Ownership

Ownership determines who can benefit from the corporation and identifies to whom the board or executives are responsible. Essentially, the public is the owner of a nonprofit corporation. The board of directors and executives who run a nonprofit do not own it; rather they are trustees who manage the nonprofit and its assets to ensure that the charitable or public purpose is fulfilled.

In contrast, for-profits are owned and operated by private individuals – often shareholders. In the health setting, the interests of the private investors - to maximize profit - can be diametrically opposed to the interests of health consumers - to get the best care possible, regardless of cost.

Special Obligations of Nonprofit Board Members to the Community

The unique public purposes and ownership of nonprofit corporations also mean that nonprofit board members have special legal obligations to the communities that they serve. But lawmakers and the public have not always held accountable nonprofit board members. For example, a nonprofit health corporation and its board may not solicit public input when making decisions about the health needs of its community, thereby resulting in a failure to provide the best services possible. In order to ensure that nonprofit corporations and their boards fulfill their special obligations, they must fulfill their community benefit responsibilities to the public. The overarching purpose of these obligations is to ensure the nonprofit corporation’s openness, responsiveness, and public accountability.

Fiduciary Obligations to the Community

Every board member of a nonprofit is obligated to ensure that the corporation is managed well and operates consistently with its nonprofit purposes. This obligation is commonly referred to as the board members’ “fiduciary duty.” Black’s Law Dictionary defines “fiduciary duty” as a duty to act for someone else’s benefit while putting one’s personal interests aside. This is the highest standard of duty imposed by law. Nonprofit board members considering conversion must make decisions based upon their fiduciary duties and not their potential private interests. In most cases, the state Attorney General is charged with ensuring that nonprofit board members meet their fiduciary obligations.

There are a number of different fiduciary duties that board members owe the corporation. Two of the more common fiduciary duties that are violated during a health conversion from nonprofit to for-profit status are the duty of care and the duty of loyalty.

Duty of Care

The duty of care requires board members to exercise good judgment and reasonable care in conducting the business of the corporation. For example, in 1996, the California Attorney General found the board members of a nonprofit hospital system in San Diego had undervalued the charitable assets of the hospital by $100 - $200 million when deciding to sell the system to the for-profit company, Columbia/HCA. The Attorney General wrote the hospital system a letter (PDF) concluding “that the [Board’s] acceptance of the Columbia proposal represents a serious breach of trust” and threatened to hold each individual member of the board who voted for the proposal personally liable for the $100 - $200 million undervaluation.

Duty of Loyalty

The duty of loyalty prohibits a board member from profiting at the expense of the nonprofit corporation. For example, in 1996, the president and some board members of Blue Cross and Blue Shield Mutual of Ohio stood to gain millions from a proposed sale of the nonprofit corporation to for-profit Columbia/HCA through payments and noncompetition and consulting agreements. The Attorney General filed suit against the nonprofit, the president, and individual board members, asserting, among other things, that these individuals had breached their fiduciary duty of loyalty. Less than a year later, the parties resolved the litigation and many of the board members and executives agreed to return their personal profit to the nonprofit organization.