Proxies, redux

The last explanation of proxies was pretty dense, so let's try a simpler take on it.

Are proxies allowed?

The first place you go for that answer is State Law. We can imagine State law saying one of four things:
#1 It could say Yes - accepting proxies is mandatory.
#2 It could say No - accepting proxies is forbidden.
#3 It could say Yes, unless disallowed in bylaws.
#4 It could say No, unless allowed in bylaws.

Michigan law says #3. Proxies are allowed, unless disallowed in bylaws. (note 1) In other words, the Bylaws are specifically allowed to override state law.

Bylaws? Those are the governing rules of a nonprofit. Every nonprofit must have them. But they're just rules, right? Do they have the force of law? YES - the above law gives them that force.

But stop for a moment and think about Bylaws.

Imagine you are starting a new nonprofit. Every one must have Bylaws, and you must write them. The Bylaws define how meetings occur. What is an agenda? How do you 'table' motions? When does the chairman vote? Arrrrgh! There are 1000 things to think about. How do you do this from scratch?

The answer is - you don't. There are already rulebooks which answer these questions. Robert's Rules, Riddick's, Demeter's, Sturgis's. Pick one. Include it into your bylaws by reference, and it becomes PART of the bylaws, in the same way that Bylaws are included by reference into state law.

SMRS Bylaws include Robert's Rules of Order. With a proviso: Robert's Rules apply if they are not overridden by 1) state law; 2) Bylaws; and 3) an action of the Board of Directors. (note 2).

Golly, you have to "allow" state law to override Robert's, that's one train you can't stop. Unless state law allows you to override it. (Michigan law allows Bylaws to prohibit proxies.)

Of course, it's also reasonable to allow Bylaws to override Robert's Rules. After all, Robert's got its authority from the Bylaws.

Allowing the Board of Directors to override Robert's is a very useful thing.

So there is the chain of authority.
State law > Bylaws > Board > Robert's Rules of Order.

Now - finally let's look at the question of proxies.

Are proxies allowed at SMRS?

1. State law says "Allowed, unless Bylaws say disallowed."

2. Bylaws say nothing.

3. Board of Directors actions have said nothing.

4. Robert's Rules of Order (note 3) says No, No, No, No! But it also says, if the Bylaws invoke Robert's Rules, that has the same effect as Bylaws prohibiting proxies. (assuming of course that is possible under state law.)

Adds up to: Proxies are disallowed at SMRS.

It is common knowledge that proxies are disallowed at nonprofits governed by Robert's Rules. Even Wikipedia discusses it. That's why I was so shocked when the inspector and the court so casually dismissed Robert's and allowed proxies. You can't dismiss Robert's - it's part of the Bylaws. How could they not know that? Real simple - lawyers are lawyers, not gods. They don't know everything. It's up to parties to remind them, which means it's up to parties to know the law, and be assertive.



Note 1: State Law.

MCL 450.2421 "(1) Except as otherwise provided in the articles of incorporation or in a bylaw adopted by the shareholders or members, a shareholder or member entitled to vote at a meeting of shareholders or members or to express consent or dissent without a meeting may authorize other persons to act for the shareholder or member by proxy."

Note 2: SMRS Bylaws.

(SMRS Bylaws 8.7) PARLIAMENTARY AUTHORITY: The procedures contained in Robert’s Rules of Order, Newly Revised current edition shall be employed in conducting General Membership meetings and meetings of the Board of Directors in all cases to which they are applicable, and in which they are not inconsistent with the laws of the State of Michigan, or of these bylaws or with any particular procedures which the Board of Directors may adopt.

