You can hardly turn around in the nonprofit world these days without tripping over yet another pronouncement on how to achieve greater accountability in the sector. Besides the hearings in the Senate and House, the attorneys general in at least 20 states are now moving to impose new regulatory regimes modeled after Sarbanes-Oxley. Practitioner organizations like the Council on Foundations, Independent Sector, National Committee for Responsive Philanthropy, and others have also put forth a blizzard of papers about various legislative and “selfregulation” proposals.
Unfortunately, neither new legislation, nor accreditation and training initiatives or exhortations to adopt “best practices,” will prevent fraud or mismanagement, at least not without a credible threat of enforcement. Further, though nonprofits could seemingly drown in the flood of accountability initiatives, there is virtually no support for nonprofit leaders in dealing with actual ethical crises. The following are a few suggestions for private initiatives that might make a difference.
Punish the Bad, Enable the Good
Despite decades of promoting better governance of nonprofits and periodic changes in the law, the same ethical problem areas persist: (1) those organizations (or bad actors within them) that intend, purposely, to commit deception, and (2) those nonprofit organizations that want to be better governed but do not have the ability to develop the necessary systems and skills.
All of the laws under discussion, and other calls for reform, suffer from two critical flaws: (1) they offer no realistic prospect of increased resources for enforcement, and (2) they offer neither positive incentives for prioritizing improvements, nor resources to enable organizations to actually improve their governance and financial management management systems.
California’s Nonprofit Integrity Act, for example, significantly increased the volume of reporting to the Attorney General’s Registrar of Charitable Trusts section, comprising approximately 12 attorneys who try to oversee more than 25,000 nonprofits in the state, yet it made no provision to increase or even maintain this level of staffing. At the national level, the IRS is straining to move more resources into enforcement without substantially increased funding. In addition to lacking “sticks,” the absence of “carrots” for improving oversight systems is a particularly glaring fault. Regulatory efforts almost always add burdens where many smaller- and moderate-budget nonprofits are weakest – in their infrastructure, their internal systems, and staff capabilities. These kinds of “overhead” or indirect cost areas are precisely the ones that government and private funders do not want to support. It might help if government funders, for one example, offered either bonus points on competitive bids or even bonus awards in contract funds for demonstrated or planned improvements in oversight.
No “Good Governance Cookbook”
Neither enforced nor self-imposed “best practices” are certain to actually improve nonprofit governance. As Jeffrey Sonnenfeld at the Yale School of Management has pointed out, recommended “best practices” rise and fall in favor over time, and their presence or absence does not determine whether an organization is well governed. Well-governed and poorly run organizations alike have followed such recommended practices. As Sonnenfeld observed,1 Enron had an audit, had board members with impeccable business and finance credentials, had only two “inside” directors on its board, and had separate committees for audit and compensation (as virtually all publicly held companies do and have for some time). By contrast, nearly half the board members of such admired companies as Microsoft and Home Depot in recent years have been inside directors.
The lesson is clear: The quality of board governance ultimately depends on how well the members of the board act as a unit; formal prescriptions of governance practices, such as what particular committees a board must have and what reports they must receive, are blunt instruments, at best. The same is true of accreditation and training programs. Accreditation works best in situations where there are fairly well settled and observable measures of quality, and importantly, where losing it will have serious negative impacts on organizations (think hospitals and schools) or individuals (attorneys, doctors).
There is no one right way to manage an organization, however, and similarly, there is no agreed-upon set of desirable, verifiable skills for nonprofit managers. Even assuming we could develop accepted standards of practice, accreditation is time-consuming and expensive. And, while it can raise standards and reduce malpractice in a profession, it is not necessarily effective in preventing fraud or poor management. Training is helpful, but as the history of response to sexual harassment shows, it’s the threat of litigation that really moves companies to put efforts into compliance – that is, to really commit to changing their systems and to enforcing discipline
In any event, by the time a nonprofit is confronted with alleged malfeasance or unethical behavior, it is too late for accreditation or training to help.
Early Diagnosis, Better Prospects of Cure
While we can’t control whether better enforcement will be forthcoming, if nonprofits and donors work together, we may be able to do some useful things that will help nonprofit leaders in sticky situations and perhaps also be more effective at addressing public concerns. Rather than putting so much energy into yet more standards and training, perhaps we should dedicate more resources to help nonprofit leaders deal with actual ethical challenges. We also need to have some ways of clearly punishing bad behavior, and recognizing or rewarding good behavior.
One approach may be to create a viable compliance hotline and investigative service for small- and moderate-budget nonprofits.
Compliance experts often note that in most problem cases someone within an organization is aware of the problem. Sarbanes-Oxley’s whistle-blower protections already apply to nonprofit organizations. Unfortunately, insiders are likely to rationally conclude that it is not worth the risk to raise the alarm, unless they are offered a reliable promise of anonymity, and perhaps more important, the added force an organization may feel when it knows that the outside party will require follow-up information about actions taken so that the anonymous source can check on the response.
Fortune 500 companies and very large nonprofits (such as hospitals, universities, and, increasingly, foundations) commonly engage the services of outside firms to help them develop governance and compliance policies and procedures for encouraging anonymous reports of potential malfeasance or inappropriate activity. Such companies also dedicate senior staff resources to implementing policies and investigating allegations.
Perhaps donors and nonprofit leaders could create an independent compliance system to serve small- and moderate- budget nonprofits, since they obviously could not afford this on their own. The point of creating an independent system, overseen by a coalition or commission of nonprofit leaders, and finance, legal, and ethical experts would be twofold: (1) to enable nonprofits to get earlier notice and an opportunity to cure unethical, fraudulent, or other inappropriate conduct, and also (2) to offer employees and stakeholders real avenues for pushing for investigation.
Another complementary approach may be to establish a private commission of nonprofit leaders and legal, financial, and ethical experts, whether national or local in scope, to investigate possible abuses. Such a body could function like a private SEC of sorts. (Exempt organizations, lawyers, and academics have debated creating an actual national government equivalent of the SEC to oversee nonprofits for years, but this is unlikely to happen for many reasons.)
Such a private commission wouldn’t have power to revoke exemptions, bar people from practice, or settle controversies, of course, but it might provide a means of speaking for the sector as a whole on high-profile scandals, and perhaps organizations would even invite the commission to review a situation, in order to assure the public that a problem is being handled, to preempt negative publicity or to forestall litigation or prosecution.
Some associations of nonprofits, funders, and fundraising professionals may be moving to create such ethics panels. A truly independent, freestanding commission would be more effective, however, for several reasons. With ethics and accountability as its sole focus, it would not divide its energies between other areas, like member services or other programs. Also, since a key function would be to signal that appropriate remedies had been taken, independence would be essential to impartiality; fairly or no, membership organizations are vulnerable to the perception that they may go easy on a favored or influential member organization.
Board members and managers need an opportunity to learn about and resolve problems as early as possible, and aggrieved employees, stakeholders, and citizens need access to more than just the phone numbers of the IRS, their state’s attorney general, or the local media. Independent efforts to spur and support investigation of possible misbehavior can point to problems disclosed or resolved as tangible successes, and enable the nonprofit sector to show that it is taking at least some direct steps to make a difference.
Discussions about nonprofit accountability often present a false choice between government enforcement or self-regulation. In truth, both are needed. Regardless of the merit of these particular suggestions, the nonprofit sector can do more good by focusing on ways to provide real support for dealing with actual crises than by trying to abolish them by decree.
Source 1 J.A. Sonnenfeld, “What Makes Great Boards Great,” Harvard Business Review, September 2002.