Swing and a Miss: Charities, like Baseball, Strike Out
April 1, 2005
In light of recent news, I am struck by the similarities between Major League Baseball and America's nonprofit sector. In the mainstream public consciousness, the two could obviously not be more different. One, despite being merely a game, dominates the front page of America's newspapers. The other, even though it is not only a cornerstone of the American economy but a provider of services that often make the difference between life and death, is relegated to the trade journals.
In reality, however, both MLB and America's non-profits have been hurt by prominent scandals where the misbehaving few have sullied the public's perception of the many and, as a result, both now face calls from media-seeking politicians for stricter government oversight. Like baseball, America's charities have been given an opportunity to prevent relatively intrusive government regulation if they can figure out a way to police themselves and propose changes that will punish those who do not play fair. Unfortunately, much like those baseball players who do not use steroids, but lack the fortitude to demand testing of their teammates for the good of the game, well-run, legitimate nonprofits are missing the opportunity to build the trust of the sector as whole by not pushing hard enough for reforms that would boost their credibility and public perception of their industry.
When the Senate Finance Committee asked the Independent Sector to commission their Panel on the Nonprofit Sector, IS had a golden opportunity, like MLB before them, to capitalize on public opinion and push for bold real-world reforms in the governance and oversight of the activities of charitable organizations. But when the ball recently came down the plate, they, like baseball's Bud Selig, Donald Fehr, and Mark McGwire, didn't even bother to swing.
As a result, non-profits should be prepared for the heavy-handed reforms that could come down. Perhaps the Senate will finally address the inconsistency of non-profit status, where we allow hospital foundations, insurance companies, and multi-billion dollar universities to evade most taxes and pay their executives outlandish sums, because they theoretically provide a "public good." Perhaps the Senate will be sufficiently shamed enough, in light of Tom DeLay's "charities," to take away the rights of non-profits to lobby the federal government. What if they actually got the courage to put an end to the absurd practice of allowing one non-profit, with one address and one mission, to incorporate as multiple entities, allowing it to hide costs and expenses? Maybe even, when the next inevitable scandal breaks, the government will be emboldened to create a national SEC for this sector, which accounts for 13% of GDP, but is regulated like it's still comprised of a bunch of kids selling lemonade.
For the record, in my opinion, all of these potential reforms deserve serious consideration from serious people. In reality, we'll probably never see bold initiatives like this from Congress, much like we'll probably not see a national steroid policy. But if we do face some of those initiatives, it will be because the non-profit sector was given the opportunity, like MLB, to clean up its own act, and chose instead to stick its collective head in the sand.
If one bothers to read the non-profit panel's 72-page report of toothless recommendations, one sees that the group acknowledged (but then ignored from there) that "the nonprofit sector's success depends on its integrity and credibility." At Charity Navigator, we agree. We not only examine the financial records of thousands of charities, we receive hundreds of letters, emails, and phone calls from donors who feel that they have been wronged by charities that demonstrate a complete lack of integrity and credibility. Yet, even with the tremendous damage that some charities and practices can inflict on the sector as a whole in the minds of donors, very few charities exist that are willing to speak out against the bad apples spoiling the bunch.
If anyone at the Independent Sector had asked us what we thought about reforming the non-profit sector, we obviously would have proposed some changes that the committee omitted. But why would they ask us for our input? We only have over a million visitors a year come to our site, looking for unbiased information they can trust on America's charities. If you type "charity" into Google, the very first entry you will find is Charity Navigator. And in the wake of the tsunami, when every media outlet in the country sought out someone to speak to donors about how they could find a charity they could trust, I appeared everywhere from NPR to Good Morning America to Geraldo. But our insights, as America's largest donor advocate, are irrelevant to this topic? Donors lose again.
So, shamelessly, we'll simply ask ourselves? If we had been on the IS Committee for reforming the non-profit sector, what would we have recommended? Herein are six recommendations for where the nonprofit sector should start, in an effort to restore integrity and credibility for an increasingly-skeptical public. All could be done tomorrow, and none would cost a dime. They are based not only on experience gained from examining the financial records of nearly 4,000 charities, but also from the hundreds of complaints we get every day from donors fed-up with the unscrupulous practices of many charities.
1). Professional fundraisers should identify who they work for and how much of a cut of a donation they're getting upfront in any telephone solicitation.
The Supreme Court has ruled that the government cannot put limits on how much a charity pays a professional fundraiser, but this doesn't mean that the public doesn't have the right to be informed. Giving professional fundraisers anywhere from 25 to 95 cents on the dollar of every contribution they raise is a short-sighted, scorched-earth (but common) practice. Donors are misled into believing that they are giving to a worthy cause when, in reality, most of their contribution is ending up in the pocket of a telemarketer.
