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Quasi-Governmental Organizations at the Local Level: Publicly-Appointed Directors Leading Nonprofit Organizations

Joseph Mead
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  • Assistant Professor, Cleveland State University, Maxine Goodman Levin College of Urban Affairs and Cleveland-Marshall College of Law,
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/ Katherine Warren
Published Online: 2016-03-03 | DOI: https://doi.org/10.1515/npf-2014-0044

Abstract

Quasi-Governmental Organizations (QGOs) are organizations that have both public and private characteristics, not fitting neatly into either category. One type of QGO is an organization incorporated as a private, nonprofit organization, but run by a board of directors that is composed of government officials or directors appointed by a unit of traditional government. These QGOs pose distinct conceptual and policy challenges that differ from those of traditional government entities or purely private nonprofits. Drawing on a convenience sample of five such QGOs incorporated in one metropolitan region (Greater Cleveland, Ohio), this piece explores potential reasons for, and possible pitfalls of, mixing private organizational legal status with public-affiliated leaders by developing a framework and proposing a research agenda for future study.

Keywords: quasi-governmental organization; government-nonprofit relations

Introduction

What happens when the government controls the board of a private organization? Can there be such a thing as a governmental nongovernmental organization? Or a government-run independent sector? These and other questions are raised by organizations that, as incorporated nonprofit organizations, are nominally private, yet are governed by a board that is required by law and its charter to have directors appointed by or affiliated with traditional government.

The government-controlled nonprofit organization is a particular subset of quasi-governmental organizations (QGOs) that populate many urban landscapes. QGOs are hybrid entities that borrow structural characteristics from both the public (governmental) and private (for-profit or nonprofit) sectors. As hybrids, they are not easily categorized into either the government or non-governmental spheres of organizations. The use of QGOs threaten the old definitions of the public and private sectors, warranting additional study of the definition, structure, use, and implications.

How do we make sense of these strange creatures? We undertake the first step by defining quasi-governmental organizations, situating them within the larger organizational ecology, and proposing a series of questions to guide future research. We apply this construct to several organizations in and around a mid-size city (Cleveland, Ohio, USA) with a history of innovation in governance structures. We find variation among the QGOs in our study in the slate of legal rules that apply to each QGO, the public communication of the QGO’s identity and in the governance structures of the QGO boards. These variations along dimensions of law, perception, and control pose intriguing questions for further research.

Public and Private Organizations

Humans structure their activity into a wide range of formal and informal institutions. The American tradition, broadly speaking, tends to distribute formal organizations into public and private sectors, with the private sector commonly subdivided into for-profit and nonprofit spheres (Williams and Taylor 2013; Mendel 2009; Stone and Ostrower 2007; Friendly 1982; Horwitz 1982). Although this divide is better described as a spectrum, the idea of sectors is found across a variety of perspectives, including dichotomous legal rules, different management norms and practices, and socially-assigned significance (Rainey and Bozeman 2000). Under this tradition, public organizations are run by leaders elected through popular and open elections (and individuals who answer through the chain of command to such leaders) who owe a duty to promote the public interest at large, while private organizations are run by directors who are put in place by a vote of shareholders, members, or existing board members, and who owe a fiduciary duty to further the narrow interests of the organization (Moe and Gilmour 1995). Public entities reflect community or majoritarian values, while private entities express the views of their narrower constituencies (Moulton and Eckerd 2012). The narrower agendas of private organizations allow a space for pluralistic dialogue and preference-fulfillment unattainable through majority-take-all elections (Tocqueville 2006). Because they are accountable to the electorate, public entities have a more legitimate claim to coerce non-consenting parties, and therefore can pass laws and collect tax revenue; private entities have power only over those who consent to their rule, and must rely on consensual receipts of funding (whether commercial or donative revenue). A corollary of public accountability is that public entities can be abolished at will by the electorate, while private organizations typically enjoy perpetual life, at least while solvent, until their managers choose to close down the enterprise (M. Lee 2007). Public entities are commonly given designations such as departments, cities, and authorities, while private entities are called corporations, trusts, and nonprofit organizations.

Table 1 highlights a few of the salient differences, somewhat simplified, of governing structure between public and private organizations in the United States:

Table 1:

Summary of characteristics commonly associated with public and private.

Some of these characteristics hold as a matter of definition, while others are simply perceived tendencies of each type of organization.

