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: Friday, October 03, 2008

By Gary Snyder

It all began with calls from friends and subscribers to Nonprofit Imperative, a twice-monthly e-newsletter that I publish. All wanted to bring to my attention to the well-documented stories on the fiasco at the United Way of the Central Carolinas.

A Compromised Agency

Let us take a look at the specifics of the mid-sized United Way controversy:

• The Board signed an agreement with the agency President and CEO giving her the highest salary and benefits package in the entire United Way system;
• The Board gave the CEO a $36,000 a year expense account;
• The Board agreed to a bonus which is the biggest of a sampling of 14 agencies of similar or larger size;
• The Board added $822,000 to the executive’s retirement benefits last year, a seven-fold increase over the $108,000 paid the previous year;

Under almost catatonic pressure from media, donors and others, the Board realized that they had to extricate themselves from the obscene contract. So what did they do?

• They relieved her of her position
• The Board gave the President and CEO 2 1/3 years of salary ($675,700) or the equivalent by reducing the payments if she gets another job;
• The Board fulfilled its obligations under her retirement plan.
• All resulting in at least a million dollar payday for the executive.

At least three board members resigned, including its chairperson. In spite of its promise of transparency, the United Way has withheld records of expense accounts and board minutes.

A Compromised Sector

One wonders how boards made up of many of the areas brightest minds came to a conclusion to endorse such a contract? Furthermore, how did they think that the general public would agree to such an egregious agreements? How did this pass muster at the national United Way of America? Why haven’t we heard an outpouring by nonprofit leaders crying out about such abuse?

The answer to all of the aforementioned questions is that few people care about what happens to a nonprofit. Only those that are directly affected cry out and that is only for a short period of time.

As with so many organizations, nonprofits have a culture of denial. Few believe that any financial abuse could happen, especially in the pristine charitable sector. The Board is typically oblivious. The internal controls are frequently nonexistent. The executive may be either deceitful or unaware. All rules are fungible. This creates a climate for anyone that makes decisions about the financial resources of the agency to take advantage of his/her trusted position.

The nonprofit world has accepted that multi-million embezzlements are a cost of doing business. Routinely, the courts have subscribed to that belief ordering restitution (which are rarely paid in full) in lieu jail sentences. The denial culture is perpetuated.

But in all instances the real culprit is the board. In the very rare circumstances when the board fulfills its fiduciary responsibility, it often surrenders any implementation to the executive to carry out. The board relies on the executive so it can “skate” and shun its own responsibilities.

In most instances a close personal bond, and considerable trust, is established between the board and executive. Frequently the executive becomes invaluable in carrying out the board’s wishes (and often at the expense of agency’s mission). Resisting conflict is the watchword.

A Compromised United Way

We have seen such denial and disengagement in the United Way network for years resulting in abuse in the form of fraud, embezzlement and mismanagement.

Late last year, the chief executive of the United Way of Metropolitan Atlanta secured a seven-figure---$1.6 million---retirement package for himself promising him roughly $106,000 a year for life. In his final year before retirement, he collected $446,7000 and $1.2 million in his last three years, not counting the lump sum payment.

The board did not even vote on the increases.

The tone at the United Way of America headquarters was set in the early 1990s when national president, William Aramony, was convicted of fraud for misusing the agency’s assets. The trend continued with Oral Suer, who ran the United Way of the Capital Area for 27 years and pleaded guilty to defrauding the charity of almost $500,000. While the president and CEO of the United Way of New York City in 2007 was under investigation for handling assets and resigned, we learn that his predecessor had used $227,000 of the charity’s money to cover personal expenses.

So as not to be undone, smaller United Way agencies have had their share of mismanagement and fraud. The Controller of the Capital Area United Way (Lansing Michigan) was successfully prosecuted for stealing about $1.9 million to fund her addiction to quarter horses. At the San Joaquin County local an employee embezzled over $200,000 and pleaded guilty to forgery and fraud. We have been able to document mismanagement and fraud at a number of affiliates including Chicago (IL), Tucson (AZ), Sacramento (CA), Bay area (CA), Santa Clara (CA), Toledo (OH), Harvey (IL), Freeborn (MN), Youngstown (OH), Story County (IA), Florida, Albemarle Area (NC), Orange (NJ), Pottawatomie (OK), Arizona, Montana, Stateline (IL), Iron County (UT), Shiawassee (MI), Wells County (IN), Washington, DC.

Some United Way affiliates, in an attempt to make contributions look more robust, were directed to count as their own contributions money that which was actually handled by other organizations. Some were also directed to count the value of volunteer’s time, a practice that is frowned upon by fundraising pundits. The practice of double counting was aimed at trying to show that it was recovering from scandals. When caught, cries of deception exploded.

Finding out about United Way malfeasance is challenging, to say the least. Beyond the flurry of press clippings about the merits of the United Way of America, we have been able to find over thirty affiliates that have been involved in wrong doing, amounting to tens of millions of dollars. Just last month, in New Jersey, a local got hit for embezzlement for over $500,000.

