E. The Standard of Conduct Imposed on Boards of Charitable Corporations
F. The Standard Applied to Museums
A museum can be defined as “a public or private nonprofit agency or institution organized on a permanent basis for essentially educational or aesthetic purposes which, utilizing a professional staff, owns or utilizes tangible objects, cares for them, and exhibits them to the public on a regular basis.”1 For the purposes of this text, the words “public” and “private” need some clarification. Each of these terms is subject to various interpretations. For example, a museum can be classified as “private” if it was incorporated by private initiative and if most of its support comes from the private sector. That same museum, however, may be “public” in the sense that it is an institution open to the public and dedicated to a public purpose. Similarly, a museum that was established through private philanthropy but that receives substantial subsidies from the government can fall into either category. A museum can be chartered by the legislature of a government and yet still be “private” in the sense that it is not a part of that government. (It is common to find philanthropic organizations specifically chartered by legislative enactments.) Every museum, however, is in the business of managing collection objects for the benefit of the public, and when questions concern this unique aspect of their work, all museums, whether “public” or “private,” share common problems.2 The observations made in this book, therefore, should have relevance for all museums, irrespective of the “public” or “private” designation. Museums that are not autonomous (they do not report directly to their own governing boards because, for example, they are part of governmental units or larger educational organizations) do have more complex problems in the area of governance. But sorting out appropriate lines of authority and articulating policies for such museums still require a grasp of principles applicable to general museum operation.3 Also, zoos, botanical gardens, and the like may have unique problems because of the nature of their collections, but the essentials of good collection management (articulation of a collection philosophy, clear delegation of authority, and procedures for record keeping and accountability) are still germane.4
Most museums can be classified as charitable corporations. For ease of discussion, this term will generally be used here. For lawyers, I should note that this simplification is not made casually. Within different states and to varying degrees, distinctions are made between charitable corporations and charitable trusts. The law of the locality should always be checked in this regard, but when cases concern the quality of governance in museums, courts do not seem overly concerned with this distinction. One surrogate’s court in New York, a court that usually oversees the management of trusts, argued that the museum involved in the case before it was not a true trust:
The term “trust” used by the lawyers and the courts, in addition to its classic usage, encompasses a variety of fiduciary relationships.… As a legal concept it is not readily susceptible to a precise definition.…
Those who are charged with the responsibility of operating the museum have fiduciary responsibilities with regard to the proper utilization of the property and funds conveyed to them … even assuming arguendo, that there is not a trust in the literal sense. A fiduciary is legally accountable for his stewardship.… This publicly aired controversy has only served to create doubt in the minds of the people … as to whether the … Museum is being efficaciously operated and administered in accordance with the testamentary wishes of its benefactors. It would, therefore, be in the public interest for the Surrogate to entertain the proceedings in question and conduct an appropriate inquiry as to the validity of these charges.5
A charitable corporation, true to its name, is an organization established in a corporate form for the purpose of pursuing a charitable purpose or purposes.6 From the legal standpoint, a charitable corporation is a hybrid still in the process of development, with attributes of both trust organizations and business corporations. Therefore, understanding the traditional or common law concept of a “trust,” and how a traditional trust differs from a business corporation, can lead to an appreciation of the present legal status of the charitable corporation.
Essentially, a trust is a fiduciary relationship whereby a party (known as a trustee) holds property that must be administered for the benefit of others (known as the beneficiaries). A trustee, even though he or she has legal title to trust property, may not use that property for personal purposes but may use trust assets only for the benefit of the individual or group that is the beneficiary of the trust and in accordance with the terms of the trust instrument.7
In its pure form, a trust relationship imposes a very high degree of responsibility on the trustee. The trustee is charged with affirmative duties to protect, preserve, and increase the trust assets. At a minimum, the trustee must exercise the skill and care of a person of ordinary prudence in carrying out these functions, but if the trustee possesses a greater skill then more exacting standards are required.8 Nor can a trustee blame personal inadequacies on the conduct of a fellow trustee: “The principle of contributory or comparative fault or neglect as between co-trustees plays no role in measuring the proper discharge of the high duty imposed by law on each trustee.… [It is] incumbent upon each to comply with the fiduciary standards required of a trustee irrespective of the default of the other.”9
Trustees also have a strict responsibility not to self-deal with trust assets. In other words, trustees must go to great pains to see that they do not personally benefit from the trustee role. To put it rather graphically, trustees must step out of their everyday role, leaving personal ambitions aside, and step into the trustee role, diligently pursuing the interests of the trust for the good of the trust beneficiaries. The responsibility not to self-deal is based on the trustee’s duty of loyalty, “the most fundamental duty owed by the trustee to the beneficiaries.”10 This duty is deemed breached, for example, even when the trustee, acting in good faith, purchases trust property for personal use and pays fair consideration.11 A prudent trustee, therefore, avoids even the appearance of a conflict of interest.12
The trustee also has a duty to be obedient to the terms of the trust. This requires faithfully carrying out the purposes of the trust. The main reason for establishing a trust situation is to ensure the performance of articulated trust purposes. “What more formidable cause of action could exist than the assertion that the trustees are failing to carry out the mandates of the indenture under which they operate?”13
In addition to the duties of care, loyalty, and obedience, trust law also imposes limitations on the ability to delegate. This is interpreted to mean that a trustee cannot delegate to others tasks that the trustee reasonably can be required to perform.14 Clearly, the trustee cannot delegate to another, even to a cotrustee, the entire administration of the trust, but under certain circumstances, the authority to perform specific acts may be delegated.15 The following are relevant considerations when deciding on the propriety of a delegation to perform specific acts:
1. How much discretion is involved?
2. What are the value and the character of the property involved?
3. Is the act one that requires a special skill not possessed by the trustee?
When there has been a proper delegation to a cotrustee or other person, the trustee still must exercise general supervision over the conduct of that individual.16
The above clearly shows that the standard of conduct required of a traditional trustee is quite exacting. Trustees must give serious attention to their duties, must be aggressive in pursuing the interests of the beneficiaries in accordance with trust purposes, must be extremely careful to avoid conflicts of interest or even the appearance of conflicts of interest, and, as a rule, must not delegate their responsibilities. It bears repeating that trustees are held to an objective standard of care. Even if trustees do their best, their best may not be good enough. As one legal scholar explains: “[The trustee] is under a duty in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise, and he is liable for a loss resulting from his failure to comply with this standard, even though he does the best he can.”17
Perhaps one of the most quoted descriptions of the trustee’s standard of conduct is contained in a decision by Judge Benjamin N. Cardoza during his tenure as chief judge of the New York Court of Appeals. In Meinhard v. Salmon,18 Cardoza said:
Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions.… Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.19
Compare the duties of the trustee with the responsibilities of a director of a business (for-profit) corporation. The assets of the business corporation are held by the corporation ultimately for the benefit of the stockholders. The directors and the employees also have a great monetary self-interest in the success of the corporation. As a practical matter, the directors are subject to continued oversight by their stockholders, and invariably the measure of success is in the balance sheet—whether sufficient profit has been made—because the ultimate purpose of every business corporation is to make money. If the stockholders are not satisfied with performance, they have effective methods for registering their discontent. Recognizing this, the law imposes a less demanding standard of conduct on the officers of a business corporation than it does on trustees. It permits the law of the marketplace to prevail, and as a rule, it does not step in and hold officers of a business corporation personally liable for mistakes of judgment unless there has been gross negligence or fraud.20 In other words, an officer of a business corporation can be somewhat less punctilious and still stay within the law.