The Quasi-Governmental Organization

While scholars have long questioned whether the tidy divide between public and private has ever been empirical reality, the complexities of modern society increasingly call it into question. This is particularly true given the rise of quasi-governmental, quasi-private organizations that do not fall neatly into either the public or private realm. These organizations have been called hybrid organizations, quasi-autonomous non-governmental organizations (Quangos), gray sector organizations, or, as we will refer to them, Quasi-Governmental Organizations (QGOs).

QGOs are extremely difficult to define (van Thiel 2004; Cole 1998). As Moe (2001) put it: “The truth is that the quasi government, virtually by its name alone and the intentional blurring of its boundaries, is not definable in any precise way.” Sure enough, the literature abounds with differing definitions. Definitional difficulties are compounded by transnational differences in legal regimes, social history, and cultural traditions, but even scholars focused on the American experience have failed to reach a consensus. The varying attempts at definition congeal around the idea that the organizations of interest possess a mix of public and private characteristics, but scholars differ as to which characteristics are considered, focusing variously on funding sources, missions, performance characteristics, means of accountability, and/or application of certain laws (such as personnel rules or governmental immunities) (Koppell 2003; Becker 2010; Andre 2010; Moe 2001; Bertelli 2005; O’Connell 2014; Kosar 2008; Musolf and Seidman 1980). One reason why scholars have not agreed on – or even sought – a common definition is because the variables of interest will differ depending on the scholar’s particular research aims.

Prior definitions also have something of a circularity problem, as they depend on an identifiable set of “public” versus “private” characteristics, which the very nature of QGOs call into question. (O’Connell 2014). Future efforts to define QGOs should first identify the characteristics that are being considered, and specify which characteristics qualify as public or private (as we have attempted to do in Table 1). This will often limit a definition to a particular social, historical, political, and/or legal tradition. However, difficulties with definitions should not distract from the significant conceptual puzzle that QGOs pose.

Private Legal Status, Publicly-Appointed Board

Without intending to define QGO for all purposes, we focus on a particular type of QGO: one that mixes a private legal status (that is, incorporated as a nonprofit corporation) with public governance (i.e. having at least one director who is appointed by a unit of government) Given our local focus, we consider organizations that have a tie with city, township, or county government, although some organizations have directors appointed by federal or state government units.

The relationship between the government and private organizations (specifically nonprofit organizations 1) has been modeled by several scholars, who have noted the varying levels of cooperation or adverseness that can exist between the sectors (Coston 1998; Najam 2000; Young 2000; Salamon 1987). Other scholars debate the wisdom of certain types of interactions between government and private organizations, such as whether certain regulations or funding decisions threaten the nonprofit sector’s promise of pluralism and independence. (Brody 2004). For the most part, however, this and other literatures presume a distinctness between government and nonprofit. 2 Existing literature studying the relationship between government and the private sector has focused on the government’s power to regulate, tax, and fund, but rarely considers the possibility of direct political control.

In the normal situation, boards of for-profit organizations are picked by shareholders or owners, and nonprofit boards are elected by any members or the existing board. Government appointments to private organizations are a departure from the normal course of things in the United States today, although hundreds of years ago the practice was more common. The ability to appoint directors offers government the theoretical possibility of controlling or influencing an organization by appointing directors friendly to the government’s preferences. The relationship between appointment of personnel and control has long been studied by political scientists in the realm of public administration (Lewis 2008; Wood and Waterman 1991; Scher 1961).

Because the board of directors has formal legal control over private organizations, it makes sense to analyze the appointment of the organization’s formal leaders. Granted, particularly for nonprofit boards, the board does not always have the level of control contemplated by the law, and decisionmaking for the organization is driven by factors well beyond a boardroom vote (McClusky 2002). Yet the board’s status as the ultimately responsible organ for the direction of the organization, and its power (even if unexercised) to override the decisions of staff, make it an important component of the organization to understand.

It is worth remembering that, even outside of the QGO context, the government asserts some measure of control over the governance of private organizations. It requires that organizations be governed by boards in the first place, prescribes fiduciary duties for these directors to consider when acting, and, through the courts, can even remove directors for perceived misbehavior. It can also require certain board qualifications for organizations with which it contracts (Guo 2007; LeRoux 2009). Moreover, private organizations can choose to elect government officials (whether past or present) to their boards. The government official might bring influence or insight that is desired by the organization (Hillman 2005). None of these situations, however, offer a governmental unit the same potential for control as the power to pick directly an organization’s leaders.

