My wife, who consults for non-profits on media and fundraising, mentioned to me that she sensed an uptick in business coming. I responded politely, “Are you crazy? Everything I hear says fundraising is down, memberships are holding steady at best, and some charities have gone out of business entirely. Why in the world do you think you're going to get more business?”

Her three-word answer? “Crisis management services.” Then she left me to figure out what she meant.

As a lawyer, I looked for a legal explanation, and I think I found it in a phrase I picked up at the Georgetown University Law Center's tax-exempt organization conference this year. The phrase is “the federalization of governance law.” One of the panelists used it to describe a steady trend in recent years away from primarily state law governing charities (and other non-profits) to primarily federal law. I had to agree, as I thought of how little time I spend making sure my tax-exempt organization is compliant with state law compared to the time I've spent recently on federal-level rules.

The most visible such rule is the Sarbanes-Oxley requirement that non-profits establish protections for employee whistleblowers. Then our boards started adopting other Sarbanes-Oxley-inspired policies even though the rest of the statute did not apply to us.

More recently the IRS put its oar into the mix by adding a series of “governance” questions to the Form 990, which most non-profits must file annually, and to the Form 1023 application for tax exemption. The result is that even though no statute or Treasury regulation requires them to, many non-profits are adopting conflict of interest policies, document retention and destruction policies, and conducting independent reviews of their executives' compensation.

Then I thought of how active Congress has been during the past decade in its investigations of high-profile non-profit cases such as the United Way's problems with William Aramony; the Red Cross' problems with disaster relief donations; and American University's problems with its president's perks. That's a lot of federal activity. And there could be more now that Congress is seriously considering putting caps on the executive
pay of companies receiving taxpayer bailout funds.

Can pay caps for non-profit executives be far behind? Isn't an exemption from tax for charities the same thing as taxpayer funds given to public companies? (I don't think so, but that is the political rationale.)

A few months ago, I noted William Josephson's statement to a Senate Finance Committee hearing on the Madoff scandal that only 11 states now actively regulate charities. That means 39 states have pretty much left the regulatory field to the feds–hence, more evidence of the “federalization” of non-profit governance law.

So, what does this have to do with my wife's “crisis management services”? It means that with the federalization of non-profit governance law come more opportunities for non-profits to get tripped up by the feds and then find themselves in a crisis that will have to be managed. It means the federal government has given itself more enforcement tools for use on the charitable sector, and because those legal tools exist, they will be used. The old saying applies here: If the only solution you have is a hammer, then every problem looks like a nail. My wife must have intuited that non-profits are going to be facing governance-related crises because that is what the government is tooled up (so to speak) to go after.

Of course, she could be wrong. The non-profit sector may simply do the right thing by creating all these good governance policies and then abiding by them. I tend to think that is what will happen. Still, if someone doesn't get the message, call my wife. Please.