Friday, January 11, 2008
How much control should a national office have over a local nonprofit affiliate? Two days ago we blogged Habitat For Humanity San Antonio, Inc. v. Habitat for Humanity International, Inc (Case No. SA08CA0013, United States District Court for the Western District of Texas, July 4, 2008). As previously noted, the case involves HFHI’s insistence that HFHSA (and all other affiliates) agree to what we thought was a 27 page “franchise” agreement, under which all organizations previously affiliated with HFHI (over a 30 year period) under a two page aspirational “covenant” must now agree to much more detailed terms governing everything from employee relationships to mortgage financing. As it turns out, the actual agreement is more like 157 pages, including all the various schedules (from A to G). Plaintiff’s counsel was kind enough to provide Nonprofit Tax Prof Blog with a copy of the agreement. Unfortunately, I am still an amateur blogger and can't figure out how to upload the entire file (I've tried several times but I must be doing something wrong; its a big pdf file). So if you want a copy, please shoot me an email or, better yet, post a comment. I'll be sure to send it right out to you. The prior post talked about the impication that HFHI might be treading into the commerciality quicksand. There are more troubling “commerciality doctrine” allegations in the complaint. Paragraph 26, for example alleges that HFHI hired a new CEO to convert the organization into a $1.8 Billion franchise operation, eschewing less profitable works, and generally adopting the operation strategies of large franchises such as McDonalds, Inc. Overall, the complaint alleges that "HFHI abandoned the independent grass-roots, faith-based ministry arrangement that had energized local volunteers and communities in favor of a corporate, centralized franchise arrangement that could maximize revenues to HFHI from the franchise name." I am quite sure, of course, that HFHI will have its own say on these matters but it sure ought to consider the implications for its tax exemption of these allegations if they turn out to be true. Of course, we should all consider the survivability of nonprofit organizations in a world increasingly driven by the profit motive. From a geopolitical point of view, the disputed agreement also contains provisions that demonstrate the new donor accountability and post 9/11 world in which nonprofits must operate. Take the financial provisions, for example. In the past local affiliates operated independently and were not required to share their financial books and records with any outside parties, save the Internal Revenue Service and then only in the summarized 990 form. But paragraph 2.6 and 2.7 of the new agreement states:
Section 2.6 Reports. Upon reasonable requests HFHI and Affiliate will provide promptly to each other such financial and operations reports as agreed upon by the parties. Without limiting the generality of the foregoing, the reports will include:
a. Form 990 and Annual Report;
b. Financial records created and maintained in the ordinary course of business, including such items as financial statements, e.g., statement of position (balance sheet), statement of activities and changes in net assets (income statement) for such year;
c. Records Related to house production numbers, volunteer numbers, mortgage refinancing, delinquency rates and such other information as may be requested from time to tim;
d. Such other information as may be reasonably requested from time to time, including but not limited to copies of tax returns, other regulatory filings and data concerning officers, directors, agents and contracting parties (subject to applicable privacy laws).
Section 2.7 Inspection of books and records. HFHI will be given access and the right to exame all books, documents, papers and records of Affiliate. Affiliate will take all reasonable steps to make the books and drecords promptly available to HFHI during regular business hours. Affiliate may request HFHI documents not publicly available. HFHI will take all reasonable steps to make such documents promptly available to Affiliate during regular business hours.
In the accompanying FAQ to the new agreement HFHI explains its rationale for demanding these rather extensive rights from local nonprofits:
Habitat for Humanity International and Habitat affiliated organizations are under increased scrutiny by individuals and organizational donors. Therefore, it is important to include the financial and programmatic activities of the affiliates and support organizations in overall Habitat financial accounting. By reporting financial information to Habitat for Humanity International, Habitat-affiliated organizations are assisting in creating the accurate and comprehensive picture of Habitat for Humanities activities.
Paragraph 5.2 of the agreement contains an “anti-terrorism” clause:
Section 5.2. Anti-terrorism. The parties agree that they have not knowingly provided, and will take reasonable steps to ensure that they do not provide material support or resources to any individual, entity or organization that commits, attempts to commit, advocates, facilitates or participates in terrorist acts, or has committed, attempted to commit, facilitiated or participated in terrorist acts.
These statements perhaps demonstrate the increasing “federalization” of nonprofit law – a trend, inevitable perhaps, but pretty much universally condemned by most interested observers. While HFHSA doesn’t complain about these specific provisions too much (it objects to the first more than the second), the underlying implication of its complaint is that it objects to the federal “hostile takeover” (in the words of the complaint) of its operations. Indeed, while the HFHI contract assets a belief in local control, its contract (Schedule G) contain pretty detailed instructions and mandates on everything from (1) political activity – lobbying must be consistent with the interests of other Habitat affiliates, (2) Board of Director Governance (including mandatory term limits), (3) Collaborative Development, (4) Communications and Technology, (5) Comprehensive and Standardized Financial Requirement, (6) Conflicts of Interests – including prohibitions against private inurement and nepotism (the prohibition on immediate family members in the same supervisory chain has both advantages and disadvantages in small nonprofits, of course, (7) Construction Standards, (8) Donor Intent, (9) financial reporting , (10) acceptance and use of government funds, . . . (14) affiliate restructuring, . . . (16) Employment and Volunteer Practices, . . . (17) Record retention and . . . (26) Nondiscrimination amongst Homebuyers. So much for local control (experimentation, nimbleness and all that!) That the agreement is so detailed and that at least twelve Habitat affiliates have been kicked out for their failure to get in lock step probably speaks to the need for a book about “good governance for national organizations with state affiliates.” The unfortunate lawsuit might have been avoided via a national conference during which the local chapters were given a serious opportunity to review and comment on the proposed terms. Even the IRS goes through a notice and comment process. From the standpoint of nonprofit governance on the grassroots level, I am not at all bothered by some provisions, slightly bothered by others, and completely put out by others; the independent sector is rightly comprised of, well, independent actors who do not and should not to take kindly to top-down management – that is a model for government and business.