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Mar 14, 2014

Fiduciary Duty and Expansion of Revenues

Recently the Corcoran Gallery of Art essentially dissolved itself, moving its school to George Washington University and its collection to the National Gallery of Art.  Eric Gibson wrote a scathing commentary on this action in the Wall Street Journal.  He says “the Corcoran is not alone in its misguided ways.  Indeed the untold story of our time is the emerging crisis in nonprofit governance, where boards embark on policies that go against — and even imperil — the mission of the institution they are charged to oversee and protect.”

He goes on to suggest that  poor board decisions traumatized  City Opera (closed), the Los Angeles Museum of Art (eroded support),  the New York Public Library (contemplated shift from research library to digital circulating library), and the Barnes  Foundation (forced relocation to Philadelphia).  He excerpts from Flora Miller Biddle’s book on the history of the Whitney Museum:  “In the 1960s…trustees were ‘idealistic and committed to public service’ and possessed ‘a genuine love of art and faith in the museum.’ By he late 1970s and into the 1980s a new breed had emerged, one that ‘wanted to used the museum and their contacts there for social and business purposes.'”  He concludes “one now-retired museum director once told me that one of the hardest parts of his job was teaching new trustees from Wall Street that a museum is not a business in the sense that they understand the term.”

It is not difficult to criticize board members who forget their fiduciary duty to the institution in pursuit of social ties or business contacts.  However, it is more challenging to make sure that those board members who take fiduciary duty seriously understand how their duty to a nonprofit or social enterprise can differ from their fiduciary duty to a for-profit.

I think the answer is that a for-profit board member has only one fiduciary duty: a financial duty to the shareholder.  In a nonprofit or social enterprise the fiduciary duty is both financial (to the community to sustain the business) and to meet a social need of its entire constituency: public, private, governmental, individual.  A nonprofit or social enterprise has a much more complex fiduciary duty which, unfortunately, is rarely discussed and usually taken for granted.

The innovation of the B-Corporation is a legal acknowledgement of this more complex, dual fiduciary duty of the board.  For nonprofits, the hardest part, in my view, is distinguishing the evolving needs of the community from the evolving changes in the marketplace.

For the New York Public Library the community need that is uniquely provided by the Fifth Avenue branch is a research facility.  The marketplace is moving toward digital sources and walls of computer instead of walls of books.  Making subsidiary branches more digital may be a useful adaptation to the marketplace, but abandoning the research facility would be compromising a critical need of the community and therefore contrary to the board’s fiduciary duty to ensure its most critical service (mission) to the community is preserved.

For the Barnes Foundation, was its critical mission to preserve an art collection in a community or just to balance the budget?  If the former, it did not focus on making the Barnes Foundation’s collection and activities an integral part of its community and thereby eroded its key mission, making moving the collection to a higher-revenue location (Philadelphia) inevitable.

For City Opera, was its critical mission to bring opera to the “outer borough” middle class audience while the Metropolitan Opera focused on a more costly patron and production?  Bringing in an “edgy” general director surely was not designed to appeal to that City Opera audience but perhaps to a more elite audience that ultimately did not shift its allegiance from the Met to City Opera.  Was its board confused between its mission  (fiduciary duty #1) to a less wealthy audience and a market strategy to shift its audience to a higher-income population to boost revenues and donations (fiduciary duty #2)?  Or did it forget fiduciary duty  #1 and just focus on #2?

Sorting this out is why I have come to believe that a nonprofit must be viewed as two businesses:  the money-losing, critical mission business that is focused on the community’s needs that CANNOT be provided at a profit or break-even; and the money-making lower mission business that is focused on generating positive net revenues to supplement philanthropy in financially supporting the critical mission activities.  Neither business can be neglected.  The fiduciary duty of the board is two-fold:  to ensure that the critical mission activities remain effective and adequately supported and to ensure that there are money-making activities that are operated efficiently and focused on generating sufficient net revenues to support the critical mission’s expenses.  Eric Gibson’s examples suggest that the first duty was forgotten in favor of the second.

I use the Linking Mission to Money Grid to provide a visual reminder of the dual fiduciary duties of the board members.  Chapters 8 and 12 in Linking Mission to Money describe that dual role and show how to use the grid to fulfill that fiduciary duty.  If you need help in identifying those dual roles and establishing an understandable approach to fulfilling your fiduciary duties, consider my keynotes, workshops, and retreats as an effective way to be an effective board member.  If not, maybe some day Eric Gibson will write a Wall Street Journal article about you and your nonprofit!