The author is also a member of the Board of Directors of the Donors Forum of Chicago and a member of the Committee of Ethics and Accountability of the Independent Sector. The views expressed herein are solely the personal views of the author. The author would like to thank Janice Rodgers of Quarles & Brady for reviewing an initial draft of this paper.
The passage of the Sarbanes-Oxley Act in 2002, intense media scrutiny over the last several years, and continued Congressional interest in the not-for-profit sector has focused the sector on issues of governance and transparency like never before. A variety of organizations have developed standards of governance, identifying principles under which not-for-profits should operate as well as offering proposed best practices for organizations to follow. Others provide “grades” on governance, certificates or seals of approval that donors can consider before making contributions or grants.(1) Increasingly, tools and model policies, including codes of ethics for various organizations, are being made available on the web or through other sources.(2) The result has been a sea change in the way in which many not-for-profit organizations approach issues of governance, accountability, and transparency.
The proliferation of resources makes it increasingly difficult for any charity to claim it lacks resources or the ability to implement best practices. Yet, for many not-for-profits, particularly smaller ones, there remains uncertainty and confusion about what steps to take and the core aspects of this evolution in practice. In many respects, the sector is still in the mid-innings of the governance ballgame and there are still hundreds if not thousands of not-for-profits that need to embrace necessary reforms, but may be uncertain where to turn.
This article offers suggestions for all not-for-profits to consider at this critical time. It suggests that by focusing on principles of governance, responsibility, ethics, accountability and transparency (G-R-E-A-T) any organization can be more effective and successful. It then offers some suggestions on how to move forward from broad principles to concrete action.
As has been repeatedly observed the not-for-profit sector is incredibly diverse. If there is a general consensus in the sector on one overarching principle applicable to the efforts to achieve better governance it is that “no one size fits all”.(3) What may work well for a large private foundation with substantial resources, may not work as well for a small public charity providing critical resources in the inner city or an arts organization with a small board and staff struggling to get by.
Organizations must adopt practices and accepted principles to their respective organizations in the context of their philosophy, culture, needs, and resources. That being said, there are core aspects and values that all organizations can embrace based on their own unique needs and circumstances. These core principles and values can be captured in the acronym G-R-E-A-T as follows:
Governance: The adoption and use of practices that result in effective oversight of the chief executive officer by an engaged board.
Responsibility: Ensuring that Board and staff understand the responsibility that comes with being a not-for-profit organization.
Ethics: Taking the necessary steps so that the mission of the organization is performed in an ethical way.
Accountability: Evaluating your actual work against your stated mission.
Transparency: Informing the public and others about your work in an open manner.
The language and concepts underlying these principles are not new to observers of the not-for-profit sector over the last few years. What is important is that organizations take the necessary steps to put into practice the words that, without action, stand as empty platitudes. The remainder of this article identifies various ways that organizations can seek to achieve these principles by taking or adopting various steps that will address one or more of the principles.
The rhetoric of good governance is easy to proclaim, but the importance of good governance goes beyond words. Implementation of good governance beyond bald proclamations matters for a number of reasons:
While there is little empirical evidence on the issue, anecdotal evidence and common sense suggest that organizations with good governance are more effective organizations.(4) They are not sidetracked by conflicts of interest, they have appropriate oversight that allows them to identify problems before they emerge, and they encourage board and staff alike to focus on effective performance of their mission.
Donors, public and private, also increasingly care about the good governance practices of their grantees. MacArthur Foundation, for example, in its due diligence process now asks grantees a number of questions about their governance practices.
Good governance is also important to the sector as a whole. If the sector cannot or does not take steps to demonstrate to regulators that it can embrace good governance, it is far more likely that regulators will impose additional obligations on the sector. The Senate Finance Committee continues to show interest in potential legislation on the issue and recently held a roundtable to discuss issues of governance in a variety of circumstances. Whether legislation will mandate governance practices or the sector can effectively self regulate is a question that depends, in part, on how the sector responds to governance initiatives.(5)
The principle of one size does not fit all does not mean there are not steps that all organizations can take without much difficulty. Each organization should assess their current practices against the best practices identified as appropriate for their type of organization. Not-for-profits in Illinois, for example, should assess their practices against the Illinois Nonprofit Principles and Best Practices produced by the Donors Forum of Chicago.(6) Every organization can (and should) implement a code of ethics or conduct that should include a conflict of interest and whistleblower policy. Examples of these polices are readily available as noted in Footnote 1 infra.
Every organization should also ensure that its board has a process to ensure financial operations are properly overseen. In most cases, this should mean the creation of an audit committee. In those cases, however, where the organization is so small that the creation of a separate audit committee(7) may not make sense, the Board should set aside time in its board meetings to act effectively as an audit committee otherwise would. This should be separately noted on the agenda and the time taken to doing it right.
In determining the steps your organization will take and in adopting policies regarding governance and ethics, select policies and practices that you believe your organization and the individuals associated with it can meet. It can do more harm to adopt a policy and then not follow it than have no policy at all. This is especially true in the area of ethics and governance. The board or audit committee should review periodically compliance with the policies that have been adopted.
