Trust…and Cups of Tea

The Philanthropy News Digest surveyed nonprofit professionals-both funders and fundraisers–earlier this spring with the question, Has American philanthropy lived up to its mission to advance the common good?” There was a surprisingly high “no” response-38%. If we don’t believe in our own overriding purpose, small wonder that donors have skepticism and even mistrust about our activities.

It gets worse. This survey occurred before the recent, disturbing news coverage of Greg Mortenson, author of the well-known book, Three Cups of Tea, who may have fabricated some of his story and possibly also mishandled the substantial dollars that have flowed to his foundation. Whether these charges are proven true, the fact remains that any kind of scandal in the world of international NGOs and philanthropy is a painful reminder that our sector must always strive to earn and keep the highest level of donor trust.

The Chronicle of Philanthropy just published an excellent response piece by two attorneys who specialize in advising the nonprofit sector, Emily Chan and Gene Takagi. The full link to the article is here. and well worth a few minutes of your time. Here are the highlights:

At a time when trust in charities has eroded, the scandal over the Central Asia Institute, the nonprofit founded by Greg Mortenson, author of Three Cups of Tea, threatens to cause even more questions for organizations of all kinds. Among the key issues facing the Central Asia Institute: whether the money the organization raised from supporters was channeled mainly to schools in Afghanistan and Pakistan, as it said was the case and in keeping with its mission, or whether it went primarily toward promoting sales of Mr. Mortensen’s books and helping him snare lucrative speaking fees.

Charities are under a magnifying glass like never before. Advances in technology have created an era of transparency. No longer can charities rely on just the good will of their name and historical record. Now they must continually justify their relevance and nurture and protect their credibility. Public trust is of paramount importance, and to lose it may mean losing everything To be sure, the problems at the Central Asia Institute are unusual, but the controversy should serve as a cautionary lesson for all nonprofits.

  1. Consider public expectations in every report and publication. One of the biggest questions surrounding the Central Asia Institute has to do with the amount of money it spent domestically versus overseas to construct and pay for the operations of schools in Afghanistan and Pakistan. It came as a surprise to many supporters that most of the institute’s spending on charitable programs was categorized on its tax form as “domestic outreach” (such as paying for Mr.Mortenson’s speaking engagements and advertising for his books). Charities should exercise care with the information they produce about the organization and monitor their sources for consistency and transparency. Every piece of information disclosed to the public contributes to how a charity builds a relationship and trust with its supporters and donors.
  2. View your informational tax return as a public-disclosure document, not just an Internal Revenue Service form. More than just an information return intended for the IRS, the Form 990 has become an easily accessible public document that charities should expect to come under scrutiny. Allegations of inappropriate use of charitable funds by Mr. Mortenson and the Central Asia came in large part after charity watchdogs and journalists reviewed the organization’s Form 990. Diligent nonprofit leaders should have their organization’s Form 990 prepared or at least reviewed by marketing experts as well as those with financial expertise.
  3. Watch for potential conflicts of interests involving top executives and board members. A conflict of interest exists when a director or officer of an organization has a personal financial interest in a transaction with the charity. While not all conflict-of-interest transactions are illegal or ill-advised, they should be allowed only after the charity has undertaken careful review.
  4. Prevent sweetheart deals that benefit a charity’s officials or board members. A charity must serve a public interest rather than a private one, and any financial benefits provided to an individual must be incidental compared with the amount spent to advance a charity’s tax-exempt purposes. If a charity’s directors and officers, as well as other “insiders” in a position to exercise substantial influence on the organization, receive a financial benefit that exceeds the value of the services or goods they provide to the charity in return, they may be subject to a penalty tax for what the IRS calls an “excess-benefit transaction.”
  5. Structure the board to engender public trust. The Central Asia Institute’s Web site identifies three people who serve on its board of directors, including Mr. Mortenson. While it is legally permissible for a charity to have only three directors, such a small board can be a problem for an organization of this size-after all, it collected $14-million in revenue in 2009. The board’s makeup in this case may cause even more suspicions because Mr. Mortenson is also the executive director. That means only two other people were operating as a check on his activities. Charities with very small boards should strive to add members who are committed to the mission and who would act in the charity’s best interests. The additional directors may bring different perspectives, skills, and other resources.
  6. Conduct independent audits regularly to avoid trouble. A charity’s board is supposed to ensure that the organization’s resources are deployed efficiently and are focused on the charitable mission. For organizations with sufficient resources and substantial financial activities, like the Central Asia Institute, an independent audit is strongly recommended (and may be required by law). The Central Asia Institute did not have an audit even in 2008 when its net assets exceeded $10 million, it spent more than $5-million, and it generated a surplus of more than $8-million.
  7. Adopt clear and fair travel policies. The Central Asia Institute’s spending on travel has attracted criticism because it covered first-class and charter travel as well as travel for companions. Charities must be sensitive to donor and public expectations of how charitable assets are used, especially when it comes to travel. For an organization that serves poor people in Afghanistan and Pakistan, first-class and chartered jet travel for insiders and their non-work-related companions can just look wrong. It may be wiser to pay a compensated employee a higher salary than to provide him or her with this type of fringe benefit.
  8. Draft an emergency response communications plan long before any problems arise. Charities that find themselves in the middle of a news-media nightmare should not underestimate the importance of strategic damage control. Especially in today’s increasingly connected world, it is impossible to stop the fast pace and extended reach of information. Even before everything hits the fan, charity officials should consider devising an emergency-response plan. This can be especially important for an organization in which a key individual influences much of the public perception about the organization. Charities depend on public support and trust. Even if a charity comes out unscathed legally, a damaged reputation and loss of good will can be equally-if not more-damaging.

RMA published its own checklist late last year about this issue in a Rich TIP, “Credibility and crisis,” which can be accessed here.

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