Regardless of which candidate wins on November 6th and no matter what Congress and the President decide to do or not do regarding sequestration, the unresolved question of how to bolster nonprofit accountability through sector self-regulation and governmental oversight will persist. Neither party has a bead on the issue. In fact, neither party nor their bevy of candidates for office seems to have anything to utter on the topic.
Whatever conversation there is on this topic occurs in meetings of the state charity officers located in attorney generals offices. These are the government officials for whom charity accountability is their bread and butter. The one-day public session of the National Association of State Charity Officials (NASCO) on October 1st didn’t include much commentary from the state charity officials themselves, who were relatively close-mouthed about their work (for fear of getting into specifics about ongoing investigations). But the various presentations and Q&As revealed much about the current debates in nonprofit accountability—and some issues that should be debated thoroughly in the sector. What follows is a series of vignettes documenting what we heard at the NASCO gathering.
Measuring Impact: Qualitative Process, Quantitative Challenge
All the charity watchdogs that publish ratings and evaluations of nonprofits based on analyses of their reports were at the NASCO meeting. Art Taylor and Bennett Weiner from the Better Business Bureau Wise Giving Alliance (BBBWGA) and Ken Berger from Charity Navigator gave presentations, and Dan Borochoff from Charity Watch (formerly the American Institute of Philanthropy) was in the audience. A film crew was also in attendance. So what are these watchdogs doing and saying to the state officials and to the public?
Sometimes, when you make a speech, your text wittingly or unwittingly plays to the audience. Whether intentionally or not, both Taylor and Berger contributed to the unfortunate image of a nonprofit sector that is rife with accountability problems—except for the mostly larger nonprofits that tend to be the subjects of their evaluations (a large proportion of the 1,469 charities rated by the BBBWGA meet their standards and Berger said that the majority of the 6,000 or so groups they rate, accounting for more than half of all charitable giving, get good marks for their financial health , accountability, and transparency). The NASCO group asked some questions from the floor concerning charity raters giving high ratings to groups who later proved to be ethically deficient at best. However, no one mentioned the most obvious example: the high rating given to Greg Mortenson’s Central Asia Institute by both the BBBWGA and Charity Navigator (though not by Charity Watch) when subsequent investigations would reveal serious problems of accountability. Taylor also announced a new BBBWGA push to examine charities’ fundraising materials for accuracy.
For all their focus on ratings based on independent reviews of their financials and other documents, the big move is toward looking at the impacts and outcomes of charities. If you think it’s hard to make judgments about nonprofits based on their financials and other “standardized” documents, try looking at the impacts of a million organizations, many of which work on problems that defy precise solutions and easy, quantitative measurement counts. BBBWGA and Charity Navigator are participants in and proponents of the Charting Impact effort, which asks charities to answer five questions on their approach to monitoring and measuring their impacts and publishes the answers online. The program, two years in the making in collaboration with Independent Sector, is a deviation from the typical charity rating process in that the participating charities generate their own answers (limited to 600 characters for each question). The presumption is that self-reporting in response to a series of strategic questions will lead charities to forthright responses.
It’s a gamble. Less than 200 charities have completed these forms. Berger says the participating charities have found the process itself to be beneficial, and undoubtedly that’s true. But will self-reporting on impacts be any more reliable than the unfortunately inconsistent reporting of fundraising costs on charities’ 990s? Or will the focus on measurement and outcomes lead donors away from supporting organizations—and charities away from undertaking work—focused on problems that are resistant to solutions and unlikely to lend themselves to easy translation into compelling metrics?
Parents and Affiliates: Scaling up without Accountability?
Two millennia ago, Epictetus said, “Reason is not measured by size or height, but by principle.” But that doesn’t seem to be the way that charity raters—and charity monitors—are going. A troubling trope through the discussion was the equation that the larger charities—typically those of the scale and wherewithal to be rated by BBB and Navigator—tend to be appreciably more accountable than small charities. Presenter Michael Peregrine of McDermott Will & Emery, in fact, lauded the scaling up of charities through mergers and strategic alliances as a positive step toward efficiency and effectiveness, particularly praising large national federations.
