The Nonprofit Ethicist | Summer 2006

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Dear Nonprofit Ethicist,

What are the boundaries between grant making and asset management activities? Are there restrictions on a foundation making money off an asset that is generating revenue from the grants it gives out? For example, is it OK for a foundation to own a building and fill it with grantees? It will be collecting rent from the same organizations to which it makes rent grants.
 
Dear Boundary Explorer,
I’m sure the foundation can do this, but it raises lots of issues. It is a good example of the devil lurking in the details. Any money the foundation makes from owning the building is, to a degree, its own money. The law requires foundations to pay out at least five percent of their assets every year. If this foundation pays out precisely five percent, then the profit it makes from owning the building goes back into its asset base, thereby reducing its actual payout. It may be obeying the letter of the law, but definitely not the spirit. It should increase its payout above five percent—or whatever internal standard it has adopted—by an amount equal to its profit from the building. If rents are below market as a form of subsidy, then the tenant/grantees have an edge over other grantees. They are, in effect, getting a grant that automatically renews every year while other organizations have to compete for the foundation’s limited dollars. Although foundations have enormous discretion to give money to whomever and under any conditions they please, it strikes me as unfair to permanently privilege a select few, who probably signed up as tenants on a first-come, first-served basis. I wonder what would happen if a grantee/tenant falls behind in its rent payments? Would the foundation give the delinquent tenant more to maintain its own cash flow while avoiding the unpleasant task of evicting a grantee? It should have a property management firm manage the building, charge market rent, and enforce a standard policy regarding arrearages.

Dear Nonprofit Ethicist,
A local nonprofit that lacks term limits for its board of directors has had the same chair in place for an astonishing 39 years. There are a number of astute professionals on the board who are frustrated with the chair’s inability to facilitate effective meetings, but no one has had the fortitude to confront the situation and ask him to step down. He has accumulated an inappropriate amount of power and has no intention of retiring from his post. Other directors do not want to offend this very elderly man—they are simply waiting for him to die. Meanwhile, the organization is experiencing serious operating problems and dysfunction within the senior management team. The board hasn’t a clue what is going on, and is not fulfilling its governance role. The CEO recognizes the board’s dysfunction, but feels helpless because it is not within his authority to intervene. How can this organization get out of the ditch?
 
Dear Planning Consultant,
It sounds like the organization may die before the board chair does. When people try to avoid unpleasant but necessary tasks, they often end up creating a bigger problem. This is a prime example. I’m guessing reluctance to get rid of someone who no longer pulls his weight is common. Nobody likes to fire a volunteer, especially a venerable board chair. But that’s precisely what this organization has to do. The drafters of the bylaws dropped the ball by not requiring term limits. I imagine it is hard to get anybody off this board—the board chair is only the most prominent one. Here’s the plan: arrange a promotion to “chairman emeritus,” name something after him, give him a party, but take away his operational powers. Oh yes, and change the bylaws. Sorry, there is no painless way to handle this. What if he refuses to bow out and a majority of the board sits on its hands? The ED could issue a him-or-me ultimatum. Or, he could try expanding (and packing) the board, but don’t tell anyone where you got this suggestion.

Dear Nonprofit Ethicist,
I found myself in a difficult situation last year. At a prospective donor lunch, the ED suggested that we could work with the donor’s business for a major building contract the next year. I had thought that these projects were usually done with bids, and was worried about the donor’s company possibly assuming that our agency would do business with this new company, and was worried about the quid pro quo that I saw was implied. I dropped a quick, “clarifying” e-mail to the company representative, stating that there was no quid pro quo between donation and our business. Was I overly concerned? In addition, I have found out that the business is already involved in the pre-construction work, including rezoning problems. This is after a small donation has occurred. Is this a problem? Dear Uncomfortable,
The situation you describe sounds symptomatic of a larger governance problem. Boards should be involved in key decisions on major construction projects. Professional services are the most common form of pre-construction work and it is customary to award professional contracts on a no bid basis. When current or prospective donors are involved, boards must take extra care to avoid even the appearance of impropriety. Construction projects, on the other hand, are usually bid. The fact that the ED talked about giving Mister Moneybags the organization’s construction business sounds as if the board is cut out of the process. If the board does not insist on bidding, it is not doing its job. By the way, if only one company bids, throw out the bid, review the specifications to make sure they did not favor the sole bidder, and re-bid the contract without disclosing the amount of the discarded bid.

