DRAFT 6.20.06
DRAFT
Conference on State Attorney General Oversight and Regulation of Charitable Organizations
Columbia Law School, National State Attorneys General Program
February 24-25, 2006
Executive Summary
Introduction
In February 2006, Columbia Law School’s National State Attorneys General Program sponsored a symposium addressing current issues surrounding the “Oversight and Regulation of Charitable Organizations.” Born of dual interest on the part of the state Attorneys General and charities communities, the symposium drew an invitation-only crowd representing 39 state Attorneys General’s offices, including fifteen Attorneys General and scores of senior-level staff members. True to the spirit and mission of all conferences sponsored by the Columbia National State Attorneys General Program, the charities symposium had the benefit of attendance of a cross-section of experts, academics and practitioners vested in the symposium’s focus: well known academics in the field, public-interest attorneys, representatives of leading non-governmental organizations, philanthropic foundations and the defense bar.
Professor Ellen Chapnick, Dean of Columbia Law School’s Social Justice Initiatives, welcomed the symposium participants to the most recent conference in a series developed by the Columbia Law School’s National State Attorneys General Program, envisioned and founded by James Tierney, former Attorney General of Maine and Lecturer in Law at Columbia Law School, and Dean Chapnick. Throughout the year, the Program hosts several symposia dedicated to discrete topics that concern the intersection of state Attorneys General and public-private legal and regulatory issues. This particular symposium germinated from the interest of Attorneys General and charitable organizations in understanding better the roles played by various public and private players within the charities and non-profit environment. Numerous exchanges between participants within the formal agenda and during informal discussion marked one of the most successful conferences ever hosted by the National State Attorneys General Program.
In his welcoming remarks, Columbia Law School Dean David Schizer stressed the “vital function” of non-profits and charities within our communities. Dean Schizer reiterated the purposes of state regulation of charities and non-profit organizations: to monitor and measure success in organizations that are overseen not by shareholders, but by those who give voluntarily of their time and money and expect a particular mission to be fulfilled through that generosity.
Keynote Address, National Association of Attorneys General President
Steve Carter, Indiana Attorney General
Attorney General Steve Carter, current President of the National Association of Attorneys General, described a recent success in Indiana, in which he successfully negotiated a settlement between two rival entities within a single non-profit. The conflict, between a private college that was both trustee and residual beneficiary of a trust, and the trust’s primary beneficiary, a public living history museum, was resolved through the careful mediation of the Attorney General.
Additionally, General Carter noted the possible hindrances created by increased public speculation and media scrutiny in high-profile civil dispute resolutions.
Panel Discussion on Authority and Role of the State Attorneys General
The first panel discussion focused on Attorneys General’s determination and protection of the “public interest” vis-à-vis the missions of charities and non-profit organizations. Columbia Law Professor James Tierney, former Attorney General of Maine, introduced a case study, the Hershey Trust. Jerry Pappert, who litigated against the Trust, then spoke, followed by a panel discussion with Professor Evelyn Brody of Chicago-Kent College of Law and Professor Harvey Dale of New York University School of Law.
The panel debated the definition and nature of the “public interest,” the criteria for Attorneys General’s intervention in the functioning of a non-profit, and the potential problems that can arise from such intervention. Professor Brody cautioned that state Attorneys General should “closely ponder” their role when challenging board decisions, targeting a charity’s structure and procedural mechanisms, or determining whether or not a board is satisfying its fiduciary duties.
Professor Dale focused on the question of whose interests trustees have a fiduciary obligation to serve. Do they serve the beneficiaries as expressed by the charity’s founding donor, or is there a greater “public interest” to which they are beholden? Professor Dale argued that certain tenets of for-profit governance can and should be imported into the non-profit and charities context. For example, in executing his or her fiduciary obligations, Dale held, a trustee should look to both the original intent of the donor as well as the realities of the current financial and social environment. Dale further argued that, unless the board acts in breach of its fiduciary duties, Attorneys General should hesitate to substitute their own notions of what is in the interest of the trust. Although a supporter of increased oversight of charities, Professor Dale cautioned that “overzealous oversight can harm a good charity if it perverts the intentions of skittish potential donors… In short, the Attorney General should exercise his discretion wisely.”
