Does Generosity Have Its Limits?

By Gary Snyder


This is an article that may have consequences…bad ones. In many instances the donation that results from that telephone call that you receive from a professional fundraiser is not going to the organization to which you intended.

It seems that for-profit fundraisers can take your money with impunity. Its all legal and the Supreme Court has limited lawmakers from interfering by upholding the free-speech rights of fundraisers and charities.

Recently, public confidence has been stunned by news that for-profit fundraisers used by police ad firefighters have been little more that shells that enriched themselves and executives.

The little confidence that is left will be further shaken by an investigative story in the Los Angeles Times that found that only 54 cents of every dollar raised ended up in the charities coffers. Further, of the 5800 campaigns studied, commercial fundraisers, in many instances, do not even file the required reports. Why not? The law is not aggressively enforced because of limited staffing by California’s attorney general.

As one would expect, the fundraising business is growing. More than 300 fundraisers are registered in California alone.

Among The Times findings:

• “More than 100 charities raised $1 million or more from commercial appeals but netted less than 25 cents per dollar. Fundraisers got the rest.
• In 430 campaigns, charities got nothing: All $44 million donated went to fundraisers. In 337 of those cases, charities actually lost money, paying fees to fundraisers that exceeded the amount raised.
• In hundreds of other campaigns, charities apparently entered into contracts that limited their share of donations to less than 20%, no matter how successful the campaign.


• Groups with strong emotional or patriotic appeal---those supporting animals, children, veterans and public safety workers---often fared worse. Missing children charities received less than 15% of more than $28 million raised on their behalf.”

The questionable behavior of fundraisers is not limited to the nonprofit world. Dr. Ada Fisher doesn't have much good to say about BMW Direct, the Washington political firm that raised money on behalf of her 2006 bid for a North Carolina House seat. BMW Direct raised more than $400,000 for Fisher during the last election cycle, but only about $30,000 made it back to her to use in her campaign. That same firm raised about $731,000 for Massachusetts Republican Charles Morse. The only problem? Morse wasn't even on the ballot, and his campaign only saw 4 percent of that haul, the Boston Globe recently reported.

One charity fundraising campaign reflects the magnitude of the problem. Over a three-year period, the American Breast Cancer Foundation raised $5.8 million from its donors. It netted only $700,000. In 2006, just 2.5% of its budget went to research and 10.5% to mammograms or other services unrelated to fundraising. In all of its promotional material it listed research as a priority. An interesting twist: the charity founder’s son and two of his friends were paid an average of almost $3 million annually for the fundraising. That’s not illegal but violates conflict of interest policies used by many large agencies. The agency was rated poorly by two watchdog agencies.

With the pervasiveness of these fundraising firms and with all the big charity money on the charitable table, one would hope that board members and executives would stop giving hard-earned dollars to these shady scoundrels and stop compromising the charity’s hard-won reputations.


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@gmail.com. His website is: www.garyrsnyder.com.

ACORN in Hot Waters

By Aaron Dorfman

A couple of weeks ago, the New York Times revealed in a piece by Stephanie Strom that the Association of Community Organizations for Reform Now (ACORN) kept secret for eight years the embezzlement of nearly $1 million .The embezzler was Dale Rathke, the brother of ACORN founder Wade Rathke.

As an outrageous breach of the public’s trust, ACORN’s case is a textbook example of horrendously weak governance combined with extremely poor judgment. While the National Committee for Responsive Philanthropy (NCRP) serves primarily as a watchdog of foundations and other grantmaking institutions (not of all nonprofits), this case is certainly worthy of comment due to the scope of the issues involved.

In the interest of full disclosure, I should point out that ACORN is a member of NCRP, that I worked for the organization from 1992 to 1997, that a senior ACORN executive served previously on NCRP’s Board of Directors, and that current NCRP board members are executives with foundations that fund extensively ACORN and its affiliates. Additionally, NCRP is currently working on new research that documents the positive impact of policy advocacy, community organizing, and civic engagement, and ACORN’s work will be included in that research.

Despite these connections between ACORN and NCRP, it is important to stress that no organization should be arrogantly allowed to take the public’s trust for granted.

ACORN’s first mistake in weak governance and poor judgment came in allowing the brother of the organization’s founder to be in charge of finances for so many years. What were they thinking? The board should never have allowed that kind of arrangement to go on for so long. Nepotism never serves nonprofits well. In spite of the fact that dozens of staff members regularly objected to the arrangement, Wade Rathke insisted on keeping his brother running the finances for decades and the board never forced him to do otherwise.

The second mistake, related to the first, was the board’s consistent failure to exercise its fiduciary responsibility and engage in sufficiently rigorous oversight. From my understanding, the board did not have an audit committee and the auditors were answering to Wade Rathke, not to the organization’s board. This is absolutely inexcusable for a nonprofit whose annual budget, when combined with its affiliate organizations, was more than $40 million in 2000.

Once the theft was uncovered, there were several acts that were clearly unethical and just plain boneheaded. First, the auditors followed Wade’s instruction to record the theft as a “loan,” which may make them criminally negligent in this matter. The staff who allowed Wade to keep the matter a secret bears a significant amount of blame too. These are people who show a tremendous amount of backbone everyday in their campaigns against injustice but who lacked spinal fortitude at precisely the moment when it was needed the most to protect the long-term interests of their organization and its constituency. As difficult as it would have been to stand up to the organization’s founder, they should have insisted on full transparency and accountability eight years ago.

While Wade’s argument for protecting the organization from those that would like to harm it has some merit, no organization should think it can operate outside of the basic principles of integrity and transparency. Every time a nonprofit is involved in this kind of wrongdoing, it hurts the entire sector; we cannot take the public’s trust for granted.

ACORN’s funders have made it clear they are willing to continue supporting the organization if ACORN overhauls its management and governance structures. In fact, some funders were pushing ACORN to address these internal issues long before news of the embezzlement leaked. While a foundation should not be in the business of telling nonprofits how to run their organization, it’s proper and necessary for funders to push the issue when basic accountability and governance are lacking.

ACORN does some fantastic work locally and nationally. [For a full description of that work, along with some insightful analysis of the current crisis, please read Peter Dreier’s recent piece in the Huffington Post.] But the fact that they do some great work doesn’t excuse how they handled this situation. All nonprofits need to function with the highest standards of integrity. To their credit, ACORN’s board acted quickly and decisively in removing both Rathkes from their posts once the story became known to them. Additionally, Bertha Lewis has now been named interim chief organizer and seems absolutely dedicated to fixing the underlying governance issues, not just in glossing over the public relations nightmare it has caused.

