Control and Accountability of the Nonprofit Corporation
| Publication year | 1995 |
| Pages | 549 |
1995, March, Pg. 549. Control and Accountability of the Nonprofit Corporation
This distinction has important implications for the governance of nonprofit corporations. Many such corporations hold substantial assets and regularly generate revenues in excess of their expenses, notwithstanding their status as "nonprofit," Without owners, the control of this property rests in the hands of the corporation's members, directors and officers. Nonprofit managers have the obligation to apply these assets for the public good, yet generally are not subject to the same level of scrutiny as their counterparts in the for-profit world. For this reason, other mechanisms for public accountability have arisen. This article explores the governance of nonprofit corporations under the Colorado Nonprofit Corporation Act ("Act") and the implications of that governance for control and accountability of these organizations.
Without stockholders, the question of who owns the nonprofit corporation becomes, as a practical matter, "Who has the right to control its assets?" A nonprofit corporation may be controlled by its members and directors, or by its directors alone. Although these persons have no proprietary interest in the corporation's assets, the degree of control they are entitled to exercise can closely resemble the control exercised by owners and, without appropriate supervision and accountability, can be abused to mimic some of the financial advantages of ownership.
Under the Act, a nonprofit corporation may or may not have members, as designated in its articles of incorporation and bylaws.(fn3) If there are members, their voting rights may be limited, enlarged or denied to the extent specified in the articles of incorporation.(fn4) In the chain of governance of nonprofit organizations, voting members fill the role that is most analogous to the role of stockholders in a for-profit corporation. Like stockholders, they generally elect the directors and approve major corporate actions, such as amendment of the organizational documents, merger or consolidation, dissolution and sale of substantially all the corporation's assets.(fn5)
Probably the most typical use of the voting membership structure is with a "mutual benefit" organization, such as a professional or trade association, which has an active membership that wants to retain control over the corporation's activities. Another common use of this structure is when one nonprofit corporation serves as the sole voting member of another, in effect creating a "subsidiary" nonprofit corporation. This is usually done to invoke limited liability for certain corporate activities, for administrative purposes or to facilitate fund-raising efforts. For example, a health care corporation may create a controlled corporation for its hospital operations, or a museum may set up a separate but affiliated fund-raising foundation with a separate board.
If its membership is large, the use of voting members can be a cumbersome administrative structure for the nonprofit organization. Because members have no equity interest in the corporation, they may not be motivated to attend meetings, making it difficult to establish a quorum.(fn6) Moreover, members are not necessarily business people and may be relatively unsophisticated in matters of corporate governance. Further...
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