September 9, 2011

New York Not-for-Profit Entities Task Force Investigates Executive Compensation

Holland & Knight Alert
Sean C. Sheely

Following recent reports in the New York Times of excessive compensation at some not-for-profits, New York Governor Andrew Cuomo created a task force to investigate executive compensation at not-for-profits that receive taxpayer funding from the State of New York. The Not-for-Profit Entities Task Force (the “Task Force”) is conducting a comprehensive review and audit of current compensation levels at not-for-profits and will make recommendations for future rules limiting the use of tax dollars to pay what they determine to be excessive salaries and compensation.

Gathering Information About Compensation

On August 25, 2011, the Task Force began sending letters to the boards of directors of not-for-profit organizations requesting detailed information about their compensation practices. The letter is expected to go out to more than 600 nonprofit providers of services, including organizations that provide alcohol and substance abuse counseling, as well as other health and welfare services. Initial reports indicate that the first round of letters was sent to 50 mental health providers serving people with developmental disabilities.

The Task Force asks the organization’s board of directors to respond to 39 questions requesting information about the organization’s compensation practices during the four-year period from June 2007 through June 2011. It asserts that the “directors must prevent wasteful expenditures of funds on outsized executive and administrator compensation.”

Seeking Views on Claw-Backs

The Task Force seeks substantial information beyond that publicly available through an organization’s annual IRS Form 990 filing. Notably, it solicits the organizations’ views on “clawing-back” compensation from executives as follows:

  • Do you believe that recoupment and/or claw-back of executive and/or board compensation is necessary?
  • What is your view regarding recoupment and/or claw-back of executive and/or board compensation?
  • Given current economic conditions and information, is the board or management considering any recoupment and/or claw-back for past salary and/or benefits?

Under New York law, Section 202(a)(12) of the Not-For-Profit Corporation Law (N-PCL) provides organizations with the authority to fix the “reasonable” compensation of its executives “commensurate with the services performed.” The compensation information requested by the Task Force potentially raises complex legal issues of fiduciary duty and fiscal responsibility. In cooperating with the Task Force, directors must also consider the possible negative consequences that may flow from disclosing sensitive business information about its proprietary practices.

Experienced Counsel

Holland & Knight’s attorneys have extensive experience advising directors of not-for-profit organizations on matters relating to executive compensation in the mental health, social services and healthcare sectors. In addition, we have represented numerous not-for-profit clients in response to government investigations and audits, and can advise your organization on the Task Force’s investigation.

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