Why Use a QGO Form?

Why might creators choose to structure a new enterprise as a QGO instead of a more traditional form? More specifically, why would the creators choose to create a nonprofit organization with government-affiliated directors, instead of a purely private nonprofit organization or an independent, nominally-public organization?

Broadly speaking, QGOs provide a balance of government influence and independence that may be desirable for political or legal reasons. We highlight a few, non-exclusive reasons that might motivate the creation of certain types of QGOs, though we caution that the reasons that motivate a QGO’s founding may differ from those that apply to the QGO as its ages.

Institutional embodiment of a PPP or Intergovernmental Agreement. To begin, a QGO can serve as a facilitator of the work of a Public-Private Partnership (Mendel and Brudney 2012). The institution could serve as the space for the PPP’s work, and/or it could embody the details of the agreement between the various partners in a PPP, specifying percentages of public and private ownership or control over the project. Similarly, the QGO could specify the details of a joint venture between different public bodies, such as different units of local government. This view of the QGO as the embodiment of a complex agreement is consistent with the construct of the corporate form as simply a complex network of contractual agreements.

Government and Market Failure. Some have pointed to QGOs as a way of overcoming instances where both traditional government forms and the market fail to produce goods at a socially optimal level (Becker 2010). BIDs are a good example of this. Business districts desire, and are willing to pay for, additional services, but to obtain the optimal level of service they need to overcome collective action problems (market failure) and elected officials focused on different political preferences (government failure). By combining elements of both the public and private, BIDs allow businesses to overcome these hurdles to arrange heightened services for the district. Although this rationale might explain some QGO structural elements, additional theoretical or empirical work is needed to explain why a nominally-private form is needed to overcome the various failures.

Autonomy. A QGO with less government control might also be indicated when a measure of independence from traditional government is desired. This might be the motivation when, for example, leaders believe a plan should be dictated by those with some specialized expertise, or when there is concern for the interests of a political minority. Depending on its composition, a pseudo-private form could potentially be more independent than even an insulated public body. For example, an organization governed by a board with a majority of directors who are not subject to governmental appointment or removal would be theoretically more distant from local government, in terms of control, than an independent commission. Further, even holding political and legal constraints constant, leaders of a nominally private organization may perceive themselves as less constrained by public will than those with a nominally public entity.

Whether the private form actually leads to autonomous decisionmaking is not certain. For example, nationally, the vast majority of BIDs claim to have independence in setting policy, the level of their services, and level of revenue, (Becker 2010), but a recent study of quasi-autonomous organizations in Canada showed a significant degree of political influence in funding decisions (Mehiriz 2014).

Commitment. Another aspect of independence is the degree of commitment to a project. Government funding can be discontinued in future funding cycles, and public departments can be abolished, but transfer of ownership of public property to a legally private institution may be irreversible.

Commitment is often disfavored in public administration because it interferes with popular sovereignty and the ability of the electorate to undo mistakes made by their leaders. However, commitment may be needed before private partners will be willing to invest in a particular project. Thus, perhaps without some assurance that a project will not be abandoned or reversed upon a change in political leadership, it may be difficult to obtain the investment of monetary, intellectual, or other resources in an endeavor. This assurance cannot always be provided by contract, and a QGO might be structured such that the organization has a life of its own that cannot be easily undone solely by the actions of municipal government. Thus, for example, after the valuable assets of the City of Detroit’s art museum were threatened in the City’s recent bankruptcy, the City transferred ownership of the art to a newly-formed QGO that prevents the City from using the art to pay off its debts (Welch 2014).

Selection of Rules. The use of QGO can be a way of picking which legal rules will apply. Public entities often have to comply with laws concerning public meetings and access to records, conflict of interest rules, personal financial disclosures, whistleblower protections, and personnel policies. There are commonly rules providing for judicial review of agency decisions. And governmental entities must comply with federal and state constitutional rules that prohibit certain actions, such as discrimination or censorship. At the same time, public entities and their officers often enjoy immunity from lawsuit. Private entities are bound by different requirements. The use of a QGO rather than a purely public form could be a way of opting out (or at least attempting to opt out) of the myriad legal requirements that constrain public administrators. As discussed below, depending in part on one’s normative position, the use of a QGO to select a particular portfolio might be described as either cutting through bureaucratic “red tape” or an end-run around rules of accountability.

