keeping a close eye...

Rating Agencies Need a Fresh Look

2009-06-30T10:06:00.004-04:00

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.

Lessons from Madoff

2009-06-29T21:46:00.003-04:00

By Yna C. Moore

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

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

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

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

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

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

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

Measuring who Benefits from Philanthropy

2009-06-26T10:21:00.001-04:00

By Julia Craig

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

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

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

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

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

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

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

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

First Lady Highlights Importance of Multi-Year Funding

2009-06-25T12:36:00.002-04:00

By Julia Craig

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

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

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

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

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

World Refugee Day: Global Economic Crisis An Opportunity for Targeted Universalism, Strategic Philanthropy

2009-06-24T11:21:00.005-04:00

by Niki Jagpal

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

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

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

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

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

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

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

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

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

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

Rwanda

and other places in the world?

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

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

Counting What Counts

2009-06-18T13:15:00.002-04:00

By Kevin Laskowski

This post is the final post in a series that looks deeper into the myths surrounding Criteria for Philanthropy at Its Best. View previous posts in the series.

It’s unfortunate that critics would have you believe that the data and recommendations found in Criteria for Philanthropy at Its Best come entirely out of left field invented of whole cloth. The sad reality is that such visceral reactions are both predictable and understandable. It’s much easier to marginalize and dismiss a call to do more for those with the least wealth, access, and opportunity than it is to engage the substance of this work.

The full report is divided into four chapters, each covering a criterion and its corresponding benchmarks. The book’s 440 footnotes are a “who’s who” of philanthropic research and commentary. Critics may not agree with our conclusions, but attempts to paint the criteria as “arbitrary” or politically motivated simply ignore widespread, sector-wide calls for philanthropy to be more inclusive, effective, transparent, accountable, and responsive. Just ask the more than 140 sector leaders who have endorsed them so far.

NCRP has taken positions on many of the issues confronted in Criteria in the past. Criteria differs from previous efforts in that it draws lines in the sand, calling on grantmakers to do more for the nonprofits and communities they care about. To demonstrate that grantmakers can do more and that some foundations already have, we used a custom dataset from the Foundation Center. This dataset included detailed information on more than 1,200 of the largest foundations in the country, and their grants of $10,000 or more for 2004, 2005 and 2006. Data were consistently collected from our sample of 809. A full description of the methodology can be found in the Data Appendix.

NCRP then examined aggregate giving patterns and disaggregated data to determine aspirational but achievable goals. For example, given the case presented in favor of general operating support and in light of the available data, NCRP believes that grantmakers practicing Philanthropy at Its Best provide 50 percent of their grant dollars as general operating support (125 foundations met this benchmark).

Measuring giving to marginalized communities was a bit trickier. The Foundation Center tracks giving to “special population groups,” providing important insight into the compelling question of who benefits from philanthropic giving. Although some grants are designated as benefitting one or more of these groups by the foundations themselves and the Foundation Center, these are not double-counted. We identified 11 of these groups as “marginalized communities” and examined foundation giving so classified. We were disappointed to discover that only one in every three grant dollars in the sample were for the intended benefit of marginalized communities, broadly defined.

Noting the inequalities that can be unconsciously reinforced by philanthropic intervention and the importance of targeted universalist approaches, NCRP suggests grantmakers devote at least 50 percent of their grant dollars for the intended benefit of marginalized communities, broadly defined (108 foundations in the sample met this benchmark).

It’s important to note that this is giving that is intended to benefit marginalized groups. For instance, an environmental grantmaker might mark a grant preserving clean air and water for people in rural areas as benefitting economically disadvantaged people and single parents if they know the demographics of the areas in which they work. Or, an education funder might mark a scholarship program as helping racial and ethnic minorities because of the scholarship’s requirements.

It’s not about the cause or group funded but who ultimately benefits from the activity made possible by the foundation’s grants - and whether foundations are considering who benefits when they make their grants. Are foundations hoping the benefits they create will eventually reach those in need, or are they taking steps to make sure they do?

NCRP then listed those foundations that met the Criteria within the 809 foundations in the sample. That wasn’t to say that those who didn’t appear on those lists haven’t done wonderful things or that those who did appear on the lists cannot continue to improve. The lists are illustrative — that’s all.

If these exemplary foundations can do it, we ask, why can’t more grantmakers join them?

Kevin Laskowski is field associate at the National Committee for Responsive Philanthropy.

Inclusive Philanthropy: Who Benefits from Philanthropy Matters

2009-06-15T09:45:00.004-04:00

By Julia Craig

This is part of a series of postings that takes a deeper look at the myths surrounding Criteria for Philanthropy at Its Best. View other posts in the series.

Myth #4: Criteria pushes for “racial quotas” in philanthropy.

In a March 3, 2009 Wall Street Journal article subtitled “Activists want to redistribute philanthropic wealth based on racial quotas,” Naomi Schaefer-Riley declared NCRP an enemy of philanthropy before having even read Criteria. Other critics were quick to follow, suggesting that NCRP was calling on grantmakers to appropriate their grants based on the race of the intended beneficiary.