Note 3: Robert's Rules

Roberts Rules of Order, Newly Revised 10th Edition, page 414:
(line 15) PROXY VOTING. A proxy is a power of attorney given by one person to another to vote in his stead; the term also designates the person who holds the power of attorney. Proxy voting is not permitted in ordinary deliberative assemblies unless the laws of the state in which the society is incorporated require it, or the charter or bylaws of the organization provide for it. Ordinarily it should neither be allowed nor required, because proxy voting is incompatible with the essential characteristics of a deliberative assembly in which membership is individual, personal, and nontransferable. In a stock corporation, on the other hand, where the ownership is transferable, the voice and vote of the member also is transferable, by use of a proxy. But in a nonstock corporation, where membership is usually on the same basis as an unincorporated, voluntary association, voting by proxy should not be permitted unless the state's corporation law - as applying to nonstock corporations - absolutely requires it.
(line 32) If the law under which an organization is incorporated allows proxy voting to be prohibited by a provision of the bylaws, the adoption of this book as a parliamentary authority by prescription in the bylaws should be treated as sufficient provision to accomplish that result.

SMRS scores minor victory

Another article in the newspaper:
http://www.lenconnect.com/news/courts/x2077692917/Costs-mounting-as-railroad-election-nears-end

The election inspector filed with the court, demanding immediate payment for his election inspection services, which now amount to $14,000.

The Society makes $50,000 gross income on a good year, and 2009 wasn't one.

Simultaneously, the Society's lawyer attempted to argue that Gross/Goligoski should pay since they started the inspection. That would be a difficult argument to win, without getting into the rather complex legal matter of their long history of scheming and legal manipulation.

The court said "No" on both counts. It validated $14,000 as an appropriate amount of money for an election inspection, but it refused Brooks a special status as debtor, and it also refused to assign costs to Gross.

Are proxies allowed in mail-in votes?

The purpose of a proxy is to allow someone to vote without being present. In presidential and municipal elections, proxies are illegal, and the problem of an absent voter is handled with an absentee ballot.

Most railway museums and many other membership organizations, vote by mail. Robert's Rules of Order has a procedure for that (RONR p. 409, line 19) People are allowed to bring their ballots to the meeting, but in practice, few people do.

Proxies have no purpose whatsoever in a mail-in election. After all, everyone can vote by mail, and at SMRS they have over 30 days to do so. That amply serves the needs of absentees. Therefore proxies are totally unnecessary and redundant.

In any case, people cannot vote during the meeting. The ballot box closes at the start of the meeting. That's because, as Robert's Rules discusses (RONR p. 409, line 4 etc.), you can't have some people vote prior to discussion while others vote after discussion. They'd be voting on different things.

Now read what Robert's Rules has to say about any form of absentee voting:

It is a fundamenal principle of parliamentary law that the right to vote is limited to the members of an organization who are actually present at the time the vote is taken in a legal meeting, though it should be noted that a member need not be present when the question is put. Exceptions to this rule must be expressly stated in the bylaws. Such possible exceptions include: a) voting by postal or electronic mail, or fax, and b) proxy voting. (RONR p. 408-409).

Sounds like if either mail or proxy voting is done, it must be expressly stated in the bylaws. Mail is specified - proxies are not!

Can both systems be used at once? Plainly, that would be bizarre and redundant. Let's look at Robert's Rules, RONR p. 571, line 24: "If the bylaws authorize certain things specifically, other things of the same class are thereby prohibited." Now wind back to page 408 above, which puts "mail" and "proxies" in the same class - both are methods for absentee voting. Note also Robert's emphatic criticism of proxies on page 414 line 15 (near the bottom of the last blog entry) Which do you think is more likely:
1. Robert's Rules endorsing an awkward scheme allowing both mail-in and proxies? Or
2. Robert's Rules disallowing proxies as redundant to mail voting?

What do you think?

Are proxy votes allowed at SMRS?

You may have noticed -- you can't proxy vote in a municipal or presidential election. You can't write out a piece of paper giving your friend permission to walk into a polling place and vote your vote. They would be laughed out of the polling place - or leave in handcuffs.

Yet if you've ever owned stock, you've received "proxies". Somebody wants you to sign over your rights to vote your shares in the company. How is this different from signing over your right to vote for the Governor or Congressmen?

Simple - in one case, your shares in the company can be sold. You could sell me half your shares, and with it, half your voting power. Shares are transferable. So it makes sense for votes to be transferable. (I could sell you my shares for $1 and agree to buy it back for $1 after the election.) In the other case, the fundamental principle is "one man, one vote". Citizenship is not transferable, so neither are a citizen's voting rights.

