The Impact - Or Influence? - Of Sarbanes-Oxley On Non-Profit Corporations

Thursday, April 1, 2004 - 01:00

Editor: Mr. Fleischaker, would you give our readers something of your background and experience?

Fleischaker:
I am originally from Kentucky. I joined Arent Fox right out of law school, and I have been with the firm for 33 years.

Editor: Would you tell us about your practice?

Fleischaker:
I started in the firm as an antitrust lawyer, and this has been a part of my practice ever since. In addition, one of the very first things I did as a young lawyer involved an environmental project. This was at the beginning of the environmental movement, and it quickly attracted my interest. As time passed, environmental concerns became more and more important in my practice, and I was the head of the firm's environmental practice for many years. Although I am not a full-time litigator, litigation normally takes up about a quarter of my time. I have also had two brief stints as Managing Partner of the firm, and at the moment management takes about 15% to 20% of my time as Chairman of the firm.

Editor: You are engaged in a number of areas, but your representation of some very substantial trade associations gets you into the non-profit organization field. What are the things that you are doing for your non-profit clients?

Fleischaker:
In many of these situations I serve as general counsel of the trade associations that I represent. Few of them have in-house lawyers on a full-time basis. Inasmuch as I have the role of general counsel, I am required to learn as much as I can about the particular industry in which the association is involved. The industries are varied - automotive, the grain industry, higher education, forest products and credit counseling for starters - so I am constantly challenged and constantly learning new things. It is a wonderful opportunity, really. In addition, many of these trade associations have for-profit subsidiaries. Since I am general counsel to the parent, I find myself acting as general counsel to the subsidiary. On both sides of this divide I am dealing with a variety of corporate issues, including the fiduciary responsibilities of trustees and directors, corporate governance and corporate ethics, membership and shareholder issues and, of course, the arms-length relationship that must prevail between non-profits and for-profits even where they are parent and subsidiary. Notwithstanding that relationship, the assets of the one are not available to the other without a fair market value consideration. That is something that is not always understood, or well received, in the board rooms of these organizations.

Editor: You have spent a considerable portion of your career in board rooms advising directors of for-profit enterprises and trustees of non-profits on a variety of corporate governance issues. How has Sarbanes-Oxley affected this aspect of your practice?

Fleischaker:
The impact of Sarbanes-Oxley on non-profit organizations has been substantial, and that is very interesting because the statute is not, strictly speaking, generally applicable to them. Interest in and concern for governance issues by non-profits is on the increase, and I think this derives from the fact that many of the members of the governing boards of such organizations come from the for-profit world, from public companies to which Sarbanes is applicable. Over the past year or eighteen months they have had an intensive education in Sarbanes and its standards in connection with their responsibilities in the public company arena. That has prompted them to analyze, I think, a whole range of governance issues at the non-profit board level, including their fiduciary responsibilities and disclosure obligations. In addition, Sarbanes-Oxley is a kind of codification of best practices with respect to corporate governance. It is simply good sense to pay attention to it, whether it is formally applicable or not.

Editor: You are saying, then, that the trustees of non-profit organizations ignore the admonitions of Sarbanes-Oxley at their peril?

Fleischaker:
Absolutely. I think that the standards of care that underlie Sarbanes are applicable to non-profits, and that the members of a non-profit's governing board would do well to consider the statute much as they would when they wear their public company directors' hats.

Editor: Do you think there is a difference between the fiduciary responsibilities of the directors of a publicly held for-profit enterprise and those of the trustees of a non-profit?

Fleischaker:
I think there are differences. Most of the state non-profit corporation laws scrutinize a trustee's fiduciary obligations in a specific non-profit organization context. I think the issue of conflict of interest receives different attention in this context than it does in the for-profit arena, for example. Nevertheless, the differences are not so much substantive as ones of focus and nuance. The duty that overrides everything else in both settings is that the member of the governing board must understand what the law requires of him, what his fiduciary obligations are, and then he must be attentive to those obligations.

