The Board and 501(c)(6) controversy
"Both for-profit and nonprofit entities operate in inherently complex settings, where matters are rarely cut and dried. The exercise of collective responsibility through a board can slow down some kinds of decision making, but it can also dampen the enthusiasm of the aspiring autocrat. It provides checks and balances by adding layers of judgment and protections against abuse of power and some forms of self dealing, self-promoting, and favoritism. The existence of a board also encourages the development of an institutional sense of purpose and continuity....I remain convinced that the idea of a board of directors or trustees, when translated into effective decision-making mechanisms and invested with well chosen members, is preferable as a principle of organization to any known alternative."
- From Inside the Boardroom,
by William G. Bowen
As I return from the August 24-26 Academy Board of Directors meeting in Chicago, I find that I am in awe of the intense sense of professionalism and profound organizational dedication of the members of the Board. They have repeatedly demonstrated the integrity to face difficult issues with deep deliberation, responsible and insightful debate, and, ultimately, with the courage to make decisions which are deemed to be in the best interests of the fellowship, the specialty, the organization, and most of all, the patients we serve.
The Board of Directors of the Academy is a diverse group with differing interests and loyalties, but, in actuality, there has been little in the way of partisan politics. The Board cares about the common good and the way it has conducted its business gives testimony to that selflessness.
Board deliberations are extremely well supported by our superb Executive Vice President, our outstanding council chairmen, and by the finest staff of any organization in the country. All issues are extensively researched by the staff and pertinent information is sent to each Board member prior to meetings. The council chairmen also contribute policy and implementation plans which often require Board action. The Board is also supported by the Academy's outstanding legal and financial counsel throughout Board meetings and the EVP, council chairs, attorney, chief financial officer, and division directors all sit at the Board table and participate freely in all discussions. I firmly believe that the Academy Board makes no decision without being exhaustively informed of all the ramifications of its action.
Perhaps no issue has been as controversial for this Board as the possibility of changing the Academy's tax status from an Internal Revenue Code (IRC) Sect. 501(c)(3) to Sect. 501(c)(6) organization. Simply stated, a 501(c)(3) organization is considered educational and may spend only a portion of its revenues (5-20 percent) on "lobbying" and nonclinical educational activities. A 501(c)(3) may not have an affiliated Political Action Committee (PAC). A 501(c)(6) organization is a professional association which does not have the same type of restraints, and may have an affiliated PAC.
In December 1994, the Board heard the report of the Task Force on 501(c)3/501(c)(6), chaired by James H. Herndon, MD, the Academy's Treasurer, which exhaustively studied all the ramifications of a conversion to 501(c)(6) organization. The Task Force unanimously recommended making the switch to a 501(c)(6) organization and to incorporate a 501(c)(3) shell organization for the future. The motion to change was tabled until the February Board meeting and was defeated at that time. It was, however, decided that the Academy's staff should prepare all the necessary documents to file for a change to 501(c)(6) status and should closely monitor all expenditures of time and resources which might be construed as "lobbying." If, at any time, those expenditures exceeded the acceptable threshold for lobbying expenses for the Academy as a 501(c)(3) organization, we could rapidly apply for (c)(6) status and begin to "behave" as a (c)(6). The Board also committed to supporting any and all health policy initiatives considered important for the Academy's membership without concern for whether or not those actions might increase "lobbying" expenditures beyond the limits imposed on 501(c)(3) organizations.
At the May 1995 Board of Directors meeting, discussions of several proposed new legislative and health policy initiatives and tax-related issues resulted in a decision to allow the new Board to once again address the 501(c)(3)/(c)(6) issue. At the August Board meeting, the Board heard a thorough review of the most recent estimates of the financial impact of converting to a 501(c)(6) and discussed, in depth, the effect of such a switch on the Academy's ability to honor its Mission Statement and Strategic Plan. Opinions also were tendered by the director of the Academy's Washington office and the chairman of the Council on Health Policy and Practice as to what additional efforts the Academy might pursue if greater resources were provided for lobbying. The Board also heard information from Bruce E. Spivey, MD, former executive vice president and CEO of the American Academy of Ophthalmology (AAO), who stated that the AAO had converted from 501(c)(3) to 501(c)(6) in the mid-1970s and that the change had not significantly altered that organization's primary emphasis on education. However, the change had allowed them to be more active in the political arena. With all this information at hand, members of the Board then discussed the appropriateness of a change of tax status for the Academy at this point in time. The pros and cons of such a switch can be summarized as follows:
1. The ability to substantially increase support for the Academy's health policy initiatives, including national and state legislative efforts.
2. A perceived ability to greatly increase support for the orthopaedic PAC.
3. That such a switch would indicate that Academy leadership was prepared to make an all-out effort to favorably influence the direction of health care reform to preserve quality orthopaedic care, access, and choice.
4. That the change would not appreciably alter the Academy's ability to carry out all of its educational and research programs and that the change would be largely a "technical" one.
5. That there may be some options for avoiding a "default" of the Academy's Industrial Revenue Bonds.
1. The concern that the Academy would be perceived by its fellows as having lost its historic emphasis on education and research and become (according to some) a "trade union" more concerned with political and socioeconomic issues.
2. That there is no apparent need to change when the Academy is already doing everything that it wants to do in the health policy and lobbying areas and that expenditures for those programs are well below the "safe harbors" limits of a 501(c)(3) charter.
3. That there is no assurance that conversion to 501(c)(6) would substantially increase fellowship support for the orthopaedic PAC and that, even if we could greatly increase our legislative lobbying efforts, there is no guarantee that these additional activities would result in more favorable action by governing bodies or regulatory agencies.
4. A change in tax status prior to April 1, 1997 would trigger a "default" condition for the Academy's Industrial Revenue Bond, resulting in a negative credit rating for the Academy and a $340,000 redemption penalty.
5. An increase in the annual operating expenses of about $290,000
per year would result from higher postal rates, loss of sales
tax exemptions, and assumption of the orthopaedic PAC's
After intense discussions, the vote to convert the Academy from
a 501(c)(3) organization to a 501(c)(6) ended in deadlock. As
the Academy President, I elected not to cast the tie breaking
vote because I felt strongly that it would be improper to resolve
such a critically important issue by a single vote.
I support that decision by quoting from Robert's Rules of Order, the Classic Manual of Parliamentary Procedure:
"When there is a tie vote the motion fails, unless the chairman gives his vote for the affirmative, which he is at liberty to do, as he has the right to vote whenever his vote will affect the result."
The right, but not the obligation. It was and is my belief that,
whatever my feeling about this very controversial issue, it would
be inappropriate to cast a vote that might profoundly influence
the financial status and perceived mission of the Academy when
the Board itself was so equally divided. I do, however, fully
support the entire 501(c)(3)/501(c)(6)
decision process and am gratified by the responsible performance of the entire Board in this debate. To a person, the members of the Board had the best interests of the membership in their thoughts and voted their conscience, based on a thorough analysis of all possible factors.
Thanks to the Board
The members of the Academy's Board sacrifice a great deal of their practice and family time to prepare for and participate in the many Board meetings, task forces, and associated committee meetings that are so necessary to effectively complete the Board's work. They genuinely care about the Academy membership and the orthopaedic surgeon's ability to provide high quality, cost effective musculoskeletal care in these times of turmoil. Without exception, the members of this year's Board of Directors consider it a privilege to participate in the policy-making process. I am very proud to be associated with them and we should all appreciate the carefully considered actions which they have taken for us all.
James W. Strickland, MD