Gaza and Charities at War: Would Nonprofit Trustees Violate Fiduciary Duties by Israeli Divestment?
Max M. Schanzenbach wrote an interesting but flawed editorial in the Wall Street Journal last week. It got under my skin, but not because it favors continued investment in Israel. He argues that university trustees will violate fiduciary duties if they “bend” to student protestors’ demand to divest from Israel. He even characterizes Universities’ decisions to divest from fossil fuels and South African apartheid years ago as aberrations contrary to, but unnoticed by principals to whom fiduciary duties were owed.
The entire premise is facially ridiculous. Ridiculous because it applies the for-profit “get rich or die trying” mantra to nonprofit fiduciaries. I take no position on whether Universities should divest from Israel — Israel is not perfect but its not South Africa circa 1983 either. Its response to October 7 is, by now, way over the top but Israel is just trying to live peacefully. Let’s just stipulate that right now to avoid hysterical response to the point I am making about nonprofit fiduciary duties.
The notion that the loss of profits from divestment creates potential liability for nonprofit fiduciaries is intrinsically ridiculous. That fiduciaries may make program related investments is proof enough. Don’t donor and government subsidizers know this already? Do they reasonably expect that their donations and tax exemptions — their “investments,” if we must apply for profit thought — will be used to generate financial returns? Nonprofits are not compelled by any business fiduciary duty to invest in anything they think is contrary to their organizationally defined charitable mission. It doesn’t matter how lucrative the investment might be and how much money they might lose by not taking the best investment. Who are the investors to whom profit-seeking fiduciary duties are owed, anyway? It’s absurd. Nonprofit fiduciaries are supposed to “get charitable or die trying.” Here is part of the op/ed:
Brown and Northwestern universities last week agreed to consider divestment from Israel as part of so-called settlements with protesters who occupied parts of campus. Though higher education has long resisted such calls for boycott, divestment and sanctions against Israel, or BDS, some schools now seem poised to buckle. University trustees should think twice before they vote to sacrifice portfolio efficiency to placate student groups. Divesting from Israel would be a breach of fiduciary obligation that could expose trustees to personal liability for investment losses on multibillion-dollar endowments.
While the law says little about how people may invest their own money, it says much about how those entrusted with fiduciary investment responsibility must act. Fiduciaries of a nonprofit university corporation must invest the endowment funds prudently and act in the best interests of the university’s charitable mission, eschewing their personal interests and ancillary social causes.
The tricky part is that bit about acting in the best interests of the university’s mission. If a particular investment’s conflict with a nonprofit’s mission is significant relative to the investment’s effect on the portfolio, the law has long allowed a fiduciary to exclude it. The law doesn’t compel the Catholic Church to own stock in abortifacient producers, nor must Greenpeace buy stock in Exxon. Even if costly to the portfolio, such investments obviously offend purposes central to those nonprofits’ missions.
But tax-subsidized universities, according to their own mission statements, exist to advance and impart knowledge, not to combat “settler colonialism” in Israel. Universities make investments in companies that do business across the world, including in Israel, and some universities take money directly from Qatar and China. Under the circumstances, sacrificing portfolio efficiency to divest from Israel violates fiduciary investment law.
I understand why some students might find this bewildering. Universities have muddled their missions. Many have issued a stream of official statements about political issues, and some have favored activism over scholarly achievement in hiring and admissions. More important, some universities agreed to divest from South Africa in the 1980s, and an increasing number have buckled to pressures to divest from fossil fuels.
Nonprofit means “not out to make money.”
darryll k. jones