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With the airing of 60 Minutes investigative report on Greg Mortenson, author of Three Cups of Tea and CEO of Central Asia Institute, a recognized 501(c)3, we are once again confronted with controversy in the nonprofit sector. Here is an organization with a very compelling and important mission – building schools and educating girls in impoverished central Asian communities – and charitable contributions that would be the envy of the vast majority of the nonprofit sector. It is unfortunate that the ensuing debate over the situation seems to be focused more on the personal actions of one individual rather than the vitally important issue that nonprofits must committed to be well run and responsibly governed in all aspects of their work in order to ensure the efficacy of their work and the trust of the public.

What we have is a mismatch of expectations and a lack of transparency. Clearly what people thought the Central Asia Institute was doing with its money is not what it was doing with it. Sure, it was delivering on its mission, but clearly not to a level that was proportionate to the level of philanthropic support it received. Sure, Mr. Mortenson’s charisma and books were significant assets that the organization leveraged to get that support, but comingling his personal endeavors with the finances of the nonprofit make it look as though these “assets” were actually significantly costing the organization at the expense of fulfilling the mission.

I work with nonprofits daily, and I can attest that their structure and regulation can be confusing. It’s not always clear what’s allowable to do under the tax exempt designation nor are the passionate people who start these endeavors, like Mr. Mortenson, always aware of the unique complexities of running a charitable organization and managing its finances.  Not understanding how a nonprofit should operate and not having the full scope of skills to run a complex organization can lead to unfortunate events like those illustrated in this case.

It is important that those working to improve our world through nonprofit charitable organizations have access to the knowledge needed to be successful, have impact, and remain accountable. Here at the Standards for Excellence Institute®, we work diligently to provide such resources and guidelines so that organizations can build sustainable governance and operations to maximize the social impact of their work, reassure donors that their contributions are used as expected, and keep themselves out of potentially compromising situations by adhering to the highest levels of accountability and ethics. We also provide organizations the opportunity to demonstrate this commitment to the public by earning the Seal of Excellence, an honor held by 250 nonprofit charities in the US.

One thing is clear. Donors, the government, and the public at large expect charities to exist for the benefit of communities and environments, not for the benefit of the people that found or run them. Following proven practices of good nonprofit governance and management reminds us that the best interest of the nonprofit and the community it serves is to take the time to learn about what the community needs and from what it can benefit; understand what it takes to effectively operate; and, when it comes to accepting items of personal benefit it may be better to only accept one cup of tea rather than three when doing so.

The Standards for Excellence Institute has always encouraged nonprofits to have a clearly written list of expectations for board members.  One of the most important responsibilities for every nonprofit board is the responsibility “to assure that adequate . . . financial resources (earned income, government contracts and grants, and charitable contributions) are available. . .”  (Source: Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector).

But don’t take our word for it!

Fisher Howe’s leading publication, The Board Member’s Guide to Fundraising (Jossey Bass Publishers)  starts with this statement:

“Start with the first principle: The board of a nonprofit organization is responsible for governing the organization and ensuring that it succeeds in its mission. That responsibility-no matter what the size of the organization or the nature of its mission includes seeing that that organization has the resources required to carry out that mission . . . . If an institute is having trouble raising money, don’t look to the development office; don’t look to the chief executive; first check out the board of trustees.”

BoardSource’s 10 Responsibilities of the Nonprofit Board clearly states that the board should:

“Ensure adequate resources.”

We know that in some organizations, board members feel as though fundraising is not really a responsibility that they want to take on.  In many situations, this stems back to their first encounters with the board:   often board members are not adequately apprised of their fundraising responsibilities during their recruitment and orientation.  Setting high expectations at the outset can go a long way toward ensuring high performance.

According to the BoardSource’s Governance Index 2010 report, year after year, nonprofit leaders identify fundraising as their board’s greatest weakness and most important priority for board improvement.

Also according to BoardSource’s Governance Index 2010 report, board members are more comfortable with fundraising the farther they are from the donor.   Eighty-seven percent of board members are comfortable writing letters, compared to 57% with directly asking for money. Comfort with fundraising is declining. Board members express greater discomfort with various common fundraising activities such as soliciting funds, identifying donors, attending fundraising events and making personal contributions in 2010 than they did in 2007.

