The troubles of Community Action of Minneapolis are a textbook study in what can go wrong with nonprofits, both from the point of internal governance and external regulation. CAM’s story is a warning to other nonprofits and governmental agencies on what not to do and what reforms are needed.

I have taught nonprofit law for 15 years, have done training sessions for hundreds of nonprofits, and have been an executive director, officer and board member for many others. These experiences have shown me that the root cause of so many problems with nonprofits starts with bad governance and the failure of boards of directors to take their duties seriously.

Many view nonprofit board service as a line on a résumé. Others think it’s a great idea to place rich, powerful or famous people on the board, asking no more from them than simply to give money or add prestige to the organization. If that is what you want from individuals, place them on an advisory board, not on the board of directors. Minnesota law is clear: Being a board member brings with it serious legal responsibilities. Board members have a fiduciary duty to act in the best interests of a nonprofit. They have a duty of care, obedience and loyalty to it. They are expected to support the nonprofit, be active participants in its governance and take seriously their duties. At the very least, CAM board members should be pressed to say why they let an organization dedicated to the poor spend almost none of its money on serving its constituents.

Minnesota law imposes the business judgment rule on nonprofit board members. This rule says “do your homework”: you are required to attend board meetings, read the minutes and be informed about the operations of the organization. Other state laws demand that you attend meetings and speak up if you think something is wrong. Silence is considered assent to decisions. It is no excuse that you did not attend board meetings or had no idea what was going on. That, or sending surrogates in your place, is negligent behavior, running the risk of personal legal liability for what the nonprofit did wrong. No-show CAM board members should have been removed. The failure to do that raises the question of how complicit all were in enabling bad governance.

If there was a real governing board, there should have been an audit committee and a yearly review of CAM’s books with an outside auditor. These annual audits, along with following other good practices as dictated by the Sarbanes-Oxley law, should have caught CAM’s problems.

Internal governance is only part of the problem. External governance and oversight failed, too. The legislative auditor pointed to $4.7 billion per year of state money — dating to 2007 — that was awarded to 1,900 nonprofits with either no-bid contracts, little oversight, or minimal or no auditing. In 2010, a similar study by the legislative auditor again found little accountability with billions of dollars in state-awarded contracts. There is little oversight for much of the money the state gives to other third parties such as CAM, violating generally accepted accounting principles. Stories in this paper also have reported how the city of Minneapolis for years structured contracts to escape competitive bidding, and it is unclear how much it has audited groups such as CAM.

Finally, as a nonprofit, CAM is supposed to file yearly Form 990 tax reports with the IRS. At best, the IRS has been lax in oversight. U.S. Sen. Charles Grassley, R-Iowa, has been sharply critical of this, along with the growing trend of nonprofits of all political stripes to abuse their tax status and engage in questionable political activities. Thus, several governmental agencies should have caught what was happening at CAM, and why they did not is a story of overlapping jurisdictions and lack of coordination.

The point is that the Community Action of Minneapolis debacle was a combination of personal failure, internal governance breakdown and external regulatory negligence. Some of this was illegal, perhaps even criminal. What happened here is not typical of most nonprofits, but it still serves as a warning to others about what can go wrong and what needs to be fixed.

 

David Schultz is a professor of political science at Hamline University and editor of the Journal of Public Affairs Education.