Regulation on the agenda

‘I prefer to give direct to the cause I want to support,’ said the man in Immigration as he took my fingerprints (a first for me!) in Los Angeles airport when I told him I was on my way to the Council on Foundations 56th Annual Conference in San Diego. ‘I just don’t like the idea of those big salaries and all those people driving Cadillacs.’ Sadly, stories about charitable sector abuses seem to be tarnishing the once pristine image of charities. This loss of trust, and how to address it, was something that came up time and again during the conference.

So what are Americans worried about? Excessive compensation for non-profit executives and trustees and improper fundraising practices are two of the most contentious issues. Threats to the US non-profit sector are arising because of ‘growing malfeasance’ and ‘egregious misconduct’, said Council President Dorothy Ridings. ‘Has the non-profit field lost its moral compass? Has the field become too lax in governance?’ No, she said, answering her own question, ‘the compass is there but we haven’t been using it well enough.’ The solution: ‘We must embrace needed reform but resist undue government interference.’

What is the Council doing?

The Council itself has several initiatives under way in the self-regulation arena. A new draft of its own code of practice for Council members, Principles and Practices for Effective Grantmaking, is almost complete. This is part of its Building Strong and Ethical Foundations: Doing It Right initiative, which was the focus of a well-attended breakout session.

One question that came up was how effective a code of ethics can be. As a membership body, the Council must hold members to the standards it sets out, applying sanctions where necessary. Taking a carrot rather than stick approach, Council membership is in itself a seal of approval, so it is reasonable that members should do something to deserve it.

The Council should be the lead organization, articulating what good governance is, said Max King (Heinz Endowments), ‘but it can’t be the organization that polices the foundation world’. This is the job of the Internal Revenue Service (IRS) and the attorneys-general, and the Council wants them to have more resources to do the job properly. 

But, said Scott Harshbarger (Murphy Hesse Toomey & Lehane LLP), people need to know what foundations do, how they do it, how they contribute to the community. Foundations are ‘shrinking violets’, he said. ‘They need more regular engagement with the communities they serve, including the political community.’

Even if foundations should not be policing themselves, they should ‘engage aggressively in the process and help regulators determine what role the law should play and where the sector can best assure best practice and ethics. The best defence is to get out front and allow yourself to be examined,’ said Harschenberger. At present, the non-profit community is perceived to respond ‘only when crisis comes to your door, with the press asking questions, the Senate potentially challenging tax benefits, and attorneys-general looking at fiduciary responsibility’. Or, as King put it, ‘even if you’re not the first one to discover abuse, it is vital to be seen to be open to scrutiny rather than trying to sweep it under the carpet.’

The Panel on the Nonprofit Sector

Another session provided an update on progress with the Panel on the Nonprofit Sector,[1] convened by Independent Sector last October at the suggestion of the Senate Finance Committee to prepare recommendations for Congress to improve ‘the oversight and governance of charitable organizations’. Committee chair Charles Grassley earlier described what was happening in the non-profit sector as ‘a cesspool’.[2] On 1 March, the Panel produced its Interim Report, and final recommendations will be published at the end of June.

The Interim Report focuses mainly on issues of financial management. More tricky issues such as executive compensation and fundraising practices are to be tackled in the final report. It suggests, among other things, that tax-exempt groups create conflict-of-interest policies, appoint people with financial skills to boards, and develop policies to encourage and protect whistleblowers. Suggestions to increase financial transparency included requiring heads of non-profits to certify IRS filings and introducing penalties such as revoking tax-exempt status for a period of time in cases of repeated failure to file IRS Form 990.[3]

A show of hands revealed that a majority in the room already had a conflict of interest policy and code of ethics. The only real heat in the meeting came in relation to payment for trustees. Many resented the ‘unacknowledged assumption that it’s unethical to pay trustees for work done’, and felt that ‘we should define what is excessive rather than outlaw the process’. Only one speaker expressed the view that trustees shouldn’t be paid. ‘We are suggesting the way government should be regulating our sector. We can rise above the fray and go to a very high standard,’ said Drummond Pike (Tides Foundation). There is a real difference between foundations and their grantees here, he pointed out, as non-profits rarely pay trustees. ‘We must recognize that trustees do a lot of the work,’ said Tim Walter (Association of Small Foundations), disagreeing.

Is the Report bold enough?

Although well received by the Senate Finance Committee, the Interim Report has been criticized by some within the sector for its lack of boldness. Its recommendations ‘will accomplish little or nothing to cure the accountability problems facing the nonprofit sector’, accuses Rick Cohen (National Committee for Responsive Philanthropy). One issue it doesn’t even plan to tackle, Cohen points out, is foundation payout.

One issue that did come up at a Council breakout session was effectiveness. ‘How effective are we?’ was the question put to a packed room. Accountability and transparency promote good governance, but this isn’t enough to allay ‘growing doubts about the foundation field’. One well-known difficulty in judging effectiveness is attribution: people change anyway, so even if you can measure change over time, this may not be due to your programme.

Another question is what you are measuring. Most foundations focus on measuring programme effectiveness, said Peter Frumkin (Harvard University). Measuring mission effectiveness, looking both at grantees and what they have achieved and at the foundation itself and what it has achieved, is much harder but gives a more complete picture.
‘If we could get strategy, accountability and effectiveness working together,’ he said, ‘the field would be in a better position to respond to threats.’  

International grantmaking honoured and threatened

Rien van Gendt of the Van Leer Group Foundation was the first person from outside the US to win the Council’s premier Distinguished Grantmaker Award. The Netherlands-based Bernard van Leer Foundation, which he headed up for many years, makes grants in 40 countries where the company has a presence, giving away only 5 per cent of its money in the Netherlands. Van Gendt is someone with a truly global vision. As governments become more unilateral, he said, it’s more important than ever that US and European foundations should work together across the Atlantic and elsewhere. With characteristic modesty, he acknowledged a debt to his American counterparts. ‘I have learned from the entrepreneurship of US foundations,’ he said, ‘their global vision, their desire to make a difference, their professionalness.’

On the regulation front, the news was mixed. We heard that the Treasury is now reconsidering its Anti-Terrorist Financing Guidelines. The next iteration will likely take into account the Principles of International Charity put forward by the sector (see p57) and will reinforce the voluntary nature of the Treasury document.

On the negative side, there is a real threat that Congress may prohibit the use of donor advised funds for overseas grantmaking – something that would severely restrict overseas grantmaking by community foundations and organizations like Give2Asia and CAFAmerica.

1 The Council session was actually one of 15 consultative ‘field hearings’ the Panel plans to hold around the US.

2 The Panel consists of 24 leaders from public charities and private foundations. It is divided into five workgroups, each of which has a team of advisers.

3 The Panel also recommends that non-profits be required to file their Form 990 electronically, and that groups with annual revenues over $2 million be required to conduct an independent audit of their filings.

For more information about the Panel on the Nonprofit Sector and a copy of the Interim Report, see www.NonprofitPanel.org

Council on Foundations 56th Annual Conference
Date 8-10 April
Venue San Diego, California
Theme Generosity and Integrity – Values for Leadership in Philanthropy