Where does SMRS fit into that? The very definition of a membership organizations is "one man, one vote". There are other types of structure, and the founders of SMRS could have chosen one of them. But they deliberately chose "membership organization". That is not to be treated lightly. Roberts' Rules says "Nothing has been placed in the Bylaws without some reason for it." (p. 571 line 26).

Wikipedia has an excellent summary for why proxies are not allowed in nonprofits generally.

Does SMRS disallow proxies? Yes - but not directly. Short version: State law defers to SMRS Bylaws. Bylaws defer to "Robert's Rules of Order", which is a parliamentary authority, or rules for governing meetings. Robert's Rules say roughly "If the decision is deferred to Robert's Rules, then absolutely no proxies."

Now let's go deeper into that.

State law does not require proxies. It allows proxies by default, and then allows the organization's Bylaws to prohibit them.

MCL 450.2421 "(1) Except as otherwise provided in the articles of incorporation or in a bylaw adopted by the shareholders or members, a shareholder or member entitled to vote at a meeting of shareholders or members or to express consent or dissent without a meeting may authorize other persons to act for the shareholder or member by proxy."

SMRS bylaws say nothing about proxies. However, they invoke Roberts Rules of Order, Newly Revised, "current edition" (often called RONR). Here:

(SMRS Bylaws 8.7) PARLIAMENTARY AUTHORITY: The procedures contained in Robert’s Rules of Order, Newly Revised current edition shall be employed in conducting General Membership meetings and meetings of the Board of Directors in all cases to which they are applicable, and in which they are not inconsistent with the laws of the State of Michigan, or of these bylaws or with any particular procedures which the Board of Directors may adopt.

Robert's Rules says Absolutely No Proxies, unless it is required by state law or bylaws:

(RONR p. 414) "Proxy voting is not permitted in ordinary deliberative assemblies unless the laws of the state in which the society is incorporated require it, or the charter or bylaws of the organization provide for it... proxy voting is incompatible with the essential characteristics of a deliberative assembly in which membership is individual, personal, and nontransferable."

Well, that's that! No proxies at SMRS!

Almost. We must revisit this again because the SMRS bylaws (8.7 again) have this extra clause:

"... and in which they are not inconsistent with the laws of the State of Michigan, or of these bylaws or with any particular procedures which the Board of Directors may adopt."

In other words, Robert's Rules control, if not incompatible with #1 state law; #2 Bylaws; and #3 any Board of Directors actions.

#1 is the hardest. State law allows proxies by default. Roberts Rules disallows proxies by default. Are these "inconsistent" with each other? No. Robert's Rules saw this one coming! Here we have a case where state law allows proxies to be prohibited but defers to bylaws, and then bylaws defer to Robert's. Robert's Rules specifically call out this case:

"If the law under which an organization is incorporated allows proxy voting to be prohibited by a provision of the bylaws, the adoption of this book as a parliamentary authority by prescription in the bylaws should be treated as sufficient provision to accomplish that result." (RONR p. 414 l. 32).

#2 is very easy. The bylaws say absolutely nothing about proxies.

#3 is easy too: the Board of Directors is silent on the issue. However, here, I must throw in some comment: In September, I cautioned, warned, begged the Board of Directors to pass a resolution: "Proxies are not allowed in SMRS elections." I gave them the wording and said "pass this like your life depends on it - can't hurt, is likely to help." Well, they failed to do that, wringing hands about it possibly being improper. Too bad... the authority in bylaws is clear, and it would have made the election a lot shorter. And cheaper.

For reference, here is the full text of the Robert's Rules section. I may be pushing the limits of Fair Use to reprint it in whole, but doggone it -- citizens have a fundamental right to be able to read the laws which govern them, and this law directly impacts 550 SMRS members.

