Nonprofit Accountability: Inside and Out
Diana Aviv, Independent Sector
On June 8, 2004, members of the Bridgestar community came together for a dialogue about how we can build an image of the sector as a responsible and trustworthy steward of public resources. Diana Aviv, president and CEO of Independent Sector, was the keynote speaker with a talk about how the nonprofit world must change in the wake of the accountability scandals that have been so prominently in the news. The meeting took place at the Boston University School of Management with over 100 members in attendance. The following is a transcript of her remarks.
Introduction: What is the Voluntary Sector?
I must say I’d rather be talking to you about civil society, about state budget issues, about the major issues that confront our sector. But it’s kind of difficult to talk about those things when we have this animal, this monster in front of us right now.
But let me put this in a context in case we forget about the importance of the voluntary sector and its critical role in society. Voluntary sector organizations are the bedrock of our civil society. They are the vital instruments through which individuals gather together to meet community needs and improve the quality of life for all people. That’s what we’re about.
We serve as robust players—some would say partners—with government and with commerce, supporting initiatives that build a healthy democracy that supports freedom, equality of opportunity, creativity, knowledge, decency, respect, a good quality of life, and other values enshrined in our Constitution and our Bill of Rights. The voluntary sector’s strength lies in its diversity, its freedom of expression, its ethical and accountable practices, its commitment to serving the public good, and its independence.
The voluntary sector advances the common good in two principal ways. Firstly, by directly conducting or providing financial support for charitable programs and the people who benefit from those programs. And secondly by enabling likeminded members of society to mobilize support for effective private and public resources to respond to society’s needs and aspirations through community leadership, initiative, and public policy advocacy. That’s just my quick thoughts on what I think the essential value of our voluntary sector in its totality is.
In order for us to do that, we need the public trust. There’s just about nothing we can do if we don’t have the confidence of not only of public officials in local communities, in state houses and at the Federal level but also of donors, of the public at large, and certainly of the people we serve. But when that public trust is broken, then it is impossible for us to achieve the kinds of missions and goals that each of our respective organization have set forth.
An Expanding Sector with Expanding Impact
Let me describe to you very quickly who the nonprofit sector is—who you are, along with your colleagues around the nation. There are 1.8 million of you around the United States. We employ in the sector 12 million people, which is more people than the combined finance, insurance and real estate sectors. We’re a $650 billion industry. Ninety-three percent of nonprofits have budgets of less than $1 million. So we have lots and lots and lots of us that are small. Eighty percent of nonprofits have budgets of less than $100,000. And so we have many, many nonprofits. We talk about the American Red Cross and the United Way of America, but there are far less of them than there are of these multiple organizations in each and every community across the United States.
Recently I was at Indiana University, where they’re doing some good research on the nonprofit sector in Indiana, and they estimate that whatever the percentage of nonprofits that there are in Indiana is about 50 percent higher than what they can count because so many of them don’t even register because they’re so small.
50,000 new nonprofits are registered in America every year. That’s in addition to the ones that don’t register. And as you know, the scope of our organizations include and range from educational institutions, research centers, hospital and health clinics, arts and cultural organizations, environmental groups, foundations and philanthropic public charities, public interest and civil rights groups, and religious organizations. I’ve only named of the sector’s various sectors. And I’m sure there are lots of areas in which you work that I haven’t mentioned. So it’s everything in between; it’s a very broad and very diverse sector.
In fact, there are some people who don’t think it’s a sector at all. That yes, we are nongovernmental organizations, but we are defined more by the issues on which we individually focus than by our connectivity. By the way, that’s not the way Capitol Hill sees it, that’s not the way the state Attorneys General or the public charity officials in those respective states see it. They see us as a sector, and I would argue today that we, too, have a vested interest in seeing ourselves as a sector so that we can organize collectively to act together.
The Climate for Scandal
Now, what has contributed to the current state of accountability and ethical lapses in our society today related to the nonprofit sector? A little context on that as well: it doesn’t really help to tell you that the corporate sector is facing its own ethical lapses, not just WorldCom and Enron and all the rest of them.
I was at a recent presentation for corporate philanthropies, and there was a fellow who was doing the presentation with me and he said, “Diana, you’ve got nothing to worry about, listen to this!” And then he listed up piles and piles of names of corporations that had engaged in lapses. That doesn’t make me feel any better to know that we’re in good company—or bad company, any kind of company. Because, when we have anybody in our sector who engages in practices that the public expect us not to do and we don’t expect of one another, then even one incident is one too many.