Out of this crisis comes an opportunity for ACORN to improve its operations. If they get it right, I expect that the organization will thrive in the coming years, that donors will maintain or increase their support of ACORN and its affiliates, and that the public will benefit as a result. If they don’t take this opportunity to improve their operations, I expect that their fundraising will suffer. Other nonprofits should use this case to examine their own commitment to accountability and transparency. Proper governance goes a long way to preventing abuses in our sector.

Aaron Dorfman is the executive director of the National Committee for Responsive Philanthropy (NCRP).

Nonprofit Executive Compensation – Who Decides What is Fair and How?

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).

Finally, Some Leadership

by Gary Snyder

Kudos to The Robert Wood Johnson Foundation joining the Center for Creative Leadership by launched a national program to train the next generation of nonprofit leaders. Its focus is to boost the skills and capabilities of early-to mid-level professionals working in health and health-related organizations in nine U.S. communities.

Health care is one of the largest segments in the nonprofit world. Based on Nonprofit Imperative, my monthly e-newsletter, it is certainly one sector that needs attention. As a former hospital administrator, I can attest that there are substantial weaknesses in the staffing skills, but more importantly, its governance. Healthcare institutions are very complex organizations. Reimbursement and other financial matters are very unique and require a skill set on the part of staff and board that is atypical to any other nonprofit.

Because of the heavy involvement of government in regulating the institutions, another set of unique skills is needed. Depending upon the size of the institution and the staffing complement, financial and regulatory issues could easily consume an inordinate amount staff.

Unknown to most of the general public, healthcare has a small margin in which to work. With recent changes, the revenues over expenses are increasingly narrowing. This presents problems relating to acquiring capital and maintaining cutting edge technology. It’s a tough challenge!

This new program is, hopefully, a thoughtful response to a critical need within the overall charitable world. A lack of leadership in the nonprofit sector has resulted in a growing number of abuses and poor practices.

A study reported in the New York Times showed that an estimated cost of fraud was $40 billion or 13 percent of the $300 billion donated. Other studies have similar results.

With these egregious offenders getting growing press coverage, the public’s confidence in our charitable organizations is diminishing. Harris Interactive Polls, for 2005 and 2006, have indicated that barely one-tenth of those surveyed believe that charities do a very good job spending money wisely.

There is a growing perception that all nonprofits lack accountability. Without trust, the backbone of our charitable organizations cannot be preserved, therefore compromising contributions.

In most instances, healthcare organizations have minimal standards to which they must adhere. If other nonprofits do not subscribe to a set of principles and practices that are generally acceptable to the public, the Internal Revenue Service, Congress, and state attorneys’ general will force adherence to a new regulatory code.

While I applaud the RWJ Foundation/Center for Creative Leaderships plans, the linchpin for success is going to be the content of the program and the degree to which it will change current practice.

I wish them well.

Gary Snyder is the author of Nonprofits: On the Brink (iUniverse, February, 2006) and articles in numerous publications. He is also a board member of NCRP. His email: gary.r.snyder@gmail.com; website: www.garyrsnyder.com; phone: 248.324.3700.

Is the Close Relationship Between the Charitable Sector and the Government Healthy?

by Gary Snyder


In a rare pleading, the American Red Cross has asked the U.S. Congress for $7 million to fulfill its obligations to main staff to coordinate state and federal disaster resources. While I am not sure of the merits of such a request, I find it chilling that the nonprofit sector is getting tight…. maybe too tight, with the government as its banker.

This request is made in the face of a similar request from the Smithsonian Institution for a $34 million bailout. Both have similar issues.

Both are well known for having poor governance. This has lead to on-going scandals, turnover in leadership and a total lack of transparency. The Red Cross has had 10 CEOs in just 12 years…several of which have left with significant golden parachutes. At the Smithsonian, nearly half dozen secretaries or deputy secretaries (CEOs of museums) have terminated employment in just the last year.

Both groups are noted for poor fiscal management with the American Red Cross admitting recently to a $200 million deficit. They are laying off (35%) staff and reevaluating office space. The Smithsonian, according to the Inspector General, failed to report expenditures and underreported millions of dollars income to favorable employees. For example, the director spent $1.15 million of donor and government money on housekeeping services. Despite paying excessive benefits and salaries, they are still in need of $2.5 billion to fix its facilities.

Both have been under the scrutiny of congress with many investigations. Because of the close relationship with the federal government (the Smithsonian gets 70% of it budget from the federal government and the Red Cross was stripped of its national first responder status and is a congressionally chartered organization), I wonder if the Congress has the wherewithal to punish these two stalwart organizations by not acquiescing to their funding requests.

Seventy percent of the charitable world is made up of small, struggling organizations. Is it good practice to indulge the two formidable organizations when they have evidenced decades of misdeeds and when the others are unable to tap similar resources to meet their important missions?

Gary Snyder is the author of Nonprofits: On the Brink (iUniverse, February, 2006) and articles in numerous publications. He is also a member of NCRP's board of directors. His email: gary.r.snyder@gmail.com; website: www.garyrsnyder.com; phone: 248.324.3700.

Abramoff Back in the Limelight

by Yna Moore

Links between Jack Abramoff and the White House makes the news once again.

According to an Associated Press story by Peter Yost , a new report compiled by the House Oversight and Government Reform Committee, chaird by Rep. Henry A. Waxman (D-Calif.), noted that:

"The White House conducted an inadequate and incomplete internal review of its
involvement with convicted influence peddler Jack Abramoff and his lobbying
team. ... that President Bush had personal contact with Abramoff, that White
House officials solicited Abramoff's recommendations on policy matters and that
Abramoff's lobbying team offered White House officials expensive tickets and
meals, at least some of which were accepted."

Abramoff is serving time after pleading guilty to several felony counts in two separate federal court cases related to corruption of public officials and defrauding Native America tribes.

In many instances, Abramoff inappropriately used his Capital Athletic Foundation to channel bribe money into the hands of politicians like Rep. Bob Ney. Other politicians who allegedly had inappropriate ties with Abramoff include former Texas congressman Tom DeLay (here and here)and Rep. John Doolittle (R-Calif.)

