Money & Finance Opinion

Deconstructing a Social Keiretsu in Public Education (II): Board of Directors

February 21, 2008 6 min read
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Why Start Here?

I’ve decided to begin this series with the relationship across various boards for several reasons.

First, to illustrate how the social keiretsu imitates the vertical and horizontal spread of its commercial counterpart. This keiretsu networks foundation funding (including the new philanthropy Gates, Walton, and Fisher Foundations), financial intermediaries (including New Schools Venture Fund and the Charter School Growth Fund) and their social entrepreneur grantees (for example Charter Management Organizations (CMO) Uncommon Schools, Los Angeles Alliance for College Ready Public Schools), advocacy groups (the National Alliance for Public Charter Schools and the pro-voucher Black Educators for Educational Options and Hispanic Council for Reform and Education Options), and self-styled education policy think tanks (Fordham Institute, Education Sector and American Enterprise Institute). Recently it has started to extend its reach into academic research and quasi-academic outreach.

Second, to demonstrate that as with the commercial keiretsu, the social keiretsu is not only about money, but control.

Third, to underline that keiretsu are not simply or even primarily about institutions or ideology, but people.

Fourth, to help readers understand what a nonprofit board of directors is intended to be, how easily reality can stray from that norm with even the best of intentions, and why it’s important to see that boards operate like Caesar’s wife - above suspicion.

The Power and Responsibility of Nonprofit Directorship

In the nonprofit world, board membership has many meanings. To the organization, it signals the nature of its values and support; and board members are generally expected to facilitate or provide financial support. To the nonprofit leader, the board is often considered something to be “managed.” To the member, it is an opportunity to volunteer, a chance to have a say, a symbol of individual importance to the organization, a means of reflecting in the organization’s positive image, and a way to identify their particular set of values and stature in the community.

Sometimes lost in this tangle of social features are the specific legal obligations of board membership.

The board of directors is as close as we get to legal ownership in nonprofit corporations. No one can own a nonprofit in the sense of using it to personal advantage. The obligation to act in the best interests of the organization in pursuit of the social purpose identified in its articles of incorporation, by laws and other documents rests in the board as a whole. Nevertheless individual board members votes are counted just as they might be in a for-profit corporation, so every member has some de facto fraction of control.

Boards are liable for their decisions; one reason organizations generally provide directors and officers with liability insurance for actions taken within the scope of their duties.

More important, each board member is an individual “fiduciary” acting in trust on behalf of the owners of the corporation, in the nonprofit case on behalf of the public. The fiduciary standard is the highest imposed by law. Directors owe their organization the duties of loyalty, care, good faith and trust.

A director must employ the organization’s assets, opportunities, and information for the organization’s benefit rather than their own, or that of their other interests.

Care: In decision-making, directors must take the steps that statutory and common law indicate directors are expected to take to protect the interests of their organization.

Good faith: Directors must act in what they reasonably believe to be in the best interest of the enterprise.

Trust: This obligation lies at the heart of fiduciary duties. A director may not place herself in a situation where her fiduciary responsibility is in conflict with her other interests - or another of her fiduciary obligations. Fiduciaries cannot have conflicts of interest, and they obviously cannot profit from their fiduciary responsibilities without the express knowledge and consent of the relevant board.

The fiduciary duty is a guide intended to 1) discourage the appointment of directors with actual or perceived conflicts and 2) encourage directors to arrange their affairs so that they will encounter neither real nor actual conflicts of interest. Once identified, even the appearance of one or more directors’ conflict of interest can disadvantage an organization, by casting doubt on its true objectives in the eyes of the public, the media or policymakers.

In the words of Justice Benjamin Cardozo writing for the New York State Court of Appeals in Minor v. Salmon, the landmark case on directors duties and the meaning of a fiduciary obligation: “Not honesty alone, but the punctillio of an honor the most sensitive, is then the standard of behavior”. The admonition is all the more important in the nonprofit setting because there are no outside shareholders available to bring directors’ conflicts to the attention of a court.

Above, I’ve identified the overlapping board memberships of thirty-five individuals across twelve organizations:
Fordham Foundation and Institute
New Schools Venture Fund
Charter School Growth Fund
Black Alliance for Educational Options
Education Sector
National Alliance of Public Charter Schools
Knowledge is Power Program
Uncommon Schools
Caesar Chavez Public Charter Schools
Friendship Public Charter Schools
Los Angeles Alliance for College Ready Schools
National Council for Teacher Quality

The net is cast wide here, because many of these individuals and their organizations are also related by funding, the next layer of analysis. No one layer defines a keirtsu, that judgment must be based on the relationships within and between all the layers. Analysis may lead to the conclusion that some of the people and organizations here fall outside the network, while future layers may suggest others should be considered “insiders.”

Readers will also note that I have included two boards that do not direct independent organizations – the editors and editorial board of Education Next, published by the Hoover Institution, and the American Enterprise Institute’s Future of American Education Project. The principals of these activities do not operate under the legal obligation of a board director, but scholarship does place them under a similar ethical regime.

I invite edbizbuzz readers to review the list and the obligations of board members, and post their comments.

Questions for Discussion

Readers might want to apply the obligations to other networks, and should. But the question here is how the obligations apply to this network.

Does Andrew Rotherham face an an actual, potential or perceived conflict of interest between his role as director of Education Sector “an independent education think tank…. a dependable source of sound thinking on policy and an honest broker of evidence in key education debates” and as director of the National Alliance of Public Charter Schools, (NAPCS) “the nation’s leading charter school support and advocacy organization” or as a director of the Caesar Chavez Charter Public Schools?

Can New Schools Venture Fund President Ted Mitchell give his full loyalty as a director of NAPCS, a “national nonprofit organization committed to advancing the charter school movement” – one borne of thousands of independent charter schools, when he is implementing a strategy for growth conceived by his predecessor Kim Smith dismissing independent schools in favor of Charter Management Organizations? (download essays here, see page 20.)

Particularly given the recent internal controversy over the article about Mayor Bloomberg, is there any reason to wonder why operating Fordham Institute might conflict with Checker Finn’s position as Senior editor of Education Next, a publication that “partakes of no program, campaign, or ideology?”

Should we be concerned about the potential for a conflict of interest between Frederick Hess and Martin West in their participation with the Future of American Education Project and their editorial roles at Education Next determining “worthy research, sound ideas, and responsible arguments,” for that same publication?

Next: Following the Grants

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