Facilitating trust. Calling an organization a “private nonprofit organization” may be perceived as a way of obtaining the trust of those who are skeptical of the government (Van Slyke and Roch 2004; Drevs, Tscheulin, and Lindenmeier 2014). The government gets the best of both worlds: benefiting from the warm glow that people feel towards the nonprofit sector while still maintaining some measure of electoral accountability for the organization.

This assumes that people will trust an organization based on the type of legal status chosen during incorporation rather than how independent an organization is from the government based on other metrics, such as presence of government officials on the board or extent of government contracting. This runs counter to some evidence which suggests that people may not know the legal status of the organizations with which they interact (Handy et al. 2010). However, at the same time, people may be more knowledgeable about the legal form than about other information such as board of directors or degree of government funding (Horne, Johnson, and Van Slyke 2005). If the assumption of a change in perception based on name is accurate, the flip-side is that an organization designated as private will not benefit from whatever positive perceptions that people may have of “governmental” entities. Further research is needed into the level of information that people have about quasi-governmental entities and how that influences their perception of them.

Limiting Debt Liability. Much like a company might form a subsidiary to undertake a new real estate project or enterprise without risking the parent company’s assets, the government could create nonprofit organizations to immunize itself from debt or liability from a risky new endeavor.

“Better” Directors on Nonprofit Boards. Nonprofit board governance is overwhelmingly criticized by scholars and practitioners, who claim that boards regularly fail to live up to their legal or ethical obligations. (Boyd 1986; Brody 1996; D. P. Lee 2003). Inattentive or incompetent board members are common targets of complaint. One might attempt to remedy this problem by eliminating the self-perpetuating board, and instead vest appointment in an outside body to perform a sort of quality control. For this to work, the political body must be viewed as superior to appointing directors than alternative means of appointment.

A similar – and marginally more plausible – explanation is that government appointment will lead to more representative board members. Nonprofit board members are often recruited for their connections or their fundraising capacity, which often excludes large segments of the community from having a seat on the board (Guo and Saxton 2010). Since local political institutions have been forged through the electoral process, they may reflect a more diverse range of perspectives than nonprofit boards. Indeed, Salamon pointed to government involvement as a means to remedy philanthropic paternalism (Salamon 1987), and some evidence suggests increased government funding leads to more representative boards (LeRoux 2009). The concern of nonrepresentative boards – and seemingly unchecked power to harm employees, consumers, and/or the environment – led some commentators to propose publicly-appointed directors on large for-profit corporate boards (Conard 1997; Blumberg 1973). Further study is needed to determine whether government-appointed directors are, in fact, more representative or competent than directors appointed through other means.

Research Method

To ground our analysis, we analyze the structure of several organizations from the Greater Cleveland area. The Cleveland metropolitan area has a rich history of using PPPs in innovative ways to solve pressing problems, making it an ideal environment for studying the development of QGOs. We took a convenience sample of five organizations in the Cleveland area that appeared to possess characteristics that fell within our definition of QGOs of interest. We collected data on the sampled organizations using the organizations’ own web sites, newspaper and journal articles, articles of incorporation, Form 990s, and other public documents.

The Organizations

Special Improvement District: Downtown Cleveland Improvement Corporation

The Ohio Revised Code (ORC) allows for nonprofits or groups of business or property owners to create a Special Improvement District (SID), better known nationally as a Business Improvement District (BID). SIDs have the unique capability as nonprofits to collect assessments from property owners within their assigned district for use in safety and sanitation initiatives as well as capital projects. Though the business owners in the district must vote to incorporate the SID, once it has been passed, all business owners in the district must pay the assessment, which is based on property value, front footage, and the benefits the business will receive from being part of the SID.

The District is governed by a board of directors, which must include a person appointed by the legislative authority of each participating political subdivision, and the municipal executive of each municipal corporation. Ohio Rev. Code § 1710.04. Moreover, SID assessment plans must be approved by the legislative authority of the relevant political subdivisions before they can be implemented. Using funds collected in the form of assessments, these organizations provide services to the area that are of the type also provided by government (safety, sanitation, capital improvements). We chose one SID in Cleveland.