The Abramoff scandal is a classic example of foundations being abused for personal and political gain. Since then, there have been efforts at better government oversight of charities by the Senate Finance Committee, the House Oversight and Government Reform Committee, and the IRS but more needs to be done. For a fully accountable charitable sector, we'll need to provide the IRS and our state attorneys general with adequate budgets and staffing to carry out their functions of overseeing charitable organizations. We will also need to close regulatory loopholes, and encourage substantive self-regulation by foundations and nonprofit institutions such as setting up and implementing conflict of interest and disclosure policies to prevent insider dealing. Click here for more on accountability in the philanthropic sector.

Kristina ("Yna") Moore is communications director at the National Committee for Responsive Philanthropy.

Giving Fundraising (and charities) a Bad Name

by Gary Snyder


In my spare time, I occasionally check out the agencies that I contribute to on the Charity Navigator website. I find the site to be extremely well organized. If I need further information, I sometimes go to the GuideStar website to delve deeply into the latest financials. Since I love financial analysis, the time goes by fast-frequently killing 3 hours.

In my exploration the other day I noticed some agencies that further the need for self-regulation or self-regulation of the charitable sector. The matter of regulation has become a hot topic recently. The Internal Revenue Service, the Congress and a few attorneys general have focused in on abhorrent practices at charities.

A few caught my eye as I scrutinized the charitable listings. The issue was fundraising expenses. There are a number of charities that spend more than 50% of their budget paying for-profit fundraising professionals to solicit.

Many of us have heard that the ‘badge’ charities use these fundraising techniques. I was surprised to see that The Committee for Missing Children headed the list of charities that overpay for fundraising. That agency spent over 86% of its income in fundraising fees. They were only able to commit 11.2% to programming. Others were only able to use small amounts for their mission: 3.7% (Junior Police Academy); 6.6% (Coalition of Police and Sheriffs) and 6.4% (American Veteran Relief Foundation) and 10% for the Children’s Charity Fund and the Foundation for Children with Cancer.

The National Children’s Leukemia Foundation spends almost 80% for fundraising and only about 15% for the children. The agency isn’t small with an annual budget of over $2.2 million. Needless to say, the National Children’s Leukemia Foundation received the Charity Navigator’s lowest rating.

The Youth Development Fund is a $3.3 million agency. Its fundraising amounts to 83% of its expenses with only 13% going to children’s education. The Youth Development Fund also received the Charity Navigator’s lowest rating.

Granted, these are just a few organizations that make it incredibly hard to defend that the charitable world that it doesn’t need some intervention. Yes, these are just a few, but as charitable donors get wind of these it only supports the notion that the nonprofit sector can’t or won’t reign in its own.



Gary R. Snyder is the author of "Nonprofits: On the Brink" and a member of NCRP's board of directors. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is http://gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.

A Challenge to the Next Generation Leaders

by Yna Moore

There's been a good amount of talk revolving around the future of the nonprofit sector and the next generation leaders.

Rosetta Thurman interviewed NCRP's field director Melissa Johnson for her blog Perspectives from the Pipeline on issues faced by emerging leaders in the nonprofit sector.

Asked about what she'd like to see changed in the nonprofit sector, she replies:

"I would like to see the nonprofit sector define itself and behave in ways that is rooted in the values of the work that we carry out. Why are we in this sector? What is the ultimate goal of our work as a whole? While we have failed and hopefully will not succeed in trying to run our organizations like corporate America, nonprofits exist to serve the public good, to be the connector between government service delivery mandates and the race for the have not’s this creates on the ground. We are the sector that can and should represent those most in need. I think we should all keep this at the forefront
as we truck along day-to-day in this imbalanced and unfair race. We should all
recognize that we have to work together to deflect this imbalance. And, most
importantly, we should remove our personal self-interest from the equation."

You can view the complete interview here.

This week, the staff from the country's foundations and nonprofits are gathered in the DC-area for the Council on Foundation's annual conference. With this year's event titled "Philanthropy's Vision: A Leadership Summit," one can hope that the next generation leaders in philanthropy see their role in making the sector more accountable, transparent and responsive to the needs of the diverse communities it serves.

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

Diversity Debate Rages On

by Yna Moore

The debate over California's AB 624 legislation continues. The bill would require the state's largest foundations to disclose diversity information regarding their board, staff, grantees and vendors.

Many foundations and their trade associations have strongly opposed the bill, arguing that their decision to fund an organization is based solely on their likelihood of achieving the most impact.

However, “improving the societal impact of foundations and improving their support for diverse communities need not be mutually exclusive propositions,” said Aaron Dorfman in a recent posting on this issue. “In fact, there is growing evidence that diversity and effectiveness go hand in hand.”

In a recent commentary on the Chronicle of Philanthropy (Foundations Should Be Required to Disclose Data on Charity, May 1), Pablo Eisenberg[1] notes that despite being “poorly crafted,” the legislation’s purpose—to require foundations to disclose race and gender information of their boards and grantees—is fundamentally sound. The bill will “provide the public and the foundations, at least in California, with a more accurate picture of the extent of diversity at foundations and their grantees,” said Eisenberg. “Armed with this information, as well as their growing awareness of the problem, foundations hopefully will begin to take much more seriously their responsibility for adequately supporting what has now become the majority of Americans.”

In a separate article (California’s Legislation Won’t Achieve True Diversity At Foundations), Mark Rosenman argues for foundations to truly reflect on their missions and how they translate this into practice. Beyond the numbers, the issue of diversity is about redistribution of power among foundations and nonprofits.

In an earlier post on this blog, Pete Manzo suggests that we’ll need better information than what AB 624 mandates to improve how philanthropy responds to the needs of underserved communities. He proposes a system that allows us to view where foundation dollars are going, the demographic attributes of those places, and information on the subsets of people being served by those grants.

Do you think it’s necessary to have legislation like AB 624 requiring foundation disclosure of diversity information? Why or why not? Do you think AB 624 is an effective way to channel more foundation funding to nonprofits serving communities of color and other marginalized groups? If not, how might this legislation be improved (assuming that you think legislation is needed)? Are there other ways to go about measuring and disclosing more accurately and effectively the current state of diversity in foundation practices and grantmaking? Tell us what you think!


[1] Pablo Eisenberg is a co-founder and former board chair of the National Committee for Responsive Philanthropy.

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

A Compromised Charitable Sector

A Compromised Charitable Sector
By Gary R. Snyder

If anyone thought that the bright light on nonprofit misdeeds was going to fade with the change in Senate Finance Committee leadership they are grossly underestimating the festering problem. Granted the loss of Dean A. Zerbe as a principal staff point person on this matter to Ranking Member Senator Charles Grassley is a significant blow. The direction may have changed but the intense interest in setting the nonprofit sector straight has not subsided.