The problems are rampant. The solutions are somewhat complex.


The combination of poor leadership, compromise practices, weak governance, fraud, embezzlement and mismanagement in the United Way network has resulted in a broken organization.

The United Way star is falling from grace. Some want to blame it on the economy and others on its business model. It may, in part, be both. But the old and tired approaches, sugar-coated by press releases, have not worked. The public relations campaigns are not swaying corporate America, unions and especially significant donors. Many United Way benefactors question the organization’s decision-making and are directing their gifts to their favorite causes instead of having the organization distribute the money.

There is irrefutable evidence that such scandals have had an effect on donations. After the Aramony affair, United Way donations decreased by 11%. Similar results showed in Lansing Michigan and New York fundraising after their respective malfeasance schemes became publicized. Similar results will most assuredly happen at the United Way of the Central Carolinas.

But the first to realize that the organization was broke were the recipient-agencies. They saw relations breaking down between the U-W and their agencies, they saw their input diminishing, they saw U-W volunteers reporting back that their input was being ignored and then they saw competition by America’s Charities and others. Their beliefs have come true as the number of U-W agencies began shrinking, contributions falling and the United Way dropping as a percentage of total giving. Many of the United Ways staunches supporters are bailing.

Another big kid on the block is exposed as vulnerable. We have seen it before---American Red Cross, Smithsonian Institution. Both are bleeding red ink and going to the taxpayers for a bailout. What is the next iteration that the United Way will use to keep it afloat in order to deny that there are any misdeeds?


Gary Snyder is managing partner of Nonprofit Imperative and author of Nonprofits: On the Brink and Nonprofit Imperative. He can be reached at http://gary.r.snyder.com. His website is: http://garyrsnyder.com.

In all fairness, a correction is important. As a matter of record, some of the local agencies have indicated that their misdeeds are only allegations, not documented.

posted on: Tuesday, July 15, 2008

By Lisa Ranghelli

In late June Charlotte’s WCNC-TV and The Charlotte Observer broke a story that the board of directors of United Way of Central Carolinas (UWCC) approved a compensation package for its president that topped $1.2 million in fiscal year 2007. This represented a jump of more than $800,000 to the executive’s employee pension plan, reportedly to retroactively provide increases promised since 2001.

NCRP’s executive director, Aaron Dorfman, commented in The Charlotte Observer, “Nonprofit executives deserve fair compensation packages, but this is outrageous. Why do people believe that we can retain the trust of the public when we pay people at outrageous levels like this?”

The Charlotte news outlets subsequently reported that many local United Way donors were outraged and pledged to stop supporting the organization.

In a message to NCRP, Charlotte resident Steve Hofstatter urged continued attention to this issue. “Charlotte is a caring community where conformance and group think is overwhelming, particularly when it comes to workplace giving and accepting the foibles of a routinely reckless United Way agency,” he wrote. “I wish there was something more I could do beyond writing letters to the editor and consoling my many corporate-employed friends who are coerced to pledge more and more by their overzealous employers.”

Whether or not the compensation package given to the UWCC president was justified, Steve raises an important point—many people who give through the workplace have no alternative to the United Way.

Luckily, this is not always the case. A Columbus Dispatch article by Rita Price, which was published only a few days after the UWCC scandal broke the news, reported on the alternative workplace giving options available in Central Ohio. A handful of federations in Central Ohio are competing with the United Way for charitable donations and are experiencing growth, while United Way donations are down. These include Earth Share and Community Shares. Earth Share donations go to environmental causes, and Community Shares typically distributes funds to organizing, advocacy, and activist groups. These regional federations help increase resources for charities that are often denied the opportunity to become a United Way partner agency or are underrepresented in United Way because they are not traditional social service agencies.

As NCRP recounted in its 2007 report, Charitable Fundraising in the Workplace:

“Many of the early workplace funds were set up in a time of movement building
when the groups that were going to benefit from the funds raised were not as
easily marketable as most mainstream social service organizations. These pioneer
funds were created to raise money for specific communities of color, for civil
and human rights work, for environmental causes, for women’s rights and
pro-choice organiza­tions, for gay/lesbian/bisexual/transgender
popu­lations, and for groups promoting social justice, community organizing
or advocacy.”

These types of organizations continue to suffer from underfunding. Despite the growth of alternative workplace giving options, these funds raise less than 10% of the total raised by United Way affiliates. And foundation support for social justice causes accounts for only 11% of all grants.

As the Charlotte story suggests, having a monopoly on workplace charitable giving may be bad for governance, but it is also bad for society – locking out many important constituencies and causes from needed resources.

So if you’re looking to support nonprofits through payroll contributions but would like an alternative to United Way, you might want to visit Our Giving Community, which lists various alternative workplace giving funds. Encourage your employer to consider partnering with OGC and ask your friends to do the same.

