A Festschrift in Honor of Professor Arthur Jacobson

https://larc.cardozo.yu.edu/event-invitations-2018/1051/thumbnail.jp

Helping Nonprofits Police Themselves: What Trust Law Can Teach Us about Conflicts of Interest

Fiduciary duty law seeks to minimize agency costs that occur when the interests of the agent and principal diverge. That law is context specific: the substance depends upon the objectives of the fiduciary relationship and the degree to which other forces, such as markets and social norms, help align the incentives of principal and fiduciary. Trust law has no business judgment rule, and prohibits even fair conflict of interest transactions unless they are approved by fully informed beneficiaries. Strict rules bolster norms against self-dealing and compensate for trust beneficiaries\u27 poor monitoring abilities and inability to exit or diversify. Corporate fiduciary duty law is more relaxed, and does not require the board to obtain advance approval prior to engaging in fair transactions with board members. The standard is more generous because diversified shareholders want to encourage risk, and because market forces pressure corporate directors to avoid conflicts that are not in the corporation\u27s best interests. Neither monitors nor markets exert meaningful pressure on nonprofit fiduciaries. When nonprofit corporations function effectively it is because the most vocal directors have internalized fiduciary duties as social norms. Fiduciary duty law in the nonprofit context should therefore seek to support and reinforce fiduciary duties as social norms. Trust law teaches that clear rules are superior tools for generating and supporting social norms. That lesson has been lost on policy makers, who have transplanted fuzzy corporate law fiduciary duty standards to the nonprofit context. The result has been the erosion of the fiduciary duty of loyalty

Is Federalization of Charity Law All Bad? What States Can Learn from the Internal Revenue Code

Professor Ascher makes a compelling case that federal law, and especially the Internal Revenue Code (the Code ), has eclipsed state law as the predominate regulating force of the charitable sector. Professor Ascher views this trend with trepidation-he criticizes the Code for imposing a frightening and bewildering array of often draconian penalties and for its failure to track preexisting state-law concepts. I agree that the combination of state and federal law creates an impenetrable maze that charitable fiduciaries find overly difficult to negotiate. Yet I am reluctant to finger the Code as the primary culprit. In my view, state law deserves much of the blame for its own demise. For when it comes to legal issues at the core of charity law-the non- distribution constraint and the charitable purpose requirement-state law is a largely useless tool for guiding or disciplining charitable boards. This failure is not solely attributable to attorneys\u27 general lack of resources or interest. The larger problem lies with the law itself. A compilation of the fuzziest of standards, state law gives no guidance to charitable fiduciaries. And charitable fiduciaries-volunteers with good intentions but little time and few resources-are uniquely in need of clear guidance