The Senate Finance Committee’s ongoing concern in nonprofit ineptitude was joined by the House Oversight and Government Reform Committee, which held hearings. Among the embarrassing issues was how veterans’ charities gave small proportions of revenue to veterans and their families. An article in the Chronicle of Philanthropy stated that committee members used terms such as “immoral”, “fraud” and “sickening betrayal” with a promise to have additional hearings as the issues unfold.

These terms of endearment are consistent with the donor’s diminishing confidence in the charitable sector. Heightened scrutiny has resulted in increased stories in the media with the recent study on $30-40 billion annual nonprofit fraud (Greenlee, Gordon) being unveiled in an arresting New York Times (March 29, 2008, Report Sketches Crime Costing Billions: Theft From Charities) article. The cumulative effect of the focus of the public attention on charity malfeasance is still unknown, but certainly isn’t going to play well in Congress or at the local nonprofit agency.

The problems continue to center on the abuses by the board, executive and volunteers. All have failed to be diligent in exercising their fiduciary duties. As the Independent Sector notes, few know what their responsibilities are. Even if they did understand what their role is supposed to be, few have the skills to adequacy address the misdeeds.

This is underscored by the Independent Sector’s Panel on the Nonprofit Sector request for government assistance in educating board and professional leaders because both are not aware of the expectations and requirements imposed upon them.

While tens of billions of dollars are taken from those to which it is intended, sector leaders continue to say that it is a “few bad apples”. Last year, the General Accounting Office noted that nearly 55,000 tax-exempt organizations had almost $1 billion in unpaid taxes with some owing tens of millions of dollars.

The fallout in loss in the nation’s misdeeds from charities is profound. According to the National Priorities Project----a $20 billion loss is equivalent to any of the following:

• healthcare to 7.721 million people, or
• 438,768 public safety officials, or
• 1861 new elementary school, or
• 3.1 million Head Start places for children, or
• 290,081 elementary school teachers, or
• 299,496 port container inspectors
or, $54,794,520 per day

Leadership at the local, state, and national levels is virtually nonexistent. The use of words such as transparency and accountability have become jargon—buzzwords---that fail to be meaningful without substance behind them.

The sole of the charitable world is under scrutiny. Integrity, credibility and effectiveness are proxy measures of the soundness of any organization. Without those, the sector is severely compromised


Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: http://garyrsnyder.com, phone: 248.324.3700.

Need for a Religious Conversion

Need for Religious Conversion
By Gary Snyder

We have seen it with nonprofits. We’ve seen it with foundations. And now we see it with religious organizations and no religion can plead innocent.

A little over a year ago, a survey by researchers at Villanova University had found that 85 percent of Roman Catholic dioceses that responded had discovered embezzlement of church money in the last five years, with 11 percent reporting that more than $500,000 had been stolen. A truly startling statistic!

A few religious leadership organizations have called on their followers to adhere to “best practices”. Needless to say their pleas have been left on dead ears, with untold numbers of religious related organizations getting into trouble.

Churches, church auxiliaries and other religious affiliated institutions enjoy special protections. Just as other nonprofits, religious organizations are exempt from paying taxes, but are still obligated to abide by tax laws regarding accurate accounting, executive compensation, insider dealings, but unlike virtually all other charities, are not required to file IRS Form 990. This Form is a snapshot of the organizations finances and the single most illuminating document available for the publics’ scrutiny.

The amount of abuse is staggering and growing. In the latest count—from 1998-2001—religion related misdeeds totaled $2 billion, up from $450 million for the previous 5 years. A lot of hands caught in the proverbial cookie jar.

In Cleveland a former dioceses employee is accused of stealing $17.5 million over an eight-year period. Across Lake Erie another fraud was brewing at a Catholic Church (MI) where a secretary was stealing over $1 million over a decade and until recently all eyes were on the Priest.

At Crossroads Christian Church a congregant stole $50 million from pastors and church-goes alike. At Daystar Assembly of God Church (AL), church leaders swindled the church membership resulting in the loss of the church.
Possibly the largest scam perpetrated on a congregation was the Baptist Foundation (AZ) where about 11,000 trusting parishioners and others, principally seniors, were defrauded of more than $550 million.

But in too many instances, the religious leadership is, in fact, treating themselves to the offerings. At St Vincent’s Ferrer Church, the priest had “off of the books” personal investments of over $3 million. Forensic accountants estimate that, in reality; over $8.6 million was pilfered. At St. Joseph Catholic Academy (NJ) the pastor stole $600,000 from raffle money.

The stories continue…with all seeking to repair almost irreparable reputations in what is a seemingly crisis-ridden religious sector.

Just as the Internal Revenue Service has “advised” other tax-exempt organizations such as foundations and other nonprofits, it has put religious associations on notice that such abuses will not be tolerated. Within the last year, the IRS sent out a strongly worded letter reminding religious organizations---of all denominations---that they should be mindful of its strict guidelines. Some have abused their tax-exempt privilege and are currently under investigation.

There apparently aren’t any internal controls in place. There needs to be more transparency. A beginning step in facing this massive problem may be politically not palatable. Open up the books. Control the coffers. List the salary and benefits for key employees. List the top employees and their compensation. Note any relationship between board members, employees and contracts awarded.

Just a first step, but lawmakers must have the political will and let the sunshine in.




Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is http://gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.

Foundation Self-Regulation Falls Short

By Julia Craig, Program Assistant, NCRP

In this March 3 “The Insider” article in Philanthropy Journal, a “veteran foundation official who wishes to remain anonymous” takes the foundation world to task. According to the author, the large national foundation where s/he works talks out of both sides of its mouth—on one hand, it publicly embraces diversity and open grantmaking practices, while on the other it internally quibbles over how a potential grantee looks and acts and whether potential board members would ever disagree with foundation practices.

"We, in fact, live a weird dual life. We are the kings and queens holding court as people come and plead their cases.

We probably even sit in the big chair or at the end of the table when the people come to see us.

In one of my previous positions, this was particularly loaded with meaning as many of the supplicants were people of color and the foundation professionals were all white.

For grantseekers who did not look and sound like us, we constantly talked in our internal meetings about how well-spoken or well-dressed they were or were not.

And if we detected an "attitude," such as any hint of questioning that we understood their situation, it was an easy way to dismiss people for having passion about their community.