Truth: As we state in Criteria, “By intentionally elevating vulnerable populations in their grantmaking, foundations benefit society and strengthen our democracy. Prioritizing marginalized communities brings about benefits for the public good.”

As Janine Lee, CEO of the Southern Partners Fund, wrote in the Atlanta Journal-Constitution, “We shouldn’t invest in marginalized communities because it’s politically correct or because public subsidies obligate us to do so. We should invest in disadvantaged communities because it has the greatest impact on the things we care about.”

In other words, if grantmakers focus on the “general public” in their grantmaking and believe that the benefits will trickle down to those on the margins, they may have some impact. However, if grantmakers utilize targeted universalism, which provides a much deeper understanding of diversity to include other bases for marginalization than just race, they will more likely impact not only the targeted constituencies but the broader public.

Criterion I: Values states: A grantmaker practicing Philanthropy at Its Best serves the public good by contributing to a strong, participatory democracy that engages all communities.

Provides at least 50 percent of its grant dollars to benefit lower-income communities, communities of color and other marginalized groups, broadly defined.
Provides at least 25 percent of its grant dollars for advocacy, organizing and civic engagement to promote equity, opportunity and justice in our society.

It is the first benchmark in the chapter that has drawn the most ire from critics. This criterion is born of a belief that who benefits from philanthropy matters, and that foundations could be doing so much more to be inclusive in their grantmaking.

NCRP’s research found that just one in three grant dollars is intended to benefit disadvantaged communities. We made our definition as inclusive as possible given the data from the Foundation Center. In total, 11 groups comprised what we call marginalized communities in Criteria: economically disadvantaged; ethnic and racial minorities; women and girls; people with AIDS; people with disabilities; aging, elderly and senior citizens; immigrants and refugees; crime or abuse victims; offenders and ex-offenders; LGBTQ (lesbian, gay, bisexual, transgender, questioning) and; single parents.

That so few philanthropic dollars are intended to benefit such a broad group of constituents has shocked some, and well it should. Philanthropy serves the public good by focusing on those with the least wealth, opportunity and power. Previous posts by Aaron Dorfman on Michael Eisner’s recent gift to the California Institute of the Arts, and by Yna Moore on women’s health demonstrate that such inclusive approach to grantmaking can be done across the various issues and causes that different foundations care about.

Given the growing income inequality in the U.S., the changing demographic landscape and the growing wealth disparity between whites and non-whites, there is so much that needs to be done. And we in philanthropy can do better. Criteria challenges grantmakers to think beyond linear problem-solving models and utilize systems thinking, which views causation as reciprocal, mutual and cumulative. NCRP’s exploration of targeted universalism and systems thinking provides grantmakers with tools to increase their impact on the complicated social problems they set out to address.

In addition to the 11 marginalized groups identified in Criteria, what are the others constituent communities that don’t see the benefits from philanthropy? Do you have a story to share of inclusive grantmaking at work?

Charities Have Felt the Effects of Ponzi Schemes

2009-06-12T14:17:00.003-04:00

Gary Snyder

About a decade ago, we were in the midst of unraveling one billion dollars of fraud as a result of two of the largest Ponzi schemes in the history of the charitable sector. In the intervening years we have seen the pyramid plans explode and affect the nonprofit sector far beyond anything anyone expected in 1999. Few lessons were learned.

The nonprofit Baptist Foundation of Arizona and the Foundation for New Era Ponzi schemes, coupled with bad taste that grew out of the American Red Cross and United Way’s handling of September disaster funds, caused a public outcry for change.

The for-profit Enron and Adelphia scandals joined in the public’s calling for strengthening corporate ethics and nonprofit responsibilities. The public pleaded for more accountability in how public and private institutions husband their resources. They were simply asking for good stewardship and some discipline.

Since then, the public and private sector---the nonprofits as well as the for-profits alike---have had a challenge defending their reputations.

Enforcement and regulatory agencies were ill prepared to face the onslaught of what was to come. As recently as a few decades ago, most Ponzi schemes were relatively small. The Washington Post notes that they have grown exponentially. The FBI has almost 500 open Ponzi investigations nationwide -- up from about 300 in 2006. Law enforcement officials with other agencies have noticed similar trends, and authorities said they expect to turn up many more cases in coming months. As the economy and the financial markets went into a nosedive, Ponzi operators couldn't find new investors to keep their fraud apace. Investors began demanding for their money and turned to law enforcement to get it.

The godfather of the Ponzi schemes is that which Bernard Madoff perpetrated. Estimates suggest that Madoff wiped out a generation of Jewish wealth and philanthropy resulting in several hundreds of millions dollars of much needed services lost. (See previous article on religious-related Ponzi schemes)

Madoff’ $65 billion fraud was just one of many that either used nonprofits as part of their ruse or had a direct effect on a charity.

