The International Journal
of Not-for-Profit Law
Volume 10, Issue 2, April 2008
In every field of human endeavor, he that is first must perpetually live in the white light of publicity.
–Cadillac advertisement, 19152
This new era also demands from public (as well as private) organizations increased fiscal accountability. We must use our resources efficiently and intelligently both to husband them and to underscore our credibility to those who provide them – the government and our donors.
–Michael Heyman, former Secretary of the Smithsonian Institution, 20073
It is a bizarre achievement to show great skill in avoiding obstacles of one’s own creation.
–Oxford University Faculty Report, 19664
Although it seems like just a few days ago, it has now been a quarter century since I first taught “Business and Public Issues” in a large state university. After the class discussed a case involving a difficult ethical dilemma, an undergraduate accounting student came to see me.
“Where is the solution manual?” she asked.
She had solution manuals for her accounting courses. She figured that this class must have one too.
Imagine how much better the nonprofit world might be with a solution manual for ethical dilemmas. No more gray areas, no more judgment calls, just a handy checklist that managers and others could use whenever problems arise.
“Build a Better Life by Stealing Office Supplies”
Cartoonist Scott Adams has made a fortune by drawing Dilbert, a hapless engineer in a dysfunctional corporation. One of my favorite compilations of Dilbert cartoons is called Build a Better Life by Stealing Office Supplies. (My other favorite: Always Postpone Meetings with Time-Wasting Morons, good advice for all.) One interpretation of “stealing office supplies” is that certain ethical transgressions are virtually universal.
Nonetheless, David Shulman contends that nonprofit employees “report observing more deceptive behaviors than their counterparts at for-profits did.” His study “explores nonprofit deceptions and identifies the inducements and organizational contexts that may explain the relative prevalence of lying in nonprofit organizations.” He proposes several possible explainations, including the following:
- Limited career mobility.
- Pressure to accumulate financial resources.
- Less bureaucracy with more discretionary authority.5
However, a quick look at some articles published in the Journal of Business Ethics over the last twenty years suggests that nonprofits are not necessarily unique:
- Business people’s perceptions of unethical practices have changed over time.
- Hindrances to change include financial and technological barriers as well as inadequate knowledge and resources.
- Altruism still matters.6
Of course, even a solution manual would not necessarily guarantee ethical behavior, as illustrated by the dozens of unopened Enron ethics booklets that were reported to be big sellers on eBay. Enron’s collapse is a stark reminder that organizations and leaders may come and go, but the need for ethical principles is timeless.7
Duct Tape, Paint Brushes, and Mother Teresa with an MBA
The special role of nonprofits may create unrealistic expectations that ultimately burden these organizations. Consider a nonprofit board meeting I once attended. This organization purchased a marginally acceptable office building because of the location and the price. In their haste to close the deal, however, the board neglected to budget for maintenance. Normal wear and tear soon led to peeling paint on the walls and duct tape on the carpet. Board members realized that something had to be done. After various expensive ideas were considered at the meeting, the board treasurer (the chief financial officer of a major corporation) suggested that the staff be called in on a Saturday, handed paint brushes, and given assignments.
The paint-brush proposal exemplifies what I call the “Mother Teresa with an MBA Syndrome”: the widespread belief that nonprofits must be extremely well-run but cost as little as possible to operate, irrespective of the nature of the work and the credentials of those who perform it. In the white light of publicity, this syndrome can contribute to problems of credibility and trust.
Credibility and Trust
Nonprofit organizations are legal constructs personified by those who lead them, so individual credibility is crucial to organizational credibility. The credibility of nonprofit leaders is complicated by the often intangible or even invisible nature of the work. Leaders of slow- or no-feedback organizations may be hard-pressed to evaluate programs. Some programs operate with a lengthy time horizon: for example, a child support program that begins with prenatal care for the mother and continues through high school graduation. Other programs must be evaluated based on whether something did not happen: for example, programs to prevent homelessness, substance abuse, and domestic violence.
Significant ethical lapses usually can be traced back to the governing board. The standard litany of nonprofit board responsibilities includes the duties of care, loyalty, and obedience. It could be argued, however, that no duty may be more important than what corporate governance expert Nell Minow has referred to as the “duty of curiosity.”8 Indeed, according to a major governance study, “Behind every scandal or organizational collapse is a board (often one with distinguished members) asleep at the switch.”9
The cases that follow are both prime examples and cautionary tales. The saga begins with some 65 years of complaints about coffee and doughnuts.