Dear Nonprofit Ethicist,
My cousin works for a nonprofit organization that holds an annual conference and seeks corporate sponsorships. Usually, this is a straightforward transaction with a corporate marketing department, which involves a simple letter about the available levels of sponsorship. The companies pick a level, get their name and logo in all the right places, and send a check. Recently, one of the regional utilities told my cousin that she needed to complete their online grant application for the corporate foundations to pay for the $5000 sponsorship. This will mean a charitable grant agreement and a donor acknowledgement letter thanking the foundation, and reporting to the donor the value of goods and services received for their contribution. Is this right? What should she report as the value of the sponsorship?

Dear Inquisitive Cousin,
Let’s get the technical details out of the way first. I consulted Kaye B. Ferriter, a nonprofit tax expert, who tells me that donors can treat sponsorship payments as charitable contributions, provided there are no substantial return benefits—e.g., a “call to action.” If the acknowledgement contains a “call to action,” then a portion of the contribution constitutes a payment for advertising. The charity then has “Unrelated Business Income” from advertising. The donor might get a marketing deduction but not a charitable contribution when it buys advertising. Without a ca l to action, the sponsorship is a charitable contribution like any other, and the organization should report the value of goods and services provided in return. It’s all very legal but, as you ask, is this right? It is another example of a trend toward corporate foundations becoming agents of marketing departments. I’m guessing that the utility’s marketing department traditionally bought sponsorships and this function is being offloaded to its foundation, which naturally considers any payment to a nonprofit as a grant. Ethical people and organizations keep their multiple roles separate, but this is an issue for the utility. Accepting its money in this fashion should not constitute an ethical problem for your cousin’s organization. However, there are a lot of issues for nonprofits who allow a commercial enterprise to use their good name. Your cousin might want to look at a report by the state Attorneys General, entitled “What’s in a Nonprofit’s Name?” It’s posted on the Web sites of the New York and California Attorneys General, among others.

Dear Nonprofit Ethicist,
As the director of a Christian group home for the last two years, I have had increasing concerns regarding the composition of the board. The board consists of only six members, all who have served since the organization’s inception seven years ago. Two of the six members are married to each other and I wondered if this is legal and/or ethical. Additionally, all six of the board members attend the same church, where they are either paid staff or in a voluntary leadership position. There seems to be a resistance to bringing on new members and one member even said to me, “We want to make sure they have our DNA.” Simple principles of group dynamics would say that “group think” is inevitable. In responding to the board member’s statement about the DNA, I pointed out the value of diversity, as well as the threat of groupthink. He was not receptive and the subject has been informally, but clearly, closed. The dilemma I am struggling with is that although I love my staff, volunteers, and clients, I no longer feel comfortable working under this board’s leadership. The organization has been severely limited in its growth and improvement of services as a result of board decisions. Do you have any suggestions that may serve as a last ditch effort to see the board become more healthy?
 
Dear Torn,
You are right to be worried about inbreeding (the DNA metaphor again) on the board, and for all of the right reasons. I think I see another problem—the bylaws should provide for term limits with staggered terms. The situation that troubles you is one of those maddening grey areas, because it would be unfair, not to mention impractical, to have a rule against two or more board members belonging to the same church or other organization. But I agree that this board crosses the line. The problem with having a married couple on the board is that your organization is probably the project of one spouse, and the other spouse acquiesces to keep peace at home. It cuts the effective size of your board while giving one person an extra vote. If you require a quorum of 50 percent, three people could conduct business. At any meeting of three people that included the married couple, they would have a majority of the votes. What to do? You have to convince the board of what you told me: “The organization has been severely limited in its growth and improvement of services.” But instead of telling them that the problems are due to their decisions—which they won’t like and will only cause them to dig in—try to persuade them that the board needs an expanded skill set. Suggest enlarging the board to bring in these skills. Six is too few anyway, although the legal minimum in some states is even fewer. Fifteen is a good number. Even if the new members come from the same church, they will inject new ideas and maybe even different opinions, especially if the new members are diverse in age.
 
About the Author

WOODS BOWMAN is Associate Professor of Public Service Management, DePaul University .