• In the mid 1990’s more than 11,000 people, predominantly elderly, were caught up in an opportunity to invest in the Baptist Foundation of Arizona. It cost investors about $590 million. The BFA had a cozy relationship with its legal counsel as well as it accounting firm with both party to the hoax. In June, the appeal court upheld the perpetrators convictions.
• As early as 1993, the Foundation for New Era was rolling with more than $400 million in investor’s money but victimized the entire lot, including universities, museums, Christian organizations, churches and colleges. In addition, this Ponzi scheme initially stumped regulators (including PA’s attorney general) and securities firms with virtually no one looking at its IRS Form 990.

Here are some very recent Ponzi schemes (it isn’t small potatoes!):
• The Thomas D. and Elizabeth S. Hooper Foundation were totally drained of its assets by an $80 million Ponzi scheme by Joseph Forte who recently pleaded guilty
• The Alexander Dawson Foundation had entrusted $13.5 million to Mark Bloom (North Hills Management) only to find he used the money to purchase a $5.2 million Manhattan triplex and $300,000 for his daughter’s bat mitzvah.
• Two Fort Lauderdale, Fla., attorneys, one of whom was chairman of the University of Florida Law Center Board of Trustees and the Fort Lauderdale Chamber of Commerce's downtown council, were indicted in a nearly $1 billion Ponzi scheme known as Mutual Benefits. They fleeced the terminally ill, elderly and people with AIDS.
• A Los Angeles lawyer was in-house counsel for an elaborate real estate Ponzi scheme in Orange County that conned $52 million from mostly elderly investors.
• Two California men ran an $80 million Ponzi scheme promising Korean-American investors a 36-50 percent return.
• Two arrested Northern California men steered proceeds to senior care and assisted living facilities with $200 million “callously swindled” in a Ponzi scheme, according to the state attorney general.
• Playing on a relationship with the CEO of United Way (Charlotte) and as a former employee, she took in about $11 million in a Ponzi scheme defrauding 200 investors, many of them elderly. She pleaded guilty. The United Way was not involved.
• Using members of their church--- Church of Jesus Christ of Latter-Day Saints in Lake Arrowhead (CA)--- as investors and leads the husband and wife Tuckers got $31 million in its Ponzi scheme.
• Terence Mayfield defrauded his fellow parishioners at the Tom’s River (NJ) The Church of Grace and Peace of more than $1 million through two real estate investment Ponzi schemes.
• Northern Californians Anthony Vassallo and Kenneth Kenitzer orchestrated $40 million investment fraud many of whom he met through Vassallo’s church in this classic Ponzi scheme.
• Targeting members of the Chinese-American community in Dallas and in California, Weizhan Tang, a Canadian, defrauded investors of up to $75 million with his and his partner’s Ponzi scheme.
• Dennis Bolze of Gatlinburg who operated a commodity pool in a manner akin to a Ponzi scheme took in up to $21 million from about 100 investors, nearly half of whom live in Europe or other places outside the U.S. some of whom were Foundations.
• Paul Greenwood and Stephen Walsh who ran WG Trading Company LP and Westridge Capital management Inc. of Connecticut and California left little of the nearly billion dollars that were invested by mostly of charitable and university foundations, and retirement and pension plans. The University of Pittsburgh and Carnegie Mellon University, have sued the defendants seeking to recoup the $114 million they invested in the funds.
• Clelia A. Flores who operated a $23 million investment scheme targeted at California’s Hispanic-American community. She solicited investors through word of mouth at churches and others places throughout the Hispanic- American community.

The effect of these scams cannot be overstated. As corruption in the charitable sector skyrockets, the confidence in the nonprofit sector has sunk to new lows. The exploitation of trust and hope has lead to devastation for the victims. Confidence is becoming an increasingly hard commodity to recapture in these troubling times.

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.

Learning from Mistakes: The Bill & Melinda Gates Foundation

2009-06-11T10:29:00.004-04:00

By Julia Craig

Jeff Raikes, the new CEO of the Bill & Melinda Gates Foundation, gave the Associated Press an interview last week in which he acknowledged the importance of experimentation and innovation in philanthropy.

For eight years, the foundation invested $2 billion in the U.S. to test the theory that smaller schools would produce higher graduation rates. Many of the foundation-supported schools did see an increase in graduation rates; however, overall student achievement and college readiness remained about the same. Following a study on the L.A. Unified School District that found a teacher having a certificate did not impact student achievement, the foundation shifted course and is now focusing on individual teacher quality.

Raikes highlighted this as an example of the foundation’s willingness to experiment and adapt. “Almost by definition, good philanthropy means we're going to have to do some risky things, some speculative things to try and see what works and what doesn't,” he told the AP.

The Gates Foundation has been criticized for its heavy reliance on technological solutions in the developing world in healthcare and agriculture. However, the willingness of the foundation to acknowledge and learn from mistakes is crucial; doing so helps build the knowledge and experience of the philanthropic sector as a whole. As Raikes noted in his interview, social innovation is largely the purview of the nonprofit sector. “We're going to try some things and I'm quite confident that some things will succeed and I'm quite confident that some things will fail,” he said.

Given the complexity of the challenges of education, health, development, and so forth, foundations being willing to experiment and take risks is a key to finding innovative solutions. Do you think the Bill and Melinda Gates Foundation has been sufficiently willing to take risks and to learn from their mistakes? If you ran the foundation, what new approaches would you want to test out?

