March 11, 2015

Nonprofits Don’t Need More Regulation

To the Editor

No good deed should go unpunished, at least when it comes to Independent Sector’s new "good governance" guidelines.

That seems to be the view of the estimable Pablo Eisenberg, with his recent criticism of the organization’s efforts and its updated principles of self-regulation. Mr. Eisenberg’s populist call for more laws and greater enforcement reflects a view of the nonprofit sector framed more by sensational headlines than by operational and legal reality.

He starts his diatribe with a gratuitous shot at "big foundations and nonprofits," as if there is something evil about their very existence. I’ve got news for you, Mr. Eisenberg: It is often in the boardrooms of those "big foundations and nonprofits" where the most serious discussions about preserving the nonprofit mission take place. And it is in those "big foundations and nonprofits" where dedicated leaders are particularly insistent about corporate compliance and effecting good governance principles. So you might adjust your choice of villains a bit.

Then there’s the typical and tiresome refrain that only more laws and greater enforcement will solve the scourge of nonprofit-sector lawlessness. What a great idea! More laws always work, don’t they? Except when you realize that there is a pretty effective regulatory framework already in place to provide oversight of nonprofits.

Let’s start with the broad mandate of state attorneys general to enforce both state nonprofit laws, including breaches of fiduciary duty. Indeed, state charity officials are some of the most dedicated and informed of regulators. Let’s also consider the breadth of IRS regulations, including the prohibition against private inurement, the restrictions against excess private benefit, and the intermediate-sanctions excise-tax penalties.

The Department of Justice hasn’t exactly been silent over the years in its scrutiny of nonprofits operating in regulated industries like health care and higher education. We can’t forget the influence of the House Ways and Means Committee and the Senate Finance Committee.

And then there’s the time-worn railing against what Mr. Eisenberg perceives as "excessive executive compensation." Absolutely, let’s enact new laws to make it harder for nonprofits operating in a competitive environment to hire competent leadership. If you’re seriously interested in helping the nonprofit sector, let them compete for the top talent. Don’t force qualified executives to accept below-market compensation for the privilege of working for a nonprofit, because that approach is guaranteed to fail.

To suggest that "sweetheart insider deals" are a "commonplace" nonprofit-sector practice is not only factually wrong, it is totally insulting to the people who work for and serve nonprofit organizations. Perhaps Mr. Eisenberg would benefit from spending some time at a meeting of a nonprofit’s audit-and-compliance or executive-compensation, committee before engaging in such harmful hyperbole. He might quickly change his tone.

And that’s the basic disconnect of Mr. Eisenberg’s opinion piece. He reflects a complete ignorance of how nonprofit companies actually operate their business. Of the highly skilled and committed executives who provide their management. Of the dedicated volunteers who serve on their boards. These are the people who fervently want to "do the right thing" to help their nonprofit succeed, and to do so want to adopt and follow governance best practices.

Self -regulation is a complement, not a threat, to effective enforcement of the nonprofit laws. Many charity regulators will tell you as much. To the extent that self-regulatory efforts, like the guidelines, improve nonprofit governance and management practices, it frees charity regulators to pursue the most serious allegations of malfeasance in the sector.

Independent Sector’s guidelines are not perfect. The format is prone to application (if unintentionally) as a one-size-fits-all approach to governance in a diverse sector that ranges from storefront nonprofits to multibillion-dollar international charities. They’re also a little light on current trends in applicable law. But they’re solid, they’re well meaning, and they serve an important need. Good for Independent Sector.

It would be both naïve and inaccurate to suggest that bad governance is not present in the nonprofit sector. But Mr. Eisenberg’s polemic does harm to the extent that it discourages good-faith efforts by volunteer board members to make meaningful changes to board practices. Sometimes the view from the academic think-tanks of Washington, D.C., gets a little hazy when it comes to what’s really going on in the boardrooms of America’s nonprofits. Self- regulation efforts like those of Independent Sector have improved, and continue to improve, the quality of nonprofit governance.

Michael Peregrine


McDermott Will & Emery