But he suggested that the problems encountered by the smaller, local affiliates of federations are really the responsibility of those local operations and shouldn’t have to be explained away by the national parents. In other words, what fiduciary duty does a national federation have to its local affiliates or constituents? In the wave of mergers that Peregrine cited, the issue of parent responsibility for the affiliates arises as well. His argument is that the affiliates often don’t know how to do the right thing and, if the parent asserts fiduciary responsibility, it will get it—and the litigation that also ensues.
So what does scaling up and participating in a version of a federated structure mean? Does it mean that a local affiliate gets to use the parent’s licensed name, but that when it encounters trouble, it’s cut loose on its own? Sorry, but that doesn’t cut it. If the national—both governmental and philanthropic—juggernaut for scaling up doesn’t include increased accountability in that process, then something is wrong. If scaling up means more adaptation and integration of program models but no greater integration of mutual accountability between the local affiliates and the national body, that’s silly. Have we entered a realm of nonprofit growth where we grow with national nonprofit parents providing greater program and financial support, but no greater—or even lesser—backup on issues of accountability? In order to avoid litigation? For all of us non-lawyers in this sector, that is truly objectionable.
Boards’ Sergeant Schultz Excuse Is Wearing Thin
At NPQ, we’ve seen and written a lot about nonprofit boards and debated how much a volunteer board is responsible for the behavior of staff. Peregrine discussed the issue of a board’s blindness to risk. In light of the Penn State University crisis surrounding the conviction of former Nittany Lion defensive coach Jerry Sandusky, Peregrine said that the relevant questions are what did the board know, when did the board members know it, how did they find out, and what did they do about it. How many boards do we know that pass the buck and claim that they were out of the loop? Board members who take the Sergeant Schultz defense—“I see nothing, NOTHING!”—may find that line of argument pathetically indefensible as the explanation for a board’s failure to act.
Very few boards are ever going to face a situation like the one that Sandusky presented to Penn State and Second Mile. But watch your next board meeting and monitor the reactions of board members who are engaged on all topics and those who mentally check out when the issue under discussion isn’t their thing. It won’t wash. The invention of directors and officers liability insurance shouldn’t be seen by board members as a “get out of jail free” (or get out of responsibility free) card, allowing them to pay attention to their particular stake in the nonprofit and to go brain dead without consequences for the rest of the organization’s agenda.
Peregrine and others noted the increasing propensity of people joining boards for their own business purposes, and he was quite strong on the increasingly cavalier attitude of nonprofits toward conflicts of interest regarding board members’ business relationships with their nonprofit organizations. There is little national propensity toward clamping down on the nation’s increasingly conflict-ridden board dynamics. If that’s the way it is, can we at least get board members to take responsibility for their actions or inactions in the governance of their organizations?
It’s Alive! Sarbanes-Oxley Is Alive!
Peregrine also discussed Sarbanes-Oxley, the corporate and accounting accountability law created from the ashes of Enron and Arthur Anderson and marking its 10th anniversary this year. Over the years, for inexplicable reasons, it has been trashed by corporate liberals and free market conservatives as a costly, burdensome set of requirements placed on a struggling corporate sector. Even though only the tiniest of provisions applied to nonprofits, nonprofits have largely attacked Sarbanes-Oxley, apparently out of the fear that some of its other provisions might migrate to the nonprofit sector.
Although conflict of interest is still a large problem, Sarbanes-Oxley has put organizational accountability and board accountability on the public agenda. It is a little hard to imagine how corporations could be complaining about being overregulated while taking in lucrative—sometimes record—profits at this point in the recession, but they have been. On what basis? And why do nonprofits shy away from taking on corporate accountability when the failures of corporate governance during the run-up to the economic freefall in 2008 and 2009 can be ascribed partly to the uncontrolled profiteering of corporate boards and CEOs and partly to the failure of governmental regulations to keep up with the complexities of financial transactions (and the failure of government regulators to enforce regulations already on the books)? Unlike the Enron era, the difference is that since the start of the recession, there hasn’t been much evidence that the Department of Justice is interested in putting corporate felons behind the defendant’s table.
