Nonprofit corporations: educate or regulate?

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Eye from Albany
January 2005

Nonprofit corporations: educate or regulate?
by Paul M. Bray

The Legislative Gazette reported in November that “Spitzer won’t apply Sarbanes-Oxley to not-for-profits”. The Federal Sarbanes-Oxley Act was a reaction to the financial fraud at Arthur Anderson and other major corporate scandals that followed in the wake of Enron’s collapse. Its goal was to restore public trust in America’s corporate structure.

Attorney General Eliot Spitzer, whose Charities Bureau supervises more than 40,000 nonprofits in New York, sought to apply Sarbanes-Oxley’s financial requirements to not-for-profit corporations through legislation introduced at his request by the State Legislature. Spitzer’s legislation was a wake-up call to the nonprofit community. Now the Attorney General believes that “educating directors and officers of not-for-profit corporations rather than imposing laws” is adequate.

From what we saw in Albany about the private nonprofit Saratoga Performing Arts Center’s (SPAC) mismanagement of its public trust to operate a performing arts facility located in Saratoga State Park (a significant public asset under a 100 year rent free lease from the State), the wake-up call is needed.

The lid was blown at SPAC only after it sought to end the 40-year residency of the New York City Ballet, the centerpiece from the beginning for performing arts center. What came to light were annual half million dollar deficits causing a declining endowment, compensation (more that $300,000) for SPAC’s President, Herbert Chesbrough, (that “is at the higher end of the spectrum for performance-arts-related nonprofts), an over reliance on ticket sales in place of fund raising (which was in the hands of Chesbrough’s wife who is the development director) and various cozy financial relationships between Chesbrough and the SPAC board members who had business dealing with SPAC. All of this came out in a long overdue preliminary audit by the State Office of Parks, Recreation and Historic Preservation.

The Audit took special umbrage at Chesbrough’s $400,000 “separation agreement” negotiated after the controversy hit the fan. State Park’s counsel, Paul Laudato, requested the Attorney General investigate this agreement for possible violation of New York’s nonprofit law.

SPAC board member Stephen Serlin who recently became Chairman has responded to the audit for the slightly reconstituted Board, in part, by saying that SPAC would conform to the Sarbane-Oxley governance reforms. However, as Times Union columnist Fred LeBrun described it, SPAC did it by “essentially agreeing with the audit, but not admitting they let it happen”. Who is at fault? Serlin also expressed his desire to see Chesbrough’s wife continue as an employee of SPAC despite her failure to generate private contributions at an appropriate level.

The other question we should be asking is how out of the ordinary is the SPAC mismanagement or how deep is the mess with nonprofits which provide many public services as well as make up a sizable share of employment in New York.

I expect that all of the SPAC board members were dedicated to SPAC’s artistic mission, but nonprofits may too easily get off track without the owner and investor scrutiny of public corporations. SPAC’s board increasingly insulated itself leaving the public in the dark. It fell into growing self-dealing. (The audit noted that numerous board members do business with SPAC and that “these types of relationships are to be avoided”.) When you assume you are doing a good deed as is the case with volunteer board members of nonprofits, giving your time and making financial contributions, anything done in a good cause apparently begins to seem to be ok. That is when a mess results.

Perhaps the Attorney General should have second thoughts on withdrawing from the legislative arena in assuring the obligations of nonprofit boards of at least the multi-million dollar nonprofits are met. It will be interesting to see how he handles the referral of the SPAC case.

Bush’s victory leaves it for the States to lead on the environment

While the Bush Administration unravels decades of hard fought environmental protections, Mark Schapiro reveals in the December 27th issue of The Nation magazine how initiatives from the European Union present a stark choice for U.S. industry: Either conform to Europe’s stricter health and environmental standards, or give up the European market. The responses from an array of U.S. industries reveal the changing position of the United States and the challenge that the EU presents to the Bush administration’s retreat from environmental and health protection. See, The Nation, Dec. 27, 2004 “New Power for ‘Old Europe'” In addition, the Kyoto protocols go into effect on February with the USA on the sidelines.

President Bush and some of his allies who have been incredibly blind in their Iraqi actions, are also showing themselves to be blind about global climate change and where the rest of the world is going on environmental protection. In a global village, being odd man out even with great military power is not the place to be.

On renewable energy courses and carbon issues, it looks like New York and some other States are going to chart their own environmental course more in keeping with Europe. As at least one commentator said, after Bush’s reelection “thankfully we have federalism”. Look for State like New York to help repair the international damage of Bush’s environmental actions and chart the course of what one day will become the nation’s environmental policy.

Paul M. Bray is President of P.M.Bray LLC, a planning and environmental law firm in Albany, New York. His e-mail is pmbray@aol.com.