A Case Study of a Private Foundation's Governance and Self-Interested Fiduciaries Calls for Further Regulation

Abstract:     
Since their early history, American private foundations have warranted and have received both consistent praise and repeated criticism. The plaguing criticisms have focused on abuses facilitated by a relatively compliant, permissive and under-regulated environment. Many individuals have attacked private foundations and their donors, leading to waves of new federal tax laws and state legislation attempting to curtail undesirable behaviors of donors, private foundations and their decision-makers. Nonetheless, so far, the existing laws have failed to eliminate the opportunities for abuse.

The core of the article is a case study. The case study fictionalizes names, times, mission of the private foundation and values of its assets, but it is based on a real private foundation. It is the story of a particular donor, the private foundation that the donor established, and the positive programs undertaken by the foundation. But, it also is the story of what may be numerous abuses perpetrated on the foundation after the donor's death by executors of the donor's estate who were also members of the foundation's board of directors. Thus, the case study serves as a "real life" vehicle to illustrate failures of the existing regulatory regimes applicable to private foundations, their donors and fiduciaries.

It is the intimate fiduciary structure, the lack of serious attention to formal protocol, and the under-regulated nonprofit sector environment that enabled the possible abuses to occur in this case study. It is submitted that creators of foundations have a duty to ensure that their philanthropic and charitable purposes are not thwarted through the lack of attention to formal structures, management responsibilities and policies. Current laws, as well as monitoring and enforcement activities, are inadequate to deter abusive behaviors. Numerous possible remedies are suggested, among which are increasing budgets and staffs of state attorneys general offices and the Internal Revenue Service to permit improved monitoring and enforcement, and modifying existing legislation and regulations and the addition of new legislation. Appropriate regulatory structures are a necessary means of supporting and maintaining the public's trust of private foundations and of assuring the healthy future of the nonprofit sector.

Number of Pages in PDF File: 105

Accepted Paper Series