American Red Cross
In 1942, Secretary of War Henry Stimson ordered the Red Cross to charge American soldiers in Europe five cents for coffee and donuts, because soldiers of other Allied nations had to pay and Stimson wanted to maintain morale amongst the Allies. The anger and resentment continues to this day, with veterans and their families calling for boycotts of the Red Cross, especially during United Way campaigns. The protests prompted the Red Cross to issue an official apology on Veterans Day 2007.10 Americans have forgiven Germany and Japan for World War II, but still hold a grudge against the Red Cross.
The coffee-and-doughnuts furor is not the only reason for the Red Cross’s compromised organizational immune system. It also has suffered from adverse publicity regarding its management of blood banks. A larger and partly related problem has been discontinuity at the top: over the last two decades, the American Red Cross has had a dozen or so leaders, either “permanent” or interim.
Fast forward to 2001 and beyond. While complaints about the CEO’s decisions and style surfaced after September 11, the ultimate responsibility belonged to the board:
- The congressionally chartered board had 50 members: seven government officials, twelve corporate/business/academic leaders, and 30 from local chapters.
- “We hired a change agent for a culture resistant to change.”
- The board had a history of overstepping its role and authority.
- The board misled the new CEO regarding Food and Drug Administration concerns about the blood centers
After giving mixed signals, the board finally dismissed the CEO, prompting her to reply: “Maybe you wanted more of a Mary Poppins and less of a Jack Welch.” The board has gone through about a half-dozen leaders since 2001.11
J. Paul Getty Trust
The legacy of a wealthy oilman, the J. Paul Getty Trust “is a charitable trust, governed by a board of trustees, which operates a public art museum and several other programs, including an art conservation institute, the Getty Research institute and a grant program.”12 Already hobbled by accusations of questionable antiquities acquisitions, the Trust found itself on the front page of The Los Angeles Times. An investigation by the newspaper led to an inquiry by the California Attorney General, which found such improper activities and board deficiencies as the following:
- Use of charitable funds to buy artwork for retiring trustees.
- Use of charitable resources for the CEO’s private benefit, when he assigned Trust employees to run his personal errands.
- Improper expenditures in paying consulting fees to a graduate art student.
The California Attorney General appointed an independent monitor to review the Trust’s reforms.
A local example serves as a reminder that every community should look carefully at its own organizations. Readers of The Seattle Times awoke on November 26, 2007, to the headline “Just 1% of Seattle Marathon money goes to charity.”13 More such headlines followed.
The organization’s annual event brought in more than $1 million, but its charity partner received just $12,000. During nearly 40 years of operation, there had never been an audit. After weeks of relentlessly adverse publicity, the board finally ordered an audit.
The Smithsonian is an iconic and unique American nonprofit. Though quasi-governmental, it serves as a role model for nonprofits, particularly those active in the arts and culture.
Revelations about dubious management practices of the Secretary (CEO) provoked a public outcry. The Board of Regents named an Independent Review Committee (IRC) to review management practices and make recommendations.
To its credit, the IRC reported that Board actions or inactions are key to understanding the need for reform. Indeed, the most significant finding was the clear imperative to “correct the underlying deficiencies in its organizational structure, decision making and financial controls that allowed inappropriate management conduct to go undetected.” The IRC report found “failures of governance and management” to be the “root cause” of these problems: among other things, an “antiquated” governance system, insufficient oversight of management, and “failure to engage in the active inquiry of [the CEO] and Smithsonian management that would have alerted the Board to problems.”
Put another way, the Board needed to exercise its “duty of curiosity.” If it had, the following problems could have been addressed more quickly and effectively:
- Excessive executive compensation.
- Inadequate monitoring of expense accounts.
- Inadequate internal financial controls and audit activities.
A more diligent board might or might not have addressed other, more subjective questions:
- Was the CEO’s disposition truly “ill-suited for the position of Secretary?”
- Did the board have enough information to fully understand the impact of declining private grants, contributions, and business revenue?
- Was Smithsonian Business Ventures germane to the organization’s mission?
The IRC concluded with a dozen recommendations, several of which could serve every nonprofit board as a template for due diligence:
- Executive expenses should be audited.
- Executive compensation should be competitive and transparent.
- The board should be active in governing, with a chair who can provide time and proper oversight.
- The board should be reorganized to allow the appointment of Regents with needed expertise.
- Internal financial controls and audit functions should be strengthened.
