Nonprofit Governance and the Closure of Sweet Briar College

The announcement this week of the closure of Sweet Briar College after the end of this semester was significant and sad news.

Sweet Briar was pressured by declining enrollment and a deterioration in pricing power. The board’s decision to yield to this trend while the college still has a large endowment to help fund an orderly wind-down is, perhaps, responsible.

Yet it’s still quite painful and abrupt for faculty, students, staff, and alumnae.

Sweet Briar alumnae, reasonably, seem upset that the board took its decision without consulting them.

A more open conversation about how to best serve Sweet Briar’s mission of being a cohesive, rural community for the liberal arts education of young women might have developed options.

I can think of several — a boarding school offering a post-graduate year with transferable college credit, a think tank focused on women’s education, or an intensive freshman year liberal arts program governed by a consortium of research universities (perhaps Southern ones).

These outcomes would have preserved the place and its memories for alumnae, even in changed circumstances. It’s unclear, though, whether those options were considered. Some alumnae are exploring legal options, but it may be too late to do anything effective.

The Sweet Briar story made me think about whether a Kentucky nonprofit corporation could be designed to avoid an episode like the college’s abrupt closure. I think it could be done rather easily.

Kentucky allows nonprofit corporations to have members, or not. Nonprofit corporations without members are governed by a self-perpetuating board of directors, while those with members usually have directors elected by the members.

Kentucky’s nonprofit corporation statutes also allow a nonprofit’s articles of incorporation to include optional provisions.

To avoid a Sweet Briar-style abrupt closure, a nonprofit could have articles that create different classes of members. In a college setting, these membership classes might include: (i) faculty and staff; (ii) students; (iii) alumni; and (iv) donors.  If a person qualified for more than one class (for instance, a professor that was also an alumnus and a donor), that person could vote with all membership classes for which they qualified.

To calibrate the “balance of power” in the nonprofit’s governance, each class of members could elect a different number of directors. Within the donor class of members, votes might be allocated proportionately to each person’s lifetime contributions to the nonprofit.

For a 15-person college board, it might make sense for faculty and staff to elect 6 directors, students to elect 2, alumni to elect 3, and donors to elect 4.

Under Kentucky law, a supermajority of at least two-thirds of the votes entitled to be cast is required to approve the merger, dissolution, or sale of substantially all of the organization’s assets of a nonprofit corporation with members.  The nonprofit would have the option to go beyond this baseline statutory requirement, and also require that a majority of the membership classes approve the merger, dissolution, or asset sale, unless the event had been approved by more than two-thirds of the directors.

With this design, the directors elected by only two classes of members couldn’t cause an abrupt transformation of the organization, unless three of the four classes of members supported the decision.

I believe alumni of and/or donors to colleges and nonprofits need to take the Sweet Briar case study very seriously. Institutions can be much more fragile than they appear. At many nonprofits, stakeholder pressure could incent governance reform now, before a disruptive event happens.

Major donors, in particular, should reflect on events at Sweet Briar, do diligence on a donee organization’s governance, and urge change, if needed.

For nonprofit institutions that won’t create stakeholder-friendly governance, or are so large a donor can’t practically exert pressure for change, the community foundation option is attractive.

A donor could create a donor advised fund at a community foundation with instructions to pay income or a unitrust amount to the college or nonprofit as long as it remained in existence, or had a certain set of characteristics (such as spending at least a certain percentage of revenue on program-related activities, or being a residential undergraduate college). If criteria for disbursement weren’t met, then future payments would go to another organization selected in advance by the donor.

This is a much more efficient approach than the complex litigation that may unfold in the Sweet Briar situation, as the terms of many gifts to their endowment have to be examined on a case-by-case basis, and heirs possibly tracked down to whom funds might be returned.

I hope Sweet Briar’s faculty will find new positions, its students will transfer successfully, and that a portion of its endowment will be used to create a smaller-scale institute fostering alumnae connections, learning, trips, career services, and reunions.

If that happens, it will be the best possible outcome for a very difficult situation.

Sweet Briar may be a leading indicator for struggling colleges and nonprofits, as traditional revenue streams shrink or stop in an economy beset by structural change and the “cost disease of the service sector.”

For that reason, pay attention to Sweet Briar and consider how organizations you care about might modify their governance to adapt gracefully to forced change, if needed.