Let Charitable Directors Direct: Why Trust Law Should Not Curb Board Discretion over a Charitable Corporation's Mission and Unrestricted Assets

Abstract:     
This article addressed one of the hardest unanswered legal questions facing the modern nonprofit corporation: How much discretion should nonprofit boards have to redefine an organization's mission - for instance by changing an acute care hospital into outpatient neighborhood clinics, or by converting a home for abandoned animals into an institute for research vivisectionists? Similarly, how much discretion should nonprofit boards have to apply unrestricted assets acquired before the change to the redefined mission? (Unrestricted assets include donations for the charity's general purposes and non-donated resources such as revenues earned from the sale of goods and services.) Stated differently, which legal framework - trust law or for-profit corporate law - should apply when a charity seeks to change its mission and activities? For trust law partisans, the answer is easy: The corporate charity should not be able to effect such changes without showing that its prior purpose has become impracticable, impossible, or illegal to advance - thereby tracking trust law's cy pres doctrine. Corporate-law partisans, by contrast, would let nonprofit boards amend any part of the articles of incorporation, including the purposes clause, absent explicit provisions in the articles that preclude such amendments.

This article advocates maximal discretion for nonprofit boards over corporate mission and assets. By accentuating the differences between the default rules for charitable trusts versus nonprofit corporations, we can minimize the transaction costs for informed philanthropists. Because they appreciate the differences between these two forms, they can pick the off-the-rack form that best reflects their preferred degree of managerial discretion. Admittedly, this approach raises problems when applied to uninformed philanthropists, as some may choose the corporate form without appreciating the broad discretion it grants nonprofit directors. It might be, for example, a (hypothetical) majority of uninformed philanthropists might prefer to curb director discretion by applying trust law principles to nonprofit corporations. Even so, a default regime that maximizes the director discretion would facilitate the application of nonprofit corporate resources to more socially beneficial uses. Of course, each nonprofit corporation can elect to curb its directors' discretion to satisfy its donors' perceived preferences and concerns, but nonprofit law should not mandate this approach across the board.

Keywords: nonprofit law, philanthropy, trust law, charitable trusts, trustees, charity governance, nonprofit corporations, directors, director discretion, mission change

JEL Classifications: D23, G34, L22, L30, L31

Accepted Paper Series