But what are the circumstances that have contributed to this? There are a lot of different reasons. One is the massive growth of our sector. I said that we are 1.8 million nonprofits. We’ve grown from 739,000 twenty-five years ago to 1.8 million today. The massive growth has not been organized or systematic. It’s very easy to become a nonprofit. It’s much more difficult to sustain oneself, as you all know. Nobody says to you that you have to have certain kinds of degrees and qualifications to manage a nonprofit. There are no rules that tell you that you have to have a certain number of board members, that they have to meet a certain number of times a year, that they need to be independent, and what sorts of practices you have.
If you’re smart and you’re responsible, then you will do those sorts of things to make sure that you know what is good governance and what’s good practice. But in fact, there are no rules, very few rules governing what we do. Since the growth has been so rapid, unmanaged and unplanned, there are many nonprofits that have no idea that there are a set of expectations related to this that are important to engage in.
Secondly, I think that sector standards have changed. Practices that might have been acceptable 20, 10 or even 5 years ago are no longer acceptable. Or we haven’t even thought about a practice. I can’t tell you how many times I get calls from the Press asking me what I think about a particular issue and I have to put them on hold, do some research and figure out, well, what do we think about that? Because we never thought about that before, and then we look in the literature and it doesn’t seem like anybody else has spent a whole lot of time, not in our libraries anyway.
Fair vs. Excessive Compensation & Benefits
This ranges from what kind of benefits executives should get, under what circumstances. Is it fair, when you’re living in a city such as this [Boston], where housing is high? Let me tell you right now that if you’re Children’s Hospital in Boston and you’re trying to attract a chief of surgery from Tulsa, Oklahoma, the candidate will require additional housing supports in order to get that person to come. But it’s not the same if a nonprofit wanted to attract that person from Boston to Oklahoma.
Do we need special benefits to attract certain kinds of people to certain kinds of nonprofits, and what is the level? What is reasonable? Who should set those standards? Those questions have changed over time.
What are reasonable travel practices? What sorts of hotels should we stay in? And if in fact you meet in the winter in Florida and not in Buffalo, is that accruing a personal benefit? There are a whole range of standards regarding practice that are changing over time, and as we think about them, we will set different standards now than we might have in the past. To the public looking at our work, if they see us meeting in Florida and Southern California in the winter, are they thinking that we’re somehow taking advantage of the dollars that they’ve given to us to do their work?
Do we see this as the way of doing business? Since our salaries are so low, not competitive with the private sector, at least we should be able to meet in comfort. Is this one of the accoutrements or one of the benefits of being in nonprofit practice? Those are issues that we haven’t resolved, and we need to resolve. In this changing market, with The Boston Globe and others taking a close look at our practices, they’re not asking about those particular practices, but they’ll get there when they’re done with all of these extraordinary examples that they have been describing.
I also think that there isn’t a single set of standards, given the fact that we have such a broad sector with different needs. We do have organizations whose budgets are $250 million, and as you heard, we have organizations whose budgets are $100,000. What is proper for an executive who is managing a budget of a very large organization in the foundation world or public charity world may be different from somebody who is working in the local community where the needs of that particular organization are different.
Some organizations have very sophisticated training programs for board members; others have none at all. Some have specific operational needs; others don’t. In that kind of diverse structure, it’s very difficult to have one set of standards and apply them across the board.
Revenue Squeezes and Shoddy Fund Raising
The nonprofit sector is probably tempted, particularly on the public charity side, at this particular time, to engage in a range of fund-raising practices that could reach the “edge of legality”—let me put it that way—and would be considered improper by any other standards. Right now, the nonprofit sector depends upon the public sector for 31 percent of its budget. Health and human service organizations, on average across the entire spectrum, receive more than 50 percent of their revenues from the public sector. We know that the Federal deficit is expected at the moment to approach $477 billion by the end of this year, and there are still something like 38 states that have deficits that are high enough now for three years running to require them to cut programs if they’re not going to increase revenues. You name a state that is interested in increasing revenues, and I’ll move there tomorrow. The fact is that there is more interest in cutting programs than in increasing revenues even as any number of states are looking at ways to close the gap also by doing that.
In that kind of environment, with a projected $5 trillion deficit over the next 10 years, those nonprofits know that the public sector is not necessarily going to be a reliable partner in funding the programs and meeting the obligations that they have and that they will have in the coming years. Individual donor and foundation support is not increasing at a level to make up the difference with the cuts that we are likely to see.
