The International Journal
of Not-for-Profit Law
Volume 4, Issue 1, September 2001
By Robert O. Bothwell**
After the United Way of America/Bill Aramony scandal in 1992, and several other surrounding scandals of high media visibility, many charitable leaders in the U.S. became concerned that the public, especially donors, would lose their confidence in the good of charitable organizations. The charitable community, thus, began thinking more about what should be done in terms of self-regulation and transparency that could both prevent similar scandals and prevent unwanted and possibly over-reaching new legislation. What has happened in self-regulation and transparency since?
The author conducted a telephone survey of 51 charity leaders and state regulators over two years to seek answers to these questions. Mostly national leaders were consulted, in the fields of health, education, welfare, the arts, advocacy and services. After interviewees identified significant attempts at self-regulation and transparency, relevant documents and other research were reviewed.
Findings and Conclusions
Media attention to nonprofit sector scandals in the 1990s has increased the sector’s discussion about regulation, self-regulation and transparency. But the media spend precious little time keeping track of nonprofits, and can only be counted on to publicize the really bad. Governmental regulation wasn’t effective in preventing the high profile scandals, nor is it seen to be effective generally in ridding the sector of bad apples. Resources are a key problem. Thus, more attention in the nonprofit sector has turned to self-regulation — both to avoid future major scandals and to avoid onerous legislation.
Self-regulation through improving board governance is on the rise. Yet it is a Sisyphean task with many difficulties. Sector-wide codes of conduct, codes of ethics, standards, principles of good practice all garnered attention in the 1990s. Some drew media attention, but they had no persistence. Accreditation plans with enforcement or tangible rewards, usually with training and education of their members in good accountability practices as an essential component, appear to be on the increase, particularly within nonprofit sub-sectors or membership organizations whose members undertake similar types of activity. Independent watchdog organizations are few and far between, with a limited growth potential, but have far-reaching influence. One new one emerged, while the other established national watchdogs are undergoing rethinking of how they do business. Cause related marketing linking business corporations and charities has expanded to $5 billion a year, attracting state Attorneys General interest and new self-regulation by charities, but involved nonprofits’ recent self-regulation has muted the issue.
Disclosure or transparency has become the most popular means of self-regulation, especially through the Internet, though mostly it has been inspired by new federal government legislation that requires much easier public access to IRS forms 990 (for public charities) and 990PF (for private foundations), and allows Internet posting as an alternative to making paper copies of 990s available. Effectiveness, corruption, and use of 501c3 soft money for political campaigns were only considered as relevant issues by a very few respondents.
The 1990s were a great trial for U.S. charities: the aftermath of the 1989 conviction of Jim and Tammy Faye Bakker for illegal activities connected with their televangelism; the conviction of Bill Aramony, CEO of the United Way of America, for misuse of funds; the conviction of John Bennett, the founder/CEO of the Foundation for New Era Philanthropy, for a pyramid scam; the forced resignation of Peter Diamandoupoulos, the President of Adelphi University, for lavish spending; the forced resignation of the President of Feed the Children in Oklahoma for misuse of funds; the expose of fraudulent advertising by child sponsorship charities — the list goes on and on when recounting the charity scandals exposed by the media in the past decade. Add in the Philadelphia Inquirer’s blockbuster book, Free Ride: The Tax-Exempt Economy (Gaul & Borowski).
“Media reports leading to Congressional action have subjected public charities to an unusual and growing amount of public scrutiny and criticism over the past several years,” began The New Age of Nonprofit Accountability, published by the National Committee for Responsive Philanthropy in 1994 (Covington).
Participants at the Fall,1994 annual meeting of the Independent Sector were reported by The Chronicle of Philanthropy: “…still not recovered from recent high-profile scandals involving misuse of funds by officials of well known charities….non-profit officials had been forced to look at themselves more critically and to come to terms with increased scrutiny from regulators, the press, and donors…The discussions covered a spectrum of topics that included establishing ethics codes, avoiding conflicts of interest, and creating new ways of penalizing charities that violate the law. A number of participants said they worried that unless non-profit groups cleaned up their own house and turned out cheats and frauds, regulators and lawmakers would step in and punish all charities collectively for the transgressions of the few” (Murawski).
Two years later, a Chronicle of Philanthropy poll of “292 people who gave at least $10,000 to charity in the past year found that almost 99 per cent said that the scandals had made them ‘highly skeptical of claims made by fund raisers and non-profit executives’” (Moore).
Also in 1996, the Harvard Business Review opined, “Unless we are provided with credible, systematic information, fresh scandals will fill our daily newspapers and public trust in these critically important institutions will erode” (Herzlinger).
In 1999, Joel L. Fleishman, Duke University Professor of Law and Public Policy, wrote, “…almost invariably, the press presents a picture badly out of focus, one that is unnecessarily alarming to the public, and even worse, that frequently undermines the public’s confidence in the possibility of effective action. The result…is to create an atmosphere of hysteria which can sometimes lead to throwing out the baby with the bath. That is the single greatest threat to the (nonprofit) sector today.”
Also in 1999, Lester M. Salamon, Johns Hopkins University, sounded cause for alarm, writing, “…important questions have been raised about the effectiveness and accountability of nonprofit organizations…this (and more have) undermined public confidence in the sector and prompted questions about the basic legitimacy of the special tax and legal benefits it enjoys.”