Floating somewhere between the concept of a traditional trust and that of a business corporation is the charitable corporation. The charitable corporation shares attributes of the traditional trust in that the corporation holds property for the benefit of others. Just as the trustee of a traditional trust holds legal title to trust property but can use this property only for the good of the beneficiaries, the charitable corporation holds its property under an obligation to use that property in the pursuit of certain public benefits.21 “[T]he assets of charitable corporations are deemed to be impressed with a charitable trust by virtue of the declaration of corporate purposes.”22 Although the beneficiary of a traditional trust is a named individual or group of individuals and the beneficiary of a charitable corporation is the public at large or a broad segment of the public, the indefinite nature of the beneficiary of a charitable corporation does not relieve those charged with the governance of the corporation of a high degree of responsibility.23
On the other hand, the charitable corporation is not unlike the business corporation in that it can be a fairly complicated operation to run and one that must deal with many of the realities of the business world. A common example of a traditional trust is a fund set up to benefit minor children or an incapacitated individual. The trustee of such a trust usually has a relatively limited scope of activities; most duties can be managed personally with ease. The trustee is not faced with the hiring and supervision of staff, with the oversight of major programs and properties, and with the innumerable problems involved in running a service for the public. These, however, are the concerns that face a board charged with the supervision of a charitable corporation, and the magnitude of these tasks makes it unrealistic to expect that the board members can adhere to the standard for personal attention required of the traditional trustee.24 Yet the charitable corporation has control over valuable property dedicated to the public, and the public cannot effectively monitor the board’s activity, as do stockholders in a corporation, especially considering the difficulty involved in measuring a nonprofit’s success. What, then, should be the standard of conduct imposed on board members who govern charitable corporations?25 Are such board members required to follow the strict standard imposed on trustees of traditional trusts, or can they adhere to the more relaxed business standard?
Fortunately or unfortunately, the courts are now being forced to deal with this specific issue—the standard of conduct expected of nonprofit boards—because the public has become more interested in the management of charitable corporations. People are much more aware that these organizations should be run for their benefit, and therefore they feel justified in questioning the management of such organizations. But before looking at the issue of quality of management, we need to consider the question of the powers of trustees of charitable corporations. The general rule is that a charitable organization, whether in trust form or corporate form, has such powers as are specifically conferred on it in its enabling instrument, as well as the implied powers necessary to carry out its stated purposes.
Regarding the trust form of such organizations, Scott on Trusts states that “[t]he trustees of a charitable trust, like the trustees of a private trust, have such powers as are conferred upon them in specific words by the terms of the trust or are necessary or appropriate to carry out the purpose of the trust and are not forbidden by the terms of the trust.… [T]he fact that a charitable trust may continue for an indefinite period may have the effect of giving the trustees more extensive powers than they have in the case of a private trust which is of limited duration.”26 Regarding the corporate form of such organizations, case law instructs as follows: “The powers of the persons who act as directors of a charitable nonprofit corporation, whether called directors or trustees, are prescribed in the statute of incorporation, in the instrument creating the corporation, and those implied powers which are necessary and proper to carry out the purposes for which the charity was created and which are not in conflict with expressions in the instrument creating the charity.”27
Given that the boards of charitable corporations (no matter which form) have specific as well as implied powers to carry out their stated purposes,28 it is also important to understand that boards have “discretion” in determining how to achieve the purposes of the organization. In other words, when making judgments, a board is given the benefit of the doubt if all else appears to be in order. “It is a settled principle that trustees having powers to exercise discretion will not be interfered with so long as they are acting bona fide. To do so would be to substitute the discretion of the court for that of the trustees.”29
Now we will turn to the issue of the standard used by courts to judge board conduct. Recently, numerous cases alleging mismanagement have been brought against board members and officers of charitable corporations; of course, in each of these cases, the basic issue is the standard of conduct required of such individuals. A 1974 case that merits close scrutiny involved a hospital, not a museum, but it is considered a landmark decision and is frequently cited on the issue of nonprofit board member liability. The case is Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries or, as it is more commonly known, the Sibley Hospital case.30 The defendant school was founded as a trust but was later incorporated under the Nonprofit Corporation Act of the District of Columbia. Subsequently, the school established the Sibley Memorial Hospital, and over the years, the hospital became the chief function of the school. This suit was brought as a class action against certain members of the hospital’s board of trustees, six financial institutions, and the hospital itself. The main allegations were that (1) the defendant trustees conspired to enrich themselves and certain financial institutions with which they were affiliated by favoring those institutions in financial dealings with the hospital and (2) the defendant trustees breached their fiduciary duties of care and loyalty in the management of Sibley’s funds.31 The financial institutions were named as coconspirators.
At the time of the suit, the hospital was required, under its bylaws, to be run by a board of from twenty-five to thirty-five “trustees” who were to meet at least twice a year. There were also three committees: an Executive Committee empowered to open bank accounts, pay mortgages, and enter into contracts; a Finance Committee to review the budget; and an Investment Committee. In fact, however, for over eighteen years, the hospital had been run almost exclusively by two trustee officers, the hospital administrator and the treasurer. The Finance and the Investment Committees never met, and the board and the Executive Committee were dominated by the administrator and the treasurer. The facts also demonstrated that the hospital maintained excessively large, non-interest-bearing accounts in financial institutions run by certain defendant trustees, that a substantial hospital mortgage was held by a syndicate organized by certain defendant trustees, and that the hospital retained the investment services of a firm controlled by one of the defendant trustees. Regarding the last two arrangements, the mortgage was deemed “fair” and the fee for the investment service “equitable” when compared with similar services offered in the area.
A crucial factor in the case was the standard of conduct assigned to the “trustees” of this charitable corporation. Under traditional trust law, trustees cannot delegate major responsibilities, they must avoid conflict-of-interest situations because of their duty of loyalty, and they have an affirmative duty to protect, preserve, and increase trust assets, as would a “man of ordinary prudence.” Under corporate law, directors, as a rule, are not held liable for their actions unless “gross negligence” or fraud has been found, and transactions between the corporation and a director are not necessarily void.32 The court in the Sibley Hospital case stated the following: “The applicable law is unsettled. The charitable corporation is a relatively new legal entity which does not fit neatly into the established common law categories of corporation and trust.… [T]he modern trend is to apply corporate rather than trust principles in determining the liability of the directors of charitable corporations, because their functions are virtually indistinguishable from those of their ‘pure’ corporate counterparts.”33
The “indistinguishable” feature was essentially that corporate directors and board members of large charitable corporations have many areas of responsibility, whereas the traditional trustee is charged mainly with the management of the trust funds.34 The court moderated its endorsement of the corporate standard, however, by specifically noting that the management of a charitable corporation imposes “severe obligations” on board members because such an organization is not closely regulated by any public entity, it is not subject to scrutiny by stockholders, and frequently its board is self-perpetuating.
