A newly formed 501(c)(3) has approached Big Donor about making a substantial and continuing donation to the new org. Big Donor’s donation will be more than half of the new org’s funding for the foreseeable future. Big Donor is very interested, but wants the ability to supervise/control the new 501(c)(3). Can Big Donor require that the new org give Big Donor the right to appoint more than half of the members of the new org’s board of directors? Can the bylaws of the new org provide that "The Board of Directors will have five members. Big Donor has the right to appoint up to three members"? Does this interfere with the independence of the board? Your insights are greatly appreciated.
Signed, Intrigued but Concerned
The arrangement you describe doesn’t interfere with the independence of the Board–it destroys it entirely. In fact, that’s its entire purpose–to assure that what Big Donor wants, Big Donor gets without back-talk, or any of that inconvenient oversight Boards are so famous for.
If a donor demands captive board members, s/he’s indicating a misunderstanding of the nonprofit structure. Charities aren’t business models for individuals–they’re community service organizations, and no one member of the community is entitled to overwhelming representation on a charity board.
Admittedly, there are nonprofits that are offspring of other nonprofits, where the mother ship retains veto power or voting control over the daughter agency. The classic example is a church’s ministry in a particular area, which separates itself into a whole different entity using bylaws that provide for x number of Board members to be appointed by the founding church. Even in those circumstances, though, the church is given a fixed number of directors on the new group’s Board, not permanent majority status. The point is to provide for continued participation by people who understand the agency’s founding mission, not to produce dead-hand control. In any case, somewhere up (or down) the chain of governance is a group of people able to exercise independent judgement in the group’s best interests. That’s the nonprofit model: not a single person with an axe to grind.
Despite her legal training, the Nonprofiteer doesn’t know whether giving veto power to a single Board member is actually prohibited by law, and she invites readers who practice in the field to advise the rest of us on that subject. (At some point of individual control/support, doesn’t an operating charity become a private foundation, for instance, subject to a whole raft of tax requirements and regulations?) She does know that the law of for-profit corporations includes a concept called "piercing the corporate veil," in which holders of corporate control are held personally liable for corporate activities because they’ve treated corporate assets as if they were personal assets. What Big Donor is suggesting is that you turn your nonprofit’s assets–its goodwill, its reputation, its legal status as a tax-exempt entity–into his/her personal assets, and what you may want to suggest in return is that this corporate fiction won’t work.
Which raises the next issue, namely, why Big Donor wants the kind of control you describe. There are a few possibilities, none of them attractive. One is that s/he has ill-gotten gains that s/he’s attempting to launder through the nonprofit structure while retaining control of their distribution: you don’t want any part of that. (While it may seem like a great idea to turn drug money or weapons-dealing money into social services, it’s not worth the intimate acquaintance it guarantees with the FBI.) Another is that s/he simply thinks of a nonprofit as another form of doing business, one with lots of tax advantages, rather than as a way of organizing the provision of social goods through public support and community governance. You don’t want any part of that, either, because it’s impossible to govern a nonprofit for the public good when it’s dominated by someone whose private good is at the front of his/her mind.
And just from a practical standpoint, any donor who asks for this kind of control upfront will only become more demanding and likely interfere with management (when s/he’s only supposed to be involved in governance) in lots of areas. It’s easier for me to say than for you to do, but turn down money with this kind of strings attached.
Not only will it keep you from an inevitable confrontation between your mission and Big Donor’s money, it will prepare you for the important task of finding a balanced portfolio with which to support your charity in the medium- and long-term. No matter how attractive a single source for money may seem, any single source can go dry. Nonprofits should establish enough wellsprings of support (to beat the metaphor to death) so they won’t be parched no matter what happens.
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