With so many bad apples in the basket, greater government regulation of charities surely must be necessary. Yet Harvey Dale, Founder of the New York University’s National Center on Philanthropy and the Law, stated in 1993 that state charity bureaus were “inactive, ineffective, and overwhelmed” (Mehegan, Bush and Nacson).
At a Philanthropy Roundtable conference in 1995, the lawyer for the Heritage Foundation made a presentation about the diminishing capacity of the federal government’s Internal Revenue Service (IRS) to monitor and regulate private foundations, using statistics of the declining number of IRS audits of foundations in recent years to prove his point.
This situation was no better two years later. At a National Center for Philanthropy and Law conference in 1997, Peter Swords, the lawyer who then ran the Nonprofit Coordinating Committee of New York, presented statistical evidence that neither IRS nor state governments had the personnel capacity effectively to monitor and regulate nonprofits. Neither the IRS nor the representative of state government at the conference contradicted the speaker.
The same year, The Chronicle of Philanthropy reported that James J. McGovern, former IRS Assistant Commissioner for Exempt Organizations, said, “Without significant changes in the way the federal government oversees nonprofit groups, ‘I believe that a credible compliance program is in jeopardy’” (Williams, 1997).
In 1998, the Independent Sector’s Government Relations Committee launched a lobbying campaign to persuade Congress to commit more tax revenues to beef up the Exempt Organizations Division of the IRS so it could more properly fulfill its responsibilities of monitoring and regulating the nonprofit community. It was unsuccessful.
In 1999, according to Fleishman, “The present accountability-enforcing arrangements of the state and federal governments are entirely inadequate, as they currently function, to detect, deter, and punish illegal actions by a tiny number of organizations…”
Late in 2000, Rebecca Carr reported for the Cox News Service that the IRS in recent years has given only a “cursory” review of nonprofit organizations and has decreased the number of nonprofit audits. Carr continued by noting that the number of IRS staff dedicated to regulating nonprofits had decreased, while the IRS budget for this activity had not increased in a decade. Carr also reported that staff of state regulators of nonprofits were stretched thin in going after abuse.
And private colleges and universities don’t have to worry about any federal or state regulations (except for Massachusetts), according to CASE Currents, the publication of the Council for the Advancement and Support of Education (M.M.).
Without effective government regulation to provide solace, charity leaders have wrung their hands and felt tortured in their souls publicly and privately about the perverted state of charitable affairs the media has reported to the public. So, during the 1990s, more and more charity leaders talked about the need for greater self‑regulation. Also, they talked about disclosure and transparency as a means to promote better public accountability and self-regulation.
With this in mind, in 1999 the author conducted a telephone survey of 41 charity leaders and state regulators to identify what then existed as effective self‑regulation and transparency and what trends were emerging. Mostly national charity leaders were consulted, in the fields of health, education, social services, religion, arts and culture, and advocacy, also from charitable trade associations, watchdog groups and state regulatory offices. In April 2001, the author re-contacted 26 of the 41 interviewed earlier (the others were unavailable) and interviewed 10 additional charity leaders, for a total of 36 interviewed in 2001, and 51 different charity leaders interviewed over the two year period.
Interviewees were asked to identify any significant activities concerning self-regulation and transparency among nonprofits. The question was completely open-ended, and interviewees encouraged to report on activities involving other organizations than their own. After interviewees identified significant attempts at self‑regulation and transparency, relevant documents were solicited and reviewed. The complete list of those interviewed is attached.
The Media as Regulator
Interestingly, only two (4%) of the 51 people surveyed mentioned the media when asked about trends. They mentioned the Feed the Children expose by The Oklahoman, New York Times’ reporting on inappropriate or unusable corporate donated goods to Bosnia, a recent article by the Wall St. Journal on corporations sending unwanted products to charities along with items in high demand, and the Chicago Tribune’s critical coverage of child sponsorship groups.
Back in 1992, right after the huge Bill Aramony/United Way of America scandal, noted foundation executive-turned critic Waldemar Nielsen reviewed all the possibilities of how to “make sure that the nation’s charitable resources are not being misspent” and concluded that only the news media were truly available “as a protection for the public interest.”
Nevertheless, writing in The Washington Post in 1999, Geneva Overholser of the Post’s editorial page reported that “Surveys over recent years show public confidence in, and approval of American media (generally) decreasing steadily and substantially.” She quotes Paul McMasters, the Freedom Forum’s First Amendment Ombudsman, as saying, that studies discover that Americans view “the press (as) part of the problem, rather than part of the solution.” While these comments followed the media’s feeding frenzy over the President Clinton-Monica Lewinsky affair, nevertheless, they reflect the cumulative change in American public opinion about media reporting about all matters over many years.
Fleishman, focusing on the media’s reporting on charities, adds that “the press almost always neglects its…vital duty to put the ‘bad’ news it reports into the context of the ‘good’ news that forms the backdrop. It is almost always the case, too, that there is far more ‘good’ news to report than ‘bad,’ and that it takes much more effort to gather it than does the ‘bad’ news that comes in over the transom…”
Self-Regulation through Improvement of Board Governance
Analysis of many of the major scandals in the 1990s reveals that controls on heads of organizations were ineffective (because of inadequate procedures or insecurity and fear among dependent staff) and boards of directors failed to detect the wrongdoings or denied they existed (because the organizations seemed to be very effective in their missions).
