by Gary M. Grobman, Ph.D.
(This is an excerpt from A Practical Guide to Ethics in Your Nonprofit Organization, by Gary M. Grobman, published by White Hat Communications in 2017.)
A Practical Guide to Ethics in Your Nonprofit Organization
The roots of our modern system of charitable organizations can be traced to religious writings that are thousands of years old. All of the major religious traditions recognize charity as a path to doing God’s work, and both a secular and nonsecular tradition of asking for money and goods to serve the less fortunate remains a thriving and vibrant aspect of American culture. Some of this is attributed to the fact that government in many other Western nations played a much more direct role in meeting the needs of the sick, the poor, the aged, and the infirm. In contrast, the government’s role in serving the needy has historically been more indirect in the United States.
Depending on the circumstances and the demand from voters for programs, government funds human services, which are often provided by nonprofit organizations. Government will avoid providing some services when there is no real voter consensus from the electorate, if they are controversial, but will subsidize private contributions through the tax system. Organizations that provide these services and meet certain accountability and reporting criteria are exempt from paying taxes, and donations to them may be deducted on the donor’s federal individual income tax return. If an individual desires to solve some social problem or otherwise promote the public interest in some way, and is unable to convince government to do so, he or she has the option to create a tax-exempt organization, have a committee of like-minded individuals who support that mission to have independent governance and management of the organization, and make efforts to have members of the public provide financial support, subsidized by the government through the tax system.
Individuals, corporations, and foundations donated approximately $373.25 billion to charities in 2015. While it certainly isn’t unusual that a donor will spontaneously write a check to a nonprofit organization, the vast majority of charitable contributions are the result of solicitations by tax-exempt organizations to individuals, businesses, and foundations. As a result of a history of unethical and fraudulent fundraising, almost every state has enacted laws requiring those that solicit for charitable purposes to register and submit periodic reports about their financial activities. Only Delaware, Idaho, Indiana, Iowa, Montana, Nebraska, South Dakota, Texas, Vermont, and Wyoming do not require registration. The federal government also has placed restrictions on charitable fundraising. It requires charities to document bona fide donations that are eligible for tax-exemptions. It requires reporting on their annual tax returns about the amount of professional fundraising fees, total fundraising expenses, information about very large contributors (using Schedule B) and detailed information about professional fundraising services (using Schedule G). And it limits the exemption and deduction to only those who submit applications and meet certain criteria.
In recent years, fundraising has become quite sophisticated. Technology has advanced so that there is much less face-to-face contact with donors. Fundraising has become a profession, with credentialing, training, university courses, and specialized software that makes solicitation more efficient. Ethics codes have been advanced that address many of the issues that relate to fundraising (see Chapter 9). And despite all of this, there is a dark side, as well. High profile cases of fraud and mismanagement have made the public more cynical about whether their donations are really being funneled to charitable purposes. For example, a year-long investigation by CNN investigative reporter Drew Griffin found that 50 U.S. charities “devoted less than 4% of donations raised to direct cash aid. Some charities gave even less. Over a decade, one diabetes charity raised nearly $14 million and gave about $10,000 to patients. Six spent no cash at all on their cause. The Chicago Tribune disclosed irregularities within the “Save the Children Federation” child sponsorship program, in which donors who contributed to support individual children were not informed that their sponsored child had died as many as five years before.
Among the ethical issues that are of particular interest in fundraising are:
1. Fundraisers should obey all laws, rules, and regulations. The federal government has laws that apply to fundraising disclosure, substantiation, and record-keeping. Forty states and the District of Columbia require registration and reporting. Some local governments have restrictions relating to solicitation, such as times telephone solicitors may call, door-to-door solicitation, or canning on public streets, or on private property without permission from the owner. Organizations should honor “no solicitation” postings. Organizations should train their fundraising staff to know about and comply with these laws, and be scrupulous in insisting that violators will be subject to discipline, even if the intent of the fundraiser was a good-faith effort to benefit the organization. Organization staff members should be encouraged to report violations of law and organization policies, and not look the other way when their colleagues engage in illegal or unethical activities that stain the reputation of the charitable sector in general and the organization in particular.