So nonprofits in seeking funding alternatives and sources are competing with one another and are thinking about all kinds of schemes—some harebrained, some questionable—in order to meet their obligations to their clients and the people that they serve. Some of those schemes are going to be problematic. We will see on Capitol Hill, in the hearings on the 22nd of June, a middle panel where the kinds of schemes that nonprofits have gotten sucked into will be described in ways in which some of the actors have found themselves in prison as a result of those kinds of activities. I think that is contributing to it—this nervousness about the inability to meet budget and thinking in creative ways.
I’m not the only who went to social work school and found myself in the nonprofit sector. I don’t remember in social work school learning about budget and finance and preparing me for the kind of work that I’m doing today. I had to learn that along the way. And maybe the schools of social work and the schools of management are doing a better job today, but not all the leaders of the nonprofit sector have that kind of training and background, and yet these people are finding themselves dabbling with fund-raising practices that they don’t even know and understand, and they will run possibly amok of the law on account of that.
Overwhelmed Regulators
Then we find that the structures that we have in place in the public sector to do oversight are inadequately funded. The IRS, in the case of the Federal government, and the state public charity officials—in different states, there are different departments, mostly it’s the state attorneys general’s offices, but not always—mostly they don’t even do audits at a level in which it bothers anybody that they didn’t file their 990 forms or didn’t complete the forms. Since we don’t have electronic filing, you don’t have to complete them unless you get an audit, and there are many organizations that go two or three years in arrears in filing their 990 or 990PF form with impunity.
State charity regulators estimate that over 50 percent of regulatory resources are consumed by processing paper filings of the Form 990 and other registration materials. Then, legal restrictions have prevented the state charity officials and the Federal officials from coordinating and collaborating. So even if there is some state office that has done it right and done it well, there’s no way to share that with the Feds, and vice versa.
So for national organizations, for example, that are in 50 states or any number of states, they’re subject to different rules and regulations in the different states, and they can’t even coordinate with the IRS in a reasonable way.
Media Scrutiny
Then I would say to you, and I’m not blaming the media, but probably one of the reasons for the attention that we have right now is because of the heightened scrutiny of nonprofits by the media. We have counted in the year since I came on board over 225 stories in newspapers across the United States detailing allegations of misconduct that include excessive executive compensation, inappropriate board compensation, self-dealing, questionable fund-raising practices, and other governance improprieties that have allowed the public to have a perception that the sector is corrupt, that the abuse is widespread, and that we have serious problems even though it’s a very small section of our sector that are engaged in these kinds of practices.
The heightened media scrutiny we trace back to the press coverage related to the post-9/11 actions of some nonprofits in how they dealt with the donations following the terrorist attacks. We also think that the corporate accounting scandals of 2002 had a spillover effect, so that while those investigative reporters were at it, they took a look at the nonprofit sector, and the fact that we’re such a large sector and the fact that we have substantial influence on public policy and on practice around the United States, makes us a sector that, believe it or not, is quite interesting.
I know that you all complain, and certainly we do—and you should if you don’t complain—that you don’t get enough press coverage about your good works. One reporter of a major newspaper said to me, “Diana, you’re supposed to do good works. That’s not news. It’s only news when you don’t do it. That’s what we cover.” So we need to find a way to describe what it is we do, especially when we do it well.
Now, I would suggest to you that these kinds of problems have a domino effect on our ability to do our work. Even if we have scrupulously ethical standards and practices, even if we talk to our board members and make sure that we have independent evaluations and auditing and all the rest of what might be considered good practice, that unless we make sure that all of us are engaged in these sorts of practices, the bad actors among us usually don’t come to these kinds of meetings. Those bad actors will sully our reputations. We have a responsibility to be each other’s keepers.
Legislative Action on the Horizon
There are going to be hearings on Capitol Hill in a couple of weeks’ time [June 22, 2004]. The Congressional professional leadership, I’m sure at the direction of their bosses, the Chairman of the Senate Finance Committee and the ranking Democrat of the Finance Committee staff are looking to prepare a white paper that will roll out a whole bunch of ideas about how they want to constrain the sector and regulate it further. There are 17 states across the United States that have some kinds of laws that are pending to regulate further our sector. Some of them are probably good ideas; some are probably extremely bad ideas.
