Watching the Charity Watchdogs: Vignettes from the NASCO Annual Meeting

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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.

  • Frances Post

    Rick – many thanks again for such an excellent overview. I agree totally with your comments regarding non-profits taking ownership of and welcoming accountability.

  • Patrick Bell

    The comments about accountability and transparency remind me that a little-known fact of life for all organizations is that, if fraud or other financial malfeasance comes to light, it’s more commonly revealed by a whistleblower than by an independent audit. Thus, I would think that those interested in promoting accountability would do well to focus on the presence of robust whistleblower policies and practices in the organizations they are interested in rating. The same holds true for conflict of interest practices. There should be full transparency in the reporting of conflict experiences in the organization’s annual report.

  • rick cohen

    Dear Patrick: Thanks for the comment. You may well be right, but look at some of the recent articles NPQ has published on whistleblowers in the nonprofit sector (including my Newswire today on expanded whistleblower protections in the Dodd-Frank legislation Most of the whistleblower protection legislation doesn’t protect whistleblowers in the nonprofit sector. We have a lot to do to make our policies and practices more robust as you suggest.

  • Bennett Weiner


    It was good to see you at the NASCO meeting. In reading through your highlights, however, I wonder if we were attending the same meeting. I would like to correct some apparent misperceptions of our work.

    During Art Taylor’s keynote address, he stated that of the national charities that provide BBB Wise Giving Alliance with information, 62% are accredited (i.e., meet all 20 BBB Standards for Charity Accountability) and 38% fail to meet one or more of our standards. The fact that almost 4 out of every 10 national charities reviewed did not meet all of these standards is still somewhat troubling as these standards were developed with significant assistance from the charitable community. Also keep in mind that these standards are applicable to both large and small charities. A number of local Better Business Bureaus produce reports on an additional 10,000 locally soliciting charities and see similar evaluation results for charities that provide requested information.

    Regarding the Central Asia Institute (the charity headed by Greg Mortenson), you report that this charity met our standards at the time the scandal broke in 2011. This is incorrect. A BBB WGA evaluation completed in 2006 showed that Central Asia Institute did not meet some of our standards. In subsequent years, we issued a report that stated the Institute did not disclose information to BBB WGA despite repeated written requests. This was also noted in the media see the following USA Today article from April 25, 2011:

    While admittedly we don’t catch every problem circumstance, we do so more often than not. The NASCO meeting mentioned organizations (such as Help Hospitalized Veterans and the U.S. Navy Veterans Association) that did not meet BBB charity standards and were subsequently the subject of government actions.

    But most importantly, Art’s keynote address announced BBB WGA’s intention to expand its review of charity appeals during 2013 to help verify that they are accurate and not misleading. Currently, as part of our evaluation, we only request sample appeals when needed. Next year, selected organizations will be asked to share copies of all of their direct mail and telemarketing scripts. None of the other charity monitors have evaluative standards that address appeal accuracy. For most donors, the appeals are the only contact they will have with the charity and serve a very significant role in public fundraising and communications. That is why we are intend to focus on them.

    Finally, the Charting Impact project was a collaborative project that involved Independent Sector, GuideStar and BBB Wise Giving Alliance. During my panel presentation I explained that BBB WGA’s intention is not to “rate” the impact information provided by charities but to educate donors about this issue. Charting Impact enables charity participants to answer each of the five questions with up to 3,000 characters, not the 600 noted in your article. In turn, we do not see this type of information as replacing the need for accountability standards but supplementing the available information. If the sector adopts a common vehicle for sharing information about their goals and accomplishments, it will reduce the need for duplicative efforts that seek to gather the same data and also provide a vehicle to help sector recognize what’s working.

    Bennett Weiner, Chief Operating Officer
    BBB Wise Giving Alliance
    Arlington, VA

  • rick cohen

    Dear Bennett: Thanks for your note. I’m pretty sure I was at the same meeting as you. Let me explain: I was pointing out that contrary to the statement that the statement that the sector is riddled with clueless nonprofits or thieves, more than half of the groups you’ve evaluated met all of the standards, and only 38 percent failed to meet one or more. While you see the problems of 4 out of 10 failing to meet one or more of the standards, I thought it was critically important to convey to the charity regulators that the nonprofit sector is not riddled with unaccountable organizations. I can assure you that some of the people near me got that sense from some of the charity rater presentations, and I can’t imagine that that is what Art Taylor would want to convey. In fact, despite the occasional Chris Mortenson and “Bobby Thompson”, I’d stack the nonprofit sector up against any other sector for nonprofit managers who actively try to do the right thing. It’s inaccurate in my mind to convey anything to the contrary.

    No one said that you, Charity Navigator, or Charity Watch is supposed to catch every malefactor, but I give Charity Watch (American Intstitute of Philanthropy) credit for clearly laying out Mortenson and the Central Asia Institute in a way that I think no one else really did. It’s good that BBBWGA found that CAI didn’t meet some of its standards. But CAI like USNVA merited good solid investigative reporting like the fabulous work of the Tampa Bay Times on the USNVA and “Bobby Thompson.”

    I did mention the new BBB WGA effort to look at charity appeals. Maybe I didn’t the prominence you think it deserves (I actually circulated your press release to see if someone wanted to do a newswire on it).

    Re the Charting Impact program, I described it as something different than the typical rating process, a deviation, an alternative, something more. Sorry about the error re 600 characters versus 3,000. That was a typo. You and I both know that many people want impact statements and impact data. And I worry about self-reported impact analyses. I have cited the Charting Impact questions in other writings positively as useful frameworks for donors to use to ask about charities.

    So apologies for the 600 versus 3,000 characters error. But please, my major concern was that people were hearing a message that the nonprofit sector is rife with unaccountable (or worse) groups. While I write a lot about the malefactors in the nonprofit sector, I’d stack the nonprofit sector up against any other sector for accountability and for the good intentions of nonprofit managers.

    Thanks again for your corrections, Bennett, and it was great to see you at the same meeting I attended.