2. Privacy and confidentiality must be protected. Organizations must protect the identity of donors who provide a gift on condition that they remain anonymous. Donor information, including credit card information (see http://en.wikipedia.org/wiki/Payment_Card_Industry_Data_Security_Standard for information about Payment Card Industry Data Security Standard compliance), Social Security numbers, e-mail addresses, and prospect research files must be protected and not disclosed to anyone without a legitimate need to know this information, unless the donor agrees. Donors should be afforded the option to opt out of having their address and/or e-mail address shared with other nonprofit or commercial entities. Organizations that use the services of third-parties for fundraising, gift processing, data management, data analysis, and similar services that require the release of sensitive data outside of the organization must make it clear in their contracts that donor privacy and confidentiality will be protected.
3. Organizations should meticulously honor gift restrictions of the donor. From the organization’s perspective, it may make perfect sense for there to be some flexibility in how a donor’s gift is used, even if it is not quite consistent with the stated purpose of the gift. However, it is unethical to divert the gift for purposes other than those expected by the donor without that donor’s express permission. There is certainly nothing wrong with alerting donors about alternative or related uses of their donations when the organization believes it is in their best interest to do so. If the organization solicits donations that are intended to be for unrestricted purposes, that should be clear to donors. Because there is a cost to tracking, managing, and reporting restricted gifts, many organizations will have some minimal threshold in their gift acceptance policy (see #4 below) that makes it clear that small donations are put to use where they are most needed by the organization.
4. Organizations should have a formal donation acceptance policy. Organizations should have a written policy governing which gifts (both money and goods) will not be accepted, and the process used to adjudicate disputes. Gifts should not be accepted from those who have values at odds with the organization’s gift policy. Included in this policy should be—
- provisions for dealing with contributions from those convicted of major crimes
- when the gift is unlikely to have any value to the organization
- when the donor places restrictions on the gift that are unacceptable (such as requiring it be used for illegal or unethical purposes)
- when the donor’s intent is to exploit the brand of the charity to an extent that is unacceptable, and not in the best interests of the charity.
A sample gift policy may be found at:
https://www.gcfdn.org/Giving/Giving-with-GCF/Fund-Policies
5. Fundraisers should not be compensated based on the amount they raise. The fundraising profession’s leadership has been virtually monolithic in its opposition to paying fundraisers based on the amount they raise, whether through finder’s fees (paying a third party who receives a fee based on facilitating a donation, and who gets paid only if the donation is actually made), contingent fees, commissions, or percentage-based compensation. One reason is that doing so encourages fundraisers to engage in behavior designed to increase the size of the gift in the short term to the benefit of the fundraiser, even when such techniques are unethical, inappropriate, or otherwise not in the best interests of the organization. Another objection is that such compensation gives the impression that funds being donated for charitable purposes are directly being diverted to private gain (see: http://www.afpnet.org/Ethics/EthicsArticleDetail.cfm?ItemNumber=734). Note that bonuses based on fundraising performance are considered acceptable, if not based directly on the amount raised, but rather tied to meeting or exceeding performance goals—particularly when staff members other than fundraisers are also eligible for performance-based bonuses.
6. Organizations must be transparent in disclosing costs that are related to their fundraising. They should disclose upon request to prospective donors a good-faith estimate of the amount of their donation that is paying for fundraising. If this is not practical with respect to any particular individual transaction, then the estimate should be based on data for the most recent accounting period. They should be transparent about any use of third-party fundraising professionals. Note that many states require contracts between charities and professional fundraisers to be filed with state regulators, and some make this information publicly available. Also, organizations that spend more than $15,000 annually for professional fundraising services must disclose information about their relationships with these organizations on schedule G of their federal 990 annual tax return.
