posted on: Tuesday, June 30, 2009

Gary Snyder


In the wake of the well-documented and well-publicized increase in corruption and malfeasance in numerous charities, too few are searching for tools to identify good governance, recognize poor management or dissuade dishonesty and fraud.

Many look to watchdog agencies to assist them in making thoughtful decisions regarding their donations by avoiding those charities with bad practices. However, some question if these agencies are misdirected and inconclusive in their efforts to address the current increase in private inurement and self-dealing in organizations with a one size fits all approach.

For-profit Sector

Prior to the economic meltdown, the public trusted credit-rating watchdogs to assist them in their investment choices. Services like Moody’s Investors betrayed their trust by giving triple-A grades to some of the cancerous derivatives and, as The New York Times stated, gave Countrywide Financial high grades. These gold seals of approval have encouraged the spending spree that left both investors with large losses and homeowners struggling with foreclosures. The imperceptible arms-length relationship between the watched and the watchdog led Moody’s profit margins to skyrocket, even surpassing Exxon’s. With no competition for the three big for-profit rating firms, the days ahead look even rosier.

Both for-profit and nonprofit watchdogs alike use proxy and unsubstantiated measures to evaluate the attributes of an organization. They are typically a reflection of the past and little forward-looking signs and structure. They seem so arbitrary.

One example serves to illustrate that point. Despite being under the sleepy eye of the for-profit watchdogs, The McKinsey Quarterly, in a study, suggested that investors paid a premium (about 18%) for good structural performance such as good governance. General Motors governance guidelines were the gold standard. Obviously they failed on a number of counts with the U.S. government unwilling to let the board fire its own CEO. Ultimately the government took-over the company and it was put into bankruptcy only to be saved by the U.S. taxpayers. So those investors with confidence in the watchdogs and their standards got hit twice.

All this, as Fortune Magazine noted, happened as the confidence in financial rating services crashed by 50%.

Charitable Sector

Several years prior to the economic implosion, there had been significant dwindling in charitable confidence. To put donor’s confidence in perspective we need only to look at a Brookings Institution study where only 11% of the public thought charities do a very good job of spending money wisely and only 19% feel that charities do a very good job of running their programs and services.

It is a generally accepted myth that the nonprofit rating services, such as Charity Navigator, BBB Wise Giving Alliance and American Institute of Philanthropy, are monitoring all nonprofits. The criterion that is used by watchdog groups is wanting. Because of different criteria, the rating agencies recommendations often conflict. One even sells its seal of approval on a sliding scale. Moreover, all fail to address in any substantive manner many of the issues that have gotten the nonprofit sector in trouble—scandals and inadequate governance.

Some ratings are anachronistic. For example, to sanction to automatic failure any group that has a certain number of years of expenses in reserves is preposterous. In these troubling times, who wouldn’t have wished that they had a huge amount of reserves? One could argue that not having any operating reserve may not suit all nonprofits and that could be lethal. That, for example, applies to 28 percent of the DC area charities, as the Washington Post cited. On the other hand, because the sector is so diverse, each organization needs to analyze its own cash flow and expenses and make decisions based on the strength of grants, the vicissitudes of fundraising, the potency of the economy and the revenue stream generated from all activities. To deny that the governing body is in the best position to make such a decision is shortsighted. Without sufficient funds (and that number is growing, I am confident), nonprofits will join the 16% failure rate of existing nonprofit groups in 2000 that either disappeared or became so small that they were no longer required to file tax returns by 2006, the Urban Institute study of DC area charities showed.

The quality of submissions to watchdogs is dubious. Charity evaluators, by their own admission, believe that the reporting from the nonprofits is often inconsistent, unclear and incorrect. Some point to large amounts of chicanery in the submissions they receive.

But is all of this bad and do these watchdogs perform a much-needed service? Some say that they raise the level of debate. Others challenge the simplistic checklists and metrics that may or may not be meaningful. Some have expressed concern that some may have crossed the line from being independent raters to becoming active consultants.

Let’s look at conventional believes that have become baked into generally-accepted good practice:

• Financial board expertise needed: we have seen some of the premier charities get caught in fraud even though they had very sophisticated board members with impressive financial skills. An example: In spite of board and Congressional monitoring, the Smithsonian had hair raising abuses including virtually unlimited travel and noncompetitive contracts, little oversight in salaries and housing allowances. On its Board of Regents: Chief Justice of U.S. Supreme Court; Vice President of U.S.; an executive of Microsoft; two university presidents; prominent builder; a venture capitalist; congresspersons.

