The new realities of non-profit accountability

Peter Shiras

In a monumental understatement made famous by Tom Hanks in the movie Apollo 13, the commander of the NASA spaceship said to the control centre, ‘Houston, we have a problem.’ America’s non-profit and philanthropic sector today has a problem. Not since 1969, when Congress  imposed a series of restrictive measures on philanthropic institutions, has the sector faced such challenges to its legitimacy and independence.

Today, however, the crisis is markedly different to those of the past. What is more, leaders of non-profit and philanthropic organizations are not taking these challenges seriously and may find public support and the autonomy and rights accorded to their organizations by law fundamentally eroded.

There have been times when non-profit and philanthropic organizations were subjected to intense scrutiny by the press, Congress and public. Foundations were scrutinized in the  1960s and a major scandal rocked the United Way of America, and, by extension, the entire sector, in the early 1990s. After a series of negative press articles, Congressional hearings and new, not particularly onerous legislation, the scrutiny dwindled. It was back to business as usual for non-profit organizations (NPOs).

While many in the sector see the current scrutiny as reminiscent of the past, ascribing it to a few bad apples in an otherwise tasty basket, the sector and the role it plays in society have changed fundamentally in the past 10–20 years. Scrutiny by the press, Congress and others is here to stay and has profound implications for the sector.

What is different this time?

New power of citizen groups
Non-profit and philanthropic organizations are a newly powerful force for change in society and particularly in the global context. While NPOs often discount their power and influence, others do not. Consider, for example, what The New York Times[1] recently said in an editorial:
‘Citizen groups… often call on governments and corporations to be accountable. By that, they mean that these powerful organizations should respond to the needs of the people they affect and that they should tell the public how they get their money and what they do with it. These [citizen] groups, part of the exploding sector of… NGOs are now part of the power structure, too.’

Citizen groups have achieved a new power that is different in kind, not just in degree, from what they have known in the past. While past movements have successfully mobilized large numbers of individuals to affect social change (eg the civil rights and environment movements), the new power of citizen groups resides in their ability also to  use the press, public opinion, the Internet, the courts and sophisticated research to promote their causes. Through the effective use of these resources they have been able to call into question the legitimacy of certain business practices and to place new issues on the international agenda. No one can dispute the powerful influence that citizen groups represent in influencing world trade talks, forcing textile manufacturers to adopt new worker standards, and putting human rights on the global political agenda, for example.

Wealth of the sector
The sheer size of the sector has risen to a point where it demands attention. When a famous US bank robber was asked why he robbed banks, his reply was simply, ‘That’s where the money is.’ Much the same could be said now about why the press is writing about many US non-profit and philanthropic organizations. The largest foundation, the Gates Foundation, has assets of approximately $23 billion and many of the largest NPOs have annual budgets well over $100 million. Such concentrations of resources, even when used for the most noble and charitable purposes, inevitably attract attention. And, when the press finds evidence or suggestion of impropriety by individuals carrying out charitable activities, it makes the news. The economic growth and size of the sector places it permanently under the microscope of a press that always follows the money.

Availability of information
A fundamental change affecting non-profit accountability is the widespread availability of information. From the press’s standpoint, not only is there now interest, but also the means to investigate. Due to the Internet and new sunshine laws making information disclosure more widespread than in the past, vast amounts of information about NPOs are available online. Organizations such as GuideStar, which puts publicly available information from NPOs’ tax returns on the Internet in an easily searchable form, have revolutionized information availability and facilitated scrutiny by the press, state and federal regulators, and even donors wanting to know how their contributions are used. The fact that much information is presented without context or may be inaccurate because of the notorious unreliability of non-profit tax returns, or that the users may have very little understanding of how to read non-profit financial reports, does not alter the fact that the information is available.

Other factors leading to increased attention to accountability

In addition to power, money and information, there are a number of other factors, perhaps more temporary in nature.

A rash of corporate failures
The rash of corporate accountability failures in the US has raised overall interest in accountability. Starting with the Enron fiasco in 2001, followed by the corporate failures of WorldCom, Tyco and more, accounting practice and corporate governance issues have been making headlines and drawing renewed attention from regulators and Congress. Indeed, a new law was enacted last year called the Sarbanes-Oxley Act that sets new standards for accounting and governance practices of publicly traded businesses in response to the wave of corporate scandals. There are suggestions that some of these practices should either be adopted voluntarily by NPOs or become mandated by law.

September 11 effects
In the wake of the attacks of 11 September 2001 there was great focus on the charitable response to the human tragedy. The press ran numerous stories alleging that charities had misled donors in fundraising appeals, were unprepared to respond quickly to immediate needs, delayed responses with unnecessary paperwork, failed to coordinate with each other and were slow to disburse funds. Regardless how accurate the reports were, the picture created for the public was of a sluggish, bureaucratic group of agencies more interested in fundraising success than in responding to the needs of victims. Later surveys revealed that public confidence in the charitable sector fell as a result of this coverage.