After analyzing the facts and conflicting case law,35 the court held as follows:
[A] director or so-called trustee of a charitable hospital organized under the Non-Profit Corporation Act of the District of Columbia [citation omitted] is in default of his fiduciary duty to manage the financial and investment affairs of the hospital if it has been shown by a preponderance of the evidence that:
(1) While assigned to a particular committee of the Board having general financial or investment responsibility under the by-laws of the corporation, he has failed to use due diligence in supervising the actions of those officers, employees or outside experts to whom the responsibility for making day-to-day financial or investment decision has been delegated; or
(2) He knowingly permitted the hospital to enter into a business transaction with himself or with any corporation, partnership or association in which he then had a substantial interest or held a position as trustee, director, general manager or principal officer without having previously informed the persons charged with approving that transaction of his interest or position and of any significant reasons, unknown to or not fully appreciated by such persons, why the transaction might not be in the best interests of the hospital; or
(3) Except as required by the preceding paragraph, he actively participated in or voted in favor of a decision by the Board or any committee or subcommittee thereof to transact business with himself or with any corporation, partnership or association in which he then had a substantial interest or held a position as trustee, director, general manager or principal officer; or
(4) He otherwise failed to perform his duties honestly, in good faith, and with a reasonable amount of diligence and care.36
Even though this less stringent standard was used, in the Sibley Hospital case the trustee defendants were found guilty of breaching their fiduciary duties to supervise the management of the hospital’s investments. In granting relief, however, the court was lenient because, as it pointed out, the hospital had already instituted reforms, there was no evidence that any of the trustees were involved in fraudulent practices or profited personally, and this was a case of “first impressions.” This last reason deserves special attention. The court in effect was saying, “We are giving you another chance, but now that we have clarified the nature and scope of trustee obligations in a nonprofit, nonmember charitable institution, board members in this jurisdiction, beware!”37
The court’s decision in the Sibley Hospital case was not, as some claim, a wholehearted endorsement of the business (corporate) standard for judging nonprofit board conduct; it was a cautious, middle-of-the-road approach that appreciated that charitable corporations were different and needed a standard of their own.38 Under the court’s tests, board members may delegate day-to-day financial and investment decisions if they use diligence in supervising this delegated authority. The criteria mentioned earlier in this chapter for judging a proper delegation by a traditional trustee permit a trustee to delegate (but retain supervision) if the subject requires a special skill not possessed by the trustee. Also, under the court’s test, a board member may not actively participate in a vote in favor of a transaction that would be a conflict of interest for the member under the trustee test, and if a board member knows that the charitable organization is contemplating such a transaction, the member must fully disclose his or her activities and any other known pertinent information. Here again, the Sibley Hospital standard can be reconciled with the traditional trustee standard. Neither standard permits direct participation in a conflict-of-interest situation, but the Sibley test recognizes that there are practical ways in which a board member can be isolated from a particular decision without undermining confidence in the management of the organization. Due to the complexities of managing a charitable organization, the size of and frequent division of responsibilities within a board permit an individual member, on occasion, to defer to the informed judgment of peers. This type of situation historically did not exist in a traditional trust, and hence the very strict conflict-of-interest rule was deemed necessary to ensure loyalty of service.39 But perhaps the key to the Sibley Hospital decision can be found in the fourth and last test described in the case. Here the court said that a board member would be found in default of duty if “he otherwise failed to perform his duties honestly, in good faith, and with a reasonable amount of diligence and care.”40 Under the traditional trustee test, good faith will not save a trustee who fails to perform as “a man of ordinary prudence” in carrying out the required duties. The traditional trustee must meet this objective standard. On the other hand, the corporate business standard usually requires only that a director avoid gross negligence and fraud. Sibley Hospital, in stressing good faith, puts forth a more subjective test, one that permits the court to consider the power and obligations of public trustees, the importance of protecting the public, and the realities of board membership. The test, if carefully followed, still places a formidable burden on the defendant. To support a finding of good faith, the defendant must be able to demonstrate to the court that as a board member the defendant pursued his or her “severe obligations” to the public with a reasonable degree of diligence and intelligence and did not in fact breach the duty of loyalty.41
What standard of conduct would a court impose today on board members of a museum when collection-related matters are at issue?42 (Note that the focus is on collection-related matters, which make up the core work of a museum.) Resolving this question with certainty is difficult because several of the more interesting cases on this point were settled before final judgments were rendered by the courts. However, the charges filed in the cases alone reflect some prevailing opinions regarding proper board conduct.
In the well-publicized Museum of the American Indian case,43 the museum trustees and officers personally were sued by the attorney general of the state of New York for mismanagement. Among the charges listed by the attorney general were the following:
1. The trustees and officers failed to keep complete and contemporaneous records of all collection objects.
2. The trustees and officers permitted questionable accession and deaccession practices.
3. The trustees and officers were involved in self-dealing. (It was alleged, for example, that trustees obtained artifacts and other benefits from the museum and that gifts to the museum from trustees were valued at inflated figures for income tax purposes.)
Essentially, the attorney general of the state of New York was saying that under his interpretation of the law a museum, as a charitable corporation, has certain obligations to members of the public (as the beneficiaries). These obligations impose on the board members of the museum a standard of conduct that requires, at a minimum, that the board members themselves establish acceptable policies concerning the acquisition of collection items, the disposal of such items, and the records to be kept of such transactions.44
After much negotiation with the attorneys for the defendants, the state attorney general entered into a stipulation that held in abeyance further court action. Under the terms of the stipulation, the museum agreed to have a complete inventory of its collection performed by an independent party. This inventory was to be made available to the attorney general and the public. Also, the museum agreed that the director would be relieved of all administrative authority, that no new administrator would be appointed without the prior consent of the attorney general, and that any new administrator would not have unfettered authority to acquire items for the collection or to dispose of items from the collection. While the inventory was in progress, the board of trustees of the museum was reconstituted and a new administrator was hired. Shortly thereafter, the museum published a comprehensive collection management policy statement.45
The Museum of the American Indian case had hardly faded from the news when some of the trustees and a former director of a museum of fine arts in Washington State were sued by the state attorney general for mismanagement of museum assets.46 Although the museum is a charitable corporation, the complaint by the attorney general was couched in traditional trustee language. Among the charges in the complaint were the following:
1. The director, without the permission of the trustees, sold assets of the museum.
2. The director did not keep proper accounts of proceeds recovered from such sales.
3. The director and the trustees failed to maintain the collection in proper condition.
4. The director and the trustees failed to maintain the museum building in reasonable repair.
5. The trustees did not exercise adequate supervision over the director with regard to acquisitions.
6. Trustees were permitted to purchase or borrow items from the collection or to otherwise benefit from their trustee status, practices that amounted to self-dealing.
The attorney general alleged that the trustees “failed to exercise the standard of care of a prudent man,” and that hence, as trustees, they were personally liable for resulting damages, whether caused by them directly or by the director.47 From the list of charges, it appears that this attorney general also believed that the standard of care applicable to board members of a museum requires that the board members set policy concerning the acquisition, disposal, and care of collection objects and that they demonstrate active oversight of museum operation. The case was dismissed after the attorney general and the defendants entered into a stipulation in which the museum agreed to pursue its remedies against one individual deemed largely responsible for the mismanagement.
In 1976, the attorney general of Illinois brought charges against the officials of the George F. Harding Museum, alleging mismanagement of the museum collections and funds and self-dealing. The attorney general argued that the officials were “common law trustees” and thus should be held to a strict standard of conduct. The case developed into a long, hard-fought legal battle, with at least nine law firms involved in the representation of the defendants.48 The attorney general’s position was sufficiently strong, however, to convince the defendants that they should consent to an arrangement whereby the collections of the museum (and title thereto) were transferred to the Art Institute of Chicago and whereby the George F. Harding Museum, for all practical purposes, ceased to exist as a collecting organization. The transfer arrangement went into effect in 1982, but charges against individual officials of the museum were not resolved until 1989.49
Actual court decisions (distinct from settlements) involving museum management also tend to require more of museum officials than the bare business standard. In the Hill-Stead Museum case,50 the trustees were questioned about responsibilities to insure the museum’s collections and to provide adequate security against fire and theft. In deciding the matter, the Connecticut court quoted the traditional trustee standard of care: “It is the duty of the trustees to exercise that care and prudence which an ordinarily prudent person would who was entrusted with the management of like property for another.”51 In Rowan v. Pasadena Art Museum,52 the defendant trustees were absolved from charges that they had failed to preserve and maintain the museum’s collections, had failed to exhibit properly, had failed to establish certain collection management policies, and had failed to receive reasonable amounts for the sale of certain collection items. The standard of conduct applied by the court stressed “good faith”:
Members of the board of directors of the corporation [the museum] are undoubtedly fiduciaries, and as such are required to act in the highest good faith toward the beneficiary, i.e., the public.… Acting within their broad discretion, the trustees must assume responsibility for making decisions regarding all of the affairs of the museum.… So long as the trustees act in good faith and exercise reasonable care as contrasted with a clear abuse of discretion, the decisions must be left in the hands of the trustees where it has been placed by the law.53
In this case, the trustees were able to show that promulgated internal policies were in place in the museum and that, in making decisions, the trustees adhered to these policies. In other words, the trustees showed that they took their work seriously.