What Sarbanes-Oxley holds for the nonprofit sector is not a wave of regulations on charities, but an awareness that nonprofit boards and managers should be looking at corporate boards and managers—and their governmental counterparts—for lessons about what to pursue as best practices and what to avoid as problems. Listening to Peregrine, it seems useful to follow his lead and look at the example of MF Global, which was brought to collapse by former New Jersey Gov. Jon Corzine, to see what it means to have a board basically roll over and play dead for a powerful CEO—an all-too-obvious parallel to Susan G. Komen for the Cure. We should all be thankful that Sarbanes-Oxley put the issue of corporate governance on the table, but as nonprofits, we should be looking not at the imaginary prospect of burdensome regulations, but at the examples of bad and better practices emerging from other sectors that have some relevance for 501(c)s.
Who’s Driving Hybrid Regulations?
In King John, Shakespeare wrote that a male character was half part of a blessed man, left to be finished by his spouse, and that the same was true for the woman in the relationship. In the nonprofit sector, this sense of nonprofit and for-profit incompleteness has led to the creation of hybrid organizations—B corporations, low-profit limited liability corporations (L3Cs), and others. Their hybridization is that they are born of the corporate sector but are drawing on some of the elements, motivation, and credibility of nonprofits. Or, if you prefer, they are like nonprofits somehow “finished” by the inclusion of corporate bottom line thinking, motivations, and payoffs.
In an excellent, thorough, and low-key presentation by Victoria Bjorklund of Simpson Thacher & Bartlett and Robert Keatinge from Holland & Hart on the regulatory challenges posed by hybrids, there were lots of takeaways. One big one is that the protection to corporate directors afforded by the B Corporation status is illusory, in part because plenty of corporations that aren’t B Corporations, from Walmart to Coca-Cola, do socially responsible things that are not necessarily the most profit-maximizing activities they might pursue, but shareholders get that it’s good for the corporation and good for society and don’t hoist the corporate directors up by their petards. So when Walmart takes to selling fruit at cost to encourage good nutrition, you don’t see Walmart’s board members quaking about the prospect of shareholder actions and looking for the protection of a certification from the B-lab.
Another big takeaway about B Corporations and L3Cs, given the just about nonexistent number of program related investments (PRIs) that have been awarded to L3Cs despite that being the primary reason for some to organize, is that these hybrids have become exercises in branding as much as anything else, though branding with the imprimatur of the state. In fact, Keatinge cited the B Corporation provision in Colorado’s statute that notes that there is nothing in the statute that a B corporation is allowed to do that any other corporation would be prohibited from doing even if they don’t register as a B corporation.
A third takeaway concerned the transparency of hybrids adopting charitable or social-good nomenclature without the 501(c) status. As the speakers pointed out, they don’t file 990s and there isn’t a lot of transparency in their public filings in any case, although most are new, so who really knows that kind of transparency there ought to be? Moreover, like charities, L3Cs, for example, may be seeking “contributions” for their social missions which might be covered by the Charitable Solicitations Act, but is anyone really paying attention or regulating the charitable solicitations of these somewhat non-charitable entities?
Cleaning House: Charity Officials and the Press
The IRS is barely funded for the charity oversight tasks at hand, and most of the state charity officials operate on very limited budgets. Who is supplementing their ability to provide a useful eye in rooting out wrongdoers whose behavior harms the credibility of innocent nonprofits that play by the rules? The representative of the AG’s office in Ohio took the platform to honor the chief of the investigative unit of the Tampa Bay Times, whose remarkable investigation of a man calling himself Bobby Thompson at the helm of a nonprofit called the U.S. Navy Veterans Association has yielded charges that both the man and the organization are top-to-bottom frauds. You can read all about this fascinating case in the NPQ Newswire here, but for now, the point is that it wasn’t the IRS or the AGs that tracked this guy down. It was Jon Testerman’s team at the Tampa Bay Times.
This should serve as a reminder that the entity that is closest to real time monitoring and reporting on nonprofit accountability is the press. For the nonprofit sector, the message ought to be clear. Oversight from the press and state charity officers aims to clean out the players at the bottom of the barrel who harm the public’s trust in nonprofits, but if you’re on the up and up, as the vast majority of nonprofits are, then that oversight should be welcome.