In 1994, Northcoast Development Coordinators was founded, holding several different identities through the years: Downtown Development Coordinators in 1996, Downtown Cleveland Partnership in 1999, and Downtown Cleveland Alliance (DCA) in 2006. It was in 2006 that DCA took its present form as the nonprofit management arm of a new SID. According to their mission statement, they are “committed to making Downtown Cleveland the most compelling place to live, work and play. Downtown Cleveland Alliance works hand-in-hand with Downtown stakeholders to enhance the quality of life in NEO’s urban core by implementing initiatives like the Clean & Safe Program, economic development assistance, marketing & special events, advocacy and strategic projects.” http://www.downtowncleveland.com/about-us.asp. The SID is known as the Downtown Cleveland Improvement Corporation (DCIC), though the two organizations appear to overlap considerably in their day-to-day operations.

DCIC was established in 2005, and all of the business owners in the district are required to pay an annual assessment fee to DCIC. In return DCIC’s Board of Directors is responsible for deciding how to use the assessment dollars. DCA is then contracted by DCIC to implement the programs in Downtown Cleveland as DCIC’s Board decides. DCA’s funding comes almost entirely from the assessment fees that DCIC collects, though they also conduct some private fundraising activities. The assessment funds are used mostly for safety and sanitation within the district, but they can also be used on capital projects for the improvement of the district.

Currently, DCIC has 21 members on its Board of Directors, including one councilman, and one City of Cleveland staff person. DCA has a Board of 25 Directors, with no public officials on the Board.

Cuyahoga Land Bank

State legislation adopted in 2008 allows for the creation of a County Land Reutilization Corporation (CLRC). Ohio Rev. Code Chs. 1724, 5722. Originally only Cuyahoga County could create this type of corporation, but the power was extended to other large counties in 2010.

The Cuyahoga Land Bank’s mission is to “strategically acquire properties, return them to productive use, reduce blight, increase property values, support community goals and improve the quality of life for county residents” (cuyahogalandbank.org). It identifies itself as a “separate non-profit, government-purposed entity” and as “a quasi-governmental corporation” (cuyahogalandbank.org). The Land Bank acknowledges its design as a nonprofit that can “operate efficiently and more like a private enterprise, but pursuant to a public mission.” (cuyahogalandbank.org). The statute authorizing the creation of the Land Bank expressly reserves the right to the County to dissolve the organization (Ohio Rev. Code chs. 1724, 5722).

The Board of Directors of the Cuyahoga County Land Reutilization Corporation consists of the County Treasurer, two county commissioners, one representative from the largest municipality in the county, one representative from another township, and the remaining members selected by the county officials on the board. Originally, the law required a majority of local mayors to approve appointed board members, but that requirement was eliminated in 2010. 2010 Sub. House Bill 313. Currently, the Land Bank’s Board has nine members, two of whom are not local city or county employees.

The Land Bank receives some government funding in the form of tax dollars, though most of its funding comes from “accumulation of penalties and interest on collected delinquent real estate taxes and assessments” or grants from local partners (cuyahogalandbank.org). The penalties and interest are collected by the county and distributed to the Cuyahoga Land Bank by the County Fiscal Officer. It is required to comply with auditing rules as if it were a traditional government agency.

Gateway Economic Development Corporation

Gateway Economic Development Corporation is a nonprofit corporation that was established in 1990 by City of Cleveland officials to own and manage two large sports facilities for professional teams. Its articles of incorporation state that it was established “for the purposes of constructing and operating a sports facility [in Cleveland]… and for the additional purposes of conducting redevelopment and economic development activities within the City of Cleveland.” They explicitly claim on their website to be a “501 (c)(3) non-profit Ohio corporation legally separate from any other entity” (http://www.gatewaysportscomplex.org/). Its board of five members is appointed by the City of Cleveland and Cuyahoga County officials, and each board member can be removed by either a vote of the board or by a vote of the legislative body that appointed the director.

Cleveland Citywide Development Corporation

Cleveland Citywide Development Corporation (CCDC) was founded in 1981, with a purpose “to advance, encourage, and promote the industrial, economic, commercial, and civic development of the City of Cleveland” (CCDC Articles of Incorporation). Currently, its mission is to “promote Economic Development in the City of Cleveland by serving as fiscal intermediaries in the review and recommendation for approval of loans to businesses within the City of Cleveland” (Id.) It exists as a nonprofit corporation, but it is the approval authority for City of Cleveland economic development loans under $250 thousand, and it provides recommendations to City Council on loans over $250 thousand (http://www.rethinkcleveland.org/About-Us/Cleveland-Citywide-Development-Corporation.aspx). Its Board of Trustees is composed of 17 members, 7 of whom are public officials, and 10 of whom are private appointees (http://www.rethinkcleveland.org/About-Us/Cleveland-Citywide-Development-Corporation.aspx). All board members are appointed by the mayor (http://www.rethinkcleveland.org/About-Us/Cleveland-Citywide-Development-Corporation.aspx).