From the foregoing cases, certain conclusions can be drawn concerning board responsibility for the management of a museum.54
Duty of Care. Under prevailing law, board members of a museum will be held at least to the duty of care imposed on directors of a business corporation. In other words, they are invariably liable for gross negligence and fraud. However, if the matter at issue directly concerns collection policy (the core function of the museum), courts have been inclined to expect a higher standard, one that requires evidence of good-faith efforts on the part of board members to set reasonable policy, to follow policy, and to exercise reasonable oversight.55 This tendency to expect board members of a nonprofit organization to pay closer attention to the core function of the nonprofit is understandable. Unlike a for-profit organization, a nonprofit cannot determine its success by studying a balance sheet. The purpose of the nonprofit is not to make money but to provide a quality product or service (as described in its charter) to a particular segment of the public. Because of the very nature of a nonprofit’s activity, outsiders experience extreme difficulty in judging, in a timely manner, the quality of governance. In such a situation, it is important, if public confidence is to be maintained, to demand that a board do more than just avoid gross negligence and purposeful wrongdoing. At the very least, the board should be under obligation to institute policies reasonably designed to further the mission of the organization and should also be able to demonstrate good-faith efforts to monitor such policy.56 If there is a tendency on the part of courts—and the public—to expect a nonprofit board to pay particular attention to the organization’s core functions, then a museum board should give attention to the establishment and monitoring of a prudent collection management policy for the museum. Ethical codes promulgated by the museum profession underscore this responsibility. These codes do not have the force of law, but they do reflect standards considered essential if the integrity of the profession is to be maintained.57
Duty of Loyalty. Case law and guidelines promulgated by the legal profession for nonprofit boards stress the importance of the interests of the organization over personal interests or those of a third party. A board member must take seriously, therefore, the obligation to disclose in advance to fellow board members any possible conflicts of interest, giving full details and removing himself or herself from further discussion and from voting if such matters in fact come before the board. In turn, when a board is on notice that a member has a conflict of interest, the real and apparent effects of this conflict must be carefully weighed in the decision process. A prudent board has a well-established procedure for addressing conflicts of interest, and the procedure is an integral part of the organization’s total collection management structure.58
Duty of Obedience. Finally, the law cautions nonprofit board members about the duty of obedience—the obligation to focus on the specific mission of the organization. For museums, this has particular relevance. What a museum collects, how it collects, and the segment of the public to be served are invariably circumscribed by the charter of the museum. When establishing a collection management policy, a museum must stay within the boundaries drawn by its charter. Also, although a museum board has discretion in deciding how its mission is to be accomplished, careful adherence to the duty of obedience means selecting goals carefully. The question should not be merely, “Is this goal relevant to our mission?” The harder question needs to be asked: “Is this a wise goal in light of our anticipated resources?” Collecting without focus and overcollecting to the point where the museum cannot effectively care for or utilize objects are examples of failure to give sufficient attention to the duty of obedience. “Those who are responsible for the governance and management of museums must … recognize that they are unlikely ever to have enough funds to operate their institutions at the level of activity that could be justified in an ideal world. Instead, they must make difficult choices of what to do with the limited funds available.”59 Trustees who take their duty of obedience seriously also understand the importance of trying to make the “right” choice.60
By 2011 museums were drifting uncomfortably in an environment that too often looked more entrepreneurial than nonprofit, The country’s economy was in bad shape, donations were down, grant money was scarce, and museums were desperately looking for ways to stay solvent. Some were exploring with a vengeance “lending for profit” (charging large loan fees and lending to for-profit as well as nonprofit organizations). Some were focusing only on exhibitions and other events that would bring in a tidy profit, and others were experimenting with licensing agreements or the renting of their facilities as ways to supplement income.61 Very often this atmosphere was affecting the selection of board members with the ideal candidate being one with marketing skills. This change in emphasis could not help but raise this question: When times are this tough, can board members start thinking like entrepreneurs without fear of legal or ethical ramifications? It is difficult to defend an affirmative answer to the question because the end result of following such a path might well be the demise of the nonprofit sector. Nonprofits that look too much like for-profits run into trouble with the IRS, and they also encourage local governments to take away property tax exemptions, consequences that could prove deadly for many nonprofits.
A better way for nonprofits to approach the current (circa 2011) financial climate is for them to examine why we have a nonprofit sector in the United States and why we afford this sector so many privileges. This research will reveal what unique benefits the third sector is supposed to offer to our society, benefits that cannot be provided by our government sector or our for-profit sector. Many of those associated with the nonprofit sector never pause to think about these benefits and often do not even realize that the United States differs from most other countries in that it has a large and powerful nonprofit sector. When time is taken to explore this question, it becomes much clearer what steps nonprofits need to take to truly strengthen their sector and protect its credibility.62
1. Definition used in Museum Services Act, 20 U.S.C. § 968(4). See 45 C.F.R. pt. 1180 for amplification of the scope of this definition. An “art museum” in the traditional sense is defined by the Association of Art Museum Directors as “a permanent, nonprofit institution, essentially educational and humanistic in purpose, which owns, studies, and cares for works of art, and on some regular schedule exhibits and interprets them to the public. The definition of the art museum has been extended to include institutions that do not have collections but whose mission is nonetheless primarily dedicated to exhibitions and related programs.” Association of Art Museum Directors, Professional Practices in Art Museums (New York: Association of Art Museum Directors, 2001). The word “museum,” it is claimed, first referred to the “temple of the muses,” built by Ptolemy in AD 2 in Alexandria, where performances of music, dance, and poetry took place at a site adjoining a library and collection of antiquities. See B. Robertson, “The Museum and the Democratic Fallacy,” Art in America 58 (July–Aug. 1971). For the evolution of the American Association of Museums’ definition of “museum,” see K. Starr, “In Defense of Accreditation,” Museum News 5 (Jan.–Feb. 1982). For texts that describe the history and practices of museums, see M. Schwarzer, Rivals and Radicals: 100 Years of Museums in America (Washington, D.C.: American Association of Museums, 2006); H. Genoways and M. Andrei, eds., Museum Origins: Reading in Early Museum History and Philosophy (Walnut Creek, Calif.: Left Coast Press, 2008); S. Dubberly, ed., Careers in Museums: A Variety of Vocation, 4th ed. (Washington, D.C.: American Association of Museums Technical Information Service, 1994); E. Alexander, Museums in Motion: An Introduction to the History and Functions of Museums (Walnut Creek, Calif.: Published for the American Association of Museums by Alta Mira Press, 1996); and G. Burcaw, Introduction to Museum Work, 3d ed. (Walnut Creek, Calif.: Alta Mira Press, 1997).