If the Shoe Fits…

2009-06-09T16:50:00.002-04:00

By Kevin Laskowski

This post is part of a series that takes a deeper look at the myths surrounding Criteria for Philanthropy at Its Best. View other posts in the series.

In his preface to Criteria for Philanthropy at Its Best, NCRP Executive Director Aaron Dorfman argued:

There’s a popular but overused saying in philanthropic circles: “If you’ve seen one foundation, you’ve seen one foundation.” People use that phrase to emphasize how different each foundation is from the next. Anyone familiar with the sector knows that there is, indeed, great variability among grantmaking institutions. But many people also use the phrase to deflect criticism, arguing that the unique nature of each foundation makes it impossible to compare one foundation to another or to hold grantmakers to any standards more rigorous than those that are within bounds of the law.

Sure enough, when Criteria was released, critics trotted out a similar charge: the criteria are “one-size-fits-all.”

Steve Gunderson, President of the Council on Foundations, contended, “[W]e cannot endorse mandates, or imposed measures that seek to promote a one-size-fits-all approach.”

Adam Meyerson, President of the Philanthropy Roundtable, used the words as he attempted to provide examples of grants that wouldn’t fit NCRP’s supposedly “narrow” definition. Unfortunately, the examples actually work against him. Andrew Carnegie’s libraries and the schools that Meyerson mentions benefitted and benefit low-income people, one of the many marginalized groups mentioned in Criteria.

Sean Stannard-Stockton of Tactical Philanthropy characterized the criteria as both “deeply flawed” and “a fine set of recommendations” in the same paragraph before warning of “the sort of effectiveness where everyone marches in lockstep.”

There are several problems with this “one-size-fits-all” criticism.

First, Criteria includes exceptions for some foundations because NCRP respects the diversity of foundation missions and intent. For instance, if your mission makes it difficult to prioritize marginalized communities at the 50-percent level we established, a lower benchmark is proposed. The criteria can’t be one-size-fits-all if the benchmarks are offered in different sizes.

Second, Dorfman also wrote, “Ultimately, it's up to the leadership of each institution to decide how it's going to operate and whether or not it makes sense to meet or exceed the benchmarks for each criterion.” It isn’t “one-size-fits-all” to leave things up to the judgment and leadership of the nation’s foundation trustees.

Finally, there are already a number of “one-size-fits-all” approaches at work in philanthropy. Regulation, which NCRP isn’t calling for, is a one-size-fits-all approach. Codes of ethics are another. Critics, however, aren’t similarly opposed to the rules against self-dealing or principles in favor of having conflict-of-interest policies, which apply to all foundation leaders equally. If “one-size-fits-all”approaches were discounted outright, our sector would have no rules at all.

Critics charge that no single set of goals could possibly do justice to the diversity of aims, methods, and people involved in philanthropy.

But is this the right issue to raise? If we have to ask whether NCRP does justice to the diversity of aims, methods and people, we should also ask whether or not the diversity of aims, methods, and people in philanthropy does justice.

Does philanthropy contribute to leveling the playing field to maximize impact? In essence, does our being different make a positive difference?

In his essay “Let’s Stop the Craziness” published in the new book Wit and Wisdom: Unleashing the Philanthropic Imagination (Emerging Practitioners in Philanthropy, 2009), Emmett Carson, President and CEO of the Silicon Valley Community Foundation, notes that industry trade groups consistently paint the same picture:

The Foundation Center, one of our most respected institutions, continues to report that the amount of philanthropic capital distributed by foundations to communities of color and women is miniscule. The Council on Foundations, our major trade association, has consistently documented that foundations have not recruited trustees of color and that there are only a handful of CEOs and vice presidents of color serving our institutions.

Noticing a different kind of conformity, Lucy Bernholz, founder and President of Blueprint Research & Design, Inc. resurrected the term “institutional isomorphism” in a post last month. In short, as different as foundations may seem, they’re astonishingly similar. She writes:

Yes, I know the old trope, "You've seen one foundation and you've seen one foundation." That may be true at some level, but it is also true that if you've seen one foundation you've probably seen 1/3 - 1/4 of the prevalent models. The differences will all be in the trimmings, not in the underlying structures, norms, practices, or expectations.

Stannard-Stockton rightly worries about a sector in which foundations march in lock-step. Unfortunately, that’s the foundation world consistently encountered by grant-starved advocacy, organizing, and civic engagement groups serving marginalized communities.

And where the foundation world does succeed in diversity — grant application processes come to mind — that success often comes at the expense of nonprofits who must pay grant writers and fundraisers to navigate those resource-intensive, idiosyncratic processes.

If the foundation world is so diverse that no set of benchmarks could possibly have anything to say about them, then why do statistics regarding the communities and causes that benefit from foundation grantmaking, and data on board composition and general operating support remain largely unchanged despite years of debating these issues? And why do the disparities which foundations work to address continue to widen?