Roberts Rules of Order, Newly Revised 10th Edition, page 414:
(line 15) PROXY VOTING. A proxy is a power of attorney given by one person to another to vote in his stead; the term also designates the person who holds the power of attorney. Proxy voting is not permitted in ordinary deliberative assemblies unless the laws of the state in which the society is incorporated require it, or the charter or bylaws of the organization provide for it. Ordinarily it should neither be allowed nor required, because proxy voting is incompatible with the essential characteristics of a deliberative assembly in which membership is individual, personal, and nontransferable. In a stock corporation, on the other hand, where the ownership is transferable, the voice and vote of the member also is transferable, by use of a proxy. But in a nonstock corporation, where membership is usually on the same basis as an unincorporated, voluntary association, voting by proxy should not be permitted unless the state's corporation law - as applying to nonstock corporations - absolutely requires it.
(line 32) If the law under which an organization is incorporated allows proxy voting to be prohibited by a provision of the bylaws, the adoption of this book as a parliamentary authority by prescription in the bylaws should be treated as sufficient provision to accomplish that result.

Robert's Rules is not the only parliamentary authority, but it is the most popular one. The correct edition for SMRS is the current one: "Robert's Rules of Order, Newly Revised, 10th Edition". It is copyright controlled. There are many obsolete copies out there. All of them are dangerously wrong. The worst is the 95-year-old edition, now copyright expired, which bounces around the Internet. Even Amazon is a minefield of wrong versions, and they promote the wrong ones as most popular! The correct editions on Amazon are Hardback ($22), Softcover ($13), Leather bound ($60). The correct Kindle Edition is $5, but it's semi-useless, because it doesn't have page numbers, and that's how everyone cites it. Avoid the 99 cent Kindle version, it is the 95-year-old edition.

The kinds of nonprofit

The Southern Michigan Railroad Society is a nonprofit public charity, under 501(c)(3) of the Tax Code. It is a membership organization. Though Michigan law does not make this distinction, it is a "public benefit charity".

For-profit vs non-profit

For-profit companies can be set up many ways, but they all lead to paying taxes. A nonprofit must have a charitable purpose of some kind, but avoids most tax obligations.

501 flavors and then some

The IRS recognizes an amazing variety of nonprofits. Churches, credit unions, foundations, retirement trusts. Some of them are reserved for very specific things. The one you're most familiar with is the 501(c)(3), which is the most versatile (and most tax-deductible, hmm!)

IRS recognizes the Southern Michigan Railroad Society as a 501(c)(3) non-profit organization. SMRS doesn't have to pay taxes, and donations are tax deductible. The trade-off is that SMRS assets can never benefit any other entity except another charity. Money is a one-way street.

Deals can happen, but only at fair market value. Profiteering or buddy deals are not allowed - neither is coercion. Penalties are severe. Even more, conflicts of interest are prohibited.

Courts give great deference to the management decisions of 501(c)(3)'s.

Public Charity vs. private foundation

The IRS distinguishes two kinds of 501(c)(3)'s.

A public charity is an institution which serves the public, draws its funding from the public, and has a suitable purpose, including education and science. Almost any museum will be a public charity.

The other kind of 501(c)(3) is a private foundation - like the Ford Foundation. They typically take a large amount of money, invest it, and give the investment proceeds to public charities.

The Southern Michigan Railroad Society is a public charity.

Public-benefit vs. mutual-benefit

Michigan law doesn't recognize this difference, but many other states do. A public-benefit charity serves the general public, such as a museum. A mutual-benefit corporation serves only a limited group - for instance a homeowner's association, or some clubs. You might think "Oh, a school serves the students" - but in fact a school is a public-benefit corporation.

The Southern Michigan Railroad Society would be a public-benefit nonprofit if it were in a state which recognized the concept.

Membership organization vs. Board-only

For any given nonprofit... how does the Board of Directors get picked? It depends. Usually, either the members elect the board, or the board itself appoints replacement members.

An Indiana nonprofit survey shows three-fourths of Indiana nonprofits are membership organizations (p. 6). 76% of those use volunteers and value them highly. Most have boards of directors. Notably, 87% report that finding new volunteers is a challenge. (p. 7). Museums are a tiny minority.

In a membership organization, political governance comes from the members. A member is expected to have a legitimate, constructive interest in the organization's purpose. Some nonprofits have additional requirements to vote, such as being an active volunteer.

But always, "one member, one vote". Michigan law is badly written in this area. Proxies are generally disallowed in nonprofits. Michigan law defers to the nonprofit's bylaws. SMRS's bylaws invoke Robert's Rules of Order. Robert's Rules say this.