2. Professor Milton Katz of Harvard Law School describes a museum as “a privately organized public institution.” He explains that a museum is public in the sense that it devotes all its resources to educational purposes and none to the pecuniary advantage of any person (other than compensation for services rendered). A museum is private because it is nongovernmental and derives its resources from gifts by private donors. J. Nason, Trustees and the Future of Foundations (New York: Council on Foundations, 1977), 10–11.
3. Museums are often administered by universities, and there are several good resources in this area, including Roxana Adams, ed., Foundations of Governance for Museums in Non-Museum Parent Organizations (Washington, D.C.: American Association of Museums Technical Information Service, 2002). Museum News (Jan.–Feb. 1980) has several articles on special problems of university museums: M. King, “University Museums Staffs: Whom Do They Serve?”; B. Waller, “Museums in the Grove of Academe”; and M. Christison, “Professional Practices in University Art Museums.” The Southern Arts Federation published Trustee Handbook (1977), which discusses the lines of authority in a state- or city-owned museum. See also Association of Art Museum Directors (AAMD), Professional Practices in Art Museums (New York: Association of Art Museum Directors, 2001); and the AAMD, “Art on Campuses” Guidelines, July 7, 2009, accessed Mar. 12, 2001, http://www.aamd.org/papers/documents/AAMDUniversityArtonCampusGuidelines.pdf. See also A. Ullberg, “Selected Materials on the Public/Private Museum: Who’s in Charge of What?,” in American Law Institute–American Bar Association (ALI-ABA), Course of Studies Materials: Legal Problems of Museum Administration (Philadelphia: ALI-ABA, 1992). Another source of information is the Association of College and University Museums (accessed May 11, 2011, http://www.aamg-us.org/index.php).
4. See, for example, J. Luoma, “Prison or Ark?,” 84 Audubon 102 (No. 6, Nov. 1982).
5. In re Estate of Vanderbilt, 109 Misc. 2d 914, 441 N.Y.S.2d 153 (Sur. Ct. 1981), 157. Usually a museum is established in a corporate form under its state’s procedures for the formation of nonprofit corporations. (A nonprofit corporation can make money, but once legitimate expenses are paid, any profit must be used to further the purposes of the organization.) If a museum is not incorporated, it will probably be classified as a charitable trust. For the purposes of the subject matter of this text, observations made concerning charitable corporations will usually apply to charitable trusts. The rather tortured distinctions sometimes made by courts between charitable trusts and charitable corporations appear to be more form than substance when applied to collection-related issues. See A. Scott, The Law of Trusts § 348, 3d ed. (Boston: Little Brown and Co., 1967) [hereafter Scott on Trusts (3d ed.); note, the most recent edition of this well-renowned book is A. Scott, W. Fratcher, and M. Ascher, Scott and Archer on Trusts, 5th ed. (New York: Aspen Publishers, 2006 updated through 2010); the third edition referenced here and the later editions are kept in most law school libraries]; T. Blackwell, “The Charitable Corporation and the Charitable Trust,” 24 Wash. U. L.Q. 1 (1938); K. Karst, “The Efficiency of the Charitable Dollar: Unfulfilled State Responsibility,” 73 Harv. L. Rev. 433 (1960); Note, “The Charitable Corporation,” 64 Harv. L. Rev. 1168 (1951); Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal. 2d 750, 40 Cal. Rptr. 244, 394 P.2d 932 (1964); Lynch v. Spilman, 67 Cal. 2d 251, 62 Cal. Rptr. 12, 431 P.2d 636 (1967). In many such cases, the real issue is the degree of oversight that should be exerted by the courts. See, for example, the Corporation of Mercer University v. Smith, 258 Ga. 509, 371 S.E.2d 858, 1988 Ga. LEXIS 379 (1988).
6. The term “charity” is defined quite broadly in the law. As stated by Professor G. Bogert, a noted authority on the law of trusts, “to the non-legal mind the word [charity] often means ‘almsgiving’ or ‘liberality to the poor,’ or ‘that which is given to relieve the needy’; whereas in the law the word has a much broader meaning and includes a large number of other acts working toward the social welfare.” G. Bogert, The Law of Trusts and Trustees, rev. 2d ed., § 369 (St. Paul, Minn.: West Pub. Co., 1977). See also Restatement (Second) of Trusts § 368 (St. Paul, Minn.: American Law Institute, 1987); People ex rel. Scott v. George F. Harding Museum, 58 Ill. App. 3d 408, 374 N.E.2d 756 (1st Dist. 1978) (this case held that a museum fell within the purview of Illinois’ Charitable Trust Act); 12 A.L.R.2d 849, § 9 (an extensive annotation on the validity of trusts created for the dissemination and preservation of material of historic or educational interest); Richardson v. Essex Institute, 208 Mass. 311, 94 N.E. 262 (1911) (the trust for the preservation of a historic house was held to be a public charity).
7. The expression “terms of the trust” is usually interpreted in the broad sense: “[I]t is not limited to express provisions of the trust instrument, but includes whatever may be gathered as to the intention of the settlor [the creator of the trust] from the trust instrument as interpreted in the light of all the circumstances, and any other indication of the intention of the settlor which is admissible in evidence.” Scott on Trusts § 186 (3d ed.). See also Restatement (Second) of Trusts § 186; Attorney General v. President and Fellows of Harvard College, 350 Mass. 125, 213 N.E.2d 840 (1966).
8. Scott on Trusts §§ 174, 176, 181 (3d ed.). See also In re Estate of Lohm, 440 Pa. 268, 269 A.2d 451 (1970); In re Mendenhall, 484 Pa. 77, 398 A.2d 951 (1979); Manchester Band of Pomo Indians, Inc. v. U.S., 363 F. Supp. 1238 (N.D. Cal. 1973); Zehner v. Alexander, 89 (Penn. 39th Jud. Dist., Franklin County, Ct. of C.P., Orphans’ Ct. Div.) 262 (May 25, 1979) (also known as the Wilson College case).
9. Henley v. Birmingham Trust Nat’l Bank, 295 Ala. 38, 322 So.2d 688, 693 (1975).
10. Scott on Trusts § 170 (3d ed.).
11. Restatement (Second) of Trusts § 170 (1959). [Note, Restatement of the Law (2d) of Trusts, like many law treatises, is continually updated. It is authored by the American Law Institute—www.ali.org—and is now in its third edition; American Law Institute, Restatement of the Law (3d) of Trusts (St. Paul, Minn.: American Law Institute, 2003). The second edition referenced here and the later editions are kept in most law school libraries.] Some states have laws that specifically forbid such self-dealing. If a trustee makes a full disclosure to the beneficiaries and purchases with their consent, possibly a sale of this nature would survive challenge.
12. An interesting case on the fiduciary duty not to self-deal is In re Estate of Rothko, 43 N.Y. 2d 305, 401 N.Y.S.2d 449, 372 N.E.2d 291 (1977), on remand, In re Estate of Rothko, 95 Misc. 2d 492, 407 N.Y.S.2d 954 (1978). In this case, the executors (fiduciaries) of Mark Rothko’s estate were removed and surcharged for engaging or acquiescing in estate transactions that were tainted by self-interest. One of the executors was an officer in an art gallery that was retained to dispose of estate assets. Another executor was an artist who signed, with the same art gallery, a favorable agency agreement of his own after the estate transaction was consummated.
13. Commonwealth v. Barnes Foundation, 398 Pa. 458, 159 A.2d 500, 505 (1960).
14. Winthrop v. Attorney General, 128 Mass. 258 (1880); Harvard College v. Attorney General, 228 Mass. 396, 117 N.E. 903 (1917).
