03 March 2020

Reputation and the nonprofit director: Fiduciary challenge in the 24-hour news era


Alana Petraske
Partner | US

This article, authored by Withers’ Alana Petraske, was published by the New York Law Journal on March 2, 2020.

In the current moment of high-publicity “tainted” donations, it is increasingly difficult for directors to balance attracting the financial support required to operate, on the one hand, with safeguarding the nonprofit’s valuable reputation, on the other.

The directors who form the guiding mind of a nonprofit organization are duty-bound to operate the organization to the highest standard—for the public good. They must each discharge their fiduciary duties by applying appropriate care and skill in good faith, and with undivided loyalty. One area that increasingly has the potential to put pressure on proper discharge of duty is fundraising: In the current moment of high-publicity “tainted” donations, it is increasingly difficult for directors to balance attracting the financial support required to operate, on the one hand, with safeguarding the nonprofit’s valuable reputation, on the other.

Competing Aims

Not every nonprofit organization seeks funds from the public, but those that do spend significant time and energy to bring in the funds needed to pursue their charitable aims. They must do so, or their programs, interventions, or services would certainly be affected. Boards and the executives to whom they delegate authority may feel that their principle challenge is locating generous donors, particularly in a crowded nonprofit “marketplace” marked by a cacophony of asks. However, another significant challenge is how to navigate the risk that some donations represent to an institution’s valuable reputation. This issue has grown in prominence in recent years as nonprofit institutions have been caught up in the reputational controversies of their donors. These controversies have affected nonprofit institutions in the United States, UK, France and elsewhere, and this, as well as the central role that social media and online news has played, makes this an issue of truly global relevance.

Reputational Risk and Governance

Risk is inherent in many aspects of nonprofit operations, from employing staff, to owning property, to working with vulnerable beneficiaries. Managing risk is a central fiduciary responsibility of the board but reputational risk is not always included in a board’s risk management strategy. Likewise, it is often glossed over in revenue-generation plans. This can lead to a potentially dangerous lacuna—reputational risk is lurking but neither those tasked with risk management or with generating funds have it firmly on the radar.

Pecunia Non Olet?

A tricky question is at the center of this issue—leaving aside scenarios where acceptance may be unlawful, can money ever be too “tainted” for a charitable organization to accept?

On one level the answer is simple: Where the disbenefit of acceptance outweighs benefit, the board may be justified in turning away even a much-needed donation. The gift of real estate illustrates neatly: A board may refuse to accept a seemingly valuable property if it turns out to be subject to costly litigation or onerous remedial obligations. Any value in the gift would be available only subject to the burden, and cost, of addressing these issues (or effectively passing them on to others). Staff time and advisory costs must of course be factored in to this calculus and ultimately, balancing all of these considerations, in advance, to arrive at an assessment of the real, net value is the fiduciary exercise at work.

In the recent spate of controversies, the question arises in respect of cash, and the disbenefit is difficult to quantify, as well as being highly subjective. So the practical application of this basic fiduciary framework is quite challenging.

Some directors may be tempted to invoke the phrase often credited to the Roman emperor Vespasian: pecunia non olet—or money doesn’t stink. Vespasian was not justifying the acceptance of charitable donations; he had reintroduced a tax on urine, collected from the sewers of Rome and sold for use in a variety of now-obscure uses (whitening of togas for instance). Vespasian’s son, Titus, is said to have been disgusted with the source of these revenues, to which Vespasian is said to have proffered a gold coin and asked him whether it smelled. A snappy phrase was thus born. While some parents may find this a useful mantra, nonprofit boards should think very carefully about relying on it. The current reality is that the origins of money can matter and they can, to some people at least, stink.

Risk Limitation

Risk can be mitigated, though again, the practical application is more complex than the legal framework.

