We are looking for some advice on managing and nurturing a parent-subsidiary relationship. Our 501(c)(3) foundation is a new subsidiary of a 501(c)(3) recreational society. We have a difference of opinion on the degree of oversight (micromanagement?) the parent board expects over the subsidiary. We’re looking for best practices in reporting and autonomy, so both organizations can learn and prosper.
My favorite question for nonprofits is “whose organization is it?” (See Ready Reference Page: “The Key Question: Whose Organization Is It?”) The people who control the organization have the power to decide the relationship with the organization that they control.
As an attorney, I tend to think about who has the ultimate power in the situation. Since you are a “subsidiary” of the society, I assume that the society can immediately or ultimately control the composition of your board and find people who will do its bidding. Your ultimate leverage is to walk out and make the society start over in attempting to pursue a fundraising program, with the attendant publicity of a bunch of dissatisfied foundation officers and trustees whose actions will plant questions in the minds of potential donors.
It ought never come to that, however, and both sides will have to be comfortable with the oversight arrangement to make the relationship work well. You will want your parent to recognize that you have expertise that they don’t. They may have people who know a lot about building pickleball courts, while you have people who know how to raise money for the effort. You will also want them to recognize that micromanagement will reduce the creativity and effectiveness of the foundation. It may take a lot of negotiation, and perhaps some trial and error, before both parties can build trust and become reasonably satisfied with the arrangement.
A computer search will probably generate some articles on traditional controls placed on nonprofit subsidiaries, like requiring approval of an annual budget, prohibiting debt, assuring financial integrity, or setting out specific reporting requirements. Much of the literature will likely deal with protecting the parent from additional liabilities. A grantmaking foundation is significantly different from an operating charity, however, and your service relationship to the parent will likely focus on different issues.
(You should be sure that your governing instruments do not limit you to making grants to the society, so that your assets are not generally available to creditors if the society has a large uninsured liability. See Ready Reference Page: “Charities Often Restructure to Protect Corporate Assets”)
There is no single answer to your question and not a necessarily right or wrong answer. The people involved will have to work it all out among themselves.
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