The Nonprofit Ethicist | Summer 2010

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Dear Nonprofit Ethicist,

For nonprofit organizations and those affiliated with them, has anyone seen or developed principles, general guidelines, or “filter questions” that would help define an appropriate relationship between doing good and doing well? With the rapid growth of social entrepreneurship, the issue seems increasingly relevant.

Rarin’ to Go

Dear Rarin’ to Go,

Congratulations: your question is a stumper. For the first time since this column began, the Ethicist put out a call to his colleagues in the academic and practitioner communities. Although Tom Pollak at the National Center for Charitable Statistics and Pam Leland at the Leland Leadership Group had good insight, no one knew of a “decision template” for social entrepreneurship. Therefore, the Ethicist offers a few simple rules of his own devising:

The social in a social-entrepreneurship project comes first. Ask whether a money-making project advances the charitable mission—in some way—regardless of the amount of money it raises. Numerous scholarly articles caution that doing well may distract senior management from its real job of doing good.

The pecuniary benefits from the entrepreneurship in a social-entrepreneurship project should go primarily to the charitable class of persons for whose benefit the project is purportedly undertaken.

Entrepreneurs—not the charitable class—should bear any outsize risk associated with social-entrepreneurship projects. Part of entrepreneurs’ charitable contribution is bearing risk.

If a taxable organization undertakes a social-entrepreneurship project, it should voluntarily follow the rules applicable to tax-exempt organizations regarding conflicts of interest and private inurement.

The last point deserves elaboration. While there are no federal rules and regulations regarding conflicts of interest, Appendix A to IRS Form 1023 has a model conflict-of-interest policy for tax-exempt entities. On the other hand, existing rules and regulations do limit private inurement: persons capable of exerting substantial influence on a tax-exempt organization’s business decisions are entitled to no more than reasonable compensation.

But regulations do not address return on an owner’s equity as a special form of inurement, because tax-exempt entities do not have private owners. When taxable entities undertake social-entrepreneurship projects, the policy against private inurement must be extended. The Ethicist suggests that the risk-adjusted rate of return on an entrepreneur’s equity should not exceed the most favorable rate at which the taxable entity can borrow.

These restrictions may prompt entrepreneurs to ask, “What is the economic incentive to undertake social projects?” True, there is no special incentive, but these rules are no disincentive either. The object of social entrepreneurship is not to do well but to do well enough. Doing good should be its own reward.

Dear Nonprofit Ethicist,

Should board members be permitted to purchase tickets for a raffle in which an organization participates or it sponsors?

Taking a Chance

Dear Taking a Chance,

Since board members cannot influence a raffle’s outcome, they seemingly should have the same opportunity to win as anyone else. Unfortunately for them, ethics requires avoiding the appearance of impropriety. If board members were to win the raffle, others might assume the game was rigged.

Follow the example of for-profit companies that use games of chance to promote their products and prohibit employees and their families from participating. The same rule should apply to volunteer board members.

Dear Nonprofit Ethicist,

I’m the founder and president of a small, all-volunteer, nonprofit organization that was founded in 1994 to help stray animals. Last April an acquaintance was taken to the hospital. Because she left my name as her emergency contact, I was called immediately. I did not know this eccentric and reclusive person well; she had no close friends and was estranged from family. My connection with her preceded my charity’s founding (I helped her with a cat adoption several years prior), and she was a longtime, regular donor to my organization.
As a result of the call, I went to the hospital with a volunteer who is an attorney (I worried legal issues might arise). I was instructed by the woman—who died later that day—to take her cats and place them in a home.

Believing that the deceased had a will that might benefit the cause of animal rescue, I made a point to locate the document. She left her two cats, plus her residuary estate, to me. What initially looked like a considerable benefit turned out to be much more trouble than it was worth.

If you are a charity officer or director and are to receive a bequest as a result of charitable work, what are the considerations? In this case, the lawyer-volunteer determined that the bequest of items may have cost a good deal at one time, but was now worth little and had been made for the benefit of the organization, which she communicated to others. I asked the deceased woman’s attorney about whether the decedent’s intent was clear in the bequest, and she said, “She wanted you personally to benefit because of the good things you have done—even if you never were to rescue another animal.”

Do situations like this happen often? Are there rules to follow? This experience has been very odd and a real distraction from our mission, which is difficult enough all by itself.

Just My Luck

Dear Just My Luck,

The Ethicist cannot imagine situations like this happening often. You got lucky (that’s a joke). If the deceased intended her bequest to go to the organization, it would have been easy for her to name the organization as the beneficiary. This should be obvious to everyone except maybe a certain obtuse volunteer. If she named you in her will and her attorney (who is the legal representative of her estate) confirmed her intent, it appears to this nonlawyer ethicist that the gift is yours. What you choose to do with it is your business, but a donation to the charity would be a nice gesture.

Dear Nonprofit Ethicist,

Recently my organization decided to upgrade its Web site and needed budget figures from companies that could perform the work. Since our board president owns such a company, I asked her to provide one of the three proposals that we needed for the grant. I disclosed to the grantmaker that one of the proposals was from a company owned by the board president. We got the grant with the stipulation that the board president’s company not perform the Web site upgrade, citing conflict-of-interest concerns.

