Thursday, August 15, 2019
William M. Klimon (Caplin & Drysdale) has published Beyond the Board: Alternatives in Nonprofit Corporation Governance, Harvard Business Law Review Online (2019). It is a detailed and fascinating account of how flexible many state laws are regarding the governance structures of nonprofit corporations. Here is the introduction (citations omitted):
The diversity of the nonprofit sector is manifold. There is great variety in organizational form; nonprofit organizations have long been structured as corporations, charitable trusts, and unincorporated associations. Now the Internal Revenue Service (IRS) has recognized the exempt status of standalone limited liability companies. Likewise, the range of activities across the sector is stunning: healthcare, education, welfare, religion, the arts, and the environment. And even within those fields the diversity astounds: from a tiny free clinic to the Adventist Health System; from a new public charter school to Harvard University; from a Primitive Baptist chapel to the thousands of Roman Catholic congregations, orders, and organizations; from a community theater to the Metropolitan Opera. That immense diversity has affected even the relatively uniform world of nonprofit corporate governance.
The basic principle of board governance remains the standard for nonprofit corporations: “[e]ach nonprofit corporation must have a board of directors.” But attempting to legislate for such a diverse sector has led lawmakers to realize that one size does not fit all and not every nonprofitmaking corporation is best served by traditional board governance. Consequently, the various state nonprofit corporation statutes include a really amazing variety of mechanisms to deviate from, supplement, or even override that basic principle.
The following discussion reviews many of these mechanisms. Reference will be made repeatedly to the Revised Model Nonprofit Corporation Act, promulgated by the Business Law Section of the American Bar Association (ABA) in 1987 and subsequently adopted by at least half of the states. The widespread adoption of that model law makes it a useful touchstone for exploring alternatives to board governance. But the great variety of nonprofit governance innovations is not ignored and several nonuniform state-specific provisions are also discussed.