CCDC has no staff of its own, and is administered primarily by City of Cleveland staff. Interestingly, as can be learned from a document outlining plans for various PPPs in Cleveland in 1981 (Cleveland Area Development Corporation, Greater Cleveland Growth Association, and Cleveland (Ohio). Department of Economic Development, “Plan for Partnership for Economic Development in Cleveland, Ohio, draft, August 1981,”Voinovich Collections, accessed July 28, 2014, https://www.voinovichcollections.library.ohio.edu/items/show/400), when CCDC was founded, its creators were open to the idea of CCDC eventually operating with its own staff and functioning more independently from the city. Though those changes never happened, the board has grown since the organization’s inception (it originally had thirteen members), though the ratio of public to private board members has remained the same through the years, with private directors always being in the slight majority.

Cleveland Transformation Alliance

The Cleveland Transformation Alliance was created in 2012 following the passage of state legislation promoted by a collection of local leaders. The Alliance represents a component of the “Cleveland Plan,” a strategy for improving primary and secondary education within the City of Cleveland. Although the Alliance primarily has an oversight and communication role, it is also required to ratify the mayor’s proposed plan for improving area schools.

The Cleveland Transformation Alliance is organized as a nonprofit organization as a “municipal school district transformation alliance” specially authorized by state law. It is governed by a board of directors, and the mayor has the “sole authority” to appoint directors. However, state law requires that directors be appointed who represent four categories: the municipal school district; partnering community schools; the community at large; and business leaders. Ohio Rev. Code § 3311.86. No single category can constitute a majority of the board. The mayor has appointed a 29 member board, which includes several public officials as well as representatives from many influential local organizations. The Alliance must comply with public records and meetings laws, but directors are not considered public officials. The Alliance will automatically terminate in 2018.

Towards Future Research

The varied set of governance structures that exist within our convenience sample of 5 local organizations highlight several opportunities for future researchers along several dimensions, including appointment, organizational goals and effectiveness, construction of legal regimes, and internal and external perception.

Governance and Government

The sampled organizations reveal intriguing differences in their board composition along several dimensions, including whether the directors are public officials or merely appointed by a public official, the political body in which appointment is vested or from which directors are drawn, and the relative percentages of each. Figure 1 highlights the different approaches.

Composition of boards, by affiliation.
Figure 1:

Composition of boards, by affiliation.

Public Officials v. Public Appointees. Our data show that some organizations allow government bodies to appoint officers, while others provide that a public official sit directly on the board ex officio. Even within an organization, there can be a mix of governmentally-appointed directors and public officials.

Both appointment and ex officio mechanisms offer some measure of influence to the political body, since it provides a chance to select a director who is predicted to act consistent with the preferences of the political unit. However, political costs and information costs preclude perfect fulfillment of preferences, and placement of ex officio members on a board is likely to lead to greater control on the part of the political unit than appointment. Even assuming, as seems quite unlikely, that an appointing authority has numerous candidates for a position and conducts a lengthy investigation of each, it still cannot guarantee that the chosen director will faithfully implement its policy preferences. For instance, the mayor’s preferences might be shared by a director appointed by the mayor, but the mayor herself will be a stronger champion of her own preferences.

Legislative v. Executive Authority. The discussion so far assumes a monolithic political body with a singular set of preferences. In fact, the organizations draw directors from different local political units (county, the City of Cleveland, and/or other municipalities). Even within a particular political body, the organizations differ in how they allocate directorships between the local executive and legislative units. Cleveland Transformation Alliance gives total control to the mayor (executive), Gateway depends on the action of two legislative bodies, and the other organizations have a mix of executive and legislative-originating directors. This, too, indicates a rich vein of potential research into the political processes that different appointment methods might reveal.