Could it have something to do with the fact that seemingly diverse foundation practices are not, in fact, making a substantive difference for growing numbers of people and the nonprofits that serve them? And couldn’t a well-crafted, well-researched set of recommendations for more responsive grantmaking, regardless of one’s preferred program goals and missions, be the very thing that in Stannard-Stockton’s words, “empower[s] each person to make their own choices in the most effective manner possible”?

Insisting on the foundation world’s diversity does not change the fact that the field appears to fail at being as responsive as it can and must be to meet the growing challenges of today. NCRP and all members of the philanthropic sector rightly want to pay appropriate attention to the diversity of donor goals, means, and practices, but we can also legitimately ask whether our great American philanthropic institutions are paying appropriate attention to the diverse and most pressing needs and communities foundation grants aim to benefit. To that end, Criteria for Philanthropy at Its Best offers an aspirational vision of a sector that can and must do more to remain relevant.

Kevin Laskowski is field associate at the National Committee for Responsive Philanthropy.

"Untapped" Donors: It’s Sap Season Year-Round for Organizers

2009-06-08T14:12:00.012-04:00

By Lisa Ranghelli

Where I live in Western Massachusetts, tapping maple trees is a livelihood for some and a hobby for others. During the fleeting weeks of sap season, I look forward to putting a tap into a tree and seeing the clear sweet liquid immediately begin to flow into the bucket. The work to collect that sap and turn it into syrup is a labor of love, but there is nothing more satisfying than pouring your own maple syrup over pancakes hot off the griddle.

Tapping individual donors also requires hard work and persistence, but the payoff is equally gratifying, and no doubt more lasting than the time it takes to swallow those delicious bites of syrup-laden pancake.

After all, that’s where the money is: three-quarters of all charitable giving is done by individuals, dwarfing foundation grantmaking. As nonprofit recipients have pointed out, there tends to be a lot less paperwork and more flexibility involved with private donations compared with institutional grants. Yet, a survey of progressive individual donors found that while the vast majority does support organizing, 42 percent of them focus less than 25 percent of their giving on community organizing.

Here enters the Linchpin Campaign. Linchpin, a project of the Center for Community Change, is the brainchild of NCRP board member Marjorie Fine, who is determined to help organizing groups raise more funds from major donors. Fine has extensively surveyed progressive donors about what they fund and why. Now the Linchpin Campaign has released a guide that draws on these survey findings and the collective wisdom of donors and fundraisers to help social justice organizations access individual wealth. Untapped: How Community Organizers Can Develop and Deepen Relationships with Major Donors and Raise Big Money was written by Joan Minieri, an award-winning community organizer and author. The guide has hands-on tools to help organizers apply their organizing skills and knowledge to the task of donor cultivation and engagement.

Untapped reinforces some of NCRP’s own findings about institutional philanthropy – that many donors believe it is difficult to measure the impacts of organizing. And even though donors want to make a difference, they may not see organizing as a cost-effective strategy to achieve tangible results. The guide offers practical advice on how to alter these perceptions. Fine believes that now is an excellent time to fundraise, despite the economy:

There is so much heightened awareness about community organizing and civic participation right now, and whether economic conditions are up or down, people with wealth have money and they continue to give. Untapped resources for community organizing lie with individuals—individuals who want to give and who are looking for opportunities where their dollars can make a real difference.

Like so many maples trees lining a country road, individual donors are waiting to be tapped …

Lisa Ranghelli is senior research associate at the National Committee for Responsive Philanthropy (NCRP) and co-author of Strengthening Democracy, Increasing Opportunities: Impacts of Advocacy, Organizing and Civic Engagement.

Let the Crisis in Nonprofits Drive Change

2009-06-08T10:35:00.003-04:00

Gary Snyder

The financial and leadership crisis we face is resulting in a crumbling charitable world. If handled correctly, these troubling times will be looked upon as a terrific learning experience in years to come. We have a unique opportunity to reset our standards in a very positive way.

The most important thing that we must restore is the confidence of the general public and our contributors. Donors must believe that we are husbanding their resources in a thoughtful and competent manner. Unfortunately only a little over 20% believe that we are vigilant watchdogs of their donations.

We can earn the public’s trust by also being totally transparent, and accountable, with each agency showing that it’s governance is deliberative. The current ‘anything goes’ mindset is unacceptable to stop the sector from spinning out of control.

Those in positions of responsibility must retune our institutional and person goals and values. The focus of this endeavor lay in leadership ---national, local directors and management. The current status quo is unacceptable. The outmoded models of directorships have produced profoundly negative consequences.

There is no silver bullet to guide us out of this quagmire. All roads lead to the need for change. Our donors don’t trust us, the regulators don’t believe us, and our stakeholders doubt we are delivering the goods.

All believe that beneficence, forethought, and self-discipline of our forefathers have gone by the wayside. Part of the problem is the current dysfunctional training apparatus. It must be updated. While we should adhere to the some of the best practices of yester-year; many of the old-fashioned policies and practices must be revamped. We must encourage innovation in order for us to see our way out of this crisis and to restore trust and grow the nonprofit world. At the outset our mentors and teaching institutions must condemn self-enrichment at the expense of those we serve.