We were really, really scared of that."

When foundation staff members are knowingly complicit in grantmaking practices that discriminate based on appearances and perceptions, philanthropy is failing at its job. The numbers show that there is a dearth of funding for ethnic minorities and for civil rights work. The Insider reveals the disturbing mechanics behind such trends: discrimination is real within the foundation world and it is overt.

Foundation leaders who are more concerned with playing it safe and the weight of tradition than with achieving the foundation’s mission are doing a disservice to the public and to their own organizations. What the author implies but does not explicitly say is that foundation leaders are afraid that funding for organizations addressing systemic social problems or serving traditionally marginalized members of society might succeed, disrupting the power dynamic in this country and resulting in a redistribution of wealth. The analogy of foundation staff as “kings and queens holding court” is particularly disturbing; philanthropy should be about serving the public interest, not satisfying the egos of donors or staff of grantmaking institutions.

Foundation missions tout lofty goals, from reducing poverty and fighting injustice to stopping the spread of disease and supporting social change. Despite such inclusive goals, The Insider claims that during board meetings, leaders at the foundation where s/he works discussed a potential grantee’s dress and mannerisms as a legitimate consideration in the grantmaking process. Foundations often advocate for self-regulation. Unfortunately, in addition to anecdotal evidence from The Insider, foundation behavior shows us that self-regulation is failing. In the past, efforts have been made to develop standards for the sector, but they have fallen short of having a real impact on foundation behavior and amounted to unenforceable suggestions for grantmakers. Glaringly absent from the list of organizations and individuals who have signed on to the Principles for Good Governance, for example, are prominent foundations who are influential philanthropic leaders.

As NCRP moves forward in developing its standards for measuring Philanthropy at its Best, one of the biggest challenges we face is breaking through the traditional culture among foundations. While many foundation trustees undoubtedly have the best of intentions, it is clear that there is a deeply rooted system of discrimination at work. Whether conscious or otherwise, this is a serious barrier to foundations achieving their missions.

How to Protect Your Agency’s Assets

By Gary Snyder

Public confidence is essential to America's 1.5 million charitable organizations and the 14 million–plus staff and volunteers. With the sector boasting over $3 trillion in assets, hundreds of articles and newsletters about the diminution of trust in the charitable sector have been written. This interest, in large measure, is the result of poor management of funds. These problems are not sporadic; these are systemic issues that are pervasive in all areas of philanthropy.

I worry about the confidence that clearly affects the public's willingness to donate time and money, shape the political and regulatory environment that governs charitable organizations, and the influence on morale within the charitable workforce.

Brookings Institution studies find only 11% of the public thinking that charities do a very good job of spending their money wisely. A very recent study from Ellison Research showed that 62% of the public believes that charities spend an inordinate amount of money on overhead costs (fundraising and administration).

Nonprofit Imperative, the monthly e-newsletter, finds that billions of dollars is absconded from charities, principally by those with whom we put our trust. The pilferers include top management, board members and financial staff.

So what needs to be done before the regulators---Congress and the Internal Revenue Service---tell the philanthropic sector how to run its agencies? Here are a couple of organizational tips to avoid a heart-wrenching discovery of fraud.

Executives should have some financial knowledge- nonprofit executives are surprisingly devoid of understanding of charitable finances. Frequently, they treat the books like their personal checking account. Most training financial seminars are lacking. They should give the executive the financial skills in which to conduct the financial end of the nonprofit. Based on studies of fraud, one central focus is the failure to demarcate between the financial staff and executive leadership.

Board members should have some financial knowledge-board members become glossy-eyed when the financials are discussed at meetings. Financial statements intimidate them. They prefer to talk about programming or good and welfare instead of budgets. Board members should be offered some tutorial so that they understand financials. In most instances it won’t raise their interest but will give them some idea as to what to concentrate on while reviewing the financials. For obvious reasons (one of which is control), many executives are not interested in having a board that is financial literate. As a board member, you should demand a tutorial.

Accountants should have significant knowledge about nonprofit accounting-most accountants subscribe to the theory that a business is a business. Charitable organizations are not for-profits and there are significant differences. A most obvious distinction is the degree that they have to adhere to Sarbanes-Oxley. Seek an accountant that has nonprofit experience and understands the many nuances that is integral to the charitable sector. We have experienced in our study of fraud that there should be an arms-length relationship between the charities decision-makers and the accountant.

Increase the number of independent (outside) members on the board

Establish an audit committee-an organization that has an audit committee should review if it operates within generally accepted guidelines.

Whistleblower protection-makes sure that there is a prohibition against taking punitive actions against employees who disclose information---illegal practices or violations of adopted policies---to the audit committee or any one else.

Records retention-a policy to maintain records for posterity purposes is important.

As part of updating your policies and practices, consider the following operational changes:

Four eyes-multiple views-staff should divide tasks so as to prevent illegal activity. Dividing the tasks is arguably the best defense against embezzlement.

Bank statement review-the executive should be the first to open and review bank statements, thus preempting manipulation of the documents by financial staff. In smaller organizations, reconciliation should be separated between 2 different employees or a board member.

Employee background checks-needless to say an employee background check is important for any new member of the staff. It is extremely important for those that are working in the financial area. Even though most employee thefts go unreported (because repayment and dismissal are typical), you can check to see if any prospective worker has had any problems with law. In your investigations, trust your instincts and explore and explore until you are comfortable.

Internal controls-few nonprofits have strong internal controls. Most charities have good intentions in developing them but getting around to developing them is another matter. As organizations grow, the internal controls need changing. Make sure the controls are operating at a level that will deter and detect fraud. Establish a code of conduct that will create a clear understanding of what is expected of all employees.

Watch employee’s life style-observing radical changes in employee consumption or travel may be a good tip-off to start monitoring the books.

Have a positive culture-demanding that employees stick to the internal controls and make sure that they (staff and rules) are frequently checked, will create a culture of adherence.

Purchase fidelity insurance-although having insurance will not deter embezzlement, it will cover, at least some of the losses. On the other hand, since the organization is often left whole, it may cover up any public knowledge of the misdeeds and enable the malfeasant to continue to his/her fraudulent behavior in another setting.

An overwhelming number of perpetrators of frauds do not get caught. There are hundreds and hundreds of embezzlements, thefts and larcenies at charities. As a result, there is a diminution of confidence in the charitable sector. Consequently, there is sufficient impetus to institute the abovementioned short and long-term barriers to malfeasance.

