New Jersey AG Challenges Non-Profit’s Board Oversight
posted by Kathleen Boozang
As reported in this morning’s (New Jersey) Star-Ledger “Attorney General Anne Milgram plans to file a lawsuit today against Stevens Institute of Technology, charging the school with fiscal impropriety and seeking to remove its top two leaders, a spokesman for her office said last night.” According to the story, Milgram met with the school’s board earlier this month, giving it two weeks to agree to her non-negotiable changes, else she would make leadership changes and install independent oversight.
This isn’t the first time a New Jersey corporation has faced a government take-over of its operations. Former-U.S. Attorney Chris Christie installed a federal monitor to oversee UMDNJ, which is the largest public healthcare system in the country, and engineered the replacement of the board as well as numerous officers. He also used the Deferred Prosecution tool with Bristol-Myers Squibb to appoint a federal monitor and obtain personnel changes at both the director and officer levels.
UMDNJ and the Stevens Institute of Technology are nonprofits, which means they fall into a block hole with regard to regulatory oversight. Apparently one of Milgram’s concerns about Stevens is certain executives’ compensation packages. Well, traditionally, that’s the IRS’s territory. The IRS just concluded a big study of tax-exempt hospitals’ CEO compensation focusing on some “apparent high salaries” and concluded that “nearly all the compensation amounts…were reasonable under the current statutory standard, even though some of the amounts were quite substantial.” Tax-exempts earn a rebuttable presumption of reasonableness if they follow certain procedures in setting compensation – primarily doing comparability analysis (one apparently outstanding question is whether T/E entities may use salaries from for-profit CEO’s in setting their numbers). Unsurprisingly, almost every entity studied follows the rules to qualify for the rebuttable presumption. There’s no reason to think that Stevens hasn’t followed the IRS process. If that’s true, does this mean that the IRS rules are too lax, or that a state AG may impose different expectations regarding executive compensation?
It’s too early to know what the NJ AG thinks Stevens problems are, but if there are big problems, she’s really the only person with standing to do anything about it. Exactly what and how she can affect change is the big question. The law governing the behavior of non-profits is extremely sparse –there’s almost no common law exploring how fiduciary duties apply to the non-profit. In short, the AG’s powers are very vague.
Whatever happens, this process should not occur in secrecy. While the story would have likely hit the newspapers even if the AG and Stevens had quietly resolved things, we wouldn’t have gotten too many details. Even now, Stevens has filed a pre-emptive lawsuit against Attorney General Milgram seeking a confidential process to resolve the situation. While this isn’t the first time we’ve seen prosecutors intervening in corporate operations, we’ve learned little about whether it works, precisely because of the lack of transparency. What kinds of corporate behavior are so serious as to be unfixable by the board, requiring a government monitor? Is it good practice for a government official to be firing and/or replacing corporate officers and directors? Have monitors effected permanent and positive change to the corporate culture?
If prosecutors seek to achieve corporate reform, then there has to be some understanding of the behavior they are challenging, and an opportunity to develop some law to guide boards in the fulfillment of their fiduciary duties. Maybe a lawsuit with a robust appellate opinion would do nonprofits a lot of good.
September 17, 2009 at 8:46 am
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Responses (2)
Priorities - September 20, 2009 at 10:26 am
There are children being shot in the playgrounds, politicians enriching themselves through rampant pay-to-play schemes, the violent crime rate right outside Ms. Milgram’s office window in Trenton is bucking the natioanl trend, and she has decided to try to micro-manage a private university?
How many hundreds of thousands of dollars has the state, which is essentially bankrupt, spent on this matter, how much will it spend in the future, and how much will it cause Stevens to spend on this matter?
Talk of temerity and skewed priorities.
Confused 2(now 3)L - October 1, 2009 at 12:26 am
As an alumnus of Stevens, I couldn’t be happier with the AG’s action. Everyone thought Hal was a crook for ages, it was a barely maintained public secret. Bur with the largess of the Board there was nothing much to be said or done.
As far as any expense to the state, I see know reason it shouldn’t be borne either by the return funds by bad actors, or from the coffers of the institution. The concept of private colleges as tax-exempt entities is half a joke anyway. And to the degree that individuals can profit from a gap in regulatory structures at others loss, that is the job of the state to intercede.
JMS
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