Incorporating the vision: Mechanisms in nonprofit governance to ensure founders' rights

Many were surprised in the last week as Project Veritas, the undercover journalism nonprofit organization, suspended and then removed its founder, James O’Keefe, as a director and chief executive officer. What will Project Veritas be without its founder? many asked online and off. Wearing my nonprofit corporate governance hat, I was led to a different question: “How could O’Keefe have failed to structure his nonprofit organization to guarantee his rights to govern the organization?”

The various state nonprofit corporation statutes provide many tools—not always widely known or often employed—that can help secure the rights of nonprofit founders. I have spent nearly a quarter of a century advising founders and other nonprofit directors, officers, and others on how best to structure their organizations’ governance—both to accomplish their missions but also to safeguard their founders’ and other stakeholders’ rights.

Without opining on the specifics of the Project Veritas case, in this essay I outline three mechanisms, available under most states’ nonprofit corporation laws, that nonprofit founders and other stakeholders can use to avoid James O’Keefe’s fate.

MEMBERSHIP

Members are a category of nonprofit stakeholders who, beyond being supporters of the organization, are typically empowered in its governance.

Originally most nonprofit corporations were organized on a membership basis, and currently many are still, including labor unions, trade associations, social clubs, and others. But more commonly today, charities are organized on a directorship basis and without a formal stakeholder class. There are many reasons for that development, but it should be noted that no state prohibits the institution of nonprofit members and any charity, no matter its mission or other constituencies, can have members.

What do members do? Members are the nonprofit analog of for-profit shareholders. Under most states’ nonprofit corporation laws, members are by definition the electors of the board. They may also possess other statutory rights, including approval rights over changes to the governing documents and of extraordinary transactions like merger, conversion, or dissolution. Finally, an organization’s articles or bylaws may, beyond those rights provided by law, “reserve” further powers to the members, which may include the right to elect officers or to approve changes to the corporate mission or more mundane matters like approving the budget or initiating a lawsuit. One caution: if a member is granted powers that ordinarily belong to the board, then the member may in fact be treated like the board and be subject to potential liability from which the members are usually exempt.

The membership mechanisms that work to provide representation and otherwise empower an organization’s large stakeholder class may also be used to guard the founder’s rights. A founder could have him or herself named the sole member of the corporation, thus ensuring that he or she would have the right to appoint and replace the board of directors if the board strayed from the founder’s vision. While this mechanism might seem to entrench the member and cement his or her control, it is an ordinary part of nonprofit corporate governance. More importantly, I have actually seen it improve corporate governance. A founder-member can feel secure in his or her position and so can feel free to appoint a board of robust, independent directors, instead of a board of his or her own supporters whose major qualifications are loyalty to the founder. The independent board can operate in a sphere of freedom—particularly if the founder is not also on the board—while the founder as member still possesses an ultimate veto.

APPOINTED OR DESIGNATED DIRECTORS

While the use of a corporate membership is an important means to preserve a founder or other stakeholder’s rights, it brings with it certain costs. I’ve often had clients reject the added complexity and administrative burden of a membership in favor of empowering certain directors directly. While it is the case that nonprofit corporate directors are typically appointed in a uniform fashion and share the same rights, most of the nonprofit corporation laws permit some variation from those default rules. In fact, they usually permit a director to be “appointed” by a specified person or “designated” in the corporation’s governing documents. So it is possible to emplace on the board of directors a founder who would not be subject to the general rules of election, removal, and terms and term limits. In other words, the law permits a permanent director. (Under some of the nonprofit laws, you could get to a similar result by establishing a special class of directors with the necessary rights to achieve the same kind of tenure.)

The same statutes also permit some flexibility with regard to director action. Generally, those laws establish a default quorum for board action at a simple majority of the board and specify that each director has an equal vote on each matter. But the statutes permit variation from those default rules, so that in an organization’s governing documents the necessary quorum could include the presence of one or more appointed or designed directors and require the appointed or designated directors’ votes for a matter to pass. (Or likewise directors could vote in different classes, with the affirmative vote of each class required to approve the matter.)

While the appointed or designated director approach can substitute for membership in the governance equation, the charter or bylaws terms that underlie that approach need to be carefully crafted and closely followed. A yet simpler, more hands-off approach also exists under most of the nonprofit corporation acts.

SPECIFIED PERSON

The specified person approach allows a nonprofit corporation to name in its governing documents (usually, the articles) one or more persons whose approval is required to adopt changes to the governing documents and to authorize extraordinary transactions like mergers and similar transactions, sales of assets outside the ordinary course, and dissolution of the corporation. The specified person may also have rights to appoint and remove an appointed director of the type discussed above.

One major advantage of the specified person approach is that that person retains an important veto over significant corporate decisions without being subject to the liability that may attach to directors or controlling members.

While the specified person approach may be unfamiliar, it is used by many nonprofit corporations that are affiliated with or subordinate to other organizations. So, for example, the mother superior of a Catholic religious order may be the designated person of a Catholic school corporation with the intention that she oversee the school’s retention of its Catholic identity. Or a hospital parent holding corporation may be the designated person of each of its subsidiary hospital operating corporations, thus substituting the specified person structure for the more usual parent-subsidiary ownership structure found in the for-profit world.

BONUS: MEMBER OR DIRECTOR AGREEMENT

One final tool I mention only because it is a unique feature of the nonstock corporation law of Virginia, where Project Veritas is incorporated. Virginia law permits a nonprofit corporation to adopt an agreement, made either among the members or the directors, and which can be included in the corporation’s governing documents or left as a standalone agreement. In the member or director agreement, the corporation can vary practically any feature of nonprofit corporation governance. It can grant powers to any member or director over any matter that comes before the board. It could vest all authority to select or remove the board in a designated director. It could withhold certain directors’ rights to vote on certain transactions. Obviously, it’s a very powerful governance tool, and it should be employed only with competent professional advice.

CONCLUSION

One of the great virtues of the nonprofit corporation laws is their flexibility. They recognize that, much more so than business corporations, nonprofit corporations take many different shapes and serve many different constituencies. The law thus permits the governance of nonprofit corporations to be fashioned to best serve their missions. And that includes the rights of a nonprofit corporate founder or other stakeholders to see their visions carried through, which can be, through the techniques discussed above, built into the very structure of the organization.

---