Legal Topics

Info You Can Use: Non-Profits and Loans

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If you didn’t catch it, in June Non-Profit Quarterly had a good 101 guide on when it is appropriate for non-profits to take out loans.  Most times you hear about non-profits and loans it is once the non-profit is in financial trouble and deep in debt.  The discussion of constructive use of loans by non-profit arts organizations is relatively rare.

In my own experience, conversations among arts administrators usually touches on earned revenue, fund raising/sponsorships and grants.  I have never heard anyone talk about using loans to fund an initiative. This might be, as the NPQ article suggests, there is a stigma of failure associated with taking out a loan. Or it might be simply that we are so used to worrying about falling attendance, lack luster fundraising and onerous grant writing that no one really thinks to mention loans.

In addition to discussing the times it is and is not appropriate to seek a loan, the article notes that there are no “one-size-fits-all” loans so organizations can negotiate terms that suit their needs.  They also provide a general sense of what answers and materials you might expect to be asked to provide as part of the loan process.

 

 

Stuff To Ponder: Professionalizing Non-Profit Boards

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Via Tyler Cowen at Marginal Revolution is a proposal put forth in the Stanford Law Review suggesting replacing board members with a professional board services company.

When I first saw the title “Why Not Put a Firm on Your Board” on Cowen’s blog, I thought maybe the Stanford article was going to be a satire of the whole “corporations are people” idea that is the basis so many recent Supreme Court decisions. However, they are completely serious and there is some sense to what they propose. (Though I suspect they may still have been inspired by the court.)

As I read the article, I started to wonder if something similar might be good for non-profits. The article is definitely aimed at large for-profit corporations, but the fundamental problems are the same:

-Both for and non-profit boards are comprised of people who have other day jobs and don’t have the time, either during or outside board meetings, to exercise proper oversight of the corporation.

-Board members either get too little information about the corporation to do their jobs, or are overwhelmed with too much.

-Board members often don’t possess specialized knowledge about the entity they are overseeing and therefore can not make good decisions.

-Finally, board members are in a position where they are more loyal to the management of the company than to the general community of stakeholders.

The articles authors propose a company, which they dub “Board-R-Us,” to provide professionalized oversight of management and assume legal liability for decisions made. I am not convinced that these companies wouldn’t succumb to pressure and influence from their clients like Arthur Andersen did or via their own corporate owners.

That aside, there were some compelling reasons for speculating on whether something like this might be viable for non-profits. In addition to the problems with effective oversight mentioned above, non-profit arts organizations often express frustrations trying to recruit a board that better represents the demographics of their community or target audience.

A board services provider (BSP) could recruit and train board members for a non-profit organization. A BSP would likely have extensive contacts at many companies, service organizations, universities, etc developed in the process of searching on behalf of many organizations which would make the search easier for them than for board nominating committees.

The BSP could advise both the organization and the board members about how to more effectively interact with each other so that neither dreaded attending regular meetings.

I am not sure if a BSP would essentially just be a recruitment firm or if the board members would work for them. The former situation would more easily permit board members to serve voluntarily. The latter might require a stipend of some sort.

I am not sure how a stipend might be resolved legally, but if a board member was paid by a separate company and if it wasn’t much more significant than gas money, it might pass muster.

One of the benefits of engaging a BSP for a non-profit is that you could actually have a healthy rotation of people through your board when the BSP assigned new people as terms expired.

A robust rotation system might also prove an incentive to companies to encourage employees to participate in non-profit boards via a BSP. The networking opportunities available as people rotated through the boards of different organizations can be valuable to companies. If the BSP is helping the non-profits provide pertinent information in an organized manner and the board meetings are being run efficiently, few may feel the experience is a waste of their time.

These scenarios assume a situation similar to the current arrangement of part-time board members helping to manage a non-profit with some guidance and oversight from a BSP rather than full-time oversight from a BSP simply because of the costs involved with the latter option.

In terms of how even part time services from a BSP might be paid for, I envision a dedicated good governance fund administered by a state arts council. If the arts council can’t find a source willing to specifically fund this, they might charge participating arts organizations a nominal fee and create a pool of money to pay a BSP.