In order to avoid controversy, the sector leadership has sat on the sidelines on critical issues and failed to assist in managing the sectors destiny. That has lead to the excesses and abuse in philanthropy. Hiding behind a publicist just has not worked.

It is our responsibility to clean up our own mess and not continue to prevail on the government to regulate out us out of our bad behavior. The charitable sector went hat in hand to ask the government to clean up our house with little consideration for 70% of the sector---the small and medium agencies. With some leadership, the charitable sector is uniquely positioned to restore trust with better board oversight and vastly improved management practices, all of which will instill stakeholder confidence.

We must act swiftly. We must show that we are capable of governing on our own. We must develop our own internal audits that show that the sector leadership is attuned to the new realities. We must show that boards are no longer tone deaf and spineless and that they are attentive to the needs of those we serve.

When that is accomplished we must use our bullhorns and tell our stakeholders, regulators and Congress that we are worthy of their trust and that we have come to terms with the fact that transparency and accountability are laudable roads to travel.

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.

Good Intentions

2009-06-05T15:47:00.003-04:00

By Kevin Laskowski

This post is part of a series that takes a deeper look at the myths surrounding Criteria for Philanthropy at Its Best. View other posts in the series.

You don’t have to give up your commitment to a cause or community to follow NCRP’s Criteria for Philanthropy at Its Best. On the contrary, pursuing the Criteria’s benchmarks increases your chances of being more effective.

Criteria was not designed to undermine donor intent but to minimize the harmful unintended consequences of thousands of grantmakers pursuing their private visions of the public good. Currently, donors are free to pursue their unique visions of the public good and enshrine their values in trusts and foundations. That’s largely a good thing, but NCRP and others have noted the problems that can arise.

For instance, the desire of large foundations to be more strategic has led to the funding of program grants and a proliferation of reporting requirements. There’s nothing wrong with these things in and of themselves. Such things can aid effectiveness and accountability. The problems arise when nonprofits confront an array of idiosyncratic requirements that result in sector-wide duplicated and wasted efforts for grants that leave them cash-poor when rent and payroll are due. It’s for these reasons, among others, that Criteria encourages reporting requirements commensurate with grant size and multi-year and general operating support grants.

Furthermore, despite foundations engaging in activities that conceivably benefit everyone, we find that marginalized groups - low-income persons, racial and ethnic minorities, women and girls, people with HIV/AIDS, people with disabilities, senior citizens, immigrants and refugees, victims of crime and abuse, offenders and ex-offenders, single parents, and LGBTQ citizens - are consistently left behind in philanthropy. In fact, only 1 in 3 grant dollars are intended for the benefit of these communities. Even as we spend millions to improve health care and outcomes for children and families in this country, Native American women experience infant mortality rates 20 percent higher than those of other races in the U.S., and children of color living in just 10 New York neighborhoods experience 90 percent of all lead poisoning in the city. These are just a sample of the statistics the report cites in its review of how inequity affects philanthropic activity. Disparities of all kinds are widening, and the refusal to pay attention to them limits foundation effectiveness.

That’s why Criteria suggests that at least 50 percent of a foundation’s grant dollars benefit marginalized communities. If you’re concerned about health, education, the environment, or the arts, it would be wise to be aware that different communities tend to benefit disproportionately from the fruits of philanthropy. Social disparities tend to reproduce themselves in philanthropic programming. NCRP does not suggest that you should stop caring about, say, neuroscience or classical music. We simply suggest that we in the sector consider how to broaden the beneficiaries of our grantmaking. Let’s ask ourselves: "Whatever public benefit I hope to create, how can I ensure that those on the margins are not left out?"

If you’re an arts funder, you might ask how low-income people or those with disabilities get access to the concerts, exhibits, or shows you help create. If you’re an education funder, you might ask about the racial diversity of the schools that receive your funds to guarantee that you are making opportunities available to all who want to succeed. If you fund the environment, you might ask if everyone’s air, soil, and water are clean. You might be surprised to find that low-income people and minorities bear the brunt of pollution and impacts of climate change.

Think of it this way: if you fund the core institutions of a community, those on the periphery may benefit, but if you make sure the benefit reaches the periphery, the condition of everyone in the community is improved.

It’s about impact — as Peter and Jennifer Buffett's recent announcement to "empower women and girls worldwide" demonstrates:

'The Buffetts say they believe focusing on helping women and girls seems like the way to make the greatest difference in the world.

"It just was logical for us after we really thought about it," Jennifer Buffett said. "If you empower adolescent girls who are the mother of every child yet to be born - if they have more resources, better health, more empowerment, more of a role in their communities, decision making, they can delay marriage and become better educated - they have so much more to offer their sons, their daughters in that next generation."'

As the Buffetts seem to believe, when grants are targeted based on these systemic issues — in their case, the role women can and do play in their communities — the benefits can bubble up and out for generations to come.

As Janine Lee, CEO of the Southern Partners Fund, wrote in the Atlanta Journal-Constitution, “We shouldn’t invest in marginalized communities because it’s politically correct or because public subsidies obligate us to do so. We should invest in disadvantaged communities because it has the greatest impact on the things we care about.”