15. Nor can a cotrustee assume joint trustee power. See Restatement (Second) of Trusts §§ 194, 383 (1959); Stuart v. Continental Illinois Nat’l Bank and Trust Co., 68 Ill. 2d 502, 369 N.E.2d 1262 (1977), cert. denied, 444 U.S. 844 (1979). Nor is a trustee relieved of his or her obligations when they are voluntarily assumed and performed by another. See Petition of United States on behalf of Smithsonian Institution v. Harbor Branch Foundation, 485 F. Supp. 1222 (D.D.C. 1980).
16. Restatement (Second) of Trusts § 171 (1959). See also Scott on Trusts § 171 (3d ed.); In re Estate of Lohm, 440 Pa. 268, 269 A.2d 451, 47 A.L.R.3d 499 (1970); Uniform Trustees’ Powers Act § 4 (1964).
17. Scott on Trusts § 201 at 1650 (3d ed.); see also § 174. Uniform Trustees’ Powers Act § 1(3) (1964). See also M. Fremont-Smith, Foundations and Government: State and Federal Law and Supervision (New York: Russell Sage Foundation, 1965), for a general discussion of the role of a trustee. Stark v. United States Trust Co., 445 F. Supp. 670 (S.D.N.Y. 1978), analyzes New York law on the duty of trustees. Stuart v. Continental Illinois Nat’l Bank and Trust Co., 68 Ill. 2d 502, 369 N.E.2d 1262 (1977), cert. denied, 444 U.S. 844 (1979), held that a trustee is personally liable for any loss occasioned by a violation of his or her duties as trustee. The rule applies when the violation is the result of negligence or mere oversight as well as when the trustee is wrongfully motivated.
18. 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1 (1928).
19. Ibid., 546. This is not to suggest that all courts have been as conscientious in maintaining for traditional trustees a “level of conduct higher than that trodden by the crowd.”
20. For example, in Kamin v. American Express Co., 86 Misc. 2d 809, 383 N.Y.S.2d 807, 811, aff’d, 54 A.D. 2d 654, 387 N.Y.S.2d 993 (1976), directors were sued under the New York Business Corporation Law, which permits an action against a director for “the neglect of or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.” The court stated the following: “This does not mean that a director is chargeable with ordinary negligence for having made an improper decision or having acted imprudently. The ‘neglect’ referred to in the statute is neglect of duties (i.e., malfeasance or nonfeasance) and not misjudgment. To allege that a director ‘negligently permitted the declaration and payment’ of a dividend without alleging fraud, dishonesty or nonfeasance, is to state merely that a decision was taken with which one disagrees.”
21. Volumes have been written regarding the proper characterization of gifts to charitable organizations, as distinct from the issue (discussed in footnote 5) of how the organization itself should be characterized. Does such a gift vest absolute title in the organization, or does it create a trust obligation? See T. Blackwell, “The Charitable Corporation and the Charitable Trust,” 24 Wash. U. L.Q. 1 (1938); J. Eubank et al., “Duties of Charitable Trust Trustees and Charitable Corporation Directors,” 2 Real Prop. Prob. and Tr. J. 545 (1967). Today, it may be more helpful to focus on the fact that, as far as gifts to charitable organizations are concerned, form is not as important as function, that is, to administer conscientiously the assets for the charitable purpose. See K. Karst, “The Efficiency of the Charitable Dollar: Unfulfilled State Responsibility,” 73 Harv. L. Rev. 433 (1960); and Note, “The Charitable Corporation,” 64 Harv. L. Rev. 1168 (1951). In certain cases, however, form becomes important. See, for instance, Crane v. Morristown School Foundation, 120 N.J. Eq. 583, 187 A. 632 (1936), where creditors tried to reach school endowment funds, and In re the Edwin Forrest Home, No. 154 (Penn., Philadelphia Ct. of C.P., Orphans’ Ct. Div., Apr. 24, 1981) (Opinion of Court en banc 1982), where the issue was whether a nonprofit organization must account as a trustee under the State’s Probate, Estates, and Fiduciaries Code. It could be argued that the court’s reasoning is frequently result oriented.
22. American Center for Education Inc. v. Cavnar, 80 Cal. App. 3d 476, 145 Cal. Rptr. 736, 742 (1978).
23. Scott on Trusts § 379 (3d ed.); St. Joseph’s Hospital v. Bennett, 281 N.Y. 115, 22 N.E.2d 305 (1939); Estate of Becker, 270 Cal. App. 2d 31, 75 Cal. Rptr. 359 (1969).
24. Most board members of charitable corporations serve without compensation, but as stated in Scott on Trusts § 174 at 1410 (3d ed.), “The trustee is held to the standard of a man of ordinary prudence whether he receives compensation or whether he acts gratuitously.”
25. Governors of charitable corporations may be called trustees, regents, supervisors, etc. When used in this text, the term “board member” or “trustee” should be construed to cover members of whatever body actually governs the charitable corporation.
26. Scott on Trusts § 380 (3d ed.).
27. Midlantic Nat’l Bank v. Frank G. Thompson Foundation, 170 N.J. Super. 128, 405 A.2d 866, 869 (1979). As this quotation notes, the state statutes that provide for the establishment of nonprofit organizations invariably list a whole range of powers that such organizations are assumed to have unless the charter of a particular organization specifically limits such powers.
28. It is important to distinguish between powers to carry out the charitable organization’s stated purpose and powers to change the purpose of or to alter a specific restriction placed on the organization. In these latter situations, boards are much more limited and usually need to seek court approval in cy pres or equitable deviation petitions. As stated in Taylor v. Baldwin, 362 Mo. 1224, 247 S.W.2d 741, 750 (1952), “[t]he point of demarcation at which the courts will interfere with the discretion of those governing a public charity reasonably is the point of substantial departure by the … [board] from the dominant purpose of the charity.”
29. Shelton v. King, 229 U.S. 90, 94 (1913).
30. 381 F. Supp. 1003 (D.D.C. 1974) and also 367 F. Supp. 536 (D.D.C. 1973) (order granting plaintiffs standing to sue). An earlier case of interest is United States v. Mount Vernon Mortg. Corp., 128 F. Supp. 629 (D.D.C. 1954), aff’d, 236 F.2d 724 (D.C. Cir. 1956), cert. denied, 352 U.S. 988 (1957), in which the United States, as parens patriae, sued trustees of a charitable foundation for improper transfer of foundation property.
31. 381 F. Supp. 1007 (D.D.C. 1974).
32. Usually such transactions are voidable at the option of the corporation. It is assumed that because of the profit motive the actions of directors will be closely watched by those having a pecuniary interest in the corporation.
33. 381 F. Supp. 1013 (D.D.C. 1974).
34. Compare, for instance, Blankenship v. Boyle, 329 F. Supp. 1089 (D.D.C. 1971), which was decided by the same judge who rendered the decision in the Sibley Hospital case. Blankenship involved the management of a large union welfare fund by a group of trustees. The major charges were that excessive cash deposits were maintained in a bank account by the union trustees and that this practice benefited the union and the bank rather than the beneficiaries of the trust, the union members. Evidence in the case demonstrated that management of the trust fund was a complex operation, that the trustees did not hold regular meetings, and that there was no set procedure for deciding policy questions. Despite the complex nature of the trust, the court favored the trust standard. It held that in view of the fiduciary obligation to maximize the trust income by prudent investment, the burden of justifying their conduct fell on the trustees. The trustees could not sustain this burden. The court required the removal of two trustees and ordered major management changes in the fund’s administration.