The US government’s post-September 11 response has led to scrutiny of Muslim charities and all organizations that work overseas. As part of the effort to cut off funds to terrorist organizations,  organizations of Muslim origin or that work in Muslim countries have faced increased scrutiny. Several Muslim organizations have been shut down, and this has had a chilling effect on giving by Muslims who are concerned that their gifts may not reach intended beneficiaries.

Failure of government regulators
A factor neither new nor temporary is the failure by state and federal regulators to police the sector effectively. While many in the sector view this as a blessing, largely because it means that their particular organization is unlikely to be audited, for the sector as a whole it is not healthy. While the laws and regulations affecting NPOs are largely appropriate, the inability of government to provide guidance and oversight to offer a credible threat of detection of wrong-doing makes the entire sector highly vulnerable to those who would abuse non-profit or philanthropic organizations for their own enrichment. The problem, by and large, is not lack of good will by the regulators, but rather a lack of resources. For example, while the number of NPOs registering with the Internal Revenue Service has risen by 40 per cent per cent in the past ten years, the number of examiners has remained constant.

Where has the sector fallen short?

So far, virtually everything I have discussed in terms of the accountability crisis facing the sector has involved either some external factor or a by-product of the success of non-profit and philanthropic organizations. But we must be honest. There are at least three critical areas where the sector itself has fallen short.

Abuse of trust and privileges
In a limited number of cases (even a small number is too many), NPOs have suffered the self-inflicted wounds of a small group who have abused the trust and privileges of charitable organizations. In many cases, these are not illegal acts, nor are they perpetrated by those who set out to abuse the system. Rather they are the result of hubris, sloppy ethical practices or simply inattention to being responsible stewards of resources. Because the general public holds NPO leaders to a higher ethical standard than business or government leaders, even a hint of abuse at an NPO is newsworthy. Issues include high levels of executive and board member compensation, apparent conflicts of interest involving board members, and high administrative costs compared to programme costs.

Lack of credible self-regulation
The sector has not developed an effective system of self-regulation. While a number of organizations  serve as watchdogs, they are limited in coverage and the extent to which the public is aware of their activities. Without the credible threat of public exposure, they do not constitute effective barriers to abuse or promoters of good practices. What is more, in some cases the watchdogs disagree about what practices NPOs should promote, leaving the public befuddled and the entire system ineffective.

Crisis of governance
Finally, the sector as a whole is suffering from a crisis of governance. I will come back to this point in a moment, but it bears repeating. Non-profit boards are systematically failing to provide adequate oversight of the finances, practices, policies and CEO conduct of the organizations for which they are responsible. In a lead editorial, The Washington Post[2] recently described for-profit boards as follows: ‘As the recent corporate scandals demonstrated vividly, boards of directors too often have been inattentive, even somnolent, pocketing their fees and complacently doing management’s bidding.’ This description could all too easily be made of non-profit boards, unless they turn their attention to practising the fundamentals of good governance.

The new accountability environment

So, what does this changed accountability environment look like and what do NPO leaders need to do to address the new realities they face?

Negative press coverage
A major change in the US accountability environment is the extent of press coverage of non-profit accountability issues. Starting after the September 11 attacks, but continuing and intensifying since, a steady stream of negative articles has appeared in the major media. From April to August 2003, major US newspapers such as The New York Times, Washington Post and Wall Street Journal have published over 30 articles about accountability issues.

While some articles report on legal action against non-profit and philanthropic organizations by government regulators, more report on independent investigations, often conducted by the newspapers themselves, dealing with ethical and accountability questions. Because the public holds NPOs to a higher standard of ethical practice than is required by law, these articles highlight the stakes for NPOs. It is not just a matter of complying with the law, but also avoiding even the appearance of impropriety.

Failure of governance denounced
Whether or not every charge or unethical practice in these articles is true, a clear pattern emerges. A failure of governance – a persistent and systematic failure of boards to exercise their legal, fiduciary and ethical duties to oversee the policies, practices, finances and CEOs of the organizations they serve – is the single most persistent theme. Governing boards[3] have ultimate legal and fiduciary responsibility for oversight of non-profit and philanthropic organizations and these articles indicate that serious and deeply rooted problems afflict the system of non-profit governance.

While a failure of governance pervades virtually every article on accountability, specific issues vary from organization to organization, eg paying high compensation to top executives and board members, spending lavishly on office, travel and other administrative expenses, conflicts of interest, failure to adhere to the organization’s mission, unethical and dishonest fundraising practices, and a lack of disclosure of information. In each case, the board looked the other way, concurred with the practice, was not informed, did not ask, or was simply not paying attention.