A nonprofit board of directors is a “beauty” and a “beast” (Bothwell, 1994). It is a beauty because any few people can form a nonprofit for almost any purpose imaginable. It is a beast because it can act “improperly.” Take the case of the United Way of America board prior to the 1992 scandal. It had looked at the huge size of the organization (raising $3 billion a year with its affiliates) and its substantial growth over the years, credited Aramony for this, slapped him on the back and said, “Good job, ole buddy. How can we help you today?”
The board, however, was acting like a beast! It failed significantly in its oversight of the organization’s CEO. The scandal wouldn’t have happened if the board had been doing its job. But the real issue here is that such a scandal could happen anytime, anywhere, to any size charity – especially when an organization appears to be doing very well. And it happens more than the media reports.
Keeping the beast, however, is the price we pay for keeping the beauty. There is no silver bullet to slay the beast in the board. There are no ways to guarantee selection of good, conscientious people as board members, nor to keep them focused on proper board oversight matters. The beauty of the current legal framework for nonprofits – that a few people anytime, anywhere, can organize a nonprofit for almost any purpose imaginable – outweighs the horror of the beast.
Nevertheless, improvement of board governance as a means to keep scandals at bay and charities on track was mentioned by 11 (22%) of the 51 surveyed.
In 1999, Bennett Weiner, then CEO of the Better Business Bureaus’ Philanthropic Advisory Service, one of the two largest independent charitable watchdog organizations, reported that improvement of board governance was a “big trend.” Weiner cited the growth of the National Center for Nonprofit Boards (NCNB) as an example.
Judy O’Connor, president of the National Center for Nonprofit Boards (NCNB), cites recent growth statistics as demonstrating expanded interest from all parts of the nonprofit spectrum: monthly “visits” to her website grew from 80/month in 1997 to 38,000/month thus far in 2001; publication sales increased by 60% from 1995 ($880,000) to 2000 ($1.4 million). Earlier, in 1999, she reported increasing interest of nonprofit academic centers and business schools in board governance and accountability issues.
Marion Fremont-Smith, nonprofit lawyer/author, reports that the State of Massachusetts has been holding annual educational conferences for nonprofit trustees on accountability issues, with attendance “unbelievably high.” But she worries that so few in the nonprofit universe receive such education.
Nancy Axelrod, founding head of NCNB, now consulting, notes that she and others working closely with a wide variety of boards are observing five trends: (1) A greater incidence of self‑assessments by boards. (2) A greater demand for developing procedures for boards to evaluate constructively the performance of the chief executive officers (and to review compensation). (3) An increase in establishment of “Governance” or “Board Development” committees dedicated to the orientation, continuing education and assessment of the board, as well as identification and recruitment of new board members. (4) More scheduling of special sessions or board retreats to focus on strategic planning, governance reform or evaluation of programs and services. (5) Greater reliance on ad hoc committees (rather than permanent standing committees) to address strategic, emerging issues with governance implications.
According to Eric Wentworth, formerly with the Council for Advancement and Support of Education (CASE), the influential Association of Governing Boards has been working to improve selection and competence of college and university boards, but mostly this has involved large public institutions with lots of political appointees.
Self-Regulation through Codes of Conduct, Codes of Ethics, Standards of Accountability and Principles of Good Practice
Many survey respondents mentioned codes, standards and principles as tools for encouragement of self-regulation and public accountability.
On contract for the Independent Sector, the Maryland Association of Nonprofit Organizations studied 70+ nonprofit organizations’ accountability efforts, and reported in 1999 “a ‘continuum’ of accountability services and programs…(ranging) from the most basic code of ethics or organizational values statement to the most comprehensive and sophisticated credentialing program involving multiple layers of evaluation, monitoring, and improvement…
“Such statements may cover employees, board members, volunteers, and their affiliated organizations…
“Some of these codes are aspirational in nature or values based in nature…Others more specifically address conduct. Codes which focus on conduct tend to set forth specific performance standards by which the actual behavior of the organization (or individuals within the organization) may be judged.”
They cover “topic areas relating to governance and management practices, such as: mission and program, governing board, human resources, volunteers, financial accountability, legal compliance, public policy, communications, public relations, fund raising, conflicts of interest, disclosure and information technology.”
However, it is clear from survey interviews that many respondents believe codes of ethics, codes of conduct, accountability standards and principles of good practice are ineffective without enforcement. While other respondents, asked to recall some major efforts to establish new codes in the 1990s, either could not recall them, or, when prompted, commented that such codes had disappeared from sight.
The Independent Sector’s Ethics and the Nation’s Voluntary and Philanthropic Community: Obedience to the Unenforceable was a major attempt at a national code of conduct. Published in 1991 after a huge membership involvement, this code of ethics was absent from the minds of all but one of the 51 survey respondents, and he mentioned it only to say that it was a “useless” exercise.
The 1993 “Donor Bill of Rights,” which outlined the guarantees and information that the public is entitled to receive from charities, was another such effort. Developed by the National Society of Fund Raising Executive and four other national organizations, only one respondent, a co-author, mentioned the Donor Bill of Rights as on the radar screen.
“The Accountable Not-for-Profit Organization” was developed in 1995 by a group of charity leaders brought together by the Mandel Center for Nonprofit Organizations at Case Western Reserve University. Again only one of the 51 survey respondents recalled this code effort, the same co-author.