- Executives should seek approval of the Regents before serving on the boards of other nonprofit organizations.
The 108-page report concludes with a word-to-the-wise warning: ”Failure to take voluntary action [to reform governance structures] will likely lead, ultimately, to action by Congress, state legislatures, and the courts, to impose reforms from without, just as it did in the case of the corporate world.”14
A translation of an ancient proverb admonishes that “where there is no vision, the people perish.” Subsequent renderings suggest in similar fashion that “without inspired guidance, a people falls into anarchy,” and “where there is no prophecy, the people cast off restraint.” Vision, guidance, prophecy—all must come from above.
Staff members of a given nonprofit organization may or may not disproportionately take office supplies and commit other forms of deception. But much larger problems come from board members who fail to understand the organization’s role and their own role within it.
Board members must discover and address problems, or else face the potential penalty of scandal. Diligent leadership is essential. There are no shortcuts and, unfortunately, no solution manuals.
Yet it is important to remember that the penalty of nonprofit leadership, while quite real, is only one side of the coin. The other side represents the privilege of nonprofit leadership, namely helping to shape the future of the community for all.
1 Michael Bisesi is Professor and Director of the Center for Nonprofit and Social Enterprise Management at Seattle University. He also has held executive positions with a foundation and with a large nonprofit organization.
2 Cadillac advertisement titled “The Penalty of Leadership,” Saturday Evening Post, January 2, 1915.
3 Bowsher, C.A. et al., “A Report to the Board of Regents of the Smithsonian Institution,” June 18, 2007.
4 Oxford University, Faculty Report on the Future of the University (1966).
5 Shulman, D., “More Lies than Meet the Eyes: Organizational Realities in Nonprofit Organizations,” International Journal of Not-for-Profit Law, April 2008.
6 Zinkhan, G.M., et al., “MBAs’ Changing Attitudes Toward Marketing Dilemmas: 1981-1987,” Journal of Business Ethics 8:963-974 (1989); Fukukawa, K., et al., “Mapping the Interface Between Corporate Identity, Ethics, and Corporate Social Responsibility,” Journal of Business Ethics 76:1-5 (2007); Fritzsche, D.J., et al., “Personal Values’ Influence on the Ethical Dimension of Decision Making,” Journal of Business Ethics 75:335-343 (2007).
7 In the interest of full disclosure, readers should be aware of some “baggage” I bring to this assignment, although enough time has passed that I believe it is “checked” rather than “carry-on.”
During most of the 1990s, I was Senior Vice President of the United Way of the Texas Gulf Coast ( Houston). In 1992, William Aramony, who had served as President of the United Way of America since 1970, was found to have used organizational resources for personal gain. A firestorm erupted in the nonprofit sector concerning executive compensation and other management practices. I learned a lot about crisis management.
I also had direct experience with Enron during the period, including many meetings in the executive offices on the 50th floor of the Enron building. The convicted (and now deceased) chairman, Ken Lay, chaired the United Way’s 75th anniversary campaign in 1997. At the end of that decade, I was Managing Director of Program Services at the Greater Houston Community Foundation. The board included Enron CEO Jeff Skilling, who in 2006 was convicted and sentenced to 24 years in prison.
By the time Enron imploded in late 2001, I had relocated some 2,000 miles away to Seattle, but the sting of deception and betrayal was no less painful. Friends and former neighbors lost jobs and pensions, nonprofits lost financial support (e.g., $5 million of the Houston United Way’s $75 million came from Enron), and even the Houston Astros had to change the name of their new stadium from Enron Field to Minute Maid Park.
8 Quoted in “Commentary: Lessons of the ‘Hollinger Chronicles,’” Business Week, September 13, 2004.
9 Chait, R., et al., Governance as Leadership: Reframing the Work of Nonprofit Boards ( New York: Wiley. 2005).
10 “Red Cross Apologizes for Charging for Coffee, Doughnuts,”.
11 Sontag, D., “Who Brought Bernadine Healy Down?” The New York Times Magazine, December 23, 2001; Strom, Stephanie, “Firing Stirs New Debate over Red Cross,” The New York Times, November 29, 2007.
12 Lockyer, B., “Report on the Office of the Attorney General’s Investigation of the J. Paul Getty Trust,” October 2, 2006.
13 Perry, N., “Just 1% of Marathon money goes to charity,” The Seattle Times, November 26, 2007.
14 Bowsher, C.A. et al., “A Report to the Board of Regents of the Smithsonian Institution,” June 18, 2007.