7. Donors should not have an inappropriate influence or receive inappropriate benefits from the organization in exchange for their donations. The principle behind qualifying for a tax exemption for donations is that the donor is making a gratuitous donation, and is not receiving anything of tangible value in exchange for the donation. But it is not unusual for donors to make unusual and inappropriate requests of the organization that violate this principle. Fundraising solicitations should not be tied to tangible benefits to a donor or potential donor that go beyond what is offered to the general public, with some reasonable exceptions related to reasonable donor recognition. For example, donors and potential donors should not be offered preferential services (e.g., having preferential admission to a college or health care facility) as a quid pro quo for their donations) beyond what is permissible under IRS rules). The organization should not be requiring a charitable donation as a condition for receiving preferential treatment. It should be clear that payment in exchange for services is not eligible for tax benefits. One can even make a defensible argument that a donor who makes a sizeable donation as a quid pro quo for having his or her name on a building is not making a gratuitous donation that qualifies for a tax exemption, but rather is simply paying a fee for service in the same way that many corporations spend millions of dollars for naming rights to athletic stadiums and arenas.
8. Organizations should resist undue influence of donors over the organization’s programs and activities. It is not unusual for major donors to seek to play a role in influencing programs they fund. But sometimes this influence goes over the line, with the donors micromanaging the program they are funding, stretching the mission of the organization to be sensitive to their personal interests, and having the organization’s staff respond to their own needs rather than those of the program’s beneficiaries. Organizations should make it clear that donors have limitations on their ability to control the organization’s policies and programs. One exception to this might be when the intent of the grant is to provide hands-on management by the grantor, such as what might be the case with some forms of so-called venture philanthropy. But if that is the case, then the organization should be clear as to the terms before agreeing to accept such a grant.
9. Fundraisers should have clear boundaries between themselves and donors. It is not unusual for personal friendships to develop between gift officers and donors. There are often opportunities to exploit this relationship in ways that benefit the fundraiser personally and that are unethical and inappropriate. For example, fundraisers should not permit such donors to include the fundraiser in their wills, accept valuable personal gifts, or engage in romantic relationships with their donors.
10. Prospect research must be conducted only for legitimate purposes. Prospect research is a legitimate activity of fundraisers to obtain accurate data about the capacity of a donor to give, their interests, and who from the organization might be the best person to solicit them. Yet, there are techniques that go over the line ethically. Sensitive personal information should not be sought, collected, and catalogued if it is motivated by seeking to have leverage on a donor in a way that is akin to blackmail or extortion. Fundraisers must not access databases for which they have no authorization or legitimate purpose, pose as others to access sensitive information about donors, or engage in computer hacking to access sensitive files. They should not make threats, overt or veiled, to encourage donors to make or increase donations that are influenced by a desire to keep sensitive information private.
11. Organizations must be transparent with financial data. They must meticulously provide breakdowns between program and fundraising costs that are consistent with accounting rules of regulators and grantors. They should disclose this data to both regulators and donors with good faith. Organizations should resist contracting with third-party fundraisers who will be compensated an unreasonable amount in proportion to their services, even if the organization appears to have some benefit (such as receiving a small amount of money in the arrangement compared to no money in the absence of an arrangement).
12. Fundraisers should avoid harassment or undue pressure of those being solicited. They must be completely respectful to the donor and sensitive to the donor’s wishes with respect to the donation. They should be willing to terminate the solicitation when the prospect makes it reasonably clear that he or she desires that; to take “no” for an answer when it is reasonably apparent that the prospect does not wish to donate to the organization; and honor contact preference requests of those being solicited, including reduced frequency, contact through certain channels (e.g., do not call, but e-mailing is fine, or completely to opt out).
