The Evolution of the Duty of Obedience in Charitable Organizations - Research Paper Example

The Evolution of the Duty of Obedience in Charitable Organizations from the Trust Model to the Corporate Model of Regulation Introduction Today nonprofit organizations suffer from the lack of people’s trust. Even in case if the organization’s activity is successful, people usually do not believe in its competence and reliability. Restricted gifts, which impose special conditions, become widespread and philanthropists received a right to apply for breaking off. Unpleasant situations and scandals spoiled the reputation of nonprofit organizations. For example, graduates do not want to maintain relations with their educational institutions because of abuses. It is difficult to assess the increasing influence of this dishonor, however it is determined that financing organizations have a lot of doubts about what and where to give1. This lack of trust is closely connected to dishonest activity of some charities, which spend the money received for their primary goals implementation for their own needs. The population is not sure if this information is reliable and what organizations do that, but nevertheless it results in indignation. Giving money to charity, philanthropists assume that the funds will be used properly. If there is a doubt, a donor looses trust and stops financing2. Losing the confidence of financing organization is not the most unpleasant that can happen to charity. Spending money for their own needs destroys the trust of people in charities’ main mission. The main task of non-profit organizations is to help and this is the reason why they exist. The lack of people’s confidence and as a result of failure in implementing the main task threatens the existence of the non-profit sector as such. The sector can simply disappear notwithstanding that the heads of non-profit organizations have an official duty to work in line with the helpful mission. This obligation, for instance, do not allow the heads of organizations which are to use finances to help homeless people from Los Angeles to spend money to help homeless people form New York. It is also not allowed to sell landed property needed for the main purpose implementation in order to benefit from nice selling opportunity, even if the income is going to be used for charity3. All these problems testify that the sector needs changes and some progress has been already made in this direction. The given paper will discuss the possible changes, mainly evolution of the duty of obedience in charitable organizations from the trust model to the corporate model of regulation. The duty of obedience The importance of duty of obedience The Duty of obedience does not only direct the heads’ activity, it also guarantees that the funds provided by the financing organizations would be spent accordingly. Thus, the obligation makes supervisors lawfully responsible to their establishment’s charitable mission and to financing organizations rightful hopes. Unluckily, this duty is unclearly determined and presently represents a more general sense concept than an official. However, it goes without saying that if general sense or self-direction were adequate motivations there would be no necessity to apply the legislation. Nevertheless, the experience shows that official accent and clearing up of the obligation are necessary to renovate the understanding of the real task of nonprofit organizations that lies in help and supply. The obligation is also essential to understanding the difficulties restricted gifts brings. Even in case if philanthropists do not refuse to give funds because of the lost confidence, they have a right to impose new restrictions that makes non-profit organizations’ activity more difficult. The limitations imposed by philanthropists complicate the relations between them and non-profit organizations. Restricted gifts increase upsets the heads of non-profit organizations as it is perceived as creating a confidence. These conditions limit the organization’s use of finances and make its activity narrower. Limitations consequently do not let non-profit organizations use the funds provided by financing institutions or private donor to advance their working conditions and pay the bills. The duty of obedience . . . mandates that a [charitable corporation’s] Board, in the first instance, seek to preserve its original mission. Embarkation upon a course of conduct which turns it away from the charity’s central and well-understood mission should be a carefully chosen option of last resort. Otherwise, a Board facing difficult financial straits might find sale of its assets, and “reprioritization” of its mission, to be an attractive option, rather than taking all reasonable efforts to preserve the mission which had been the object of its stewardship4. Sometimes the conditions set by donors represent a serious threat to non-profit organization’s primary task. For instance, the limitations imposed on definite areas of research can prevent thorough investigation of scientific research institute. Restricted gifts negatively influence the probability of future financial help. Philanthropists and the non-profit organizations have different understanding of what should or should not be allowed. These different points of views usually become the reasons of misunderstandings, which are often resolved in courts. Such scandals lead to the refusals of financing organization to provide future financing5. The main role The duty of obedience should help non-profit organization’s heads to understand the obligations included when the requirements are set. At the same time as the duty of obedience imposes some limitations, it gives the stimulus to meet the financing organizations or person’s requirements and helps understand what the organization should do and how to behave in future6. Meeting requirements can advance cooperation between the non-profit organizations heads and philanthropists. Moreover, it can help strengthen public confidence in nonprofits organizations and balance the obligations. Unrestrained, market-oriented solutions can help advance economic position; however will not contribute much to the creation of healthy, democratic society7. Despite the fact that the obligations make the heads of non-profit organizations work ineffectually, it provides necessary protection.  