Herein lies the heart of the matter about codes, standards and principles: Can purely voluntary compliance provide effective self-regulation for the nonprofit sector? Or can compliance with rewards or non-compliance with penalties increase the possibilities for effective self-regulation?
The foregoing three attempts at national codes of conduct appear to have failed miserably. Commitment of organizational leadership beyond the drafters of the codes did not develop. There were no educational programs implemented beyond the initial take-back to members and affiliates. There were no teeth to bite those in non-compliance, nor were there tangible rewards for compliance with the codes. Today no one knows the codes exist.
Membership organizations have a penchant for codes, standards and principles. Since the early 1980s, the Council on Foundations — with over 1800 members — has had “Principles for Effective Grantmakers.” A foundation not willing to agree to the principles will either be denied membership or have its membership terminated. Since 1994, Independent Sector — with over 700 national organizations as members — has had by-laws requiring members to “be committed to the corporation’s values of openness, accountability and ethical behavior,” otherwise membership could be denied or terminated.
Clearly these codes have acted as deterrents for applicant agencies not wanting to comply (in fact, a whole new council of foundations, the Philanthropy Roundtable, was created by right-wing foundations which did not want to commit to the “Principles and Practices”). Nevertheless, there has been no public record of ever activating these codes to kick out existing members.
According to the National Council of Nonprofit Associations (NCNA), at least three of its 40 state association members have developed comprehensive codes, and several more are flirting with the idea. One of the leading and most outspoken associations, the Minnesota Council of Nonprofits, worked long and hard 1993-1998 on developing a “Principles & Practices for Nonprofit Excellence.” In the end, though, the Council made compliance purely voluntary, “Because of the diversity of the sector by size, region, and activity area, each organization must make a determination of whether or not an individual practice is appropriate for the organization in its current situation.” The Utah Nonprofits Association’s “Standards of Ethics” are also voluntary, though buttressed by a formal self-certification process.
Meanwhile, another active state association, the Maryland Association of Nonprofit Organizations, has developed a “Standards for Excellence” program which has drawn very positive reviews from several of the survey respondents. The code has a strong educational component for member organizations to learn what is expected of them. However, the program also involves accreditation (Maryland Association of Nonprofit Organizations, 1998).
Accreditation is a significant move beyond simple codes, standards or principles. The Maryland Association has a voluntary certification program which involves peer review by other member agencies. The program has recently certified its first thirteen organizations (out of 1100 members) as demonstrating their compliance. They are now eligible to utilize the program’s “Seal of Excellence” on their fund raising appeals and other literature. According to a recent public opinion poll conducted by the Association, “85% of Marylanders asserted that whether or not a charity has a seal of approval for ethical standards and accountability given by a reputable association is an important factor in making giving decisions.”
According to the Maryland Association study, “Credentialing programs are important accountability mechanisms among nonprofit organizations today, particularly in the association community. Certification, Standards, and Licensing programs have all increased in prevalence in recent years…Self assessment, peer review, site visits, and extensive review of organizational documents are common place….Ultimately, one of the critical considerations in structuring any credentialing program is enforcement” (Maryland Association of Nonprofit Organizations, 1998).
National accreditation programs have long existed for trade associations, colleges, universities, hospitals and even the fairly new health maintenance organizations, often involving both private and public entities. But national accreditation programs for other private nonprofit organizations are not so ubiquitous.
Part of the problem in creating sector-wide codes or accreditation programs is the diversity of organizations by type of activity, certainly at the national level, but, also at the state level, as illustrated by the fact that only three of the NCNA’s 40 members have actually adopted codes, and only one has a serious accreditation program.
The Evangelical Council for Financial Accountability (ECFA) is seen by several survey respondents as the epitome of an umbrella organization with a code and accreditation program that is effective. Scandals certainly were the instigation for ECFA, though not the 1990s scandals, but ones many years earlier. Threatened with legislation, the evangelicals banded together, developed effective peer regulation, and today have nearly 1000 organizations as members of ECFA, paying annual dues of $290-$8000. As Paul Nelson, the President, says, “It’s the church caring for its own.”
ECFA has a standards committee which acts as the investigative arm of the board. It includes various types of experts, some from members, others not; however, all are part of the religious culture. The committee has no power by itself, but makes recommendations to the board. The committee reviews extensive questionnaires filled out by the members and made 80 random site visits in 2000, during which members had to pass, according to Nelson, the “red face and smell test.”
Nelson believes the peer regulation works because any bad member organization “threatens the good image of all the others.” ECFA also separately investigates when complaints are made about a member’s possible non-compliance. Nelson reports that they added 66 new member organizations in 2000, but they also expelled seven members. The ECFA seal of approval thus provides donors with assurances of members’ legitimacy. This is a code with the teeth of a serious accreditation program.
Cause-Related Marketing and Government-Encouraged Self-Regulation
Six (15%) of 41surveyed in 1999 mentioned charity‑corporate relationships as a growing concern, including three independent watchdog agencies and two state regulators. By 2001, only one of 36 persons surveyed noted this as a serious issue, and he said that self-regulation and experience had laid the issue to rest.
In 1998, 16 Attorneys-General issued a preliminary report and held a public hearing about the issues surrounding the use of charities’ good names in marketing corporate products and services (Spitzer et al). The report estimates this action at $5 billion/year (corporations grant around $9 billion a year). Health charities were a prime concern. The health agencies get money and rent their logo or name, while the corporations market their products or services as identified with the health agencies. The report concludes with recommendations for how charities can maintain their good names, while engaging in cause related marketing. One might call this government encouraged self‑regulation.
