The Right and Wrong Way to Give Large Donors a Say in Nonprofit Governance

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Large gifts to nonprofits sometimes come with strings attached. When a large donor conditions a gift upon also having a voice in management, perhaps with a seat on the board or other meaningful legal rights, leadership must give careful thought about whether the conditions are acceptable. These situations often require careful negotiation to protect the nonprofit’s interests.

The advantages of granting a voice to a large donor

Before delving into the potential risks of adding large donors to a nonprofit’s management, it’s worthwhile exploring the potential advantages.

  • Financial resources. The most obvious advantage, of course, is greater access to financial resources, not only at the time of the initial gift but, one hopes, into the future as well. Large donors tend to have connections to other potentially significant donors, making them a valuable resource. A motivated donor doesn’t necessarily need to sit on the nonprofit’s board to continue to give, but being on the board gives the donor a personal stake in the organization’s success.
  • Improved governance. At least one empirical study has found that adding major donors to a nonprofit’s board can improve operating efficiency. A major donor may be able to contribute meaningful financial acumen and strategic insights to enhance the existing board’s expertise.
  • Enhanced image. A nonprofit can benefit significantly from having high-profile leadership. A donor with a sterling reputation in the community can improve the organization’s competitiveness for fundraising, attracting volunteers, and operational opportunities.

Potential pitfalls worth considering

Before accepting a conditional donation a nonprofit’s board should give careful consideration to the full spectrum of potential problems that may come with it. Some problems can be addressed through negotiation, while others may raise serious questions about whether the donation is appropriate. Here are some things to consider when evaluating a donor’s request for management rights:

  • Qualifications. Care must be taken to ensure that the proposed director has the necessary background and qualifications to provide competent leadership. Having a large sum of disposable cash does not necessarily make someone competent to make management decisions. Placing a dangerously unskilled person on a board can make governance more difficult.
  • Organizational fit. Before accepting a large donation it is always a good idea to examine whether the donor fits with the nonprofit’s mission and brand. This is a broad category that captures a range of topics, including potential personality or cultural conflicts and the donor’s alignment with the organization’s existing vision and values. Care should be taken to formally evaluate the donor’s background, including a criminal history check to ensure that significantly embarrassing problems are identified in advance.
  • Governance rules. Before the donor can join the board, become a member, or otherwise become part of management care must be taken to ensure that the organization’s governing documents allow for it. In some cases documents may need to be amended to expand the size of the board or make other structural changes. If significant changes to charter documents are required care must be taken to ensure that they do not trigger reporting obligations or threaten the organization’s tax status.

The Church Law Center of California can help

The Church Law Center of California provides nonprofit governance counsel to religious and secular nonprofits. If your organization is weighing whether to accept a large but conditional donation, we are happy to help you evaluate it from a legal perspective. Call us at (949) 892-1221 or reach out to us through our contact page.

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