The participating arts organizations could then choose from among a number of available board service providers.

I Gave Away My Right To Vote

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A couple weeks ago, I encouraged others to take away my right to vote.

Why? Because I am an ex-officio director on a board by dint of my position and during a recent review of the board’s by laws, I discovered they did not specify that my position was non-voting.

In a recent repost of one of her blog entries, Ellis Carter clears up some common misunderstandings about ex-officio officers, one of which is that the term means they don’t have voting rights.

There is often a misconception that ex officio board members lack voting rights. The term “ex-officio” has nothing to do with voting rights. Ex-officio directors can be voting or non-voting; therefore, it’s important to clarify in the bylaws whether ex officio board members have voting rights.

No election or appointment is required. Also, it can be very confusing to make a position “ex-officio” and subject the ex-officio director position to term limits. Ex officio directors are not generally subject to term limits because the director position is tied to the office. What happens if the term ends before the director leaves the office the position is tied to? The better practice is to avoid term limits for ex-officio directors all together.

Other than the fact the original intent has always been that the person in my position not have a vote, one of the prime reasons I asked to have the by-laws changed was to remove any concerns about a conflict of interest that might exist. This particular board’s sole existence is as an independent partner in the presenting season of the performing arts center I run. Among the things they vote to approve are fairly significant transfers of funds in support of that partnership.

While I have never attempted to vote and my presence has never been used to establish a quorum, there is always the possibility my position technically having a vote might be used as a tie-breaker in a contentious situation.

On the other side of the coin, there may be decisions the board makes that neither I nor the university will want to be entangled in. Closing an admittedly small opening to claim I might have voted on the decision is a good step to take.

It occurs to me to wonder if ex-officio board members are covered by board insurance depending on whether they have voting privileges or not. Are there any lawyers reading who might know?

Info You Can Use: Who Owns An Artist’s Booking Data?

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A very interesting question regarding the relationship between an agent and artist was recently broached on the Musical America blog. An agent who has an artist leaving their representation for another company asks who owns the leads and contacts they have cultivated on behalf of the artist.

However, the question has come up as to whether we are obligated to give the artist all of the leads and contacts we have been pursuing on his behalf that have not been booked yet. That doesn’t seem fair. We have been working on some presenters for years, have invested a lot of time, and consider that to be our proprietary information. If we turn all of that over to his new manager, that’s just going to be a gift to the new manager who will follow up on all of our work and take the commissions.

Now you may think the agent is correct. It doesn’t seem fair that the new manager will benefit from the efforts of the company that the artist is leaving. However, lawyer Brian Taylor Goldstein answers that under the law of agency, representatives, a term which applies to people like attorneys, realtors, accountants, artist agents, etc, work for a principal party and all the work they do belongs to that principal. (my emphasis)

…there are four key concepts:

(1) An agent works for the principal and, while the agent can advise the principal, the agent must follow the instructions and directives of the principal.

(2) An agent can never put his or her own interests above that of the principal.

(3) All of the “results and proceeds” of the agent’s work on behalf of the principal belongs to the principal.

(4) Any contractual provision, written or oral, that contravenes rules (1) – (3) is null and void.

In short, when a manager represents an artist, the manager has no proprietary information. In other words, those aren’t your leads and contacts, they are the artist’s. While your leads and contacts may start out as your own, once you contact someone on behalf of an artist, the artist is legally entitled to know anyone you have spoken to on his or her behalf, including the details of such conversation. Moreover, unless there is an agreement to the contrary, the artist is also free to contact anyone directly on his own behalf.

This information was surprising to me. I knew that this relationship existed with one’s realtor, but didn’t realize it extended to artists and agents/managers as well.

Goldstein goes on to explain that the law is set up this way to protect the agent from liability for any breach by the principal. The agent isn’t liable if the artist fails to show up for a performance, for example.

(Of course, since the agent will be the first to receive an emotionally fraught phone call if the artist doesn’t show, they will bear a lot of non-legal responsibility.)

He also enumerates a number of aspects of the agent-artist relationship that people may assume are a matter of law, but are merely a result of traditional practice, and perhaps due for a change.