We have two boards, a foundation board and an operating board for our 501(c)(3) organization. Each has its own by-laws and tax number. The foundation board is starting to exert more influence on the operation of the charity in the areas of budgeting and personnel, to the point of threatening to withhold further funds. Is this allowable?
If there are two boards and two separate entities, the board of each organization has a fiduciary duty to act in the best interest of its own organization. If the board of the foundation thinks the budgeting and personnel allocations of the operating charity are way out of whack, it may want to withhold funds that it thinks would not be wisely spent. It is not only allowable, but is fiduciarily required, for the foundation board to do what it believes is in the best interests of its own organization.
That legalistic response begs the broader questions, however. What is the purpose of the foundation? Whose organization is it?
Normally a related foundation is created to support the operating charity while protecting investment assets from potential creditors. In most cases, the operating charity (or a parent of a group of operating charities (See Ready Reference Page: “Charities Weigh Restructuring to Protect Assets”)) controls the foundation by virtue of its power to appoint the board.
There is a benefit to having a separate board beside the obvious one of increasing the protection of corporate assets. The separation provides another perspective on projects and programs and can serve as a brake on a potentially runaway operation. Normally such differences are worked out by the boards. But if the foundation board is totally uncooperative, the controlling organization can usually install new board members who will be more sympathetic. If the foundation in your case is truly independent and if you can’t work things out, you may want to consider setting up a new foundation to continue the separateness but regain ultimate control.