Searching for Trust in the Not-for-Profit Boardroom: Looking Beyond the Duty of Obedience to Ensure Accountability

Abstract

Until recently, little attention has been paid to the law governing not-for-profits, and in particular (1) whether the not-for-profit director should be held to a trust standard, a corporate standard or some other standard in fulfilling his fiduciary duties, and (2) who should have standing to enforce those fiduciary duties. In the 1990s these issues were pushed to the forefront by public scandals at several high profile not-for-profit organizations. These scandals triggered a public outcry that the not-for-profit sector was not being effectively overseen and the public interest was not
being adequately protected.

In this Comment, Peggy Sasso concedes that the not-for-profit sector is indeed experiencing a profound crisis, but argues that it is a quiet crisis that has little, if anything, to do with the scandals that have captured the public's attention. Instead, the author suggests that the health and long-term vitality of the sector is fundamentally threatened by increasing institutional homogenization that favors majoritarian concerns at the expense of the nonmajoritarian interests embodied in the organizational mission. Given that this crisis is far more abstract and pervasive than a handful of misdeeds at a few not-for-profits-and is in part informed by our very choice of a democratic government-its resolution is far more complex and less immediately accessible than much of what has been proposed thus far concerning the appropriate standard of fiduciary conduct and who should have standing to enforce those standards.

The not-for-profit director is held to three fiduciary duties: the duty of care, the duty of loyalty and the duty of obedience. While the first two duties exist in for-profit corporate law, the third is unique to the not-for-profit sector and recognizes that, as an institution held in the public trust, the success of the not-for-profit corporation is defined by the efficacy with which it fulfills its mission. Thus, the duty of obedience provides a standard of legal accountability roughly equivalent to that of enhancing shareholder value in the for-profit sector.

This Comment concludes that while not-for-profit corporate law should play an important aspirational role by substantively defining the duty of obedience as a distinct fiduciary duty, it should play a limited role when it comes to enforcing the duty. Instead of looking to the solution for the crisis solely in terms of corporate law, we must also examine the vital contributions that can be made through further studies of organizational behavior and group processes in the not-for-profit institution. How effective the not-for-profit is at fulfilling its public purposes is ultimately driven by what information is presented in the boardroom and how the directors use that information to strategically position the institution within its operating environment on an ongoing basis.

59_50UCLALRev14852002-2003
By uclalaw