According to Bob Goldberg, Vice President for Operations and Membership, National Health Council, the health agencies and Attorneys-General were close to agreement in 1999 on principles for charities’ involvement in corporate advertising — except that they differed about what should be told to the public about what they are not doing. For example, if the health agencies are not actually endorsing a product or service, the Attorneys-General want the ads to state that the charities are not making an endorsement, while the charities say the ad should say nothing if, indeed, they are making no endorsement.
By 2001 the Attorneys-General, after issuance of their preliminary report, public hearings and review of additional information, decided to stand pat and issue no final report, reports Barbara Turkheimer of the Wisconsin Attorney-General’s office. Goldberg explains that the 48 health agency-members of the National Health Council have agreed to abide by “Guiding Principles for…Corporate Relationships” and the Attorneys-General “were convinced that health charities could self-police themselves.”
The American Association of Museums is now developing guidelines for its members on corporate giving and cause related marketing, reports Ed Able, President and CEO.
Independent Watchdog Organizations
Nonprofits are evaluated by independent watchdog organizations against standards the latter conceive, then the results are published for public scrutiny. Since government is nowhere involved in this process, it is considered part of the nonprofit sector’s self-regulation scheme. There have been four sector-wide watchdog groups, only one of which was established recently:
- National Charities Information Bureau (NCIB), New York City (1918)
- Philanthropic Advisory Service of the Council of Better Business Bureaus (CBBB), Arlington, VA (circa 1974)
- National Committee for Responsive Philanthropy (NCRP), Washington, DC (1976)
- American Institute of Philanthropy (AIP), Bethesda, MD (1992).
Three of these four watchdogs have evaluated public charities’ governance and financial situations, making public reports on individual national charities, information on charity standards, facts on wise giving practices, issue alerts, and advisories on diverse subjects such as car donations and tax deductibility. The fourth watchdog group (NCRP) evaluates foundations, corporate giving programs and United Ways for their responsiveness to marginal and disenfranchised populations, and makes public reports both on sub-sectors and on individual foundations and corporations.
Major changes are happening among these watchdog organizations. First and foremost is the merger of the two oldest and largest ones. Failure to renew funding and departure of a new CEO left the NCIB vulnerable, and merger with the CBBB was proposed and accepted. The new organization, called the Better Business Bureaus Wise Giving Alliance, became operational in early 2001. Meanwhile, having created a Standards Review Panel to rethink its criteria for evaluation of nonprofits, the CBBB is now completing that process as the Alliance. The reasons for the review were:
- Increased public interest in charity accountability,
- Changes in nonprofit accounting guidelines,
- New forms of fund-raising, such as Internet-based appeals,
- Growth of cause related marketing,
- Rise of local charities in importance, and
- Rise of international charities in importance (Council of Better Business Bureaus, 1999).
Meanwhile, after 23 years of operation under a founder/CEO, a new CEO took over at NCRP in 1999. Changes in program direction are anticipated, but unclear yet.
The American Institute of Philanthropy has made some big waves in its short tenure. Deciding to publicize the charities which had huge reserves yet continued soliciting for operating money, AIP gave Father Flanagan’s Boys Home (Boys Town) a failing grade for having reserves that could fund operations for five years. The charity hauled AIP into court, saying donors would think Boys Town was corrupt. The two parties settled out of court with neither backing down, but agreeing on a clarifying statement (Dundjerski).
While supportive of the concept of independent watchdog organizations, Law and Philanthropy Professor Harvey Dale is concerned about how few charities and foundations actually are evaluated by these organizations, and about the small number of donors who avail themselves of the evaluation results.
Disclosure/Transparency as Another Means to Self-Regulation
Supreme Court Justice Louis Brandeis is credited with the mantra for transparency: “Sunshine is the best disinfectant.” (Although, according to Dale, he also wrote a celebrated treatise on “The Right to Privacy” which counters his sunshine prescription.)
The publication Trusts and Estates called this the “era of transparency” in its September, 2000 issue. Transparency, though mostly legislatively stimulated, and increasingly Internet stimulated, is on many charity leaders’ minds as a better way to self-regulation.
Disclosure has been a hallmark of leading charities and grant‑making foundations for many years. They have voluntarily been publishing annual reports, brochures, newsletters and grant guidelines to inform the public, potential and actual donors and grant‑seekers. Data usually include financial balance sheets and statements of income and expenses; lists of officers and key staff; mission statements, organizational and program goals; reviews of history and accomplishments; future plans; lists of donors; and more. Foundations usually also report lists of grants made, to whom, for how much, and for what purposes (National Committee for Responsive Philanthropy, 1980).
However, according to the Foundation Center, only 41% of large foundations with assets of $25 million or more voluntarily publish annual reports, and only 25% of the 11,000 largest foundations (assets $1 million+ or grants $100,000+) publish anything at all. These figures are lower than they were 20 years ago (Renz, 1998).
Legally required public reporting, through the IRS forms 990 (public charities) and 990PF (private foundations), can help to redress this information gap. Legally required disclosure means that key items of information must be publicly reported whether an organization wants to or not.