• Frequency of board of directors meetings: Over the years watchdog agencies have changed the number of board meetings that will make boards more successful. There apparently is no optimal number of meetings that puts an agency in good stead. The most important intangible is effectiveness of the deliberations of the members. On Board of United Ways: The Central Carolinas United Way had some of brightest minds but the frequency of meetings did not preclude it from making the some glowingly embarrassing mistakes. They gave the executive of a mid-sized agency the highest salary and benefits package in the entire United Way system. They tried to keep it a secret. When the press got a hold of it, they fired her and are currently being sued by her. Embarrassed, 3 board members resigned, but the agency is still withholding pertinent documents from the public. This shortsightedness has been replicated in several United Ways including Atlanta, Capital Area, and New York with many affiliates with ongoing malfeasance.

• Attendance, size, more: It is unclear that attendance, codes of conducts, board size and minimum number of board members have reasonable impact, but some watchdog agencies think that these are important. Studies in the for-profit sector are inconclusive that board size means better decision-making. Diversity, seldom considered, may prove to be a more important matrix.

• CEO importance: There are mixed reviews as to the importance of having the charities CEO on the board. We have seen the Smithsonian with its CEO on the board and the CEO at American Red Cross and United Way not on the board having similarly poor results. There is no argument as to the importance of the CEO. However, The Urban Institute study finds that a CEO serving on the board means that the board is weaker and less engaged. The CEO, coupled with board chair, is the public face of the organization. A poor face, as in the case of the Smithsonian, ended with his humiliating firing. Several poor showings at the Red Cross ended with very public dismissals. The compromised face of several of those at local United Ways cost the agency dearly with diminished contributions. One thing is clear, there needs to be a demarcation between the roles of the board (as the ultimate authority) and the CEO (carries out the boards mandates).

Some believe that watchdogs in both the for-profit and nonprofit sectors are seemingly propagating meaningless guidance. This is particularly important since in many instances there is no better outcome by adhering to the standards than not. Furthermore, the costs associated with adhering to such fungible determinants can be immense in terms of time and money, particularly for small agencies.

The strengthening of the matrices that produce organization integrity may lie in some of the intangibles. Such human dynamics such as leadership character (both board and staff), organizational values, how decisions are made, open communications --- both at board meetings as well as between staff and board---conflict management and strategic thinking (both long and short) may promise to be the difference between a successful and a compromised agency.

Such skepticism has lead to an effort currently underway---The Social Investing Rating Tool. It will try to assess the way donors evaluate whether a charity is worth their money as well as whether organizations have favorable outcomes. Some believe that is a good endeavor, but others will reserve judgment until its completion. One problem is that it is made up of prominent philanthropists and entrepreneurs some of whom have questionable issues residing within their own organizations.

All want both sectors to do well. In the future, maybe we should calculate how the watchdogs measure objective data that support board members and staff dedication and diligence to do good governance. Maybe more importantly, they should gauge how agencies are doing with empirical evidence or determine whether their work is even making any difference.


Gary Snyder, the managing director of Nonprofit Imperative in West Bloomfield, Mich., is author of Nonprofits On the Brink and publisher of a monthly e-newsletter—Nonprofit Imperative, which focuses on the major issues affecting the philanthropic community. He can be reached at gary.r.snyder@gmail.com or at 248.324.3700.

posted on: Monday, June 29, 2009

By Yna C. Moore

Bernard Madoff received a 150-year sentence from a federal court in New York today. He was given the maximum sentence, but for many individuals and organizations that have lost an estimated of more than $13 billion to his Ponzi scheme, this brings little consolation.

Among Madoff’s victims were nearly 150 foundations, 105 of which lost between 30 to 100 percent of their assets to Madoff. What can other foundations learn from their mistakes and hopefully avoid being scammed by the next slick operator?

In today’s The Huffington Post, Aaron Dorfman summarizes the findings of Learning from Madoff: Lessons for Foundation Boards. He noted that more than 80 percent of those foundations that showed poor judgment by investing heavily on Madoff had four or fewer individuals serving on their boards. There was also a marked homogeneity among the trustees.

The results of the study puts into question the ability of these small, homogenous groups to make the best decisions for their organizations.

According to Aaron and the study, foundations need to have at least five trustees with a diversity of perspectives to serve on the board. In addition, trustees must implement and maintain conflict of interest and investment policies, and disclose demographic information of the institution’s board and staff.

Were you surprised about the findings regarding board size and diversity among the foundations victimized by Madoff? What do you think about the recommendation to have a minimum of at least five individuals serving on a foundation’s board?