For more information, see the Standards for Excellence Educational Resource Packet, Conduct of the Board, which includes sample position descriptions for board members. This and other packets are free to Standards for Excellence Institute members through the members’ only section of our website. Hard copies are also available upon request.  We also offer one-on-one technical assistance for members only.  Not a member? Join now!

If your board is among the ranks of nonprofits without a strong commitment to fundraising and raising the resources for the organization, we hope this posting will provide some much needed ammunition for your journey to an excellent board.

In a recent column, the Baltimore Sun’s Jay Hancock slammed the relationship between nonprofit organizations and for-profit fundraisers.   He had received a telephone call on behalf of an organization to which he had previously donated, and after some digging, discovered that the nonprofit had only received 51% of the funds collected the last year from this same for-profit telemarketing company.  Outraged by this discrepancy, Hancock wrote, “Your reaction, however, ought to be the same. Ignore them. Yes, even if it’s your favorite nonprofit and you always give money, just say no. Politely decline and hang up.”   These are very strong words.  The Standards for Excellence Institute has not chosen a side in this debate, however we do stand by our written code and expect our members to do the same.

The Standards for Excellence®: An Ethics and Accountability Code for the Nonprofit Sector provide clear guidance in the area of fundraising revenue and expenses and honoring donor intent.  Section 7A of the code states, “A nonprofit’s fundraising costs should be reasonable over time.   On average, over a five year period, a nonprofit should realize revenue from fundraising and other development activities that are at least three times the amount spent on conducting them.”  This 3:1 ratio is the minimum standard required to maintain the Seal of Excellence from the Institute.

However, the true power of the 3:1 principle lies in the freedom it gives to nonprofit managers.  It allows them to deliberate and  determine the most effective way to allocate scarce resources to raise essential support while still maintaining reasonable expense to revenue ratios.  Imagine if a reporter called you at work and said he knew your organization contracted a for-profit company to solicit your donors for end-of-year contributions or that you had spent large amounts of money on advertising campaigns to encourage donations. ,How great is it that you would be able to respond by clearly stating that over the past five years your organization has meet the high standard of a 3:1 revenue to expenses ratio across all of your fundraising efforts.  You can tell the reporter that even if you lose a large part of the cut for this specific fundraising campaign, your organization’s overall operations meet their goals and stand up to the highest public scrutiny. 

A nonprofit organization adhering to the Standards for Excellence may engage in any egal and ethical fundraising strategy as long as it meets the demands of the 3:1 fundraising ratio and honors the intent of donors.  Ethics, accountability, and best practices don’t mean your nonprofit must become a cookie cutter organization that operates according to some formula.  Quite the opposite- the Standards for Excellence guidelines give your organization the capacity and freedom from worry to creatively engage your donors and constituents.

For more information, see the Financial Cost and Fundraising Practices educational resource packets. This and other packets are free to Standards for Excellence Institute members through the members’ only section of our website. Hard copies are also available upon request.  We also offer one-on-one technical assistance for members only.  Not a member? Join now!

As I write this post, the special extended deadline for small nonprofits to file their Form 990s has just passed.  As the story goes, Congress passed two small laws back in 2007.  These laws require all nonprofits to file a Form 990, and if a nonprofit fails to file for three consecutive years, then it would lose its tax-exempt status.  The IRS applied this law by creating a new and truncated version of the Form 990, called the Form 990-N (“e-Postcard”).  This new form is for the smallest organizations which previously were not required to file, ones with budgets of $25,000 or less. 

 

The real problem did not become apparent until earlier this year.  The IRS released figures in the spring of 2010 which listed hundreds of thousands of small charities that had not filed a Form 990-N for the three consecutive years (08, 09, and 10) since the above mentioned laws were passed.  Either these charities no longer operate, and/or these charities were not keeping up with important news and knowledge.

 

Even if you were not affected, there is a clear lesson to learn from this situation.  Make sure you stay in the know.  The Standards for Excellence® state,

“Nonprofits should periodically conduct an internal review of the organization’s compliance with known existing legal, regulatory and financial reporting requirements and should provide a summary of the results of the review to members of the board of directors.”

