Thursday, September 11, 2008

DiPietro Publishes "Duty of Obedience: A Medieval Explanation for Modern Nonprofit Governance Accountability"

Professor Melanie DiPietro (Seton Hall) has published "Duty of Obedience: A Medieval Explanation for Modern Nonprofit Governance Accountability" in the Duquesne University Law Review.  Here is an excerpt:

The United States “boasts the largest nonprofit sector in the world,” which has often been referred to as the “invisible sector,” and as “perhaps the biggest unknown success story in American history.”  The nonprofit sector, especially those public benefit charitable corporations enjoying federal tax exempt status as 501(c)(3) corporations, has become less invisible. Unfortunately, the success of public benefit charitable corporations has been overshadowed by scandal. These scandals have contributed to public skepticism concerning the effectiveness of the substantial benefit the public actually receives from the activities of these corporations--the raison d'être of privileged tax exempt status. In short, the public benefit charitable sector is “plagued by a ‘dangerous crisis of confidence’ that stems from a financial and economic crisis as well as a crisis in effectiveness.”

While there is much debate over how to improve the “transparency and accountability” of the sector, there is consensus that accountability is necessary. The need for accountability has engendered discussion of various remedies, including the utility of Sarbanes Oxley-type legislation for nonprofits and accountability for violations of fiduciary duties, without which the law is merely aspirational. Other commentators focus on director independence in the board room and establishing fiduciary duties for the directors of parent holding companies because of potential conflicts of interests arising from overlapping boards in related corporations. In addition, the Internal Revenue Service's Form 990--“Return of Organizations Exempt From Income Tax”--is another method of providing publicly available information concerning, in addition to financial information, information on “exempt purpose achievements in a clear and concise manner”--including “achievements that are not measurable.” The need for transparency and accountability has also sparked a discussion of the scope and the nature of the fiduciary duties of directors of public benefit charitable corporations.

The Proposed Principles of the Law of Nonprofit Organizations of the American Law Institute (ALI Principles) include the duty of care and the duty of loyalty, but do not employ the language of a separate duty of obedience. Evelyn Brody, the reporter for the revision of the ALI Principles, concludes that “[t]he law imposes on fiduciaries only the twin duties of loyalty and care.” There is general agreement concerning the separate articulation of the duty of care and the duty of loyalty. There is, however, less support among commentators concerning the necessity to reference a separate duty of obedience for directors of public benefit charitable corporations.

For the entire article, see Melanie DiPietro, "Duty of Obedience: A Medieval Explanation for Modern Nonprofit Governance Accountability," 46 Duq. L. Rev. 99 (2007).

DAB

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