Although complaints about telephone solicitations are some of the most universal objections we hear from donors, few charities will speak out against it and the matter is not even addressed in the panel's recommendations. Charities argue that this is just business as usual and there is nothing wrong with fundraising this way. But if they believe nothing is wrong with this practice, they should not fear providing the public with as much information as possible. If this change were enacted, a typical telephone solicitation would begin like this:
"Hello, my name is ______ I am calling on behalf of XYZ TELEMARKETING in order to raise money for CHARITY NAME. For every $1 you donate to CHARITY NAME, $.xx will go to XYZ TELEMARKETING. . ."
2). Mailing lists should only be shared with the expressed consent of the donor.
Along with complaints about telephone solicitation, we also hear a ton of protests about the amount of excessive mail many donors receive. Many donors, especially older donors, feel compelled to at least open, if not contribute to, every appeal they receive. We receive phone calls daily from frustrated donors trying to find a way to stop the appeals. Many are shocked and saddened to learn that their original act of kindness led to such an unkind result. A few reputable charities are beginning to take action, putting into place statements expressing they don't share donor lists or creating policies that allow donors to "opt-out" of exchanged lists. Even these "opt-out" policies, however, do not go far enough. Usually, they are buried in small print at the bottom of an appeal or require donors to seek out the address to contact the charities and have themselves removed.
This is another case of a few bad apples spoiling the bunch. Charities that do not engage in these shady fundraising practices should be speaking out loudly against the ones that do, yet so far their voices are silent, and are certainly not expressed in the Nonprofit Sector Panel's recommendations. Some charities will argue that requiring permission to exchange donor lists is unfair because for-profit firms are not subject to the same regulation. Nonprofit organizations, however, need to be held to a higher standard because of the special function they perform and because of their tax-exempt status. People who give their hard-earned money to charities hold them to a higher standard.
3). Every fundraising appeal should contain the organization's tax identification number (EIN), a telephone number, and the address listed on its 990.
Donors often contact us confused about charities that use different names, have addresses in different states, and have no reply information except the P.O. Box to which to send donations. Even the most savvy and educated donors have difficulty finding financial information on charities from which they receive appeals when the name and reply address on the appeal do not match the name and address on the 990. Charities that do good work and have nothing to hide should stand behind open information disclosure.
Governance and Accountability:
1). No compensated individuals should serve on an organization's board, except for the Chief Executive serving ex-officio.
Service on the board of directors of a nonprofit organization should, without exception, be voluntary. Any compensation provided to board members of any organization, no matter how small, diminishes the public perception of integrity of charitable organizations as a whole.
2). All compensation provided to Officers, Directors, Trustees and Key Employees from a charity and all of its 501 (c) related organizations should be included explicitly on page 4 of the form 990.
Some charities are able to pay their CEOs through multiple affiliated organizations -- allowing them to report a lower salary on any one 990, and thus appease donors who want to keep the compensation number low. Charities are already required to include this information in the 990, but more often than not, instead of being listed in one place so that donors can easily find it, this compensation information is spread out in several statements throughout the 990. This is a distinction that has to be made in the non-profit sector only, as in no other sector does an individual's salary for a regular work week come from multiple sources.
Instead of forcing donors to get out their calculators and search through statements 17, 23, and 28 to add up the CEO compensation from all related organizations, this information should all be on page 4, with statements only included when the compensated directors and key employees list exceeds the space allotted in Part V. In addition, all funds paid as consulting fees for the services of the Chief Executive should be included as compensation.
3). Wherever a program expense is labeled as "education," the charity should indicate whether or not the educational materials were bundled with a fundraising appeal.
Disguising fundraising appeals as educational materials is another practice, engaged in by some unscrupulous charities, that undermines the integrity and credibility of the entire sector. One prominent health research charity, for example, incurs 25 percent of its education costs in conjunction with its fundraising appeals. If charities feel that this is a legitimate way to label their expenses, then they should have no problem disclosing it to the public.
The common thread in all of these proposed changes to improve the integrity
and credibility of the nonprofit sector is open disclosure. If a charity does
not see anything wrong with a particular practice, it should have no problem
making the public aware of how it operates. For example, if charities genuinely
believe that paying a professional fundraiser an 80-percent commission or paying
their CEO through five affiliates is a perfectly acceptable practice, than they
should not have a problem disclosing this information to a donor. Critics of
Charity Navigator often assert that donors don't understand the complex
way charities operate. If charities believe that donors need to be educated,
then they should be at the forefront of providing them the information they
need. Otherwise, be prepared for the government to step in. The choice is ours.
It's the non-profit's sector's turn at-bat.