Associations establishing charities – thoughts

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Sometimes a nonprofit professional or trade association investigates whether it makes sense to establish a related charity to solicit tax-deductible donations and grants to support scholarships, public education, and other programs and services that benefit the general public.

During these discussions, the issue of control comes up.  In a recent newsgroup post to the American Society of Association Executives, I address the issue of control and fiduciary duty.  Here’s the post:

 

I think the cost estimates [for the new 501(c)(3) foundation’s governance and administration] are definitely at the low end of the range you identify.  However, a lot depends on the relative size of the foundation and how expenses are allocated between the association and the foundation.

In my experience, most complaints from EDs about their related foundations have to do with the need to allocate their time to working with two boards of directors and participate in governance of two organizations.  Of course, if the foundation has its own executive, the association’s executive has less of a time commitment.  The question is whether the foundation’s revenues can justify a dedicated ED and whether the association’s culture can tolerate such a differentiated organizational structure.

I respectfully disagree with those who insist on the association having 100% control over the related foundation.  I understand and sympathize with their concerns that a foundation might “go rogue” and betray the association’s purpose for forming the foundation.  My objections are based on two related factors I have personally experienced in my volunteer board service as well as observed in my consulting practice.

A 501(c)(3) foundation has a fiduciary duty to the entity with which it is related – no question.  However, the 501(c)(3) also has a fiduciary duty to its donors and funders.  Those donors and funders may also be related to the 501(c)(6), but not necessarily.  In addition, a 501(c)(3) may be established, in whole or in part, to solicit donations to build a corpus of endowed funds, with the investment proceeds funding scholarships, public education, or other public benefit purposes congruent with the association’s mission.

There are times when the 501(c)(3)’s fiduciary duty to the 501(c)(6) may come into conflict with its fiduciary duty to its donors and funders.  A gross example of this might be the association “raiding” the assets of the foundation to fund an operating deficit.  A more nuanced example may be the case of an association’s chair or board demanding support for a personal pet project that is at odds with the donor-intended uses of the funds under stewardship by the foundation.  Especially if the foundation has an endowment, its investment horizon far exceeds the term of office of any association board member, leading to tension between the immediate needs of the association and the long-term commitments of the foundation to its donors.

Remember that a 501(c)(6) is free to act in the interest of its members, while a 501(c)(3) is required to act in the public interest.  The difference in legal definition and regulation is the source of the inherent potential for conflicts of interest when the entities are related.  Regardless of any effort to “control” a 501(c)(3), if a 501(c)(3) seeks to act in the interest of anyone other than the public, its officers and board members may be held liable.  This is true even if 100% of the 501(c)(3)’s officers and board members are also officers and board members of a related 501(c)(6).

Similarly, even when both entities are 501(c)(3)s, each has a fiduciary duty to its own donors, supporters, stakeholders, and community (public).  The extent to which their missions and activities differ is the extent to which their interests and fiduciary duties may come into conflict.  Just as with the 501(c)(6) – 501(c)(3) situation, these conflict situations require legal and ethical resolution, not the potentially illegal and/or unethical subjugation of one organization by the other.

As I said above, I respect the point of view of those who disagree with my point of view.  Having lived through the strife and bearing the scars therefrom <g>, I just prefer the potential dangers of my approach to the potential dangers of the alternative approach.

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