Proportions of Board Members. All but one of the studied organizations had a board that was 100% composed of government-affiliated (whether through appointment or ex officio) directors. Several of the boards had a mix of public officials and public appointees, and at least one organization (Cleveland Citywide Development Corporation) has a majority of directors who are affiliated with a single municipality’s executive (either as city officials or mayoral appointees). Some of the organizations were carefully designed to avoid having a majority of the board from any particular bloc. The Cleveland Transformation Alliance, for instance, may not have a majority of members from any of four categories, and Gateway is structured to ensure complete equality in terms of board membership between the City of Cleveland and Cuyahoga County.

Appointment versus Removal. Appointment is but one half of the equation; if an appointed director fails to perform as hoped, what are the remedies? Only one of the organizations – Gateway – had information about removal, and it gives the appointing authority the power to remove a director. The remainder of the organizations did not have clear information about removal, which suggests that removal can only be done by a vote of the organization’s board, and not the outside political body.

With the power of removal comes the potential to issue threats ex ante, and act ex post, to persuade the director to act in accordance with the potential remover’s wishes. Yet removal is hardly a perfect tool of control, as political scientists have documented the ways that, for example, the President’s greater formal power to remove some agency heads more than others does not always lead to increased control over their agencies (Lewis 2003). Nevertheless, the combination of appointment and removal power gives a considerable amount of potential political control to the government over directors.

The variation uncovered in our set of QGOs suggests several questions for future research. First, what political or other factors correlate with decisions to vest selection and removal authority in a local governmental body. Second, how do directors selected by governmental bodies differ in demographic characteristics from directors selected through other means. Third, do directors selected and/or removable by elected officials perceive their role differently than other types of directors, or do they behave differently in their decisionmaking.

Selection of Legal Rules. Quasi-governmental organizations of the type we study here can be created either under a generally-applicable nonprofit incorporation statute (generic nonprofit) or under specially-authorizing legislation (specialized nonprofit). Two of the five organizations we studied appear to be incorporated under a generally-applicable nonprofit incorporation statute, under the same state statutory provisions that apply to any other Ohio nonprofit corporation. Three of the five are incorporated as specially-authorized nonprofit organizations, where the state legislature has specifically authorized the creation of that organization and specified some of the particular rules that apply. Table 2 summarizes the organic statute that authorizes the creation of each QGO studied.

Table 2:

Legal status and website description of studied organizations.

The law of nonprofit corporations is fairly well defined, but the mix of public control and private status can place QGOs in ambiguous legal terrain (O’Connell 2014). For example, particularly when the organic statute is silent, it is often unclear whether QGOs must comply with open meetings and public records statutes and whether the entity’s assets can be seized and repurposed by elected government. Subject to a minimal constitutional floor, these rules are primarily a product of legislation at the state level. But state-level legislation on government transparency often applies only to traditional government, often failing to specify under what circumstances it applies to government affiliates such as QGOs in nonprofit form, leaving courts to resolve ambiguities, as in State ex rel. Toledo Blade Co. v. Univ. of Toledo Found., 65 Ohio St. 3d 258, 602 N.E.2d 1159 (1992) (holding that private nonprofit that received funds on behalf of a public university was a public office for purposes of public records laws). To alleviate such ambiguities, special incorporation statutes allow the state legislature to identify the slate of legal rules that must apply to the QGO. Table 3 summarizes a few features from legislation authorizing the three specialized nonprofits in our sample. The three specialized nonprofit forms do reveal some differences in what mix of laws the legislature has prescribed for them.

Table 3:

Summary of legal rules specified in authorizing legislation of specialized nonprofits.

Some rules, however, are not specified in legislation, leading to even greater ambiguity. State legislatures cannot modify constitutional law, for example, and therefore it is unclear the extent to which public-director-led nominally private organizations must comply with federal constitutional rules of process and equality (Seidman 1998), the extent to which QGOs can exercise delegated power from the traditional government (Dep’t of Transportation v. American Ass’n of Railroads), and how they fare under state constitutional law, such as Ohio’s constitutional ban on joint ownership between the government and private entities (Osmer 2012). For example, Gateway has argued in court – at times successfully, at other times not – that it is not bound to provide constitutional protections such as free speech because it is not a governmental entity (Cleveland v. Bregar, 106 Ohio App. 3d 713, 721, 667 N.E.2d 42, 48 (Ohio Ct. App. 1995); United Church of Christ v. Gateway Econ. Dev. Corp. of Greater Cleveland, Inc., 383 F.3d 449, 455 (6th Cir. 2004)).