Critics like to pretend that donor intent is at odds with Criteria. On the contrary, they’re among a donor’s best shots at ensuring that their good intentions will lead to real improvements for the causes and communities we all care about.

Kevin Laskowski is field associate at the National Committee for Responsive Philanthropy (NCRP).

The Beldon Fund: Ten Years of Building Advocacy Capacity Has Paid Off

2009-06-02T11:15:00.003-04:00

By Lisa Ranghelli

The Beldon Fund officially closed its doors on May 31, 2009. But it left behind an infrastructure of advocacy groups that already have achieved significant impacts and have the capacity to continue to make a difference on the issues Beldon’s founder cares about–the environment and environmental health.

In 1998 John Hunting, Beldon’s founder, infused the Foundation with $100 million and committed to spend down that investment in ten years. The foundation’s leaders decided that the most effective way to move the needle on environmental issues in such a short time would be to support advocacy. Beldon used strategic approaches to its advocacy funding, focusing on a handful of states to concentrate its grantmaking. During that decade Beldon’s leaders also decided to incorporate support for non-partisan voter engagement to amplify the power of its advocacy partners. One area where Beldon saw tremendous progress in a decade was in Americans’ understanding of the risks of toxic chemicals all around them – in their homes, their children’s’ schools, their cosmetics. One former Beldon grantee, Toxic Free NC, offers an example of statewide impact from support for advocacy. As highlighted in NCRP’s recent report on advocacy and organizing in North Carolina, Toxic Free and its allies have prevented and reduced North Carolinians’ exposure to pesticides and cleaning chemicals.

The foundation’s revamped website is chock full of lesson learned, case studies, tips and resources for other funders and advocates. The foundation is refreshingly honest about efforts that were less successful, like its six-year investment in Florida, which did not result in the development of effective statewide advocacy leadership on environmental issues. By sharing its observations on why this effort failed, Beldon is helping advance knowledge in the field. Let’s hope more foundations follow their lead, so that both support for advocacy and also sharing of information, warts and all, becomes the norm rather than the exception.

Lisa Ranghelli is senior research associate at the National Committee for Responsive Philanthropy (NCRP) and co-author of Strengthening Democracy, Increasing Opportunities: Impacts of Advocacy, Organizing and Civic Engagement in North Carolina.

Cause Marketing and the Spirit of Philanthropy

2009-06-01T09:46:00.005-04:00

In the Summer issue of Stanford Social Innovation Review, Dr. Angela Eikenberry addresses the growing field of consumer-driven philanthropy (e.g. the Product Red campaign supported by The Gap, Apple, and Starbucks). “The Hidden Costs of Cause Marketing” details the ways in which such campaigns actually weaken the social fabric of philanthropy. The article is well worth the full read.

Consumption philanthropy, as Dr. Eikenberry calls it, serves the dual purpose of promoting a product and providing some social benefit through charitable donation. It is highly accessible and convenient; simply by choosing to buy one type of yogurt over another, consumers can easily donate to the causes they deem important. However, despite the success of cause marketing, she warns:

“Consumption philanthropy individualizes solutions to collective social problems, distracting our attention and resources away from the neediest causes, the most effective interventions, and the act of critical questioning itself. It devalues the moral core of philanthropy by making virtuous action easy and thoughtless. And it obscures the links between markets—their firms, products, and services—and the negative impacts they can have on human well-being. For these reasons, consumption philanthropy compromises the potential for charity to better society” (Emphasis added).

Take the example of water. Some bottled water companies donate clean water in developing countries based on the number of bottles of their water consumed in the West. A consumer chooses the brand that donates clean water and feels good knowing that she is helping someone across the world access a basic necessity. However, the consumer is still using a disposable plastic bottle and she is still contributing to the depletion of limited resources by choosing the bottle of water taken from a spring rather than filling her own re-useable cup or bottle. Cause marketing does not challenge her to think about the consequences of consumption; it instead rewards her. And when that consumer receives a solicitation seeking funds to build wells in a developing country, she is less inclined to give, feeling she has already done her part through her consumption habits.

The passive giving of cause marketing as secondary to consumption stands in stark contrast to the Dr. Eikenberry’s report on giving circles Lisa Ranghelli wrote about earlier this month. Giving circles allow people of moderate means to pool their money and have a greater impact on and deeper understanding of the causes they care about.

While highly successful campaigns have raised millions of dollars and attracted the attention of celebrities, it detaches people from the purpose of philanthropy: to provide collective solutions to social problems. As nonprofit organizations around the country struggle to cope with the current recession and increasing need, cause marketing deserves a critical look.

A New Wrinkle in Charity Crime

2009-05-27T15:51:00.002-04:00

Gary Snyder

A 2009 study on the topic by the Association of Certified Fraud Examiners revealed that more than 55 percent of its members performed more fraud-related investigations in 2008 than in 2007. Although this study does not show a higher occurrence rate possibly because agencies are ashamed to report them because their “best” practices didn’t catch the malfeasance.

Nonprofit Imperative, the twice-weekly e-newsletter, has shown a substantial increase in fraud. There has, however, been an interesting wrinkle in the age of the perpetrators of the crimes.