Move towards increased government regulation
In addition to increased press coverage of NPO accountability issues, Congressional and state regulators are looking at ways to pass new legislation or tighten up regulations. For example, Congress is debating a new provision in foundation law that would limit the administrative expenses foundations may count towards the 5 per cent of their assets they are required to distribute each year. Some members of Congress view foundations as less accountable than NPOs because they do not raise funds from the public and are not, therefore, subject to marketplace discipline. Congressional leaders have also undertaken independent investigations of several NPOs that have been the subjects of press stories, and these investigations may lead to further Congressional action.

On the regulatory side and in response to the closure of several charities accused of channelling funds to terrorist organizations, the US Treasury Department issued a set of voluntary guidelines for all international grantmakers. These are so draconian that if they were fully implemented, they would force a great deal of international activity to close down.[4] As it is, the ‘voluntary’ guidelines have created  uncertainty for all international grantmakers and led to some important international support being suspended.

NGO Watch and others
The legitimacy of the sector is also being challenged from within by self-proclaimed watchdog groups with an ideological axe to grind. The conservative think-tank, the American Enterprise Institute, and the Federalist Society have established a website called NGO Watch to, in their words, ‘bring clarity and accountability to the burgeoning world of NGOs’. Another effort along these lines, funded by business interests, is Public Interest Watch, established in 2002 to deal with, in their words, ‘the growing misuse of charitable funds by non-profit organizations and the lack of effort by government agencies to deal with the problem’. It has just released a report alleging that Greenpeace misuses charitable donations, a charge Greenpeace emphatically denies.

Some, however, question whether these self-described ideological watchdog groups are really addressing accountability, or something else. According to one foundation president, ‘Some of the non-governmental organizations funded by conservative philanthropists have initiated an “NGO watch”, an attempt to harass, harangue and discourage non-governmental citizen groups from expressing their views.’[5]

The demand for accountability does not, however, come only from conservative groups. The New York Times editorial mentioned above states, ‘As they [citizen groups] become part of the established political landscape worldwide, these groups owe it to the public to be accountable and transparent themselves.’

What can foundation and NPO leaders do?

Foundation and NPO leaders need to realize, in the words made famous by the Apollo 13 commander, that ‘we have a problem’. The entire sector is extremely vulnerable and unless leaders in the field recognize this, it will only get worse. Beyond that, leaders need to focus on three areas.

First, they need to look at their own governance structures and improve them. They should do a board self-assessment using BoardSource[6] resources to identify and address problems. There are invaluable resources available to NPO boards if they will only take time to use them. Too many NPOs think that governance and accountability problems only apply to others and fail to take action themselves. The press articles that have questioned NPO practices include a veritable who’s who of US foundations and major NPOs.

Second, foundations need to invest in governance and accountability. This can take a number of forms, from requiring grantees to demonstrate good governance practices to strengthening organizations that promote good governance and accountability. In this sense, governance and accountability should not be seen as just the negative aspects of how to stay out of trouble (or out of the press), but also the positive aspects of how effective governance and institutional capacity-building leads to positive outcomes.

The field as a whole also needs to invest in fixing and expanding the system of self-regulation. While there are inherent limits to what any set of organizations can do to police itself, NPOs can do a great deal more than they are doing now and foundations can invest in effective self-regulation. This should include a widely agreed set of standards applied to a large number of NPOs across the entire spectrum, and making those standards widely known to the public as the best means of enforcing self-regulation. Effective self-regulation is important not only in its own right, but also because it can help prevent excessive and undue government regulation.

Finally, the sector needs to demonstrate credible commitment to effective government regulation. Right now, the problem is not lack of effective regulations, but rather a lack of resources for state and federal government to ensure compliance. NPOs and foundations could do much more to lobby for increased funding for government regulators, as convoluted as that might seem to the casual observer. Ensuring that government has the resources to carry out audits and presents a credible threat of catching those who abuse public trust by using NPOs for their own personal gain is in the long and short-term interest of all non-profit and philanthropic organizations.

At the same time as addressing governance and accountability issues that make them highly vulnerable, foundations and NPOs also need to continue much of what they have been doing to carry out their missions effectively. They need to speak out boldly on the issues of the day. They need to hold government and business accountable for what they do and what the implications of their actions are. They need to ensure that their research is sound and they are true to their missions. They must be ever mindful of the great assets they have, including the public’s trust, solid information and high moral purpose. On these issues, there can be no compromise.

1 21 July 2003.

2 13 October 2003.

3 Known variously as boards of directors, trustees or governors.

4 See article by Barnett Baron outlining these guidelines. Visit Alliance Extra at www.allavida.org/alliance/allianceextra.html

5 Timothy Wirth, ‘Shepherding a New Philanthropic Bull Market,’ in Foundation News and Commentary, September/October 2003.

6 See www.boardsource.org

Peter Shiras is Senior Vice President, Programs at Independent Sector, USA, and co-guest editor for this Alliance feature. He can be contacted at peter@IndependentSector.org

 
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