BBLJ 9.1 ART 3 JAMESJAMES 8/21/2013 9:55 AM Nonprofit Pluralism and the Public Trust: Constructing a Transparent, Accountable, and Culturally Competent Board Governance Paradigm Faith Rivers James* In recent years, the nonprofit sector has come under scrutiny for failings of governance that present themselves in the form of policy controversies and operational scandals. Notwithstanding the altruistic nature of nonprofit organizations, too often, there is a gulf between good intentions and good governance. This article suggests that nonprofits should follow the example of the for-profit corporate sector and employ demographic diversity as a strategy to achieve better corporate governance. Demographic data indicates that the majority of nonprofit boards are significantly exclusionary in their constitution and governance. The lack of diversity can impair a nonprofit board’s efforts to be effective, inclusive, and pluralistic organizations. Nonprofits that employ diversity in governance are better positioned to maintain obedience to the organizational mission. Diverse governance enables a nonprofit board to employ better decision-making processes, and enables boards to define and achieve goals in a culturally competent, more efficient manner. In the spirit of democratic pluralism, nonprofit organizations and foundations should disclose board demographic composition as a strategy to achieve more transparent and accountable leadership. Modeling government-led efforts to disclose board demographic diversity, the sector can establish a paradigm for diverse governance that yields better nonprofit organizational performance. I. Introduction .................................................................................................... 95 II. State of Nonprofit Diversity .......................................................................... 97 A. Independent Sector ............................................................................ 97 B. Accountability.................................................................................... 99 1. Regulatory Strategies .................................................................. 99 * Professor, Elon University School of Law. J.D., Harvard Law School; A.B., Dartmouth College. The author would like to thank law faculty who attended presentations of this paper at the Southeastern Law Scholars Conference, the Southeast-Southwest and Midwest People of Color Legal Scholarship Conference, and the Lutie A. Lytle Black Women Law Faculty Workshop for the many constructive and thoughtful comments on earlier versions of this article. For research assistance, the author extends thanks to Tiffany Dyson, Meredith Thompson, and Julie Goldfarb for their invaluable efforts. This article is dedicated to the memory of Joseph N. Shine, William A. Ruth and Claude M. Scarborough, all exemplary lawyer-leaders who embraced diversity and excellence in charitable board service. 94 BBLJ 9.1 Art 3 James 8/21/2013 9:55 AM Nonprofit Pluralism and the Public Trust 2. Fiduciary Duties and the Public Trust ...................................... 100 C. Board Diversity ................................................................................ 105 1. For-Profit Board Diversity ........................................................ 105 2. Nonprofit Sector Board Diversity ............................................. 107 III. Board Diversity and Governance ............................................................... 114 A. The Business Case for Diversity: Groupthink and Governance ...... 114 B. Nonprofit Corporation Diversity and Governance........................... 119 IV. Modeling Diverse Governance .................................................................. 126 A. Legal Services Corporation: A Cultural Competent Board Model ............................................................................................ 126 B. Transparent Diversity Disclosure: Learning from the SEC ............. 132 C. A Diverse Governance Paradigm for the Nonprofit Sector ............. 