This week we have seen the following:

• A New Jersey 87-year-old pleading guilty to embezzling more than $375,000 from the FAA;
• The 60-year old treasurer of the Van Buren Youth (MI) Fair Association was caught embezzling up to $50,000;
• A 70-year old who managed a D.C. government program was indicted on charges of embezzling $281,000;
• A 62-year old was sentenced to 26 months imprisonment for theft of federal fund at the Crow Creek Tribal School and bribery;
• A 65-year old Tucson Museum of Art’s accountant was indicted of embezzling $973,000;
• A 73 year old administrative secretary has been charged with embezzling $95,000 from the Saford (PA) city coffers;
• A 74-year old awaits trial for embezzling $500,000 a year from the city of Vernon (CA).

Is this a trend or a sign of the recessionary times?

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.

A Large Uptick in Charitable Fraud Is Met By A Yawn

2009-05-26T14:08:00.007-04:00

Gary Snyder

In these times of considerable financial pressure, we are seeing some troubling signs in charities’ ability to keep their nonprofits afloat. One major, but often ignored, area of concern is charitable fraud…and by all measures it is growing. Desperate employees and board members are doing desperate things at an alarming rate.

A little over a year ago, a New York Times article, “Report Sketches Crime Costing Billions: Theft From Charities”, caused considerable discussion about the cost of fraud in the charitable sector. It highlighted a 2006 study that put the estimated cost of theft at $40 billion of the roughly $300 billion given to charity.

After that study’s results were published, many believed that brakes were being put in place to slow down the contagion of philanthropic crime. Some thought that it would be harder to hide fraud with the increased scrutiny with the submission of the revised IRS tax Form 990 which added questions regarding theft, embezzlement or other fraud in the previous year. Others held that the increased federal examination would lead to more exposure by newspapers and dampen the incidents of such crime. Still others believed that some provisions in the Sarbanes-Oxley Act would take hold and rein in fraud.

Even with the IRS becoming more aggressive in pursuing nonprofit fraud, the major federal investigative force in fraud--- the Federal Bureau of Investigation---and other enforcement agencies have shifted their focus to other matters such as counterterrorism and the explosion of banking and insurance misdeeds.

Peppered with optimism things have not worked out as envisioned. There have been some mitigating factors that most never anticipated. In the intervening year since the study results were released, the economy has tanked and the newspaper industry is in doldrums.

A recently released survey by the Association of Certified Fraud Examiners has shown that the economic crisis has led to an increase in fraud. The ACFE report “Occupational Fraud: A Study of the Impact of an Economic Recession” pointed out a sobering issue. Those organizations that had been most effected by the poor economy which resulted in layoffs during the past year were the ones that eliminated internal controls (35%). Only 3.2 percent of those surveyed increased controls. This trend is consistent with Nonprofit Imperative, my newsletter that tracks nonprofit fraud, data collection, which indicates that there is an increasingly widespread lack of internal controls in place in nonprofits.

As a result of less internal oversight, more than half (55.4 percent) of the ACFE respondents indicated that the level of fraud has increased in the previous 12 months compared to the level of fraud they investigated or observed in prior years. The largest reason for committing the crime was greater financial pressure caused by the depressed economy.

The magnitude of fraud in the nonprofit sector is considerably larger than all organizations in general. In the 2006 ACFE study, U.S. companies, on average, lost 7% of their annual revenue to fraud. This is in contrast to 13% that was published in the Nonprofit and Voluntary Sector Quarterly in 2007.

Although the revised Form 990 is still being phased in, Nonprofit Imperative had its largest amount of misdeeds ever in March 2009. NI showed an increase of 63 percent in nonprofit fraud from the past March 2008. That closely mirrors the 48.3% ACFE survey boost in corporate embezzlement during the past year.

Few--- only 2 percent--- in the ACFE survey expect a decline in the level of fraud.

The focus should be on the perpetrators. They are typically those in power and have direct responsibility/access to the money. The earlier ACFE study said that accounting personnel, followed by executive and upper management, commit the largest number of thefts. With little or no deterrents in place employees and board members can have a run on the money. With fewer charities having fraud-prevention policies in place, it becomes harder for auditors to help identify problems and set up counter-measures to keep deceit in check.

The dismissive response on the part of nonprofit leadership to this most important problem is puzzling. Their reliance on the government to weed out what they say is “a few bad apples” has resulted in a firestorm of criminality. The apparent boredom by agency boards is equally puzzling How many studies and how much evidence does it take to get their attention?

The facts are irrefutable. Organizations that had well-implemented policies have much smaller misconduct. Increasingly, fraud has become big business, with $15 trillion at stake, and fewer obstacles to getting caught. With every proxy measurement---endowments, contributions and trust--- on the wane what better time than now to address the fraud issue. Absent an unrelenting and unyielding thrust to rid the nonprofits of this scourge, the confidence in philanthropy will continue to spiral downward and so will the support that keeps the agencies that do so much good sustainable.

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.com; website: www.garyrsnyder.com, phone: 248.324.3700.