35. See, for instance, George Pepperdine Foundation v. Pepperdine, 126 Cal. App. 2d 154, 271 P.2d 600 (1954), a case illustrating the view that hard cases make bad law. Pepperdine was overruled in part by Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal. 2d 750, 40 Cal. Rptr. 244, 394 P.2d 932 (1964). See also Lynch v. John M. Redfield Foundation, 9 Cal. App. 3d 293, 88 Cal. Rptr. 86 (1970), where the court held corporate trustees to the traditional trust standard regarding investment duties. (Note that as of 1980 California has in effect a comprehensive nonprofit corporation law that spells out standards of conduct. Cal. Corp. Code §§ 5000-10831).
36. 381 F. Supp. 1015 (D.D.C. 1974).
37. For an analysis of the Sibley Hospital case, see M. Mace, “Standards of Care for Trustees,” Harv. Bus. Rev. 14 (Jan.–Feb. 1976).
38. Years later the need for a separate standard of conduct for nonprofit trustees is being demonstrated. In the 1990s, boards of nonprofit hospitals began selling their organizations to for-profits, and those who endorse the “business” standard of conduct for nonprofit boards find themselves without strong legal arguments to protect the public. A series of scandals in the early 1990s concerning nonprofit boards’ failures to police the conduct of chief executive officers also puts into question the wisdom of a very relaxed standard of conduct for nonprofit boards.
39. See also C. Welles, Conflicts of Interest: Nonprofit Institutions, Report to the Twentieth Century Fund Steering Committee on Conflicts of Interest in the Securities Markets (New York: Twentieth Century Fund, 1977). The revised nonprofit corporation law that went into effect in California in 1980 approves this concept of reasonable delegation with continued oversight. Cal. Corp. Code § 5210.
40. 381 F. Supp. 1015 (D.D.C. 1974) (emphasis added).
41. Compare, for example, the decision in Zehner v. Alexander, 89 (Penn. 39th Jud. Dist., Franklin County, Ct. of C. P., Orphans’ Ct. Div.) 262 (May 25, 1979) (known as the Wilson College case). The trustees of Wilson College voted to close the school because of declining enrollment. The decision was challenged in court. The closing was enjoined, and two trustees were ordered removed, one for gross negligence and the other for conflict of interest (she was the president of another college) and for failure to use her special expertise. Here, apparently, the court did not think the trustees tried hard enough to avoid closing the school and thus found grounds for overruling their judgment. But see Rowan v. Pasadena Art Museum, No. C 322817 (Cal. Sup. Ct., L.A. County, Sept. 22, 1981), which stressed the broad discretion vested in trustees. In this case, however, the trustees were able to show that the decision in question was carefully considered in accordance with promulgated internal procedures. In Mountain Top Youth Camp, Inc. v. Lyon, 20 N.C. App. 694, 202 S.E.2d 498 (1974), the court adopted a test similar to that used in the Sibley Hospital case. Although the courts seem to take different paths in these cases, a key issue in each is whether the trustees appear to have made good-faith efforts to carry out their responsibilities.
42. See G. Marsh, “Governance of Non-Profit Organizations: An Appropriate Standard of Conduct for Trustees and Directors of Museums and Other Cultural Institutions,” 85 Dick. L. Rev. 607 (1981); A. Geolot, “Note: The Fiduciary Duties of Loyalty and Care Associated with the Directors and Trustees of Charitable Organiztions,” 64 Va. L. Rev. 449 (Apr. 1978); J. Nason, Trustees and the Future of Foundations (New York: Council on Foundations, 1977); W. Abbott and C. Kornblum, “The Jurisdiction of the Attorney General over Corporate Fiduciaries under the New California Nonprofit Corporation Law,” 13 U.S.F. L. Rev. 753 (Summer 1979); D. Kurtz, Board Liability. Guide for Nonprofit Directors (Mt. Kisco, N.Y.: Moyer Bell Limited, 1988); G. Overton, ed., Guidebook for Directors of Nonprofit Corporations (Chicago, Ill.: American Bar Association, 1993).
43. Lefkowitz v. The Museum of the American Indian Heye Foundation, Index No. 41416/75 (N.Y. Sup. Ct., N.Y. County, June 27, 1975). Many years after this case was settled, the Museum of the American Indian became a part of the Smithsonian Institution and took the name “National Museum of the American Indian.”
44. When investigating the case of Lefkowitz v. Kan, Index No. 40082/78 (N.Y. Sup. Ct., N.Y. County, Jan. 3, 1983) (compromise agreement), the attorney general of New York questioned the museum’s purchase of several art objects once owned by a member of the museum’s board. The attorney general argued that in New York such a sale amounted to “self-dealing” by a fiduciary. This particular aspect of the case was settled when the attorney general and all parties concerned reached an agreement that required the following:
1. All transactions between the museum and the board member were to be reconsidered after the board member made full disclosure of his or her interests. If the museum’s board rejected any piece, the board member was to refund the full purchase price.
2. The board members would not purchase, sell, or exchange any materials from, to, or with the museum without advance written disclosure to the museum’s board and to the attorney general.
3. The museum’s board would establish a committee to draft a comprehensive code of ethics. Pending the adoption of this code, the museum would not purchase, sell, or exchange collection objects with board members or staff.
(Statement of Louis Lefkowitz, Attorney General of New York, by Charles Brody, Assistant Attorney General, May 19, 1978)
45. The collection policy was adopted by the board of trustees of the Museum of the American Indian, Heye Foundation, on June 29, 1977, and was published in Indian Notes 22 (No. 1, 1978), a publication of that museum. The collection policy provided that all accessions, except certain field collections made by staff, and all deaccessions required the approval of the board of trustees. This requirement, which was part of the stipulation entered into with the attorney general, was rather stringent for a museum of this size and type.
46. State of Washington v. Leppaluoto, No. 11781 (Wash. Super. Ct., Klickitat County, Apr. 1977). The trustees filed a countersuit against the attorney general, alleging breach of an earlier agreement between the trustees and the attorney general regarding reorganization of the museum.
47. If a museum director is permitted to perform actions that should be reserved for the trustees, the trustees may be held liable. If there is a proper delegation of authority to the museum director but the trustees fail to oversee generally the exercise of their delegated power, the trustees may be held liable.
48. People ex rel. Scott v. Silverstein, No. 76 CH 6446 (Ill., Cook County Cir. Ct., Oct. 1976) and 408 N.E.2d 243 (1980). See also People ex rel. Scott v. George F. Harding Museum, 58 Ill. App. 3d 408, 374 N.E.2d 756 (1978), and People ex rel. Scott v. Silverstein, 412 N.E.2d 692 (1980) rev’d, 429 N.E.2d 483 (1981).
49. In Hardman v. Feinstein, No. 827127 (Cal. Supp. Ct., San Francisco County, July 1984), several citizens filed suit against the trustees of the Fine Arts Museum of San Francisco, charging mismanagement of the collections because of poor inventory methods, improper disposal of certain works, and lax security. The case was not pressed but is of interest regarding the plaintiffs’ perception of the accountability of museum trustees.
50. Harris v. Attorney General, 31 Conn. Supp. 93, 324 A.2d 279 (1974).
51. Ibid., 287.
52. No. C 322817 (Cal. Sup. Ct., L.A. County, Sept. 22, 1981).
53. Ibid., 6.
54. The cases just described involve charges filed against board members and directors of museums for violations of fiduciary duties. Are staff members of museums immune from such suits? This question was raised in the case of Lefkowitz v. Kan, Index No. 40082/78 (N.Y. Sup. Ct., N.Y. County, Jan. 3, 1983) (compromise agreement). In this case, which was settled by a compromise agreement dated January 3, 1983, the attorney general of New York alleged that the defendant, a curator, violated a fiduciary responsibility owed the museum when he arranged certain deaccession sales involving a dealer with whom the curator did business personally. The settlement agreement stated that although no museum policy required the disclosure of the curator’s personal transactions with the dealer, the situation created “at least the appearance of an impropriety” and that “full and candid disclosure of personal transactions are required by present codes of ethics and fiduciary law.”
55. This “higher standard” does not mean that a board must be able to show that its decisions were always correct but rather that a board must be able to show that it made reasonable efforts to address major responsibilities. American Association of Museums, National Standards and Best Practices for U.S. Museums with Commentary by Elizabeth E. Merritt (Washington, D.C.: American Association of Museums, 2008). For a more detailed discussion of museum board responsibility, see M. Malaro, Museum Governance: Mission, Ethics, Policy (Washington, D.C.: Smithsonian Institution Press, 1994); and W. Boyd, “Museum Accountability: Law, Rules, Ethics, and Accreditation,” 34 Curator 165 (American Museum of Natural History) (No. 3, Sept. 1991).
56. If, for example, the matter at issue concerned the museum’s investment policy (not the core purpose of the museum), a court may be inclined to quote the business corporation standard of care. Here the “auxiliary activity” (the management of the museum’s investments) must be carried out in the marketplace subject to marketplace pressures, and measuring success or failure is relatively easy. Thus, judging by a business standard makes more sense. See W. Cary and C. Bright, The Developing Law of Endowment Funds: “The Law and the Lore” Revisited, Report to the Ford Foundation (New York: Ford Foundation, 1974), and the Uniform Management of Institutional Funds Act, prefatory note. See also Midlantic Nat’l Bank v. Frank G. Thompson Foundation, 170 N.J. Super. 128, 405 A.2d 866 (1979). But see Attorney General v. Olson, 346 Mass. 190, 191 N.E.2d 132 (1963), where the trust standard was applied but was liberally construed in favor of the trustees. See also B. Boehm, “MOCA Ordered to Revamp Its Budget Practices,” Los Angeles Times, Apr. 16, 2010. Here the board of the Museum of Contemporary Art was chastised for overspending, questionable monitoring of investments, and unauthorized tapping of restricted endowment funds. There was no attempt to hold board members personally liable, but they were ordered to take training in proper nonprofit management. G. Marsh, “Governance of Non-Profit Organizations: An Appropriate Standard of Conduct for Trustees and Directors of Museums and Other Cultural Institutions,” 85 Dick. L. Rev. 607 (1981), presents another analysis of a museum trustee’s responsibilities, as does S. Weil in the chapter entitled “Breach of Trust, Remedies, and Standards in the American Private Art Museum” in his book Beauty and the Beasts: On Museums, Art, the Law, and the Market (Washington, D.C.: Smithsonian Institution Press, 1983). See also C. Sherrell-Leo and R. Meyer, “The Buck Stops Here—and Other Trustee Responsibilities,” 39 History News 28 (No. 3, Mar. 1984); and M. Malaro in the chapter entitled “On Trusteeship” in Museum Governance: Mission, Ethics, Policy (Washington, D.C.: Smithsonian Institution Press, 1994).
57. . The section on “governance” in the Code of Ethics for Museums adopted by the American Association of Museums (Washington, D.C.) in 1994 and now in its 2000 edition states the following: “Museum Governance in its various forms is a public trust responsible for the institution’s service to society. The governing authority protects and enhances the museum’s collections and programs and its physical, human, and financial resources. It ensures that all these resources support the museum’s mission.… Thus the governing authority ensures that: … [P]olicies are articulated and prudent oversight is practiced.” The Code of Professional Ethics initially promulgated by the International Council of Museums (Paris: ICOM, 1990) stated in § 3.1 that “[e]ach museum authority (i.e., museum board) should adopt and publish a written statement of its collecting policy. This policy should be reviewed from time to time, and at least once every five years.” In 2004, ICOM substantially revised this Code of Professional Ethics (accessed Apr. 10, 2011, http://icom.museum/what-we-do/professional-standards/code-of-ethics.html). The online version is currently dated 2006 and has the following pertinent paragraphs:
1.2 Statement of the Mission, Objectives, and Policies
The governing body should prepare, publicize and be guided by a statement of the mission, objectives, and policies of the museum and of the role and composition of the governing body.…
2.1 Collections Policy
The governing body for each museum should adopt and publish a written collections policy that addresses the acquisition, care and use of collections. The policy should clarify the position of any material that will not be catalogued, conserved, or exhibited (See 2.7; 2.8).
58. The Restatement on Restitution § 197 (St. Paul, Minn.: American Law Institute, 1937) provides that where a fiduciary in violation of his or her duty to the beneficiary receives or retains any profit, the fiduciary holds what is received on a constructive trust for the beneficiary. In other words, the profits must be turned over to the beneficiary. Under this doctrine, a museum trustee could be charged with the return of any profit he or she might make at the expense of the museum. Interestingly, in California the attorney general’s office has found self-dealing to be the “single most troublesome charitable trust enforcement problem.” W. Abbott and C. Kornblum, “The Jurisdiction of the Attorney General over Corporate Fiduciaries under the New California Nonprofit Corporation Law,” 13 U.S.F. L. Rev. 753, 777 (Summer 1979). See also D. Kurtz, Board Liability: Guide for Nonprofit Directors (Mt. Kisco, N.Y.: Moyer Bell Limited, 1988), 59–84.
59. Martin Feldstein, ed., The Economics of Art Museums (Chicago, Ill.: U. of Chicago Press, 1991), 7. See also American Association of Museums, Slaying the Financial Dragon: Strategies for Museums (Washington, D.C.: American Association of Museums, 2003).
60. For an interesting decision on the question of whether the board’s vote to deaccession a number of works in order to better focus the collection amounted to a change “in mission,” see Dennis v. Buffalo Fine Arts Academy, 15 Misc. 3d 1106(A), 836 N.Y.S.2d 498 (Table), 2007 NY Slip Op 50520(U) (Sup. Ct., Erie County, 2007). See also L. Sugin, “Resisting the Corporatization of Nonprofit Governance: Transforming Obedience into Fidelity,” 76 Fordham L. Rev. 893 (2007).
61. See Celestine Bohlen, “Retrenching Guggenheim Closes Hall in Las Vegas,” New York Times, Dec. 24, 2002.
62. See D. McLennan, “Culture Clash—Has the Business Model for Arts Institutions Outlived Its Usefulness?,” Wall Street Journal, Oct. 8, 2005, 11. See E. Merritt, “Museums: A Snapshot, a Rundown from 2009 Museum Financial Information,” MUSEUM (Jan./Feb. 2010). This article suggests that museums may have little choice but to run faster than they are racing now just to keep up. This is a rather dismal outlook considering the stress museums are currently experiencing. Maybe “stop running and start thinking” would be a more productive approach. See also Leah Arroyo’s interview with Senator Charles Grassley in “Grassley’s Roots: The Man (Some) Museums Love to Hate,” MUSEUM (Sept./Oct. 2008). Senator Charles Grassley is leading a crusade to improve the way many nonprofits currently operate. For more information on the suggested solution, see Chapters 1–5, 9, and 11 in M. Malaro, Museum Governance: Mission, Ethics, Policy (Washington, D.C.: Smithsonian Institution Press, 1994).