Creators of nonprofits organizations define the primary concerns of the society, which need their interference. Donors in their turn define what non-profit organization will be able to meet their requirements8. The duty of obedience officially differentiates nonprofit organizations and their tasks from the tasks of commercial ones. The task of commercial organizations is to make profit and the role of non-profit organizations is to implement their task and to be mission and loyalty-oriented. The negative side The negative side of duty of obedience is that its strengthening restrains the actions of non-profit organization’s heads. They can’t implement all the ideas and reach all the goals. Sometimes the necessary actions can’t be implemented, because of the restrictions. This prevents the activity of the whole non-profit sector. A very unpleasant situation occurs if a donor dies after he left restrictions. The restrictions can be cancelled only in court and it takes time to receive the corresponding decision. However, the society and market conditions are changing rapidly and such dead hand control can bring a lot of harm. In general, the law honors donors’ restrictions on charitable gifts, often into perpetuity, in order to encourage charitable giving. In deciding between devoting their property to charitable use and keeping it in the family, donors take into account the likelihood that their donated property will remain governed by their wishes. Implicitly the state has determined that net social welfare increases by permitting the dead hand of the testator to dictate the enjoyment of donated wealth forever9. Reinforcing the duty of obedience leads to rising accountability for non-profit organizations. The heads of non-profits in their turn may impose more requirements on their personal that can reduce their activity. Strengthening the duty of obedience also can impose more charges on some organizations. All the negative effects should be taken into account by the donors when they impose restrictions. The models of regulation in non-profit organization Speaking about charitable organization, it is easy to become really confused as to the model of its regulation, due to the fact that this organization has a something like a hybrid of corporate regulation and its primary charitable mission. The solution for this issue is still not found, while it becomes especially relevant, when non-profit organization wants to alter its main goals or the ways of their implementation. There are two main models of regulation that are available theoretically and in practice: the corporate model and the trust model. However, they are both not satisfactory, because they do not take into account the differences in the role of the duty of obedience in business and in non-profit organizations10. The Corporate Model This model is considered to be the most uncomplicated. According to it, courts consider the alterations like the similar changes in a business company. If the law approves the goals’ alteration supported by organization heads’ voting, neither other heads nor the court have any reasons for protest. The Trust Model The trust model is more difficult. According to it, the court sees the resources a philanthropist provides a non-profit organization with as those should be used only in order to implement the organizations’ primary mission, the purpose it has for the moment of receiving funds. Consequently, the organization is considered to be a subject that has an obligation to implement a definite goal. The heads are not able to make any alterations11. The application of Both Models Both models are equally applied. The trust model puts the conditions provided by donor on the first place. Moreover, it assumes, without clarification, that a philanthropist can impose restrictions. The organization has choice because the donor also may appear indifferent to the organization’ behavior as for alterations12. The corporate model is quite different. The court may put the non-profit organization’s intention on the first place. The grounds are the following: if the donor gave the funds to the non-profit organization with the form that allows to alter the goals, he must assume that these funds may also be spent differently. However, this is not fully correct, because the trust model states, that a financing organization or an individual always believe that the purpose will be the same as for the moment of financing and it is no need to specify it. That is, definitely, exactly the resolution the courts makes under the trust model. According to the current set of guidelines, the resolution should be grounded first of all on the financing organizations’ aim. However, sometimes donor’s desires may appear not understandable or simply vague or even doubtful. In this case the court’s resolution should be founded on other rules. However, any resolution is usually founded on two factors: the donor’s purpose and the social principles. If the first is vague, the second represent