Due diligence, gift acceptance and refusal policies. The board of a small charity could discuss the merits of accepting every gift and rely on their collective experience and intuition to turn away a risky gift. However, this will not be feasible for many organizations, particularly larger organizations that delegate fundraising to staff. One way to mitigate risk in this scenario is if gift acceptance and refusal processes and policies are codified and cover:

  • donor due diligence that is proportionate to the size of the gift and the prominence of the publicity the gift will attract;
  • whether, and in what circumstances, anonymous gifts are accepted;
  • a process for review of proposed gifts that raise concern, e.g. by escalating to a standing group of experienced “stakeholders”;
  • the organization’s approach to granting naming rights, including perpetuity and circumstances for terminating naming arrangements;
  • thresholds for the use of gift agreements, if relevant;
  • a framework for assessing proposals for unusual donor control or involvement; and
  • particular considerations raised by different types of gifted asset.

Gift agreements. While many organizations use gift agreements for some gifts, others rarely, or never, use them. Monetary thresholds are common where agreements are used, and agreements are frequently used when restrictions on purpose or capital expenditure may be imposed. The agreements themselves vary in length and complexity, including whether a clause expressly addressing reputational risk is included. Sometimes referred to in the United States as “morals clauses” and in the UK with reference to “disrepute”, these provisions may permit an agreement, or naming arrangements, to be paused or terminated where the continued association would cause reputational damage.

These provisions may be unilateral so as to permit the organization to terminate any naming arrangements if it determines that the donor’s circumstances are harmful, or have the potential to cause harm, to the organization. However, a nonprofit organization may itself become involved in a controversy sufficiently serious that a donor would not wish to be associated with it on an ongoing basis, so a mutual provision may be the most equitable approach.

Thought should be given to consequential practicalities, whether or not the agreement speaks to them expressly—_When and how will donor attribution be removed? Can a space be renamed immediately? With sponsored programming, is “pause” rather than “terminate” an option? How will communication about the separation be handled?_

Crisis readiness. It is tempting to take an ostrich-like approach to reputational controversy, but fiduciaries must not put their heads in the sand. Some planning for the possibility of a donor-connected crisis is prudent, whether or not a formal crisis plan is made. At a minimum, people internally, and external advisers as needed, should be identified who collectively have the experience and skill to promptly identify a budding crisis and devise and implement a crisis management plan. In some circumstances, a reputation management lawyer may represent a wise inclusion in this team in place of a traditional PR.

Giving it away? “Returning” donations that have been accepted prior to the eruption of a controversy may not in all cases be possible. A nonprofit might sensibly argue that a donation had not in fact been accepted, but once the gift becomes a charity asset, it may be hard for the fiduciary board to justify return, and in some cases tax considerations may prevent it. Transferring the remaining gift to another organization may be an option, but this must also be fully justified, and crucially must not involve funding a purpose outside the transferor’s charitable aims.

Governance framework. Directors should consider the organization’s approach to risk management generally to ensure it is fit for purpose and encompasses reputational risk. They might consider the establishment of a committee tasked with overseeing the identification and monitoring of key risks across the organization, and the adoption of operational policies that aim to mitigate them. A central risk management policy (sometimes incorporating a matrix ranking current applicable risks or a “risk register”) may be put in place, or several policies across distinct operational areas can address risk. A distinct gift acceptance committee might also be formed, particularly as part of an escalated process for the review of proposed donations under a gift acceptance policy. Either such committee could take a key role in crisis management if a controversy does arise

A Shifting Landscape and a Chilling Effect?

Social media and the 24-hour news cycle certainly contributes to the speed with which a potential controversy escalates. Protests, for example by university students or patrons of a cultural institution, can also cause a situation to explode into the international consciousness. Changing norms may also be at play; income inequality is at an extreme, rivalling the “Golden Age of Philanthropy,” and the power that philanthropy can seem to provide to donors is increasingly subject to challenge in public and academic discourse.

It is not clear whether this may lead to a chilling effect in philanthropy generally, in the practice of prominent naming, or even in the ability of nonprofits to recruit directors (who are commonly also donors). What is certain is that nonprofits will continue to need philanthropic support while also needing to protect their valuable reputations from lurking risk, and directors will find balancing these needs one of their key responsibilities as fiduciaries.

Alana Petraske Partner | New York

Category: Article