I would suggest to you that you pay close attention to that white paper when it comes out. We get an opportunity here that we don’t often have to get a white paper before we get proposed legislation. Any of you who toil in the legislative world, you know that it’s much harder to change proposed legislation that a bunch of lawmakers have gotten their names and support behind than it is a white paper that’s being rolled out for our reaction.
If our response to the white paper is “no, no, no, don’t regulate anything,” in the face of these 225 stories, we are not going to succeed. We really have a responsibility to think about what practices we want to change ourselves and what makes sense for the public sector to do. The first step is to acknowledge that there are some problems, that these are bad actors. We don’t know in the particular cases how much of what is said is true. Obviously, we are not always in a position to know exactly what is going on. I suppose that once they’ve gone to prison, we would be safe in saying that there was a problem, but the practices as they’re being described, we certainly can make some sort of comment about.
Four Areas to Take Action
- Clear Reporting
I want to suggest to you four main areas in which we can take action and ought to. One is to make sure that your reporting of your work through the 990 and the 990PF tax filing forms need to be clearer. That if the IRS and the state charity regulators don’t have the kind of instruments that they can look at easily, and the bad actors fall through, or questionable practices are highlighted through some sort of electronic filing system, then we have a problem. Those of you who know about those kinds of forms that give the media and the public an opportunity to review our work know that those forms are very poor and need to be improved. We need to improve transparency. We need to make sure that our tax filing forms are on all of our web sites. We need to make sure that any donor who wants to see the practices of our organizations has easy access to our annual reports (I encourage all foundations to have them even though they’re not required), to make sure that there is public access to the reports on our web sites even though they’re not required. - Adequately Funded Regulators
Secondly, I think we need to make sure that IRS and the state charity regulators have enough money to do their work. For those of you who are involved in advocacy, you know that it’s not that hard to imagine an advocacy campaign to build the political will to do something like this. It’s not enough to say that’s their job, they ought to do it, it’s not our responsibility. If we think it’s their job and that they should do it, let’s create the public will to ensure that it happens. You know that the state government here has a budget competition among all kinds of issues. You’re fighting—or competing—with all kinds of interest groups to make sure that the funding goes in directions that support the kind of work that you do. We need to make sure that there’s also enough funding for oversight, because if they do their job and enforce the laws that are already in existence, it will make it much easier than keeping on promulgating and enacting new legislation which the organizations that do abide by the law will be further constrained by and the bad actors will ignore because there’s no enforcement mechanism. Let’s begin with that kind of practice. - Improved Self-Regulation
Thirdly, we need to improve self-regulation. We need to think about standards within our own sector. I am at the national level convening an ad hoc working group of major national organizations—the ones with budgets that are higher than a million dollars, the American Red Crosses and United Ways and some of the major foundations and also some family foundations and community foundations—to think about what kind of standards and practices we can have as a common denominator. Obviously, within fields, there will be respective standards that can be adapted. I don’t think that it matters if we meet all together and we have all sorts of efforts going on here on the East Coast, on the West Coast, in the middle of the country, to think about standards, because if I can say on Capitol Hill that everywhere in the United States, this is a concern to the voluntary sector and we are doing something about it, and we’re thinking about what those standards of practice are, then I think that that will go a long way to allowing us to have the time to develop those sorts of standards.
I think we also have to improve practice. Nonprofit organizations should be adopting codes of ethics and educating board members and staff about good governance. Independent Sector developed exactly such a standard code of ethics and statement of values which is on our web site if you want a copy of it. We think that every nonprofit in the United States should either adopt that one or adopt something like that for their own organizations.
Those standards of practice don’t mean anything if one doesn’t implement them. That means educating every new board member. We don’t want to make it so onerous that nobody wants to serve on a board, but serving on a board has to mean something as well. I think that if we can educate board members, then they can execute their responsibilities as leaders of those organizations. - Raise Awareness About Our Successes
Finally, I think that we need to raise awareness among lawmakers and others in society about our good works. If the only perspective that the public has is seen through the eyes of the reports in The Boston Globe and other newspapers across the United States, I think that we will have done ourselves and the people we serve a disservice. There are lots of excellent programs. We need to describe what their good practice is, how we do it, who we are, to make sure that on Capitol Hill and also in the state houses that lawmakers know who you are and what you do so that when there are bad actors out there, they also have a base of comparison of the wonderful charities and foundations that are doing good work and making a difference.
I think that if we work together, and if we have a commitment to accountability, we’re likely to succeed. If we don’t, we’re likely to see more regulation.
Nonprofit Accountability: Inside & Out
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