the basic foundation. Practice shows that usually these values are the same as default rules of non-profit organization, so the resolution is made in favor of the organization. The Evolution of the Duty of Obedience Some scientists state that the corporate law used in for-profit companies should not be applied for non-profit organizations. They state that the law should recognize that the charitable trust and the charitable origination have a lot of corresponding items and therefore the trust model is more appropriate for non-profit organizations. However, in the modern economic conditions organizations need more flexibility is usually considered to be a main reason to adopt the corporate model of regulation. This feature of the corporate model is clearly demonstrated in connection to every of the fiduciary obligations. For instance, speaking about the responsibility, the corporate model creates the conditions for the heads to participate in doubtful business deals without confession if the outcome is beneficial for the organization. In trust model, such deals create legal responsibility. Speaking about claims, corporate model flexibility is perfectly demonstrated by the protection of any fair non-profit corporation head’s decisions. In trust model, courts make a careful review to reveal any discrepancies. Lastly, corporate flexibility has serious implications for duty of obedience. At the same time as both the corporate and trust model imply the conformity to rules, the corporate form let the directors change the rules independently without court authorization, while under the trust law approval can be given only if the court considers the amendments appropriate and corresponding to the donor’s conditions. Under the corporate law, the heads of non-profit companies have a right to break up the corporation of their own free will and make another corporation if find that appropriate. Moreover, both trust and corporate law implies definite minimum fiduciary principles, which are not to be ignored or changed. The supposition that the corporate model can help breach the duty of care is not correct as it is related only to the amendments to the duty of obedience. If to consider corporate law separately, it may seem that it weakens the influence of the concept of the responsibility and main mission in charitable organizations, and a trust law can serve as a solution to the problem. However, the two facts must be taken into account. First, by emphasizing the lawful discrepancies between non-profit organizations and charitable trusts, it is possible to decrease the expenses of knowledgeable generous donors, who want to found and hold up charitable organizations the regulation of those is extremely concerned with the goals and assets. By decreasing the expenses of those engaged in financing charitable organizations, it is possible to improve and increase the activity of such organizations. Secondly, a corporate model can raise the effectiveness of organization’s resources. A lot of donors who are not properly informed will create and hold up charitable organizations, even if they would chose to restrain a charitable organization regulation’s control over its goals. Corporate law can help use the charitable organizations’ resources for society’s benefit. Conclusion In the modern society nonprofit organizations suffer from the lack of people’s trust. Even in case if the organization’s activity is successful, people usually do not believe in its competence and reliability. Duty of obedience is essential for the successful activity of the nonprofit corporation. A duty of obedience should make it possible for nonprofit corporation to preserve the people’s trust that is vital to their activity. Nevertheless, it should not overstrain administrative capacities of nonprofit organization’ heads. It should make them drawing their attention to the main duty of their organization. The obligation should serve as a stimulus for the heads of organizations to establish good relations with financing organizations. At the same time as the duty of obedience imposes some limitations, it gives the stimulus to meet the donor’s requirements and helps understand what the organization should do and how to behave in future. Meeting requirements can advance cooperation between the non-profit organizations heads and financing institutions. Moreover, it can help strengthen public confidence in nonprofits organizations and balance the obligations. Unrestrained, market-oriented solutions can help advance economic position; however will not contribute much to the creation of healthy, democratic society. Despite the fact that the duty of obedience makes the heads of non-profit organizations work ineffectually, it provides necessary protection.  Creators of nonprofits organizations define the primary concerns of the society, which need their interference. Financing organizations in their turn define what non-profit organization will be able to meet their requirements. The duty of obedience officially differentiates nonprofit organizations and their tasks from the tasks of commercial ones. The task of commercial organizations is to make profit and the role of non-profit organizations is to implement their task and to be mission and loyalty-oriented. Both models are widely used. The trust model puts the conditions provided by donor on the first place. Moreover, it assumes, without clarification, that a financing organization or an individual can impose restrictions. The organization has choice, because the donor also may appear indifferent to the organization’ behavior as for alterations. The corporate model is quite different. The court may put the non-profit