Not only should you carry out the mission of your organization; you also must devote the time to keep abreast of important news and happenings in the nonprofit sector.

 

As the opening story shows, nonprofit organizations can be hurt by a lack of vigilance.  Nonprofits must keep up with all the various laws and regulations of federal, state, and local governments.  These laws can and will change.  For this reason, the Standards for Excellence Institute® provides its members with a Legal Requirements Checklist educational packet.  We routinely update this resource with the information you need to stay on the right side of the law.  This and other packets are free and available to Standards for Excellence Institute members through the members only section of our website. Hard copies are also available upon request.  We also offer one-to-one technical assistance tomembers.  Not a member? Join now!

What’s your worst volunteer horror story?  Well, if it can top the Maryland SPCA’s current situation, then your story must be bad indeed.  From news reports last week, we learn the story of Derrick Chambers and the Maryland SPCA.  Chambers was arrested and charged with four counts of animal cruelty by Baltimore City.  Because of an apparent lack of evidence, the lawyers and judge reached an agreement.  Chambers would serve 50 hours of community service with the SPCA.  The only problem, no one asked the SPCA, and they don’t want him as a volunteer.  Their Executive Director, Aileen Gabbey puts it this way:

“This recommendation wouldn’t be made if the abuse had happened to a child.  Certainly a defendant wouldn’t be ordered to work with children for his rehabilitation. If the court wants rehabilitation, then counseling for violent behavior is appropriate, and it’s safer.”[i]

 Gabbey’s argument makes sense.  If you organization’s mission is to work with a certain population, would you want an accused abuser of that population to volunteer for you?  I assume not.

 What’s the simplest lesson to learn from this?  That’s right; make sure your non-profit has a clear, effective volunteer policy in place.  The Standards for Excellence® code states:

“With respect to volunteers, the organization’s policies and procedures should also address initial assessment or screening, assignment to and training for appropriate work responsibilities, ongoing supervision and evaluation, and opportunities for advancement.”

 Many non-profits depend on volunteers for the continued success of their mission.  If you are going to use volunteers, make sure you go about it in the best way possible.  We wish that everything works out well for our colleagues at the Maryland SPCA.  And we hope that you are prepared to respond, should you find yourself in a similar situation.  Make sure you protect your organization, your staff, and your volunteers.  Make sure you set yourself up for success. 

 Want some help implenting this advice?  The Standards for Excellence Institute offers educational resource packages that will help you set up goverance, ethics, and accountability policies and practices.  These packets are free and available to Standards for Excellence Institute® members through the members only section of our website. Hard copies are also available upon request. Not a member? Join now!

[i] The Baltimore Sun, September 22, 2010.

A new report, “The Importance of Ethical Culture- Increasing Trust and Driving Down Risks” just  released by the Ethics Resource Center shows that organizations with strong ethical cultures find few employees feeling pressure to commit misconduct (4 % versus 15 % in organizations not found to have strong ethical cultures).  In addition, the report shows the rate at which employees observe misconduct by co-workers is nearly twice as high in weaker cultures (76 %) as it is in stronger cultures (39 %).  As the report asserts, “Study after study confirms it: the vast majority of people act based on the circumstances in their environment and the standards set by their leaders and peers, even if it means compromising their personal moral ideas.”

While this report focuses on employees in for-profit organizations[1], nonprofit organizations can take their cue from these findings and embrace best practices for nonprofit ethics and accountability and work toward fostering a strong ethical culture.

We’ve used this blog as a vehicle to encourage organizations to foster a strong ethical culture by utilizing tools such as:

• A strong whistleblower policy and confidential means for employees, board members, and volunteers to report financial improprieties  
• A code of ethics for your organization
• Grievance procedures, both for participants in the programs that you offer and the employees you hire
• A strong conflict of interest policy that is applicable to staff, volunteers, and board members
• Financial policies that are appropriate to your organization, particularly those for internal controls and purchasing

In addition, nonprofits should commit to the guiding principles of the Standards for Excellence® code. This is a requirement for all members of the Standards for Excellence Institute® and a step that any nonprofit organization can take. 