Federal and often state laws require filing of 990s/990PFs as public documents. These documents contain all the basic information identified above that nonprofits and foundations usually voluntarily publish, but they also include expenses by program; lobbying expenses; complete lists of directors or trustees, with any compensation, expense accounts and/or allowances; identification of the five employees and five consultants who are highest paid; analysis of income producing activities (including program service revenue, government fees and contracts, member dues and assessments); and more.
New federal laws and regulations require greater public access to 990s/990PFs. Any citizen visiting a charity’s or foundation’s office can request immediate access to the 990/990PF for the past three years and the organization’s original application for tax exempt status. Any citizen posting a written request can expect to receive these documents within 30 days for no more than nominal costs of duplicating and postage (Williams, 2000).
Public charities do not have to provide their contributor lists, private foundations do. However, private foundations only have to provide the 990PFs they file after March 13, 2000 (Williams, 2000).
A major new development is that publication of 990s/990PFs on the Internet is now a legal alternative to making paper copies available.
Some survey respondents predict that mandatory electronic filing of 990s/990PFs will be here in a few years, leading to instant public Internet access. (The Securities and Exchange Commission now requires all corporations selling to the public to file 10K forms electronically.)
According to many survey respondents, these new laws and regulations regarding 990/990PF disclosure and Internet postings are already making disclosure more popular.
The Foundation Center has been posting more and more 990PFs on the Internet to assist grant-seekers. Guidestar (Philanthropic Research, Inc.) has been putting on the Internet many charities’ 990s and foundations’ 990PFs plus selected other information from annual reports, brochures, etcetera, to permit active donor research. According to John Edie, General Counsel of the Council on Foundations, the Internet posting of 990PFs is a “non-issue” with the Council’s 1800 members.
Scanned versions of all 990s and 990PFs received by the IRS were posted on the Internet by Guidestar in 2000 in a program worked out by Guidestar, the Urban Institute’s National Center for Charitable Statistics and the IRS. “Timely, in-depth disclosure of this public information will revolutionize our understanding of charitable organizations – their structure, missions, investments, administrative costs and interactions with the government and business sectors,” says Elizabeth T. Boris, Director of the Center on Nonprofits and Philanthropy at the Urban Institute.
As of April 2001, Guidestar’s website claimed to have reports on more than 700,000 charities and foundations. Of these, 32,000 are posted voluntarily, says Guidestar President Arthur W. Buzz Schmidt, the rest from IRS files. Former President of the National Society of Fund Raising Executives, Pat Lewis, however, is concerned that churches and other organizations that do not have a 501c3 IRS tax exempt designation are not experiencing the same transparency.
Several survey respondents thought that Internet exposure might encourage charities to put up more information than the 990 requires, in order to explain or provide a context for salaries, board of directors’ fees, consultant fees, unusual expenses and other data.
Meanwhile, the Congressional Joint Committee on Taxation last year issued “a massive set of proposals that would expand substantially the disclosure requirements for tax-exempt organizations,” reports Bruce Hopkins, noted author on nonprofit tax law. “The litany of recommendations is overkill, way beyond anything that can be considered reasonable…(This set of proposals, if enacted,) threatens to stifle the nation’s 750,000 charitable organizations.” No action has yet been taken, according to Hopkins, except for a new law requiring political organizations to file with IRS information about their contributors which must be made public.
But more data/information is not a panacea for accountability, since potential donors do not have time to search through everything, nor necessarily the capacity to evaluate same, says Chuck Bell of Consumers Union. And there is little in the way of analysis, criticism or comment, adds Dan Borochoff of the American Institute of Philanthropy.
Quality reporting on 990s is an increasing issue: (1) to improve the quality of the required data and information, eliminating blanks and improperly filled out forms; and (2) to improve the user-friendliness of the 990 document. Sponsors of a Quality 990 Project are the Urban Institute’s National Center for Charitable Statistics, National Council of Nonprofit Agencies, Independent Sector and Association of Fund Raising Professionals (see <www.qual990.org>). And Peter Swords, formerly President of the Nonprofit Coordinating Council of New York and long-time student of the 990, is developing a document for the public identifying the 10 most important things one can learn from the 990 about a nonprofit organization. Meanwhile, fund raising professional Pat Lewis is concerned that many organizations are not seeing the posted 990 for what it can do for them — they still let their lawyers and accountants fill out the form as before instead of using the 990 to showcase important program and financial information.
Dan Borochoff, American Institute of Philanthropy, and Bennet Weiner, Better Business Bureaus Wise Giving Allicance, while both clear exponents of greater charitable disclosure, worry about the privacy of donors. Borochoff especially is concerned about those who contribute to controversial causes.
While some nonprofits are worried that all this increased transparency will provide easier access for troublemakers (Planned Parenthood of America, UJA Federations of North America, Alliance for Children and Family). And according to an e-mail from Independent Sector, Marcus Owens, when Director of Exempt Organizations at IRS, was “expecting the number of complaints about tax-exempts to increase dramatically now that Form 990s are widely available on the web” (Rumbaugh).
But Peter Swords has discovered that “large numbers of cases of abuse (of the charitable trust) that (IRS and state agencies) investigate and prosecute are originally brought to their attention from outside sources, particularly by stories appearing in the newspapers and other media.” Disclosure, thus, helps society deal with several issues. It helps to:
- Provide information to potential clients, members, constituents;
- Provide information to potential donors and volunteers;
- Provide basic data to media;
- Provide basic data to researchers;
- Establish norms for peer organizations;
- Provide information about NPO salaries;
- Provide information about trustees’ and directors’ fees;
- Provide information about total revenues;
- Provide information about the mix of revenues;
- Provide information about total expenses;
- Provide information about the mix of expenses;
- Provide information about fund raising costs as a percentage of revenues;
- Provide information about performance;
- Identify possible conflicts of interest;
- Identify possible corruption; and
- Identify possible illegal activity.