Yna C. Moore is communications director at the National Committee for Responsive Philanthropy.

posted on: Friday, June 26, 2009

By Julia Craig

A new report from The Philanthropy Collaborative, a Washington-based coalition of nonprofit and local government officials, estimates that 68 percent of health-related grant dollars from 2005 to 2007 was designated for “minorities, the economically disadvantaged, and other underserved groups.” This translates into $5.5 billion of institutional grantmaking funds over the three year period. The report’s author, Phillip L. Swagel, PhD, wrote: “One can only conclude from these findings that foundations have played the role expected of them in supporting those in our society who need the most help – and have done so in a financially significant way.”

Broad Benefits: Health-Related Giving by Private and Community Foundations examined both Foundation Center data on intended beneficiaries for health-related grantmaking and conducted additional analysis of a sample of 200 grants that were coded as health-related but not as intended to benefit marginalized groups.* The report found that 31.4 percent of grant dollars could be explicitly categorized as benefitting those with the least wealth and opportunity. Further, 53.4 percent of the foundation dollars from the additional 200 grants analyzed counted as benefiting such groups. Swagel extrapolated this to conclude that 53.4 percent of all grants not designated for marginalized communities could in fact be categorized as such. (68.6 percent of total health-related grant dollars). Hence, the 68 percent figure: 31.4 + (0.534 x 68.6).

The difficulty of relying on data from the Foundation Center’s sample and the (often inconsistent) 990PF form is one that researchers in the philanthropic sector know well. As Swagel showed, it is possible that some grants not previously marked as benefitting specific populations are in fact intended as such. By focusing on health-related grants – the largest category of giving according to the report – Swagel was able to dig deeper into the data. He also discussed the challenge of coding, even within his own sample of 200 unspecified grants.

Swagel explained his process using the example of a $74,929 grant from the Cleveland Foundation to Catholic Community Care. While the grant was initially categorized as benefiting the elderly, Swagel determined that based on Catholic Community Care’s mission and the demographics of the Cleveland area population, 40.5 percent of the grant could be designated as benefiting minorities and the economically disadvantaged. This example further highlights the difficulty of determining what “counts” when it comes to grantmaking for marginalized communities. An illustrative estimate seems to be the best possible outcome rather than a definitive number.

If you are familiar with NCRP’s work, you are probably asking yourself: If Swagel found that over 2/3 of health-related grant dollars are intended to benefit marginalized groups, why did NCRP write in Criteria for Philanthropy at its Best that just one in three grant dollars (or 33 percent) across all categories can be designated as such? Swagel posited the 2/3 figure only after conducting additional research on his 200 grant sample; the Foundation Center data initially categorized 31.4 percent of health-related grant dollars as benefiting underserved populations.

Swagel concluded that his findings highlight the importance of his grant-by-grant analysis. I agree: the deeper the researcher is able to dig to find answers, the better. However, the results remain illustrative, particularly given the subjectivity of the process of evaluating the additional grants. This study contributes to the ongoing discussion in the field about who benefits from philanthropy, why this is a crucial question for grantmakers to be asking themselves, the challenges of measuring intended beneficiaries and the need to improve reporting and data gathering.

Previous posts by Niki Jagpal, Kevin Laskowski, and me have discussed the importance of “targeted universalism” – essentially the reason why understanding who benefits from philanthropy matters. Targeted universalism holds that in order for society as a whole to improve, there must be a specific focus on those with the least wealth and opportunity. This is in contrast to a “trickle-down” approach, or one that assumes benefits will reach those at the bottom if applied to the general public. Further, by addressing the needs of those with the least wealth and opportunity, targeted universalism provides benefits to all people. Funders should ensure their grants are reaching those on the margins; in Criteria we call for 50 percent of grant dollars to be designated this way.


*The TPC report cites 11 constituencies per available Foundation Center data: racial and ethnic minorities; the economically disadvantaged; people with disabilities; victims of crime or abuse; people with terminal illness; people with AIDS; immigrants and refugees; lesbians, gays, bisexuals, transgendered individuals; ex-offenders and current offenders; substance abusers and; single parents. NCRP utilized nearly identical categories in its analysis for Criteria.

posted on: Thursday, June 25, 2009

By Julia Craig

Last week, First Lady Michelle Obama called on the nation’s philanthropic institutions to seize the opportunity to get involved in economic recovery efforts. Speaking at a luncheon of Washington-area philanthropic organizations and nonprofits, Mrs. Obama told the group that despite government programs such as the Serve America Act that greatly expands AmeriCorps and volunteer opportunities, “Washington can only do so much.”