Moreover, because the articulation of directors’ fiduciary duties is largely accomplished through judicial decisions instead of legislation (Gold 2012), the types of obligations that publicly-appointed directors have is far from settled. Some cases have suggested that government-appointed directors owe a fiduciary duty to the nonprofit organization in exactly the same manner as any other director, and therefore must sacrifice the broader public interest to the mission of their organization; however, at least one scholar has argued that a public method of appointment should be considered when defining the nature of a director’s fiduciary obligations, such that a structural tie to the government implies a right to consider the public interest and needs of the electorate, and not simply the best interests of the organization (Froomkin 1995). Further research will need to update this survey of the law as courts continue to resolve the unsettled issues involving QGOs.

Beyond “what” is “should:” If local governments can create and supervise QGOs to carry out their functions, to what extent should these QGOs have more stringent or different regulations than a typical privately-run nonprofit? In some QGOs, leaders might chose to voluntarily assume the transparency obligations of other government offices whenever possible. Other times, government units might attempt to use a nominally private nonprofit arm as a shield against ambiguous public meeting and records laws, or to evade constitutional obligations applicable to public officials. For example, when the state was considering authorizing legislation that would allow the creation of Cleveland Transformation Alliance, there was a debate about the extent to which it should be required to follow governmental transparency laws (O’Donnell 2012).

Self-identification. How do these organizations present themselves to the public? As seen in Table 2, some of the organizations emphasize their private, nonprofit status on their webpages. The Land Bank says a little bit more about its relationship with the government, but two others singularly stress their privateness in their external communications. There are two possibilities for the emphasis on private legal status. First, the organization’s leaders perceive of the organization as a genuinely private endeavor, discounting the role of director appointment in the orientation of the organization. The cause and effect of such organizational identity is worthy of further study. Second, the organization could believe that being perceived as distant from elected government would benefit the organization in some way.

A QGO’s emphasis of private (or public) characteristics could potentially lead to a less-than-complete understanding of the organization’s status. The use of the nonprofit moniker by a QGO might imply to many an independence and distinctness from traditional government that is not actually possessed. Scholars have observed that other characteristics, such as government funding, could pose a threat to the nonprofit sector’s independence (O’Regan and Oster 2002). Similar concerns exist with the right of control over an organization’s board and other structural characteristics, yet these nuances may not be fully articulated when a QGO proclaims that it is a private nonprofit organization. Future research is needed on (1) whether government-affiliated directors in fact change organizational behavior, and (2) whether the public’s perception of these organizations would change if full information was provided. Moreover, further research can uncover whether local government might look to QGOs when political leadership wants to retain control but also wants the political cover of a superficially private organization to implement a controversial project.

Conclusion

QGOs – particularly entities incorporated as nonprofits but run by government-affiliated boards of directors – differ in potentially significant ways from pure nonprofits, and are worth further study as a distinct species. This particular quasi-governmental cocktail creates opportunities for innovation as well as mischief, and policymakers should carefully consider how government should proceed in their oversight of these quasi-governmental organizations, and how they should exercise their discretion in forming new ones.

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Footnotes

  • 1

    The private role played by nonprofit organizations in these models often can be performed by for-profit companies (though the extent to which one form is preferred over another is debated and debateable). For example, for-profit and nonprofits alike receive and administer governmental funding. For-profit companies have increasingly adopted public or social missions. And for-profit companies have increasingly assumed a role in political and ideological advocacy and even religious expression and identity. Here, however, we focus on nonprofit organizations, leaving to others to continue the rich and valuable inquiry into differences between for-profit and nonprofit organizations. 

  • 2

    Two of the watershed articles in the field of government-nonprofit relations have carefully noted the problem of cross-sector organizations. Young (2000) noted the difficulties the resulted from “governing boards of some nonprofit community development agencies in the United States [which] have members appointed by government officials.” Salamon (1987) observed that both Harvard and Yale once had boards staffed with trustees appointed by state legislatures. Generally, though, the implications of government control over the composition of nonprofit boards have not been subject to much scrutiny. 

About the article

Published Online: 2016-03-03

Published in Print: 2016-09-01


Citation Information: Nonprofit Policy Forum, ISSN (Online) 2154-3348, ISSN (Print) 2194-6035, DOI: https://doi.org/10.1515/npf-2014-0044.

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© 2016 Joseph Mead, published by De Gruyter Open. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. BY-NC-ND 3.0

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