood’ of an executive compensation problem.
  • Be wary of “The Lake Wobegone Effect” with compensation – i.e., paying above the average one year which becomes the average the next year, leading to consistently pushing the “average” higher each year.

Hyatt recommends reading the Consent Agreement between the Institute and New Jersey AG as an example of some best practices for board governance. The pdf is available here.

For further commentary, please view Jack Siegel’s series of posts covering the event on his blog, Charity Governance.

3. Erickson Retirement Communities
As reported by the Washington Post, “Charities boosted profits of Erickson retirement communities.”

For more information on the exemption requirements for 501(c)(3) organizations, please visit the IRS website.

4. Political Campaign Activity by Tax-Exempts
As reported by the New York Times, “Hidden Under Tax-Exempt Cloak, Political Dollars Flow.”

In the following month, Senator Max Baucus, chairman of the Senate Finance Committee, made a written request to the IRS to “survey major 501(c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity to examine whether they are operated for the organization’s intended tax exempt purpose and to ensure that political campaign activity is not the organization’s primary activity.” The letter cited the above-mentioned New York Times article among other news headlines that prompted him to write to the IRS. Senator Baucus’ letter has been reprinted in full by Caplin & Drysdale here.

5. Jackson Health System
As reported by the Miami Herald, “Jackson Health System bleeding red ink” and “Grand jury: Jackson Health System a 'colossal mess’.”

  • A ‘perfect storm’ of unfavorable circumstances (e.g., a bad economy, an increased demand, reduced tax breaks, etc.) may not be the only reason a charity is facing significant challenges. Sometimes, there may be an even bigger culprit such as an unwieldy governance system in desperate need of reform.

The final report of the Miami-Dade county grand jury can be accessed here.

6. Dismas Charities
As reported by WDRB Fox 41, “No apology from charity spending 150k on sports suites?” and “Dismas charities giving up sports suites.”

  • 501(c)(3) tax-exempt organizations are held to a high standard of financial stewardship. Technical legal compliance and public perception of proper expenditures may not always align but both are of critical importance.
  • Use crisis to re-examine and re-evaluate; there is power in a timely apology.

More news coverage is available in the Courier-Journal article, “Dismas Charities apologizes, gives up luxury suites.”

7. SUNY-Buffalo
As reported by the Inside Higher Ed, “Excitement or Overstepping?

  • Hyatt emphasizes that organizations need strong and clear bylaws and policies; the process must be stronger than the people. Power struggles are not always good versus evil. Sometimes, conflict over who is in control is between well-intentioned people.
  • Have a coordinated communication strategy in place; everyone should know who voice of the organization is.

More commentary on the story is available in Joe Hodnicki’s post “A Little Weirdness Going on at Buffalo?” on the Law Librarian Blog.

This post is part of a four-part series on the BoardSource Leadership Forum 2010. Part I covers the opening plenary and "Politics and Budgets" and Part II covers the "Top Ten Legal Risks Facing Nonprofit Boards."