Mrs. Obama recalled her time as a community organizer and nonprofit staff member working on fundraising and grant reports. She said that multi-year grants allowed her to make realistic budgets and build capacity through investments in technology and staff. She also noted the importance of demonstrating impact in order for funders and community members to maintain interest in supporting the work of nonprofits. Mrs. Obama encouraged the group to take advantage of federal programs designed to increase volunteerism and encouraged funders to come together with communities and nonprofit organizations to develop solutions to the current economic crisis at the local level.

In Criteria for Philanthropy at its Best, NCRP calls on grantmakers to designate 50 percent of their grants as multi-year funding and 50 percent as general operating support. These types of support best allow nonprofit organizations to fulfill their missions and meet the needs of their communities.

Flexible, multi-year support – as Michelle Obama stated – allows nonprofits to plan for the future and respond to changing needs. Given the current economic climate and the difficulty foundations and nonprofits alike are facing, it is more important than ever that philanthropic institutions fund their nonprofit partners in ways that allow them to best achieve their missions.

Has your organization ever received a multi-year grant? How have multi-year grants helped your nonprofit? We’d love to hear your stories!

posted on: Wednesday, June 24, 2009

by Niki Jagpal

The UN Office of the High Commissioner for Refugees (UNHCR) dubbed this year’s International Refugee Day “Real People, Real Needs” to highlight the negative consequences of threatened cutbacks in foreign aid on the 42 million displaced persons around the globe. The UNHCR noted that “a shortage or lack of the essentials of life—clean water, food, sanitation, shelter, health care and protection from violence and abuse—means that every day can be a struggle just to survive.”

According to a comprehensive assessment of refugees and other marginalized groups that UNHCR serves, 30 percent of this group’s basic needs, a third of them in services, remained unmet. “Improvements in nutrition and water supplies, access to primary health care, strengthened child protection programmes, better protection for women from sexual violence and abuse, and improvements in living conditions and sanitation facilities are just some of the needs that are not being met worldwide.”

Queen Noor of Jordan explained in an op-ed on Huffington Post the importance of identifying explicitly the positive outcomes of intentionally targeting refugees and displaced persons in grantmaking, noting the vast number of such people in her country because of the ongoing turmoil in the Middle East for the last 35 years. She stated:

“Yet, I have also seen that refugees are a tremendous inspiration. Supporting these vulnerable people not only reduces their suffering, but also brings peace to troubled regions. Despite the pain and trauma they have experienced, refugees and displaced people hold on to the hope that they can someday return home and rebuild their lives. Like all of us, they want to be able to contribute to society, earn incomes, and send their children to school. An investment in refugees is an investment in whole communities and a clear way to promote peace and prosperity.”

Noor’s statement speaks directly to the high “return on investment” of using an approach called “targeted universalism,” a means for broad society-wide advancement by accounting for the needs of those groups most disadvantaged by our institutions and structures and discussed in length in Criteria for Philanthropy at Its Best (pdf). Refugees/immigrants were one of the 11 special communities we included in defining broadly “marginalized groups” based on Foundation Center data, where giving intended to benefit both groups is counted under one category. This suggests that giving explicitly to improve refugees’ life conditions could be lower of if the two groups were separated out.

Still, our analysis of disaggregated data on philanthropy intended to benefit these two groups in the years before the global economic crisis set in fully found disappointingly low-levels of giving. The range of the top five funders for this special population group showed great variation, 12.9-40.3 percent (Please see p. 114 of the Criteria Data Appendix [pdf]).

Our analysis is especially disturbing given the dire need, the unbelievable number of displaced persons around the world, and the resounding impact on every aspect of life in the developing world.

The 2007 growth rates among countries in the African continent were finally showing signs of improvements after years of stagnation. If foreign aid is indeed scaled back, economic gains will more than likely revert to the pre-2007 levels, undoing the positive impact of foreign direct investments and aid in the continent (please see the World Bank’s 2007 Africa development indicators for additional information and links to various other country statistics).

The UNHCR called on the global community to do more for refugees this year, reminding us that “basic needs that must be met so they have a chance to rebuild their lives.”

The important questions for international donors are: Will this crisis lead more donors committed to helping displaced persons to consider “targeted universalism” as a way to augment the impact of their contributions? Do you think that we in the U.S. all have a stake on peace and protection of human rights in Sudan, Rwanda and other places in the world?

What do you think? We’d love to hear your thoughts.

Niki Jagpal is research & policy director at NCRP, and primary author of Criteria for Philanthropy at Its Best: Benchmarks to Assess and Enhance Grantmaker Impact.