Smartness instead of indifference is the way to go. It isn’t that hard.




Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.

Watching the Watchdogs
Gary R. Snyder


I was struck by the 50% plummeting in confidence in the financial rating service agencies. I then thought about the confidence in the charity rating services of the nonprofit sector.

It is a generally accepted belief that the nonprofit rating services, such as Charity Navigator, BBB Wise Giving Alliance and American Institute of Philanthropy, are monitoring most nonprofits. Unfortunately, there is no third party source watching the activities of the multi-billion dollar philanthropic community.

To put donor’s confidence in perspective we need only to look at the Brookings Institution study where only 11% of the public thinks charities do a very good job of spending money wisely and only 19% feels that charities do a very good job of running their programs and services.

The criterion that is used by watchdog groups is wanting. Two of the aforementioned focus only on financial standards and the third sells its seal of approval on a sliding scale. Because of different criteria, the rating agencies recommendations often conflict. 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. Furthermore, the charity evaluators, by their own admission, believe that the reporting from the nonprofits is often inconsistent, unclear and incorrect.

Because the watchdogs have no teeth in their recommendations, the Senate Finance Committee and other regulatory bodies have been working on legislation that guides philanthropy in making their decisions. The Senate Finance Committee and the Internal Revenue Service have become surrogate boards for the sector. They have given guidance to the American Red Cross, Smithsonian Institution, Natures Conservancy, universities, as well as hospitals.

Even in the face of billions of dollars of nonprofit malfeasance in just the last year, the watchdog agencies as well as the sector leadership does not see the need for more transparency. It has only been the efforts of Congress and the IRS that have made some incremental changes.

Despite the government’s efforts there has more of the same. Misconduct is still rampant with little response from those that lead the sector. In spite of protestations of wanting self-regulation, all indications from the sector’s leadership are that it wants to relinquish its authority to regulators and establish a partnership with government.

With watchdogs being only marginally effective and the leadership in total denial, who has the credibility to lead and enforce? Without transparency, accountability, credibility and confidence, how much farther can the contributor’s confidence sink?


FORTUNE, December 24, 2007.



Gary Snyder is the author of Nonprofits: On the Brink (iUniverse, February, 2006) and articles in numerous publications. He can be reached at gary.r.snyder@gmail.com or 248.324.3700

Principles May Have a Dangerous Journey

The Independent Sector has issued its “Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations”. These principles were largely an outgrowth of pressure from the chairman and ranking member of the Senate Finance Committee who identified some critical issues in the charitable sector.

 

There has been surprisingly little written about the guide outside of the charitable literature.  I have been an ardent critic of the document. I wrote about my concerns that self-regulation of the industry failed to address the multitude of issues that currently compromise the nonprofit sector. I shared my distress that it took the government (Congress and the IRS) to raise the issues to the level that the document needed to be written. I have raised concerns if an expenditure of nearly $3.5 million to develop the document is an appropriate us of charitable dollars. I’ve expressed concern that the sector basically rolled over to quiet the outsiders. But my biggest disappointment was that the nonprofit leadership failed to even attempt self-regulation and ultimately found itself partnering with government. It took the most expedient solution.

 

Except for few other lone soldiers, I felt alone in my criticism.   Others, however, are seemingly coming to the fore with similar conclusions.

 

The well-respected organization, The Philanthropy Roundtable, has indicated its displeasure with several aspects of the IS Principles. It notes that it does “not recommend the Independent Sector document as a whole as a guide to improving governance and accountability among foundations”. The organization has a multitude of reasons for their decision.

 

First, The Philanthropy Roundtable believes that the principles take an “arbitrary and one-size fits all approach”. To that point, I have written that the IS guidelines are going to be onerous for small and medium agencies---about 70% of the sector. Those are the agencies that are not typically members of IS and therefore not represented at the negotiating table. Small and medium nonprofits are already taxed to the max and these additional burdens may exacerbate the already accelerated exodus of staff leaving the sector.

 

The Roundtable secondly felt the “principles imply improperly that foundations act unethically or practice misgovernance unless their boards include members from diverse backgrounds”. 

 

And third, the Philanthropic Roundtable has concerns that the “principles represent ‘standards of practice that organizations are encouraged, but not required to meet’”. The encouragement by of IS has turned into a first step toward regulation. The Roundtable’s apprehension has already been borne out in testimony of the IS President. She requested, in testimony, that the equivalent of the federal Small Business Administration be created for the charitable sector. This would, in fact, become a regulatory apparatus to implement new stipulations that are put on the sector.

 

Several other reforms offered by IS will strengthen the government-charitable sector relationship. One IS’ request is for government assistance for board members and professional leaders because they are incapable of understanding that what is expected of them.

 

The IS report suggests more involvement by the Internal Revenue Service particularly in the areas of improper self-dealing and excessive compensation whether the board knew or “should have known” that it was improper. They may have gotten their wish. In a recent speech, the IRS’ commissioner of the agency’s tax-exempt and government-entities division told a group of foundation officials that the IRS is readying itself to make sure “that a contribution to an organization is put to good use and not squandered.”

 

IS indicates that a couple of hundred organizations have signed off on the principles.  This is far fewer than the 600 charities, foundations and corporate philanthropic programs that make up the IS coalition and is a small fraction of the 1.6 million nonprofits in the U.S. 

 

Those agencies and individuals that did give approval are many of the same people who helped develop the Guide. Even those that did sign off on the Principles face no financial or regulatory repercussions by not implementing them. A guide without teeth. A plan that is a subterfuge to keep the regulators at bay?

 

Independent Sector says it is the leadership forum for charities, foundations, and corporate giving programs committed to advancing the common good in America. With so few on board with the Principles, whom are they leading? IS says it serves as the premier meeting ground for the leaders of America's charitable and philanthropic sector. Others apparently disagree.

 Gary Snyder is the author of Nonprofits on the Brink. He can be reached at gary.r.snyder@gmail.com or 248.324.3700.

 

 

Lack of Clarity Ends Up in Poor Leadership

For those who have closely monitored the charitable sector and its leadership, few will be surprised by the sanctimony of its elite. They are the true believers in the purity of the nonprofit sector. A perfect illustration was the Charlie Rose Show segment on philanthropy with Judith Rodin of the Rockefeller Foundation, Joel Fleishman of Duke University and author, The Foundation: A Great American Secret and Mathew Bishop of The Economist.