13. Fundraisers should not exploit any decreased mental capacity of those they solicit for the purposes of obtaining or increasing a charitable gift. They should not knowingly solicit those under 18 without permission from their parents or guardians, or those who are too ill or infirm to understand completely the consequences of their pledges and donations.
14. All fundraising solicitation materials and communications should be honest, accurate, and up to date. Solicitors should be willing to disclose the full and correct name and location of the charity for which they are soliciting, identify themselves and the organization that employs them if this is not the charity, explain the mission of the organization and the purpose funds raised will be utilized, say how the individual being solicited can access official financial information about the charity, and provide an opportunity to ask questions about the organization and receive honest answers.
15. Fundraising costs should not be excessive. Although the Supreme Court has ruled that statutory limits on fundraising costs are not enforceable, it is unethical for organizations to engage in solicitations whereby the amounts expended for fundraising costs are excessive. It is difficult to determine what reasonably constitutes “excessive,” since factors such as the type of organization, its mission, and its lifecycle stage would influence this. There has been much debate over the years about the appropriate minimum threshold for the program costs/fundraising costs ratio. One industry minimum that seems to be a standard suggests that at least 65% of the nonprofit’s three-year average annual expenses should be used to directly support programming. Clearly, it is unethical for situations such as what a CNN investigation found with respect to the Disabled Veterans National Foundation, a veteran’s startup “charity.”
16. Online solicitations should provide both online and offline contact information for prospective donors. Contact information should make clear the relationship between the organization, professional fundraisers hired by the organization, and third-party payment processors. It should be clear how much of any donation made by the contributor will be eligible for a tax deduction before a gift is made, if not all of the donation is funneled directly to the charity, but part of it is withheld by any third-party that is not a 501(c)(3) tax-exempt organization itself.
References
AFP (2001). Position paper: Percentage-based compensation. Retrieved online from: http://www.afpnet.org/Ethics/EthicsArticleDetail.cfm?ItemNumber=734
Canadian Code of Practice for Consumer Protection in Electronic Commerce
http://www.cmcweb.ca/epic/site/cmc-cmc.nsf/vwapj/EcommPrinciples2003_e.pdf/$FILE/EcommPrinciples2003_e.pdf
References
AFP. (2001). Position paper: Percentage-based compensation. Retrieved online from: http://www.afpnet.org/Ethics/EthicsArticleDetail.cfm?ItemNumber=734
Anderson, L. (1998, March 18). Save The Children reacts to probe, plans reforms. Chicago Tribune. Retrieved online from: http://articles.chicagotribune.com/1998-03-18/news/9803220001_1_special-report-child-sponsorship-children-federation
Blodget, H. (2006, November 13). Grant away: Why venture philanthropy is important, even if it sounds ridiculous. Slate. Retrieved online from: http://www.slate.com/articles/life/philanthropy/2006/11/grant_away.html
CharityLawyer. (2013). Arizona abolishes solicitation registration. Retrieved online from: http://charitylawyerblog.com/2013/06/20/arizona-abolishes-solicitation-registration/
Charities Review Council. (n.d.). Use of funds. Retrieved online from: http://www.smartgivers.org/notfit
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Fitzpatrick, D., & Griffin, D. (2012). IRS forms show charity’s money isn’t going to disabled vets. Retrieved online from: http://www.cnn.com/2012/05/07/us/veterans-charity-fraud/index.html
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(This is an excerpt from A Practical Guide to Ethics in Your Nonprofit Organization, by Gary M. Grobman, published by White Hat Communications in 2017. The book is available at Amazon.com.)
Gary M. Grobman (B.S. Drexel University; M.P.A. Harvard University, Kennedy School of Government; Ph.D., Penn State University) wrote his doctoral dissertation on An Analysis of Codes of Ethics of Nonprofit, Tax-Exempt Membership Associations: Does Principal Constituency Make a Difference? He served as the executive director of the Pennsylvania Jewish Coalition from 1983-1996. