October 8, 2009
Professor Ira Mark Ellman (Arizona State University Law School) Posts "On Developing a Law of Nonprofit Corporations"
Professor Ira Mark Ellman of Arizona State University Law School has posted his draft article on California Nonprofit Corporation Law on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "On Developing a Law of Nonprofit Corporations." Here is the abstract:
This article considers the California Nonprofit Corporation Law. That law was seen to have broken important ground, and the author’s role as one of the two draftsman of the California approach informs his discussion. This article explains the evolution of the California Nonprofit Corporation Law, describes some of the basic issues considered in its drafting, and offers tentative suggestions for the future development of nonprofit laws. It concludes that the innovations in the California law are only the beginning and hopes that further development will continue.
October 7, 2009
Brian Galle (Florida State University Law School) Posts "Foundation or Empire? The Role of Charity in a Federal System"
Professor Brian Galle of Florida State University Law School has posted his draft articleon subsidies for the charitable sector on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "Foundation or Empire? The Role of Charity in a Federal System." Here is the abstract:
This Article critiques the prevailing justification for subsidies for the charitable sector, and suggests a new alternative. According to contemporary accounts, charity corrects the failure of the private market to provide public goods, and further corrects the failure of government to provide goods other than those demanded by the median voter.
However, the claim that government can meet the needs only of a single “median voter” neglects both federalism and public choice theory. Citizens dissatisfied with the services of one government can move to or even create another. Alternatively, they may use the threat of exit to lobby for local change. Subsidies for charity inefficiently distort the operation of these markets for legal rules.
Nonetheless, there remains a strong case for subsidizing charity, albeit on grounds new to the literature. Charity serves as gap-filler when federalism mechanisms break down. For example, frictions on exit produce too little jurisdictional competition, and excessively easy exit produces too much competition - a race to the bottom. At the same time, competition from government constrains inefficient charities. Thus, charity and government each perform best as complements to the other.
Finally, this Article sketches the normative legal consequences of these claims. Most significantly, I respond to the claims by Malani and Posner that for-profit charity would be superior to current arrangements. That suggestion would fatally weaken competition between charity and government, defeating the only persuasive purpose for charitable subsidies.
October 6, 2009
Stewart Sterk (Cordozo Law School) Posts "Rethinking Trust Law Reform: How Prudent is Modern Prudent Investor"
Professor Stewart Sterk of Cordozo Law School has posted his draft article on reform in the trust investment doctrine on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "Rethinking Trust Law Reform: How Prudent is Modern Prudent Investor Doctrine?" Here is the abstract:
During the 1990s, modern portfolio theory provided the theoretical foundation for significant reforms in trust investment doctrine, reforms that freed trustees from a legal regime in which they faced potential liability for making 'speculative' investments. The reforms enabled trustees to pursue investment policies that protected beneficiaries against inflation risk. But the reforms worked too well: they encouraged trustees to invest a higher percentage of trust assets in equities just in time for a decade that has seen two precipitous stock market declines.
Although no sensible investment strategy would have avoided losses during these periods of market turmoil, the doctrinal reforms endorsed in the Restatement (Third) of Trusts and the Uniform Prudent Investor Act made matters worse. By structuring trust investment doctrine as a regime of vague standards, the UPIA and the Restatement provided trust beneficiaries with little protection against agency costs that would lead trustees to invest too heavily in equities. The current regime would be problematic even if its economic underpinnings - modern portfolio theory and, in particular, the efficient capital markets hypothesis - accurately described economic reality. But market behavior over the last ten years, combined with recent theoretical work, weaken those underpinnings and make the current regime’s bias toward equity investments even more questionable. A legal regime that replaced the current standard-based system with one providing trustees with 'safe harbors' for making investment decisions would provide trustees with more guidance, while simultaneously providing better protection to beneficiaries against excess market risk.