While much of charities’ information disclosure today stems from laws and regulations of the government, additional disclosure and action is happening voluntarily. If only government review of disclosed documents and subsequent action were involved, as already discussed in the beginning of this paper, not much regulation of charities would result because of the limited staff of government regulators. However, the increasing transparency becomes the means for effective self-regulation of the nonprofit sector because it involves many people and organizations in evaluating nonprofits, especially those who are outside the staff and board power structures, such as junior staff, board members who don’t sit on executive committees, clients, members, other constituency, peer nonprofit organizations, funders and potential donors.
What Has Not Been Discussed in This Paper
Only few people surveyed mentioned this — even though Independent Sector has a huge project designed to develop better measures of effectiveness, instigated because of perceived public concern.
Only one mention — even though all the scandals noted by the media involved corruption in some form or another.
501c3 “Soft Money” for Campaign Finance: only one mention – even though the issue has been a paramount one in Congress ever since the 1996 election.
Media attention to nonprofit sector scandals in the 1990s increased the sector’s discussion about regulation, self-regulation and transparency. Governmental regulation wasn’t effective in preventing these high profile scandals, nor is it seen to be effective generally in ridding the sector of bad apples. Resources are a key problem. Thus, more attention in the nonprofit sector has turned to self-regulation — both to avoid future major scandals and to avoid onerous legislation.
Self-regulation through improving board governance is on the rise. Yet it is a Sisyphean task with many difficulties. Sector-wide codes of conduct, codes of ethics, standards, principles of good practice all garnered attention in the 1990s. Some drew media attention, but they have had no persistence. Accreditation plans with enforcement or tangible rewards appear to be on the increase, particularly within membership organizations.
Cause-related marketing was seen as a serious problem by Attorneys-General and watchdog organizations, but involved nonprofits’ self-regulation has muted the issue. Independent watchdog organizations are few and far between, with a limited growth potential, but have far-reaching influence. Disclosure and transparency, though mostly legislatively stimulated, and increasingly Internet stimulated, are on many charity leaders’ minds as a better way to self-regulation.
Boris, E. As quoted in “Annual Financial Disclosures Filed by Charities Now Easily Accessible.” Washington, DC: Urban Institute Press Release, Oct. 18, 1999.
Bothwell, R. O. “Charity Governance, Board Oversight and Executive Compensation.” Paper presented at the Charitable Trust and Solicitations Seminar of the National Association of State Charity Officials and the National Association of Attorneys General, Savannah, GA, Nov. 1, 1994.
Carr, Rebecca. As cited in “Cox News Reports on Concern about Effectiveness of IRS, State Regulators in Exposing Nonprofit Abuse,” MacArthur Information Retrieval Project Report #74, reporting Cox News Service articles distributed Oct. 17-18, 2000.
Council on Foundations. Principles for Effective Grantmaking. Washington, DC: Council on Foundations, circa 1982.
Council of Better Business Bureaus. “Expert Panel to Update Council of Better Business Bureaus Standards for Charitable Solicitations.” Arlington, VA: Council of Better Business Bureaus Press Release, July 26, 1999.
Council of Better Business Bureaus. “Bigger and Better Charity Watchdog!” Give…But Give Wisely, Autumn, 2000, p. 1 & 8.
Covington, S. 1994. The New Age of Nonprofit Accountability. Washington, DC: National Committee for Responsive Philanthropy, 1994.
Dundjerski, M. “Watchdog Case Settled Out of Court.” The Chronicle of Philanthropy, June 13, 1996.
Fleishman, J. L. “Public Trust in Not-for-Profit Organizations and the Need for Regulatory Reform.” In C. Clotfelter & T. Ehrlich (ed.), Philanthropy and the Nonprofit Sector in a Changing America. Bloomington IN: Indiana University Press, 1999.
Gaul, G. M. & Borowski, N. A. Free Ride: The Tax Exempt Economy. Kansas City, MO: Andrews & McMeel, 1994.
Herzlinger, R. In Harvard Business Review, March-April 1996, as quoted in “‘Harvard Business Review’: Charity Accountability.” The Chronicle of Philanthropy, April 18, 1996, p.38.
Hopkins, Bruce R. “Bush Forces Should Fight Disclosure Overkill,” The Chronicle of Philanthropy, Feb. 22, 2001, pp.43-44.
Independent Sector By-Laws, Section 3.05, “All Members – Conduct.”
Independent Sector. Ethics and the Nation’s Voluntary and Philanthropic Community: Obedience to the Unenforceable. Washington, DC: Independent Sector, 1991.
Maryland Association of Nonprofit Organizations. Protecting the Trust: Public Attitudes about Charities in Maryland. Baltimore, MD: Maryland Association of Nonprofit Organizations, 2000.
Maryland Association of Nonprofit Organizations. Briefing Paper: Ethics and Accountability in the Nonprofit Sector. Report prepared for the Independent Sector Feasibility Study Taskforce on Accountability. Baltimore, MD: Maryland Association of Nonprofit Organizations, 1999.