But, we must remember that all of the best policies in the world will not ensure a strong ethical culture in any organization.  These policies and practices must be understood, used, and implemented day in and day out by the organization’s staff (at all levels), board  leadership and volunteers.  This report by the Ethics Resource Center points out that “actions and perceptions of top managers drive the ethical culture of the company and have significant impact on outcomes.”

Organizations with strong ethical cultures are committed to strong ethical practices on an ongoing basis. They offer training and education to ensure that these practices are understood and followed and take great efforts to update their policies and practices when the need arises. Some even have special standing committees in place to focus on these and related issues.  People at all levels of the organization are consistently implementing these practices in their work and in their actions.

Did you know? The Standards for Excellence Institute offers educational resource packages on topics to help foster a strong ethical culture in nonprofit organizations?  These packets are free and available to Standards for Excellence Institute® members through the members only section of our website. Hard copies are also available upon request. Not a member? Join now!

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[1] This report is based on the data and results of the Ethics Resource Center’s 2009 National Business Ethics Survey  which the Ethics Resource Center describes as “most exacting longitudinal research effort examining organizational ethics from the employee perspective.”  This longitudinal survey looks at national trends and tracks views of employees from all levels within organizations.  Responses for this survey included 2,852 employees in for-profit organizations.

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As I witnessed the magical beauty of the Independence Day fireworks paint the sky of our nation’s capitol, I could not help to think about our country’s founders and that very important document adopted in early fall of 1787.  The Constitution of the U.S., provides the framework for the organization of our government and the relationship of the government to the citizens and states.  It is one of the world’s oldest governing documents of any country today.  But they weren’t perfect as drafted at the turn of the century.  In fact, the first amendment which established the separation of separation of church and state (among other rights) came just four years later.

If your board of directors is considering making changes to your bylaws, tackle the job thoughtfully, but fearlessly.  Own up to the fact that as times change, the way we govern and operate might need to change with them.  Perhaps you need to change the criteria for a quorum, length of board service terms, change the committee structure, change the minimum number of board meetings, or add a conflict of interest policy.  It was bound to happen eventually. 

As you ponder the possibilities of new amendments and provisions, there are few very specific things to keep in mind to assure that your new bylaws continue to keep your organization in compliance with the Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector ®.

The Standards for Excellence® code requires term limits for all board members.  Although the code does not dictate how long terms of service should be, it encourages nonprofit organizations to establish term limits to encourage board renewal.  While it is good to keep dedicated volunteers engaged with our organizations, lifetime board members or having very long terms can hinder new ideas, progress, and make it difficult to remove problem board members.

The bylaws or other written policies of the board should address attendance, participation, and consequences for noncompliance with board polices.  Often the last requirement (consequences for noncompliance) is not stated clearly in the written policies of the board or bylaws.  Board members should know what is expected of them in terms of participation and the board should always have a standard process to address issues as they arise.

The minimum number of board members required by the Standards for Excellence code is five, preferably seven. 

The board should meet at least four times a year.

Proxy voting is not allowed.  The practice of delegating another board member to vote in another member’s absence is considered to be a breach of one’s fiduciary responsibility and does not comply with the Standards for Excellence code.

To read more about the Standards for Excellence and bylaws and expectations for board members Institute members may download the “Conduct of the Board” Educational Resource Packet from the Standards for Excellence Institute website. Not a member? Join Now.

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There have been some recent high profile stories in the news of nonprofits that have found tragic results due to organizational structures  where the power of the organization is held by one or two individuals—often a founder and his/her family member.

In our work with nonprofit organizations over the years, we occasionally encounter situations where a visionary leader is interested in founding a nonprofit organization, serving as the organization’s first paid executive director, and then retaining control over that organization and all of its actions into the future.  The founder is often interested in constructing safeguards that allow him or her to control the organization, as Buzz Lightyear (from my son’s favorite movie, Toy Story) would say “to Infinity and beyond!” 

