November 01, 2005
More on the CIC and Nonprofit Accountability
Posted by geoffrey manne

I said I'd post more on the Community Interest Company. But then Vic and Steve and Larry and Steve weighed in, and they pretty much said exactly what I would have said. Precisely, and in the same words, no less. I even said a little more myself.

So I won't belabor the point. I'll just add this bit:

One more aspect of the CIC troubles me: The Regulator. What on earth could the world need with yet another agency to regulate yet another corporate entity? In this case, the entity is, as I said, essentially a nonprofit. So I can understand the (knee-jerk) sentiment that organizations that purport to operate in the "community interest" must be monitored by the community's representatives (for those of you unsure, that's the gubm'nt). But is that right? Is there another way? I would submit that there is. In fact, I did so submit in an article, Agency Costs and the Oversight of Charitable Organizations, in the Wisconsin Law Review about 5 years ago. The full text isn't on SSRN, but here's the abstract:

This article uses property rights theory and the theory of the firm to analyze the behavior of the participants in nonprofit organizations. It locates the failure of nonprofit oversight in the confluence of strict standing rules and nearly insurmountable agency costs. The article repudiates the conventional solutions to the problem (ranging from relaxing standing limitations to restricting the use of the nonprofit form), and proposes a contractual solution through which nonprofits or their founders would secure the services of a set of independent agents to monitor and, where appropriate, enforce the nonprofit's charter and the relevant fiduciary rules through judicial action. Because the monitoring agents would function within a market framework, market controls should operate to constrain the behavior of these agents. Thus donors, philanthropists, and beneficiaries would receive the benefit of effectively monitored corporate (or trust) agents who do not present a significant agency cost problem. The result should be increased accountability on the part of nonprofit agents to their donors or patrons without the serious threat of frivolous suits or politically-selective attorney general enforcement.
You can find the whole thing on Westlaw or Lexis, of course, or just e-mail me (manne-at-lclark-dot-edu) if you'd like a copy.

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