The show illustrated the mixed signals that that the leadership of the philanthropic sector is sending, the role of government oversight and the financial commitment of government and philanthropy to those in need.

The discussion was basically between Fleishman and Rodin. The two of them are from the nobility of the philanthropic society. Fleischman is former President of the foundation Atlantic Philanthropies and former chair of the Markle Foundation and presumably a good friend of Rose. Rodin is a former president of the University of Pennsylvania, and a provost at Yale University. Poor Bishop; he was drowned out by crosstalk and interruptions.

The discussion is reminiscent of Fleischman’s book— an attempt to stay on the fence and not ruffle anyone’s feathers. Fleischman said that with his book, he hoped that foundations realize that “they need to open up themselves so that they get ideas from the outside, criticisms from outside. The problem is the foundations aren’t really accountable to anybody except their own boards.” He quickly clarified that by “outsiders” he didn’t not mean government, nor regulatory structures, but people from the nonprofit sector such as other foundations. Just minutes later he suggests that he wants foundations to ‘be more carefully watched, essentially, by the governmental apparatus…There really isn’t effective oversight at the governmental level not just of foundations but of the whole nonprofit sector.’

As an activist in the Expert Advisory Group of the Independent Sector’s (IS) Panel on the Nonprofit Sector, Fleischman shared the Independent Sector’s original position against outside regulation. Based on his conflicting positions, we are not certain as to his current position. We do know that despite its public protestations against regulations, the Independent Sector has converted. It has pandered to the lawmakers and coveted regulations.

It’s simply startling and certainly inexplicable! In the Independent Sector’s final document, which Fleischman presumably endorses:
· They asked the government to assist in educating board members and professional leaders because both are not aware of the expectations and requirements imposed upon them. (That says a ton about what IS thinks about the sector and the quality of those who lead it at the agency level.)
· They requested government assistance for resources to facilitate full implementation and new regulations to prevent abuses. (This is particularly interesting because they have said that the abuses are perpetrated by a few. Why punish all?)
· They endorsed overall tax enforcement and improved oversight of charitable organizations as well as audits and investigations and additional resources. (Contrary to public pronouncements, nonprofit leaders must believe that there is significant abuse to warrant increased audits and investigations.)
· They asked the Internal Revenue Code to impose penalties on board members and other managers of charitable organizations who approve of self-dealing or excess benefit transactions, including excessive compensation, not only if they knew that the transaction was improper but also if they “should have known” that it was improper. (Where was the IS when many of the nonprofit stalwarts got caught in their misdeeds?)
· They suggested increasing reporting requirements. (Increased reporting requirements are easier for the staffs of larger organizations---the Independent Sector’s major constituent. This may strangle smaller nonprofits.)
· They asked more disclosure on travel, entertainment, gift and car expenses.
· They wanted legislation on board reform including size as well as additional requirements for board participation. (It is surprising that simple guidelines wouldn’t work in this regard.)

And, in recent testimony, the IS president and CEO Diana Aviv paved the way for the nonprofit-government relationship. She requested the creation of the equivalent of the federal Small Business Administration to implement new regulations put on the sector. In essence, the nonprofit sector leadership wants to concretize a regulatory system.

This doesn’t seem like a leadership that endorses self-reform, does it?

Judith Rodin comments regarding the role of foundations were perplexing as well. She suggests that foundations do not replace government. However, that position contradicts the practice of the current administration. The Bush administration has proposed over $200 billion dollars in federal cuts over the next four years. The money is for programs providing services in education the environment to assistance for low-income families.

Such cuts reduced capacity for general services, leaving many people to fend for themselves or turn to existing nonprofits. Many foundations step in and increase their monetary awards, effectively replacing the missing government contributions. Others take a more strategic approach to awarding grants, making more collaborative grants, and in some cases providing low-interest loans instead of grants. The foundation-government relationship has been long-standing, but as the federal funds continue to dry up, the resources of the voluntary sector are becoming overtaxed.

Those speaking on behalf of the philanthropic sector have purported to be its leaders. Independent Sector represents, at most, 30% of all of the charitable organizations. They cling to that position because of the apathy of the other seventy percent. When the vast majority wakes up to the urgent reality that they face they will find out that they were blindsided.

The nonprofit sector needs leadership that will show the mettle to address the multitude of problems that will put it on the right track and not stifle the vitality and ingenuity that it once had.

Gary Snyder is managing partner of Nonprofit Imperative. He can be reached at gary.r.snyder@gmail.com. His website is: www.garyrsnyder.com.

Media Matters in Nonprofit Accountability

by Yna Moore

Throughout the years, NCRP has worked with many newspaper reporters who bring to our attention malfeasance and questionable practices among a number of foundations (e.g. Abramoff's Capital Athletic Foundation, Sarasota Family YMCA, D&K Family Foundation, and the Leavitt Family Foundation to name a few).

In a recent article in the Chronicle of Philanthropy (Aug. 23 issue), Pablo Eisenberg brings home the important role that these newspapers play in the fight for more accountability in the philanthropy and nonprofit sectors. Eisenberg points out that the ability of the media to be effective accountability watchdogs is threatened by widespread budgetary cuts among the nation's newspapers.

He writes, "The reason that this is worrisome for nonprofit groups, donors, and citizens who depend on charitable institutions is that for the last decade newspapers have been the only major force in holding nonprofit organizations and foundations publicly accountable. Broadcasters and online journalists have made important contributions, but nothing like the powerful effect of the investigative articles that have appeared in newspapers." Read more

Yna Moore is communications associate at the National Committee for Responsive Philanthropy

The Nonprofit Sector Crossroads

By Gary R. Snyder

A surprise took place a week or so ago. We saw the nonprofit sector depart from its solid position of just a few years ago. Call it a 180. Call it a new awakening. Call it a reincarnation.

The Independent Sector, the presumptive nonprofit sector leader, has taken up the mantle of representing the charitable world on matters before Congress and federal regulators. IS seems to have drastically changed its position on partnering with government.

Let Us Control Our Own Destiny

Self-regulation has been a committed cause in the charitable sector for decades. But the sector has been under condemnation for years. With the 1992 United Way of America scandal and several others of high media visibility, many charitable leaders in the U.S. became concerned that the public, especially donors, would lose their confidence in the good of charitable organizations. There were outcries at the Fall, 1994 conference of the Independent Sector to clean up cheats. They feared that regulars and lawmakers would “punish all charities collectively for the transgressions of a few”. In 1997 the New Era Philanthropy Foundation took $135 million from seniors; in 1998 $78 million was diverted from the Alleghany Health, Education and Research Foundation; in 1999 Greater Ministries International absconded with $353 million; and, in 2002 the Baptist Foundation took $570 million from its trusting contributors. At all junctions where there were regulatory inquiries, the cry from the sector leadership was ‘trust us, we can regulate our own’.