A board-only nonprofit has a board who picks its own replacements. The board appoints the board. Some people dislike this, since the board does not answer to the people it serves. Fortunately, the Southern Michigan Railroad Society is a membership organization.

Board-selected boards are most common in foundations, which hold enormous amounts of money. Membership wouldn't work there - a conspiracy could join in mass, vote themselves in, and give the money to each other.

A very rare form is the "share based" nonprofit. That's how private companies work. This can work in a nonprofit if the number of shares is fixed, and tied to something of high value - such as sidewalk frontage in a business district, or acreage in a farm co-op. Obviously, a share-based system cannot possibly work if unlimited additonal shares can be acquired cheaply - because someone could simply buy an overwhelming number of shares and seize control.

Shares based nonprofits are only worth mentioning because Michigan law is lazy. They wanted to cover "membership" and "shares" nonprofits in the same law (Act 162 of 1982). So "shareholders" and members" are always mentioned together. (click for examples: 1 2 3 4) A fellow might get the impression that members and shares are the same thing! Anyway, shares nonprofits are rare, and many states prohibit them, and Michigan is considering it.

Membership Organization vs "private club"

It's easy to get confused. After all, if it's a membership organization, doesn't that mean it's a private club? Not at all.

The simple fact is, most public charities are membership organizations - as the Indiana report revealed. They serve the public generally - think Kiwanis or Rotary. Membership merely reflects a special interest and level of involvement in the charitable cause.

Private clubs do exist. Some states call them "mutual-benefit nonprofits". They exist to provide services to their members - and not to the general public. Like a co-op, or an employee credit union, or an HOA. Yes, those are nonprofits, but they cannot be 501(c)(3) public charities.

The Southern Michigan Railroad Society is a 501(c)(3) public charity. It is a membership organization because that is how railway and technology museums are traditionally set up. Anyone can volunteer. But hard-working volunteers tend to really care about how the nonprofit is governed. And that's what membership is all about.

The three sectors

One very basic question about the Southern Michigan Railroad Society (indeed, any railway museum) is, "what kind of institution is it?" You've heard of the public sector - the government. And the private sector - industry. Less well known is the civic sector - nonprofits.

The civic sector is a significant part of our economy. It includes hospitals, schools, churches, retirement funds, museums, civic associations like the Boy Scouts or Kiwanis - even homeowner's associations.

A nonprofit is considered different from private industry because it works in a very different way. First, its causes are charitable - worthy of tax deduction and tax exemption. And second, once money enters the nonprofit system, it can never leave. No person or company can draw dividends or profits of any kind. They also cannot overcharge for goods or services. There are special rules constraining directors of a nonprofit from acting with a conflict of interest. This is enforced at the Federal level by the IRS.

Now, let's talk about taxation and liability. And for that, we need to look at the structure of companies, because a nonprofit is a kind of company. We journey back into the private sector.

What if you paint somebody's house and they pay you? It's just you, doing an informal business. The IRS calls that a "sole proprietorship" and you just tally the income and expenses on your personal 1040 (schedule C). As for liability, you have no protection, you can be bankrupted. If you do the same thing with friends, it's called a "partnership", and all the same applies.

Suppose you create "Paint Your House, Inc." Everything changes. A corporation is a separate legal "person". The corporation files its own taxes with its own SSN. You must keep your personal money carefully separate from corporation money, or else the corporation could be declared invalid! Why bother? Because a corporation stops liability. They can sue and bankrupt the company, but they can't touch you personally.

What is a nonprofit? Money put into a nonprofit is tax deductible, but can never leave the nonprofit system. Money must be carefully separate from personal finances of volunteers. It files a different tax return (form 990). The corporate model that fits this best is "corporation". And so, every nonprofit must also be a corporation.

It seems strange because we often associate corporations with all sorts of evil. But in this case, it's merely an organizational structure. Once a nonprofit incorporates, they apply to the IRS, which confers nonprfit status. There are many kinds of nonprofit status, both from the IRS, from states, and just in the nature of the structure chosen.

But that's for another blog entry.