June 23, 2015

Sweet Briar’s Remarkable Reopening Has Lessons for All Nonprofits

Julia Schmalz, The Chronicle of Higher Education

Student’s, faculty and alumni hold a rally on Friday, April 3rd, 2015 to protest Sweet Briar Colleges closing

When a Virginia circuit court judge on Monday approved a settlement brokered by the state’s attorney general to keep Sweet Briar College, a 114-year-old women’s institution, open for another academic year, it was the culmination of several wild months.

In February, the college’s board decided to close the institution for financial reasons. That move was met with fierce opposition from alumnae, including Saving Sweet Briar, a group that raised millions to support the institution, enlisted the support of state officials, and attracted substantial national media attention in the process. Lawsuits were filed, and the state attorney general, a local prosecutor, and the State Supreme Court all got involved.

The questions raised in the Sweet Briar saga dealt with concerns often associated with difficult financial decisions — whether the institution’s leaders did enough to prevent money problems; the impact of closure on the charity’s constituents; and the resolution of unspent charitable gifts and endowments. So Sweet Briar offers valuable lessons about preparations charity boards can take if and when their turn comes to make the tough call — whether it be to "bet the farm" on a particular opportunity or actually "close the farm" and end the mission. These lessons include:

Due diligence matters. Critical financial decisions made by a charity board are likely to attract scrutiny from regulators, the media, and others no matter how diligent the board may have been in approaching the decision. That doesn’t mean the board should refrain from making difficult decisions or from informed risk-taking. It does mean that the process by which they make those calls needs to be well structured.

Boards will face the heat. Decisions intended to respond to a charity’s financial problems are almost certain to attract scrutiny, especially given recent court rulings, including a lawsuit that found board members of Lemington Homes for the Aged, in Pennsylvania, were liable for contributing to the charity’s insolvency. There is something about financial distress that raises fundamental questions about board stewardship in the minds of the media, charity regulators, and charity creditors.

Social media will amplify concerns. The size of an aggrieved constituency is less of a concern than the "noise" that angered alumni and others can make. If they are media savvy and can prompt some form of journalistic attention, that may increase the likelihood that board action will come to the attention of regulators.

Regulators won’t sit on the sidelines. They’ll respond to complaints about charity governance from interest groups that appear informed and rational and that raise credible concerns about the security of charity assets. Remember that a primary goal of charity regulators is to take action to preserve charitable assets before they are placed in jeopardy and before charitable interests are harmed.

Understand which laws apply. A major dispute in the Sweet Briar case was whether the law of nonprofit corporations, the law of charitable trusts — or both — should apply. While this may seem an arcane issue to most charity board members and executives, huge stakes are involved. Boards usually have far more flexibility with respect to their conduct and their use of assets when corporate law, rather than trust law, applies.

Expect copycats. To the extent that the Saving Sweet Briar group is perceived to have won the battle (if not the war), the group’s victory may embolden other small constituency groups to pursue similar challenges in other charity controversies.

Document everything carefully. Well-crafted and readily accessible minutes, agendas, resolutions, and other indicia of board diligence are never more valuable than in the face of controversy over the actions of the governing board. The ability to immediately provide regulators with clear and incontrovertible evidence of board business judgment and prudence can often have a moderating effect on the intensity of any review or investigation.

Let’s be clear: There was no evidence that the Sweet Briar directors did anything wrong. In the settlement agreement, the Virginia attorney general praised the board’s "principled determination" and "best judgment" in handling Sweet Briar’s challenges. Yet despite that judgment, everything blew up. And that’s the lesson for charities. When boards address mission-sensitive issues, controversy is sure to arise — so plan for it.

Michael Peregrine is a lawyer who specializes in working with nonprofits at McDermott Will & Emery’s Chicago office.