organization’s intention on the first place. The grounds are the following: if the philanthropist gave the funds to the non-profit organization with the form that allows to alter the goals, he must assume that these funds may also be spent differently. However, this is not fully correct, because the trust model states, that a financing organization or an individual always believe that the purpose will be the same as for the moment of financing and it is no need to specify it. That is, definitely, exactly the resolution the courts makes under the trust model. According to the current set of guidelines, the resolution should be grounded first of all on the financing organizations’ aim. However, sometimes donor’s desires may appear not understandable or simply vague or even doubtful. In this case the court’s resolution should be founded on other rules. However, any resolution is usually founded on two factors: the donor’s purpose and the social principles. If the first is vague, the second represents the basic foundation. Practice shows that usually these values are the same as default rules of non-profit organization, so the resolution is made in favor of the organization13. In the modern economic conditions organizations need more flexibility is usually considered to be a main reason to adopt the corporate model of regulation. This feature of the corporate model is clearly demonstrated in connection to every of the fiduciary obligations. For instance, speaking about the responsibility, the corporate model creates the conditions for the heads to participate in doubtful business deals without confession if the outcome is beneficial for the organization. In trust model, such deals create legal responsibility. Speaking about claims, corporate model flexibility is perfectly demonstrated by the protection of any fair non-profit corporation head’s decisions. In trust model, courts make a careful review to reveal any discrepancies. Lastly, corporate flexibility has serious implications for duty of obedience. At the same time as both the corporate and trust model imply the conformity to rules, the corporate form let the directors change the rules independently without court authorization, while under the trust law approval can be given only if the court considers the amendments appropriate and corresponding to the donor’s conditions. Under the corporate law, the heads of non-profit companies have a right to break up the corporation of their own free will and make another corporation if find that appropriate14. Moreover, both trust and corporate law implies definite minimum fiduciary principles, which are not to be ignored or changed. The supposition that the corporate model can help breach the duty of care is not correct as it is related only to the amendments to the duty of obedience. By emphasizing the lawful discrepancies between non-profit organizations and charitable trusts, it is possible to decrease the expenses of knowledgeable generous donors, who want to found and hold up charitable organizations the regulation of those is extremely concerned with the goals and assets. By decreasing the expenses of those engaged in financing charitable organizations, it is possible to improve and increase the activity of such organizations. Secondly, a corporate model can raise the effectiveness of organization’s resources. A lot of donors who are not properly informed will create and hold up charitable organizations, even if they would chose to restrain a charitable organization regulation’s control over its goals. Corporate law can help use the charitable organizations’ resources for society’s benefit. Works Cited 1. Katz, Robert A.. Let Charitable Directors Direct: Why Trust Law Should Not Curb Board Discretion Over a Charitable Corporation’s Mission and Unrestricted Assets, 80 Chi. Kent L. Rev. 689, 2005.  2. Manhattan Eye, Ear & Throat Hosp., 715 N.Y.S.2d at 595 3. Sugin, Linda. Resisting the Corporatization of Nonprofit Governance: Transforming Obedience into Fidelity, 76 Fordham L. Rev. 893, 2007  4. Freemont-Smith, Marion R. The Search for Greater Accountability of Nonprofit Organizations: Recent Legal Developments and Proposals for Change, 76 Fordham L. Rev. 609 ,2007.  5. Adtkinson, Rob. Obedience as the Foundation of Fiduciary Duty, 34 J. Corp. L. 43, 2006  6. DiPietro, Melanie. Duty of Obedience: A Medieval Explanation for Modern Nonprofit Corporate Governance Accountability, 46 Duq. L. Rev. 99 , 2007  7. Sasso, Peggy. Searching for Trust in the Not-for-Profit Boardroom: Looking Beyond the Duty of Obedience to Ensure Accountability, 50 UCLA L. Rev. 1485, 2003  8. Fishman, James. Improving Charitable Accountability, 62 Md. L. Rev. 218 , 2003  9. Adkinson, Rob. Unsettled Standing: Who (Else) Should Enforce the Duties of Charitable Fiduciaries?,23 J. Corp. L. 655, 1997  10. Brody, Evelyn. Whose Public? Parochialism and Paternalism in State Charity Law Enforcement, 79 Ind. L.J. 937, 2004  11. Broday, Evelyn. The Limits of Fiduciary Law, 57 Md. L, Rev 1400 , 1998  12. Cherry, Jaclyn A. Articles, Update: The Current State of Nonprofit Director Liability, 37 Duq. L. Rev. 557 , 1998  13. Crimm, Nina. A Case Study of a Private Foundation’s Governance and Self-Interested Fiduciaries Calls for Further Regulation, 50 Emory L. J. 1093 ,2001  14. McVeigh, Ellen W. and Borenstein, Eve R. The Changing Accountability Climate and Resulting Demands for Improved “Fiduciary Capacity” Affecting the World of Public Charities, 31 Wm. Mitchell L. Rev. 119 , 2004  15. Notes, The Hershey Trust’s Quest to Diversity: Redefining the State Attorney General’s Role When Charitable Trusts Wish to Diversify, 45 Wm. & Mary L. Rev. 1769, 2003.  Read More