Atlas: Dismembering Civil Society: The Social Cost of Internally Undemocratic Nonprofits by Dana Brakman Reiser

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ISTR Sixth International Conference
Toronto, Canada / July 11-14, 2004
Contesting Citizenship and Civil Society in a Divided World

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Dismembering Civil Society: The Social Cost of Internally Undemocratic Nonprofits
by
Dana Brakman Reiser
Brooklyn Law School

For today’s U.S. nonprofits, internal democracy is optional. Most states’ laws provide that a nonprofit may choose democracy, or it may opt for a self-perpetuating and omnipotent board of directors. Under the democratic structure, the nonprofit’s founders opt to empower a group of individual members to elect its board of directors and approve other major corporate decisions. Alternatively, the founders may deem such democracy impractical, and opt for a structure under which directors reappoint themselves and/or appoint their successors, and directors alone approve organic changes to the organization. While the legislative position of “optionality” may seem neutral, it actually leads to a bias against democratic governance. Today, self-perpetuating boards are the norm and members are rare, particularly among charitable or public benefit nonprofits.

Nonprofits avoid internal democracy because doing so is practical. Governance with members is time-consuming and cumbersome to manage. Moreover, nonprofit founders correctly perceive that members are unlikely to prevent the high-profile lapses in accountability that have plagued the nonprofit sector. This insight explains, in large part, legislatures’ willingness to endorse optionality – even in a political climate in which nonprofit scandals are highly publicized and derided. If members are ineffective monitors, and membership adds costs, why bother? Indeed, for these reasons, a self-perpetuating board is the most appropriate governance structure for many nonprofits. However, the fixation on accountability as the sole motivator of governance has prevented legislators and commentators from perceiving the real social cost of optionality.

This sole focus on accountability ignores the nonprofit sector’s role in constructing and maintaining civil society. Civil society is that realm of institutions between the individual and the state, including charities, public advocacy organizations, churches and bridge clubs. These organizations overlap substantially with the nonprofit sector. Theorists who have examined civil society argue that participation in these institutions enhances our political democracy in two ways. It offers opportunities for participants to build norms of reciprocity and cooperation – also called social capital. And, participation trains citizens in those practical skills necessary to participate more actively and ably in the political arena; these institutions teach civic skills.

Institutions that are internally democratic are more capable of and effective at building social capital and teaching civic skills. Thus, the trend away from members reduces nonprofits’ ability to perform these essential societal services, imposing social costs. Furthermore, weakening nonprofits’ ability to play their pivotal role in constituting civil society threatens the reputation of the nonprofit sector and the support it receives. Nonprofits’ role in enhancing our political democracy is one of the principal reasons advanced in support of its receipt of various financial, political and social advantages. Any reduction in nonprofits’ capacity to play this role undermines the legitimacy of this support.

In order to provide a careful critique of optionality, this paper will explore its history, and will consider the costs and benefits of the trend away from members to individual nonprofits, the nonprofit sector, and society in general. Part I will briefly introduce the nonprofit corporation and its governance structures. Part II will explore the legislative history of state statutory provisions regarding membership and will relay the story of the adoption of optionality in various jurisdictions. In addition to considering the types of statutory language that different legislatures used to effect this change, this Part will identify the motivations behind its widespread legislative endorsement. As will be shown, legislators and law reformers sought to offer nonprofits greater flexibility in internal governance, in order to reduce their administrative costs and to facilitate their participation in sophisticated business transactions.

With this background established, Parts III and IV will pursue several potential arguments in favor of governance with members. Part III will address the potential benefits of members for individual nonprofits, by considering the roles that members realistically can play in nonprofit governance and whether, through their performance of these roles, members will make individual nonprofits more efficient and/or more accountable. Ultimately, it will conclude that the benefits of membership are uncertain, because serious obstacles reduce members’ ability to make efficient decisions and to hold other corporate actors accountable through monitoring and enforcement. When these uncertain benefits are balanced against the clear reduction in costs of administration and transacting offered by a self-perpetuating board, it is understandable that legislators have chosen to permit either structure. The same comparison predicts that individual nonprofit founders and their counsel will choose the self-perpetuating board route, bearing out the trend in favor of this option.

However, Part IV will argue that the aggregation of these individual decisions into a general trend away from members results in societal costs. It will draw on literature describing the existence and importance of civil society to show this effect. This Part will begin with an outline of the concept of civil society. It will then summarize the civil society theorists’ claims that civil society supports and strengthens political democracy, principally by offering opportunities for citizen-training and social capital construction. Having established these parameters, Part IV will argue that the decline in membership roles diminishes the nonprofit sector’s ability to provide these democracy-enhancing opportunities. Furthermore, it will assert that this reduction in the capacity of the nonprofit sector to constitute civil society threatens its privileged position in contemporary American society, and the legitimacy of the advantages it enjoys.

Finally, Part V will raise various potential responses to mitigate the social costs arising from the trend away from members. A draconian (and deeply problematic) response would mandate voting membership governance structures for all nonprofits. A somewhat less severe, but still substantial remedy, would use governance structure as a factor in a classification system, imposing differing benefits and restrictions on nonprofits that provide different societal benefits. The most modest type of response would be purely educational – to broadcast the message that the nonprofit sector exists and enjoys advantages for a wide range of reasons. In essence, the rhetoric of the nonprofit sector might be made more complex, in order to match the reality of its various components.

Date received: September 28, 2003