Lisa Ranghelli is a senior research associate at the National Committee for Responsive Philanthropy (NCRP).

posted on: Thursday, July 03, 2008

By Niki Jagpal

The issue of appropriate levels of compensation for nonprofit executives and CEOs is making headlines once again after investigative reports by WCNC-TV and The Charlotte Observer. The United Way of Central Carolinas’ (UWCC) president and CEO Gloria Pace King will receive more than $1.2 million, following the addition of $822,507 to her retirement plan. As the two media outlets have noted, the increase in Pace King’s benefits package places her level of compensation above that of many other United Way executives in different parts of the country.

UWCC board chair Graham Denton defended Ms. Pace King’s compensation, saying she deserved the package given to her.

The Chronicle of Philanthropy’s 2007 survey of executive compensation, however, shows that among the various chapters of the United Way, Pace King’s compensation relative to her organization’s fundraising is significantly higher than that of her counterparts in similar-sized United Way chapters. The Charlotte Observer provides the following examples of other United Way CEO salaries compared to their annual fundraising in FY 2007:

• UWCC raised a record $44 million and Pace King’s salary was $365,000 (excluding benefits).
• In metropolitan Atlanta, the United Way chapter raised nearly $79 million; their outgoing CEO was paid a lump sum of nearly $1.6 million when he retired, on top of a salary of $352,611.[1]
• The United Way of Greater St. Louis raised close to $69 million; the CEO was paid $254,487.

The Observer also highlights a 2002 study it conducted in which the newspaper’s investigations revealed that Pace King was the fifth-highest paid executive of the 50 chapters they analyzed. Her current compensation package places her third among the nation’s 42 United Way chapters as noted by WCNC. These figures raise many questions, including to what extent should the level of fundraising be tied to CEO compensation? And if Denton defends Pace King’s salary on the basis of her fundraising, why is there no consistency in the pay rates of other UW CEOs who out-fundraised her?

So, what are the appropriate ratios to determine a ‘fair’ level of compensation for nonprofit executives? NCRP received a note defending UWCC, highlighting the small percentage of the UWCC budget that comprises Pace King’s compensation. Based on the organization’s 2006 990 form, according to the note, Pace King’s salary was 1.25 percent of her organization’s total operating budget. The writer compared this figure to NCRP’s 2006 990, which showed its executive director’s salary at 15.47 percent.

S/he raised a valid point for consideration in the discussion of what constitutes an appropriate level of compensation and what factors are considered to determine it. For example, while a CEO’s salary may only account for a fraction of an organization’s total budget, is there an absolute figure after which this statistic becomes irrelevant? What of the nonprofit operating with a very small budget that employs only one person who has the title of ‘CEO’? Surely this person’s compensation would comprise a significant proportion of her or his budget, perhaps even 50 percent, give the “multiple hats” the CEO wears in this scenario. In short, is the CEO’s salary as a percentage of the overall budget a valid measure to determine appropriate levels of compensation?

The author of the comment also pointed out that NCRP’s overhead costs in 2006 (17.1 percent) were higher than UWCC’s (13.6 percent). The rate and what constitutes overhead or administrative costs[2] that keep an organization functional vary from organization to organization. It can cover not just staff salaries and benefits but also other costs that enable an organization to work and thrive, such as rent, technology infrastructure, staff training and unplanned program expenses. Moreover, the transaction costs of conducting business in different parts of the country make the local context far too important to ignore. Keeping a small nonprofit in the greater DC metropolitan area functional, paying employees competitive wages based on the local market and cost of living will affect a nonprofit’s overhead.

Finally, the comparison of NCRP with the UWCC assumes that a nonprofit that depends largely on foundation grants should have the same metrics for reasonable compensation as an organization that receives majority of its income from individual donors through workplace giving programs. If this is the case, then what about private foundations, which receive minimal, if any, contributions from individuals?

So how do we select the criteria that ought to determine appropriate levels of executive compensation? Is it realistic to expect foundations to account for local and regional variability in the costs of living when determining how much money to allocate for compensation? Is it fair for a nonprofit executive of an organization funded largely by individual as opposed to institutional grantmakers to disclose how much of the public’s contribution will go toward compensation versus the actual business of the nonprofit? The answers to all the above questions will certainly vary by organization, mission, strategy and personal values. If nothing else, the UWCC case highlights the need to discuss these difficult issues to ensure philanthropy serves the public good and not private interests.

[1] The salary figure was taken from the Chronicle of Philanthropy's 2007 survey.
[2] NCRP recognizes the importance of providing nonprofits with adequate general operating dollars to be truly effective in achieving their organizational missions. It has been urging foundations to increase funding general operations and provide more funding for administrative overhead costs in programmatic grants.

Niki Jagpal is research director at the National Committee for Responsive Philanthropy (NCRP).