Lloyd Mayer (Notre Dame Law School) and Brendan Wilson (Akin Gump) Post "Regulating Philanthropy in the 21st Century: An Institutional Choice Analysis"
Professor Lloyd Mayer of Notre Dame Law School and Attorney Brendan Wilson of Akin Gump have teamed up to post their draft article on regulating charity governance on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "Regulating Philanthropy in the 21st Century: An Institutional Choice Analysis." Here is the abstract:
For more than fifty years scholars, practitioners, and government officials have debated whether the federal government, the state governments, or the charitable sector itself can best ensure that charitable organization leaders fulfill their fiduciary duties. The dramatic growth of this sector, recent highly publicized governance scandals, and a push in Congress and the IRS for more federal involvement in this area have now brought this issue to a head. This article lays a foundation for resolving the dispute by developing an institutional choice framework for considering and comparing the various available options. Applying that framework, the article concludes that the best regulators of charity governance would most likely be state-level government agencies that work with but have a limited degree of independent from the state attorneys general. The article also determines that the best way to ensure adoption of this institutional choice – and limit potential weaknesses – is for the federal government to use a portion of the already existing private foundation investment income tax to provide funding for such agencies.
October 5, 2009
Melanie B. Leslie (Cordozo) Posts "Conflicts of Interest and Nonprofit Governance: The Challenge of Groupthink"
Professor Melanie B. Leslie of Cordozo Law School has posted her draft article on nonprofit "group think" on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "Conflicts of Interest and Nonprofit Governance: The Challenge of Groupthink." Here is the abstract:
The central dilemma for nonprofit law is that nonprofit fiduciaries are not accountable to a principal. Although state and federal governments have authority to enforce directors’ fiduciary duties, enforcement efforts range from minimal to nonexistent. The nonprofit corporation is also free from the market pressures faced by its for-profit counterpart. It is up to boards of directors to police themselves – to ensure that the nonprofit is run effectively and that charitable assets go towards mission and not into the pockets of insiders. Decades of psychological research about group dynamics teach us that “groupthink” can undermine social norms that facilitate good governance procedures. Groupthink occurs when directors place allegiance to fellow board members ahead of the nonprofit’s best interests. Groupthink blinds directors to conflicts of interest, and may also induce directors to refrain from adequately monitoring ongoing business relationships with board members. As a result, conflict of interest transactions often divert charitable assets away from the charities’ intended beneficiaries and into directors’ pockets. Recent nonprofit scandals, such as Yeshiva University’s decision to invest $15 million dollars with Ezra Merkin, the chair of its finance committee, who then quietly entrusted it to Bernard Madoff, demonstrate that charities are uniquely susceptible to groupthink.Because currently, fiduciary duty law is structured as a set of fuzzy standards that appear to sanction self-dealing, the law facilitates groupthink. Restructuring the state law fiduciary duty of loyalty as a set of clear rules would help support good governance norms. A flat prohibition on self-dealing and conflict of interest transactions would be the most effective way to ensure that fiduciaries place the best interests of the nonprofit ahead of self-interest. Short of that, clear directives requiring disclosure of conflicts, investigation of alternatives and proof that inside transactions are clearly below market would do much to counter the damaging impact of groupthink.
Dana Brakman Reiser (Brooklyn Law School) Posts "Charity Law’s Essentials"
Professor Dana Brakman Reiser posted an abstract of her working paper on the essential characteristics of charity law on SSRN's Nonprofit and Philanthropy Law Abstracting Journal. The article is entitled "Charity Law's Essentials." Here is the abstract:
The boundary between charity and business has become a moving target. Social enterprises, philanthropy divisions of for-profit companies (most notably at Google), and legislation creating hybrid nonprofit/for-profit forms all use business models and practices to mold and pursue charitable objectives. This article asserts that charity law must be streamlined in order to respond to these and other dramatic charitable innovations. My new vision of charity law centers around two essential requirements. First, charity law must continue to demand that charities maintain an other-regarding orientation, pursuing benefits for someone other than their own leaders and managers. Second, existing charity law must be revised and supplemented to mandate that charities utilize group governance. Additionally, this dual focus should be intensified by removing the limits on commercial and political activity that currently clutter charity law. These reforms will enhance charity law's ability to regulate traditional charities. Moreover, focusing charity law on its essentials will reveal the tools necessary to respond to the exciting developments blurring the boundary between charity and business.