136 I. INTRODUCTION Nonprofit organizations constitute a significant sector of the United States economy. Ranging from private foundations to public charities, the nonprofit sector constitutes 5.2% of gross domestic product.1 While hospitals and universities hold 22.4% of all nonprofit assets,2 the sheer number of nonprofits reflects a wide array of charitable causes, including over 900,0003 traditional “relief of the poor” charitable activities in the Elizabethan sense.4 Despite the social significance and economic impact of the nonprofit sector, nonprofits operate in a fairly independent manner, outside of heavy government control. This huge yet “independent sector” essentially monitors itself, with governance limited to directors who typically volunteer to serve in leadership capacities.5 From the Madoff Ponzi scam which led to the loss of billions swindled from poorly monitored charitable investment portfolios,6 to nonprofit providers publicly derided for being out of sync with the service needs of their 1. THE URBAN INST., THE NONPROFIT SECTOR IN BRIEF: FACTS AND FIGURES FROM THE NONPROFIT ALMANAC 2007 1 (2006), available at http://www.urban.org/UploadedPDF/311373 _nonprofit_sector.pdf. 2. JAMES J. FISHMAN & STEPHEN SCHWARZ, NONPROFIT ORGANIZATIONS: CASES AND MATERIALS 19 (3d ed. 2006) (Table 1.3 “Recipients of Charitable Giving” Source: American Association of Fund-Raising Counsel, Giving USA 2005: The Annual Report on Philanthropy for the Year 2004 (2005)). 3. THE URBAN INST., NAT’L CTR. FOR CHARITABLE STATISTICS, QUICK FACTS ABOUT NONPROFITS, http://nccs.urban.org/statistics/quickfacts.cfm (last visited Feb. 20, 2013) (stating that there are 973,961 charitable nonprofit organizations). 4. Act for the Relief of the Poor, 1601, 43 Eliz., c. 4 (Eng.). 5. Nonprofits are subject to regulation by the Internal Revenue Service, but monitoring is fairly limited to the awarding of nonprofit status and submission of annual tax returns. 6.See Melanie B. Leslie, The Wisdom of Crowds? Groupthink and Nonprofit Governance, 62 FLA. L. REV. 1179, 1181 (2010). 95 BBLJ 9.1 Art 3 James 8/21/2013 9:55 AM Berkeley Business Law Journal Vol. 9:1, 2012 communities,7 poor governance has contributed to the perception that the independent sector should improve the governance model. Prof. James Fishman has argued for higher fiduciary standards for nonprofit corporations which exceed standards for for-profit corporations. Fishman argues that the “special public purposes and public trust” that nonprofit organizations serve require higher fiduciary standards because the organizations steward assets dedicated to the common benefit.8 Governing a nonprofit organization requires that directors uphold this public trust in a manner that is accountable and culturally competent. Those who lead nonprofit organizations should embrace diversity and include members of various backgrounds (gender, race, ethnicity, and income) on their boards of directors. Demographically reflective leadership equips a board to avert the shortcomings of homogeneity and evolve into better decision teams that have diversity of thought and experience. With diverse governance, women and minorities will share a fair opportunity to protect, distribute, and serve charitable assets and philanthropic investments. Diverse governance provides an additional level of accountability that evades government regulators who monitor independent nonprofits from a distance. Participation by demographically diverse directors enhances a nonprofit’s ability to make sound, culturally competent decisions. As the primary consumers of nonprofit services, clients deserve a voice as board members who set the strategic direction of organizations which they rely upon for basic human services and community investments.9 A diverse governance parody is an essential element for a truly pluralistic nonprofit sector. Notwithstanding the charitable or philanthropic nature of nonprofit organizations, the sector has failed to lead in the area of diverse governance. Statistical data indicates that women and minorities are under-represented on a significant portion of public nonprofit and private foundation boards. 10 The lack of diversity has broad implications for board governance and organizational mission. Recently, the tension between good intentions and good governance 7.See The Letter that Shook a Movement, SIERRA MAGAZINE, May/June 1993, at 54, reprinted in, AMERICAN ENVIRONMENTAL HISTORY 323 (Louis S. Warren ed., 2004); see also Faith R. Rivers, Bridging the Black-Green-White Divide, 33 WM. & MARY ENVTL. L. & POL’Y REV. 449, 480 (2009). 8. James Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 EMORY L.J. 617, 676 (1985) (noting “the special public purposes and public trust of the nonprofit corporation, the nature of the nonprofit board, and the inadequacy of internal control and enforcement.”). 9.See discussion in Section IV: Modeling Diverse Governance, infra. 10. FRANCIE OSTROWER, URBAN INSTITUTE, NONPROFIT GOVERNANCE IN THE UNITED STATES: FINDINGS ON PERFORMANCE AND ACCOUNTABILITY FROM THE FIRST NATIONAL REPRESENTATIVE STUDY 18 (2007), available at http://www.urban.org/UploadedPDF/411479_Nonprofit_Governance .pdf. 96 BBLJ 9.1 Art 3 James 8/21/2013 9:55 AM Nonprofit Pluralism and the Public Trust exploded in California during a battle between nonprofit diversity proponents and the philanthropic community over A.B. 624.11 While that legislative battle subsided, debates over