Remarks by Columbia Professor of Law Harvey Goldschmid Regarding Governance of Non-profit Entities and the Applicability of Sarbanes-Oxley
Turning to the equally pressing topic of self-regulation by non-profit boards and managers, Columbia Law School Professor Harvey Goldschmid, former Commissioner of the Securities and Exchange Commission, presented remarks on the potential applicability of the substance of the Sarbanes-Oxley Act to the non-profit environment. Specifically, Professor Goldschmid applauded efforts to import to the charities sphere the stringent accountability and oversight requirements imposed by Sarbanes-Oxley in the public sphere. Attorneys, accountants and auditors, for example, are equally at play in the non-profit world and could be utilized more prominently in order to increase public confidence in charity management. In addition, Professor Goldschmid noted that the whistle-blower provision of Sarbanes-Oxley is not only currently in force within the non-profit community, it is in fact utilized fairly frequently. Apart from these other aspects of the for-profit corporate community that could be applied to the non-profit realm, Professor Goldschmid believes that the business judgment rule should apply equally to non-profit corporations.
Professor Goldschmid vigorously endorsed the notion that state Attorneys General introduce legislation to adopt provisions similar to those encompassed by Sarbanes-Oxley for non-profit entities, including “reporting up” requirements and strong enforcement powers at the state level. Cognizant of those charitable organizations that do not have tremendous assets or resources for auditing and reporting functions, Professor Goldschmid echoed Attorney General Carter’s call for state Attorneys General to serve as educators for the non-profit community even as legislation is enacted with reporting and auditing requirements appropriate for smaller charities. “Nonprofit enforcement at the state level would prove ideal,” Professor Goldschmid concluded.
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Panel discussion on the Reality of Governance and Fiduciary Duty Issues
The second day of the conference began with a panel of distinguished Attorneys General and senior staff members discussing specific examples of foundations, trusts, charities and other non-profits that faltered or imploded under various degrees of poor management.
This panel discussed problems that can arise when boards of directors engage in egregious self-dealing; trustees live far from the immediate vicinity of the trust; and donor/founders pass away, leaving a murky understanding of their original intentions. Panelists recounted “war stories” of dealing with the media on high-profile cases, expressed frustrations about interaction with the IRS and federal investigators, and thoughtfully revisited the options the respective Attorneys General ultimately utilized.
Panel Discussion of Regulation versus Study versus Litigation
The final discussion of the symposium was devoted to the merits and tradeoffs of regulation, study and litigation in the charities environment. Marion Freemont-Smith, former Massachusetts assistant Attorney General in the 1960’s and Fellow at Harvard University’s Hauser Center for Nonprofit Organizations, summarized the history of regulatory action (or inaction) for charities over the last half century. Professor Freemont-Smith urged Attorneys General to recognize the inherent utility of enacting regulatory schemes at the state level and of seeking state funding and public support for such schemes. She also underscored the need for the charitable sector itself to support the mission of regulatory regimes, including disclosures and audit requirements.
Marc Owens, former Director of the Exempt Organizations Division of the IRS, then addressed the interaction of state Attorneys General and the IRS. Because the IRS wields tremendous power to revoke the tax-exempt status of a non-profit entity, Mr. Owens advised Attorneys General to interact with the IRS frequently during an investigation, if the continued existence of the non-profit is desired.
Lastly, the final panel debated the efficacy of the current regulatory scheme split between state and federal authorities. Daniel Kurtz, former New York Assistant Attorney General, maintained that better enforcement of current laws would preempt the need for future state legislation. Professor Dale, as moderator of the panel, held that federal preemption of the field discourages states from undertaking a valuable analysis of which regulatory provisions are necessary. According to Professor Dale, by undertaking this analysis, states will find the appropriate level of regulation.
In sum, a full spectrum of views emerged from the panelists regarding the proper method of ensuring good governance within charitable entities.
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