Adopting good policies and putting in place a process to measure compliance are important first steps, but they are not the end of the process. Leadership, particularly in the areas of ethics, must flow from the top of the organization: The chief executive officer and the board. They must demonstrate a commitment to doing the right thing in all situations that raise ethical issues. Nothing can be more damaging to efforts to ensure a G-R-E-A-T organization than for employees or outsiders to believe that the leadership does not “walk the talk” in the area of ethics and good governance. Failure of leadership to take these steps also exposes the organization to damage to its reputation should the media examine critically the actions of the leadership and to charges of hypocrisy or worse.
Understand what your peer organizations are doing and don’t be an outlier to a standard of conduct or care that similarly-situated organizations are meeting. Organizations are more vulnerable to criticism or to scrutiny by the media or regulators if their practices are outside the mainstream. It is increasingly easy to determine the policies and practices of other peer organizations through their websites or by communicating directly with them. Make a conscious decision – and understand the consequences of your decision if your practices do not meet the standards set by your peers.
The IRS and the states’ attorneys general often make known their concerns and the areas where they will be focusing their audits or attention.(8) No organization should be caught by surprise by an audit or examination on matters that the regulators have announced they are looking to review. This includes, for example, the recent focus on compensation. The IRS over the last year reportedly sent some 2000 letters to various organizations inquiring about compensation practices. In some cases, these initial letters were followed up with more intensive examinations based on the initial information provided. Once you are aware of the concern or interests of regulators, have an independent party assess your practices in light of a possible inquiry by regulators so you can take steps to improve your deficiencies. For organizations that may lack resources to hire outside law firms or auditors, there are organizations or individuals who are willing to provide pro bono assistance in this regard.
Private grantmakers, in particular, have become far more transparent in terms of their own governance practices and in their expectations for grantees. Often these practices and expectations are available on the organization’s website. Organizations should take the time to understand the issues of importance to their donors and be prepared to respond accordingly. There should be no surprises when the information is readily available in one form or another.
Identify your core audiences and find the most effective way to communicate with them regarding your mission, how you are performing, and how they can help. A good website is almost a necessity in this day and age and there are organizations that will help not for profits with setting up and running a website. If a website is not feasible, find other ways to communicate, such as newsletters, annual reports, or e mails. Recognize that donors and other interested parties may be receiving a flood of information, some of which may simply go unread, and think about ways to distinguish the information you make available.
Transparency is also widely expected in this day and age. If you have audited financial statements, these should be readily available and on the website. An annual report, containing financial information or other key statistics about the organization should also be considered. This report can be put on the website or distributed electronically.
Measuring success and failure can be difficult for not-for-profits, but the absence of easily identifiable benchmarks, such as profits and losses, is not an excuse for failing to honestly evaluate your performance, admit mistakes, and take steps to improve performance. The board must take the lead in insisting on evaluation of performance of the institution. The board should also periodically assess its own effectiveness and performance as there are no shareholders to hold the board accountable. This is more easily done with the assistance of independent third parties, but there are assessment tools available to assist boards.(9)
Not-for-profits are increasingly expected by donors, the media and regulators to govern themselves in accordance with best practices. A focus on ethics and Codes of Conduct are an important first step, but it is incumbent upon boards and leaders to demonstrate their commitment. By staying focused on G-R-E-A-T principles, an organization can be more effective in the pursuit of its mission.
1 - The website of Independent Sector contains an excellent compilation of various standards and practices that organizations, national and state, have compiled. See www.independentsector.org. Among those cited are the Illinois Non-Profit Principles and Best Practices prepared by the Donors Forum of Chicago; Statement of Values and Code of Ethics for Nonprofit and Philanthropic Organizations prepared by Independent Sector; Minnesota Council of Nonprofits Principles and Practices for Nonprofit Excellence; and Maryland Association of Nonprofit Organizations: Standards of Excellence. Organizations that provide evaluations of other organizations include the Better Business Bureau Wise Giving Alliance, Charity Navigator and the Maryland Standards of Excellence Institute. The Council on Foundations’ website, www.cof.org, also contains forms and principles that grant makers will find useful.
2 - For a variety of different codes of ethics see the Independent Sector home page.
3 - The Final Report of the Panel Convened by the Independent Sector emphasized this aspect of its recommendations to the Senate Finance Committee. See pages 20-22 of the Report.
4 - Recent studies in the for-profit world suggest good governance can make a difference in returns.
5 - The Panel convened by the Independent Sector recently announced the formation of a new advisory committee to study the issues of self-regulation. See www.nonprofitpanel.org.
6 - The Board of Directors of the Donors Forum of Chicago undertook such a review shortly after the Principles and Best Practices were finalized and found the exercise helpful in identifying further modifications to existing practices. The Donors Forum further developed board self-assessment tools that are available on its website, www.donorsforum.org.
7 - Some states may require that all not-for-profit organizations above a certain size have audited financial statements or an audit committee. See, e.g., California Non-Profit Integrity Act of 2004 (charitable corporations with gross revenues of $2 million or more must have audited financial statements using generally accepted accounting principles).
8 - State attorneys general maintain websites that often contain important indications of concerns or interest. In addition, the website for the National Association of Attorneys Generals, http://www.naag.org, contains press releases and other information that might be of interest. The National Council of Nonprofit Associations also has state policy updates on its web site: http://www.ncna.org/index.
9 - A number of third parties have assessment tools or kits available for a fee or made available for no charge. The Donors Forum of Chicago has a board assessment tool kit it has made available on its website, www.donorsforum.org.