Throughout the 1990s and early to mid 2000s concerns were expressed that scandals would erode the public’s trust in the critically important nonprofit sector.

The $20+ million Independent Sector was the nonprofit’s sector’s point-organization as well as the leading proponent for self-regulation. In 2005 when outsiders wanted a peek at the charitable sector, IS conducted town hall meetings in 15 locales where speakers rallied the followers around the concept of no government involvement. They spoke about the need to prevent the intrusion of government regulation and police themselves. At the Southfield Michigan meeting, speakers attributed the desire for Congress’ involvement to the 3 R’s---reelection, regulation and recompense. The approached worked and the troops rallied around the self-regulation banner.

Oop…here’s the deal

The media attention to nonprofit sector scandals in the 1990s had increased the sector’s discussion about regulation, self-regulation and transparency. Existing governmental regulation and self-regulation wasn’t effective in preventing the high profile scandals. Independent watchdog organizations were inadequate and only monitored less than 10% of the charities. As late as mid-2007, state nonprofit agencies are still proposing self-regulatory guidelines in the wake of recent scrutiny at both the state and federal level.

It was not until several of the sector’s stalwart agencies got into trouble did Congress, state attorneys general and the Internal Revenue Service say enough is enough. They saw a voluntary sector out of control. They saw the American Red Cross, the United Way, Natures Conservancy, and hundreds of others misbehaving. The headlines screamed of billions of donors’ dollars stolen or wasted and hundreds of agencies not fulfilling their charitable mandate. The abuses that caught the outsiders’ attention were principally perpetrated by the sector’s largest agencies.

With billions of the contributor’s dollars lost just last year, it continues in 2007….with the Smithsonian Institution (poor management and virtually no governance and a multitude of firings) or the EduCap ($11 million diversion of student loan funds to the executive’s husband’s ventures) or the America’s Clean Water Foundation ($25+ million embezzlement with the EPA wanting its money back).

No one wanted to go on record to condemn this malfeasance.

Wow...a marriage

In response and in lockstep, the leadership of the Senate Finance Committee, the House Ways and Means Committee, the IRS and others wanted to know what was going on. The protectionist charitable sector balked initially but soon converted and began to covet a partnership with the lawmakers and regulators. Congress gave the nonprofit leadership, through the efforts of the Independent Sector Panel on the Nonprofit Sector, the opportunity to change public opinion and work toward significant reforms by self-regulating.

The sector admitted it needed assistance from the government. In 2005 the Independent Sector produced a document; Strengthening Transparency Governance and Accountability of Charitable Organizations acknowledged that executives and boards are not aware of their ‘expectations and requirements’ without government help. It further pleaded for the government to closely collaborate with the sector in addressing a multitude of reforms.

With the increasing abuse, the sector leadership is relying on the government to jump-start regulatory measures to avoid the risk of the loss of the faith and support that the public has always given to the charitable community. The IS asked for government assistance in educating board members and professional leaders because both are not aware of the expectations and requirements imposed upon them. Further, they asked the government for sufficient resources to facilitate full implementation and new regulations to prevent abuses. They asked Congress to authorize additional resources to the IRS for overall tax enforcement and for improved oversight of charitable organizations as well as audits and investigations. The report wants the Internal Revenue Code to impose penalties on board members and other managers of charitable organizations who approve of self-dealing or excess benefit transactions, including excessive compensation, not only if they knew that the transaction was improper but also if they “should have known” that it was improper. It suggested increasing reporting requirements. It wanted a more disclosure such as travel, entertainment, gift and car expenses. It wanted board reform including size as well as additional requirements for board participation.

And now, in recent testimony, the IS President cemented the nonprofit-government relationship with a request to create the equivalent of the federal Small Business Administration to implement new stipulations put on the sector.

A flawed plan?

Some felt betrayed by the nonprofit sector’s requests for help from the government. They were troubled by its vacating its long time belief that a strong system of self-regulation and education is critical if the people making up the nonprofit community -- boards, staff, volunteers, and donors -- are to ensure that their organizations are living by the highest ethical standards.

There is very little argument that the sector needs to promote good housekeeping. Cleansing the sector to rid itself of further abuses and poor practices is critical. Finding an appropriate balance between regulation and self-regulation is essential.

A highly regulated sector has its consequences. The IS efforts represented the thinking of big foundations and nonprofits, leaving 70% of the sector---the small and midsized agencies---with potentially being encumbered with time consuming regulatory requirements. With small-medium charity executives already taxed to the limit, many are already looking to leave their charities in the next couple of years. The sector’s challenge is to maintain a quality stable of executives not chase them out.

Few disagree with the leadership of the sectors belief that board members need help in understanding their roles and responsibilities. The sector should build upon the existing, albeit somewhat disjointed, learning network, organizations rather than create another. Boards need to learn how to perform or face a policing system will be not to their liking. Similar to executive counterparts, board members are currently in very high demand. There is an acute leadership shortage. Board improvements must be delicately addressed or we could intensify the current exodus.

Hopefully the nonprofit sector will go down the road that will win the sector’s confidence and regain the public’s trust

Gary Snyder is the Managing Director of Nonprofit Imperative in West Bloomfield, MI..
He can be reached at gary.r.snyder@gmail.com

Ethics Reform One Step Closer to Reality

On Thursday, the Senate voted overwhelmingly to pass the Honest Leadership and Open Government Act of 2007, the same bill that was passed in the House earlier this week. By a vote of 83-14, the Senate voted for the measure that would provide the first substantive effort in years to reform the ethics procedures in Congress.

The bill is now headed to the desk of President Bush, where it will either be vetoed or signed into law. With enough votes in both chambers to override any possible veto, the prospects for passage of the bill remain highly promising.

The bill would force lawmakers to detail on a quarterly basis where donations are coming from by making the information accessible on the Internet. In addition, “pork projects,” or funds that are appropriated with more respect to Congressmen and their district rather than actual need, would face stronger scrutiny and disclosure measures. The bill also prevents Congressmen from receiving certain perks, including discounted rides on private planes, and would prohibit members of Congress from receivi