Is it ethical to shut down a charity when there is a group of people that would like to form a new board, drawing on new contacts and strategies, to help the organization carry on its work? When should a charity close its doors?

Ethically, the decision to wind up a nonprofit organization should be made by its “owners” – the community, profession, trade group, etc. that it was formed to serve. If they were to decide that the services were no longer of sufficient value to continue, then a few people should not be able to override that. A nonprofit exists for community benefit and must appeal to a community.

But we rarely agree on who “owns” a nonprofit, other than a co-operative. Legally, as I understand things (and I am not a lawyer), only the voting members can make a decision to wind up. The existing board would call a special members’ meeting and put the issue to a vote. But organizations have varied ways of determining who is a voting member. Some count anyone who gives a dollar, while at the other end of the continuum, some restrict membership to members of the board of directors. We sometimes forget when writing bylaws that such votes can hold so much power later on. Often, so few people turn up for a meeting that even a small organizing attempt can easily sway the vote at the members’ meeting. A busload of new members might outvote longtime members in many nonprofits.

People rarely want to admit that their organization has become useless. If the original purpose has been served, they may want to redefine the organization and give it a new purpose. Depending on how vague the objects of incorporation are, the change may not even have to come to a members’ meeting.

Such change can be quite appropriate. When polio was mostly eradicated, the March of Dimes could have wound up. Instead, it chose a new mission: to improve the health of babies by preventing birth defects, premature birth, and infant mortality. Was it right or wrong to change the existing organization? Well, the problem they chose was very important. The charity saved itself some legal costs and the pain of watching a beloved organization die. When radically changing the mission, take great care that donors to the former mission feel the new one is similar enough, or appropriate enough, that their monies are not being misused.

In most cases, organizations only talk about winding up when resources are drying up and no new ones are being found. Options become limited to wind-up or being acquired by another, more solvent, organization. The latter sometimes happens when the lack of resources is due more to mismanagement or poor fundraising than to lack of a valuable mission. The organizations sometimes choose to speak of a merger instead of an acquisition; it sounds nicer. But unless BOTH organizations wind up and form a new organization together, one has effectively disappeared into the other.

If a charity is truly wound up, the assets must go to a charity doing related work. The reader who asked this question apparently did not attract enough votes to keep the original organization alive, but could form a new charity and seek to have the assets transferred there. Even without those assets, a new organization can always be started.

Sometimes it really is easier to have a new phoenix rise from the ashes than to try to save the dying bird. In my community, I can think of one organization that should die because the members foolishly passed a bylaw a few years ago that required all decisions to be made by 100% consensus. This is an umbrella group for highly competitive interests who are in contentious contract negotiations with each other frequently! Since the bylaw change, they have been able to decide little beyond when and where to meet.

Coming back to the question, the reader should determine the current decision status. Depending on local laws and the organization’s bylaws, the decision may not yet be final. Unless the only voting members are the directors on the board, the issue has to come to a members’ meeting. There may yet be a chance to save the organization.

The case should be based on what benefits the organization will bring to the community and what the consequences to the community are of a wind-up. History no longer matters, and there is no point finding new resources for unimportant work. If the cause is still important, and the work is valued, some way should be found to save the programs whether or not the organization survives.

Since 1992, Jane Garthson has dedicated her consulting and training business to creating better futures for our communities and organizations through values-based leadership. She is a respected international voice on governance, strategic thinking and ethics. Jane can be reached at jane@garthsonleadership.ca.

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