Maryland Association of Nonprofit Organizations. Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector. Baltimore, MD: Maryland Association of Nonprofit Organizations, 1998.
Mehegan, S., Bush, B. & Nacson, S. “Charity Regulation Today: How the States See It.” NonProfit Times, March1994, p. 1-.
Minnesota Council of Nonprofits. Principles & Practices for Nonprofit Excellence. St. Paul, MN: Minnesota Council of Nonprofits, 1998, p. 2.
M.M. “The Role of Regulation: Good news for campuses: The feds, and all states but one, exempt you from the recent wave of fund-raising rules.” Case Currents, April,1995, p. 20.
Moore, J. “Wealthy Donors Worried by Series of Scandals Rocking Non-Profit World.” The Chronicle of Philanthropy, Feb. 8, 1996, p. 28.
Murawski, J. “Still Haunted by Scandals, Charities Discuss New Standards of Accountability.” Chronicle of Philanthropy, Nov. 1, 1994, p. 9.
National Committee for Responsive Philanthropy Foundations and Public Information: Sunshine or Shadow? Washington, DC: National Committee for Responsive Philanthropy, 1980.
Neilsen, W. A. “Reporters, Not Trustees, Make the Best Watchdogs.” Chronicle of Philanthropy, March 24, 1992, p. 41-42.
Overholser, G. “Proposal for the Press: Self-Restraint.” The Washington Post, August 31, 1999.
Renz, L., et al. Foundation Giving. New York City: The Foundation Center, 1998. Tables 80-81.
Rumbaugh, C. “Comments from Marcus Owens.” Washington, DC: Independent Sector e-mail, Oct. 29, 1999.
Salamon, L. M. “The Nonprofit Sector at a Crossroads: The Case of America.” Voluntas, 1999, 10 (1), 5-23.
Spitzer, E., et al (15 other Attorneys General). What’s in a Nonprofit’s Name? Public Trust, Profit and the Potential for Public Deception. A Preliminary Multistate Report on Corporate-commercial/Nonprofit Product Marketing Advertising of Commercial Products. Albany, NY: Office of New York State Attorney General, 1999.
Swords, P. “Nonprofit Accountability: The Sector’s Response to Government Regulation.” Norman A. Sugarman Memorial Lecture, Mandel Center for Nonprofit Organizations, Case Western Reserve University, Cleveland, OH, March 16, 1999.
Williams, G. “Former IRS Official Calls for Shakeup in Regulations.” The Chronicle of Philanthropy, January 23, 1997, p. 39.
Williams, G. “New IRS Rules Tell Foundations How to Comply with Public-Disclosure Law.” The Chronicle of Philanthropy, January 27, 2000.
* This paper was presented at The European Institute of Advanced Studies in Management
Workshop: The Challenges of Managing the 3rd Sector, held in Brussels in May 2001.
** Robert O. Bothwell is Founding Executive Director, former President, current President Emeritus/Senior Fellow of the National Committee for Responsive Philanthropy, Washington, DC. He has authored or published over 30 research reports concerned with private philanthropy’s responsiveness to social justice and environmental organizations. He created a national movement of “alternatives” to the United Way, which raise over $300 million annually from workplace charity drives in the U.S. He challenged foundations to reevaluate their grant making — in light of the conservative takeover of Congress/public policy — through research, publicity and educational briefings. He initiated the first public examinations of community foundations and their responsiveness to the disenfranchised, and of corporate grant making to racial/ethnic populations. He expanded disclosure of critical information by foundations and nonprofits to grant seekers and the public.
Robert O. Bothwell can be reached at:
1710 Rhode Island Ave. NW, 4th Floor
Washington, DC 20036 USA
email: email@example.com website: www.ncrp.org
Atachment: List of Those Interviewed
July 1999 – May 2001, Interviews conducted by Robert O. Bothwell:
Ed Able, President and CEO, American Association of Museums, Washington, DC, 1999/2001
Diana Aviv, Senior Associate Executive Vice Pres., Public Policy, UJA Federations of North America, Washington, DC, 1999
Nancy Axelrod, Founding President of National Center for Nonprofit Boards; currently Principal, NonProfit Leadership Services, Washington, DC,1999/2001
Chuck Bell, Director of Programs, Consumers Union, NY, 1999/2001
Peter V. Berns, Executive Director, Maryland Association of Nonprofit Organizations, Baltimore MD, 1999/2001
Harriet Bograd, Attorney/Consultant; Coordinator of Cyber-Accountability Listserv, New York, NY, 2001
Dan Borochoff, President, American Institute of Philanthropy, Bethesda, MD, 1999/2001
Diane Canova, Vice President of Advocacy, American Heart Association, Washington, DC, 1999/2001
Harvey Dale, Founder and Director, NYU National Center on Philanthropy and the Law, NYC, 1999/2001
John De Haan, Executive Director, Association of Evangelical Relief and Development Agencies, Washington, DC, 1999
Shelly Dreyling, Minnesota Council of Nonprofits, St. Paul, MN, 1999/2001
John Edie, Senior Vice President and General Counsel, Council on Foundations, Washington, DC, 1999/2001
Marion Fremont-Smith, Attorney/Author, Associate of Hauser Center for Nonprofits, Harvard University, Cambridge, MA, 2001
Rita Fuerst, Counsel, Charitable and Philanthropic Management, BBoston, 1999/2001
Janne Gallagher, Dep