When I informed my board president that we received the grant but could not use her company for the work, she was upset and our relationship changed immediately. Over the past several months, I have felt strong animosity from her that has resulted in resistance to many of my initiatives and suggestions. She has been on our board for six years, and I know her well; her recent behavior toward me is clearly a result of this incident.

Our organization has a clear conflict-of-interest policy that requires only that conflict-of-interest transactions be disclosed openly and approved by the board, where the member with the potential conflict is excused from discussion and abstains from voting. This time the donor required it, but it makes me wonder whether the better method of conflict-of-interest management is never to entertain such a transaction. Certainly the organization can lose out on some sweetheart deals from altruistic board members, but this episode has made me see the potential for more risk than reward.


Dear Distraught,

So the board president thought you should have withheld relevant information from the grantmaker? Or maybe she thought the conflict-of-interest policy did not apply to her? Bizarre. Do not blame yourself for her bad behavior. Sadly, the safest course is to ban such transactions flat out. It is sad, because when conducted properly, some transactions with insiders may benefit an organization.

This is a teachable moment, so let me add that transactions with insiders are acceptable provided that (1) the conflict is disclosed to the board, (2) the board investigates other alternatives and determines that the transaction is in the best interest of the organization, and (3) the board approves the transaction after both debate and voting take place in the absence of the conflicted party.
Dear Nonprofit Ethicist,

I am the executive director of a small nonprofit organization that takes in animals seized by county animal-control agencies because of neglect or abuse. For several months, I have worked with our board president to develop a proposal involving land acquisition that could significantly affect our future. Either the county acquires the land and we manage the shelter, or we acquire the land and contract with the county for services. Both ways have pros and cons.

Our president is unwilling to share the development of this proposal with our board while actively promoting its acceptance by the county. Should the county accept the proposal, it puts our organization at significant risk. The county is in no way obligated to contract with us for services, and should it choose another organization, that organization would be in direct competition with ours.

I have repeatedly asked for permission to share the proposal draft with other board members or to approach outside funders for support, and each time the board president asks me to stand down.

Should I go against the wishes of the board president and follow my gut? The president has been with our organization for approximately two years and has moderate political clout. Nearly 10 years ago, I helped cofound our organization and am a significant financial contributor.


Dear Anxious,

Too bad your board president views the board as an impediment rather than a resource. One job of a board is to make sure all important questions are asked before major undertakings. It’s called due diligence. But boards are not good at keeping secrets. If neither the county nor your organization yet owns the land, there is a danger that leaks will drive up the price.

Try to interest your president in appointing a small committee of board members known for their discretion to review the deal. Stress the need for due diligence and try to get him to see that the board will be very angry if he presents it as a fait accompli.

If this approach does not work, give him a choice: either he tells the board (or a committee), or you will. He will not like an ultimatum, but as the executive director, you have a responsibility to the entire board. Being the founder and major donor may carry weight with him, but when the board is given a fait accompli to ratify, these things will not prevent the board from being angry with you as well.

By the way, do you know who owns the land? There may be something else going on beneath the surface.

Dear Nonprofit Ethicist,

An acquaintance took a job as head of IT at a foundation, where he promptly created a valuable piece of software on company time with the help of some consultants. Now he’s shopping around the product to for-profit companies, believing that he’ll figure out how to handle the details with the foundation later.

One of his ideas was to transfer ownership of the software to a nascent nonprofit he started. Then he could more easily take over the software license and sell it to the highest bidder or use it to garner an executive job somewhere.


Dear Appalled,

This is a common occurrence in universities. Your acquaintance, as the creator, and his employer, which provided necessary resources, both have a claim on the economic benefits of this product. Your friend should meet with the foundation’s CFO now and work out an agreement. After the dollars start flowing, it will be harder to negotiate.

But your acquaintance is kidding himself if he thinks transferring “ownership” to a shell nonprofit will allow him to keep all the goodies for himself.

The whole issue here is who, in fact, owns the product? If the product is successful, he can expect that the foundation will sue both him and his nonprofit. Moreover, a court might award the foundation more than he would be willing to give up through negotiation, and he would have litigation expenses on top of that.

Just for the fun of it, let’s look at his shell nonprofit scheme more closely. How does he get paid? If the nonprofit is merely a conduit for cash, he may have difficulty registering as a nonprofit and he will have a harder time getting the IRS to recognize it as tax exempt. If he clears these hurdles, he must still contend with the Intermediate Sanctions law, designed to prevent persons with substantial influence over an organization’s affairs from receiving excess benefits.

A negotiated solution is the simple and ethical solution.

Woods Bowman is a professor of public service management at DePaul University.

To write to the Ethicist with your query, send an email. Copyright 2010. All rights reserved by the Nonprofit Information Networking Association, Boston, MA. Volume 17, Issue 2. Subscribe | buy issue | reprints.