There is a common misunderstanding of the label “nonprofit” that is applied to tax exempt charitable or educational organizations; and this goes to the heart of what a nonprofit organization is supposed to be.  Under federal tax law the key characteristic of and most important rule governing these organizations is that their resources and assets are dedicated solely to achieving the legally recognized public benefit or purpose for which they were granted this tax status.

This is often expressed, in the negative, with the doctrine that prohibits “private inurement”, or private benefit.  A nonprofit organization is allowed to make a profit, but not to distribute its earnings or profits (or its assets on dissolution) for the private benefit of any individual or non-charitable organization. This is why nonprofits generally have members in place of shareholders – no one has an owner’s right to the proceeds of the organization’s work; and It’s the reverse of  a ‘for profit’ business, whose purposes is to generate income for its owners or shareholders.

Nonprofit  directors or trustees, free of financial or other conflicts of interest, are expected to provide assurance that their nonprofit organizations are in compliance with these and other principles of accountability and integrity.  Examples of practices that must be avoided are paying excessive compensation to staff or contractors, or business dealings or relationships that enrich individuals or other entities at the expense of the nonprofit.  It’s difficult to imagine how a board of directors or trustees can properly meet this duty if they in turn are accountable to one or a few individual “members” who also have financial interests in the organization or its activities.      

So no matter what a state incorporation law might appear to allow, founders of charitable organizations should not try to set up a nonprofit organization that is “theirs and theirs alone.” Actually, there are many reasons why it is NOT wise for nonprofit organizations to be set up like monarchies or independent fiefdoms.  Not the least of these is the fact that the IRS is really clamping down on organizations that are actually closely held corporations or sole proprietorships masquerading as nonprofits.  In fact, an article on governance and related topics on the IRS website states that:

Irrespective of size, a governing board should include independent members and should not be dominated by employees or others who are not, by their very nature, independent individuals because of family or business relationships.  The Internal Revenue Service reviews the board composition of charities to determine whether the board represents a broad public interest, and to identify the potential for  insider transactions that could result in misuse of charitable assets. The Internal Revenue Service also reviews whether an organization has independent members, stockholders, or other persons with the authority to elect members of the board or approve or reject board decisions, and whether the organization has delegated control or key management authority to a management company or other persons. (Governance and Related Topics, IRS website, Life Cycle of a Public Charity)

Nonprofits should ensure that one person does not retain ultimate control over an organization.  The Standards for Excellence: An Ethics and Accountability Code for the Nonprofit Sector states, “…where an employee of the organization is a voting member of the board, the circumstances must insure that the employee will not be in a position to exercise undue influence.” The Standards for Excellence code encourages nonprofits to institute conflicts of interest policies that cover board members, staff members and key volunteers.  The code also requires nonprofits to have comprehensive board-approved personnel policies and volunteer policies in place that help organizations ensure fair and equitable treatment of staff. Term limits help to ensure adequate rotation of board members and an organization’s volunteer leadership.  The nonprofit exists to achieve its mission of service to the community.  The board of directors has an important fiduciary role to hold the organization “in trust” for the community. 

Remember, the person who starts the nonprofit organization will ALWAYS be the founder – no one can ever take that legacy away.  Most founders do lead their organizations successfully for years and even decades.  However, do be aware that there is a phenomenon called “founder’s syndrome” that applies when an organization’s needs have outgrown the skills of the founder.  Sometimes, the founder must step aside in order for the true lasting legacy to be realized.  Founders who fail to realize this or insist on bylaws that leave them in control can doom their organization to failure once they retire.  Additionally, everyone leaves an organization eventually. If control has been tightly held for years, the leadership void created can also lead to organizational failure. That is not likely the legacy most founders want to leave behind.

We often say that “you can’t own the nonprofit” and “once you set up the charitable nonprofit organization, you can no longer have complete control over the organization and its work.”  So, if your interest is in controlling the organization and the terms of your own employment, “To Infinity and Beyond,” it might make more sense to consider starting another type of organization altogether.

Did you know?  The Standards for Excellence® Educational Resource Packet, “Board Composition,” includes a discussion of handling situations where employees are on the board and ensuring that one person is not in a position to exercise undue influence.   The packet is free and available to Standards for Excellence Institute® members.  It is available through the members only section of our website.  Hard copies  are also available upon request. Not a member? Join now!

