Charitable Accountability and Social Norms

Abstract

This paper examines the use of social norms in influencing nonprofit board behavior. Directors and officers of charities are fiduciaries to their organization. Once a person assumes a fiduciary obligation, a series of moral and legal demands are placed upon her. The generality of fiduciary norms makes application difficult in concrete situations. Fiduciary accountability presents a paradox. Though the number of nonprofit organizations has expanded enormously, at the same time enforcement efforts by regulators have declined, so there is little chance of legal sanction for violations. Yet, most organizations and trustees abide by the rules, adhere to good practices and demonstrate fidelity to the organization's charitable mission. Why do most fiduciaries do what's right? Charitable fiduciaries have internalized the norms of appropriate behavior and that most fiduciary law is the explication of social norms. The paper argues that Section 4958 of the Internal Revenue Code, which imposes an intermediate sanction of an excise tax on excessive benefit transactions of insiders or disqualified persons of section 501(c)(3) and 501(c)(4) nonprofits other than private foundations, was less important as a sanction or tax than in creating new behavioral norms, because in the years following enactment there was almost no enforcement. The particular change in normative behavior the intermediate sanctions legislation produced, though effective is inefficient, because of the costs incurred by all nonprofit organizations to adhere to the new norm.