Editor: The trustees of many non-profits - certainly most of the § 501 (c)(3) charities - are unpaid volunteers, while the directors of most for-profits - and certainly the public companies to which Sarbanes is applicable - are compensated. Is that a valid distinction, in terms of their fiduciary duties?
Fleischaker:
I think both unpaid volunteers who are the trustees of charity and the paid members of a for-profit board of directors are held to significant duties of care. For that reason it is essential that the former group have directors and officers liability insurance coverage to the same extent as their counterparts on the for-profit governing board. Incidentally, I do not believe that compensating trustees of a charity is necessarily a bad thing. Many non-profit boards are made up of people who mean well but who bring little in the way of sound business judgment or expertise to their positions. Compensation may not serve to remedy that state of affairs altogether, but it may attract a greater number of people with the requisite skills to non-profit governance.

Editor: Would you tell us about the role of the audit committee in the non-profit setting? How does this differ from that of the for-profit audit committee?

Fleischaker:
Not all non-profits have or have need of an audit committee. This is usually a function of the size and complexity of the organization's operations. The very large non-profits are parallel to the for-profits in governance and structure, however, and I think, as a general proposition, that they ought to have an audit committee that is made up of people who have the requisite accounting or financial background to bring to the discussion, as well as an independence from the organization's management. The audit committee's relationship with the CFO and with the outside auditors, and its oversight responsibilities with respect to the organization's financial reporting, are, in my view, substantially similar to those of the audit committee of a large for-profit enterprise. Large non-profit and for-profit organizations have much more in common with each other, at least in terms of corporate governance, than they do with small organizations of their own type.

Editor: What about the role of outside counsel in the post-Sarbanes scheme of things? What kinds of things ought to be handled in-house and what ought to be sent to outside counsel?

Fleischaker:
There are complicated issues that arise in just about any setting that almost always require the attention of outside counsel, someone with the expertise and specialized knowledge necessary to deal with the matter. This is true of both non-profit organizations and for-profits. Sarbanes does not really change anything here. Sarbanes has brought a focus to bear on a number of very sensitive corporate governance issues, however. Outside counsel may be in a position to bring a certain objectivity to the discussion that no corporate insider, including general counsel, can provide. There are certainly situations where an evenhanded, objective and non-partisan view of things is going to be helpful to the resolution of a difficult issue, and here is where outside counsel can play a positive role. Please understand that I am speaking in generalizations here. What may work in one setting may not necessarily work in another. As a general matter, however, I think that the very distance that outside counsel has from the heat of the fray in these sensitive corporate governance issues is a positive thing, and this holds for both non-profits and for-profits.

Editor: Only a few of the very large non-profits have general counsel. Is that something that you see changing? Is Sarbanes having an influence on such an evolution?

Fleischaker:
At this point I do not see Sarbanes as having had such an impact on non-profit organizations that those without general counsel or legal departments are beginning to add them to their rosters. Expense is clearly an issue here, and, as you say, it is only the large non-profits that have in-house legal help. Nevertheless, Sarbanes - or, rather, the corporate scandals that resulted in the enactment of Sarbanes -- has called considerable attention to the ways in which corporations govern themselves. That is essentially a legal and ethical issue, and lawyers are playing an increasing role in helping corporations - both for-profit and non-profit - address this issue. In addition, in my practice I see more and more lawyers, or people with a legal background, heading up non-profit organizations. That type of person sees legal issues that might be missed by someone with a different background, which means that more legal issues are being addressed than in the past.

Editor: What are your thoughts on Sarbanes in the long term? Is it something that will be forgotten in a few years, along with the corporate scandals that prompted its enactment, or does it represent the kind of fundamental change that the securities legislation of the 1930s represents?

Fleischaker:
I think it is too early to tell whether Sarbanes-Oxley is going to have the same long-term impact that the securities legislation of the 1930s has had. It has certainly generated a great deal of discussion, and I think that is a very good thing. If it results in nothing more than a more attentive governing board - and it is certainly doing that - then it will have been worthwhile. An improved corporate governance - for both for-profits and non-profits - is in everyone's interests.

Please email the author at fleischm@arentfox.com with questions about this interview.