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If you are in the market for a professional fundraiser or solicitor, you’re not alone.  Most nonprofit organizations have employees or contracts with professional fundraisers or solicitors.  When deciding on the appropriate compensation for these services, always keep in mind that the Standards for Excellence® code prohibits percentage-based fundraising.  The code states, that “fundraising personnel, including both employees and independent consultants, should not be compensated based on a percentage of the amount raised or other commission formula.”  The Association of Fundraising Professionals Code of Ethics also advises against the practice. 

Although not illegal, there are more than a few good reasons to pay fundraisers based on the job and not on the amount raised. 

Paying by the job can save you money.  According to Association of Fundraising Professionals, there is a correlation between charities that have extremely high fundraising costs and those who pay their fundraising firms on a percentage basis.  Also, donors might also become disillusioned to learn that 30%, of their donation, for example, will be given to a professional solicitor.

Commissions can lead to a “money over mission” attitude.  The practice is also considered unethical because mission tends to takes a back seat to personal gain in these situations, as it creates an incentive for self-dealing. 

Fundraising should be a team effort.  In the article, Why Good Fundraisers Are Never Paid on Commission , fundraising expert, Kim Klein tells us that the most important reason that commission-based fundraising is a bad idea is that successful fundraising requires coordination between the board, staff, and other volunteers rather than having one person in charge of an entire campaign.

The bottom line is that we encourage all nonprofit organizations to refrain from paying professional solicitors based on the percentage raised or other commission formulas.  It is just the ethical thing to do.

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Recently, the Ethics Resource Center released the report, Saving the Company Comes at a Cost: The Relationship Between Belt-Tightening Tactics and Increased Employee Misconduct .  This report focuses on the effects that tactics that companies use to weather the financial struggles affect employee behavior.  Based the National Business Ethics Survey, the study found that tactics such as adjustments to work schedules, layoffs, compensation and benefit reductions, hiring freezes, early buyouts, production slowdowns, and plant closures are all related to significant increases in the number of employees observing misconduct.

Unfortunately, most of us in the sector have first-hand knowledge, if not first-hand experience of nonprofits that have tightened up their finances. Many of us have had salaries frozen, have instituted layoffs and furloughs, and have had other types of reductions in expenses and workforces.  And although this report focuses on employees of for-profit companies, it conveys a message that nonprofit organizations can use.  No longer can we afford to relegate transparency and accountability to the backburner while facing difficult financial times.  Some might even say it is actually more important than ever to ensure that our “houses are in order.”  Committing to implementing policies and practices aimed at reducing employee misconduct, should be a priority now. 

So what can nonprofit organizations do?

• Commit to the guiding principles of the Standards for Excellence® Code. This is a requirement for all members of the Standards for Excellence Institute® and a step that any nonprofit organization can take. 
• Institute a strong whistleblower policy and confidential means for employees, board members, and volunteers to report financial improprieties.  
• Establish your own organization’s code of ethics.
• Establish and publish instructions on your grievance procedures, both for the programs that you offer and the employees you hire.
• Establish and carry out an appropriate conflict of interest policy that is applicable to staff, volunteers, and board members.

Now, more than ever, we are faced with intense demands for programs and services, and an even more pronounced competitive atmosphere for raising the resources to get the job done.  Trying to do more with less has not become a temporary mantra, but a new way of operating for the long-term. In short, we must do all that we can in order to foster an organizational culture that addresses ethical dilemmas and issues when they first come up and solves the problems at the outset. Actions such as these are vital to a well functioning nonprofit organization interested in avoiding issues related to employee misconduct.

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[1] Supplemental Research Brief 2009 National Business Ethics Survey: Saving the Company Comes at a Cost: The Relationship Between Belt-Tightening Tactics, 2010.  The Ethics Resource Center describes the National Business Ethics Survey as the “most exacting longitudinal research effort examining organizational ethics from the employee perspective.”  This longitudinal survey looks at national trends and tracks views of employees from all levels within organizations.  Responses for this survey included 2,852 employees in for-profit organizations.

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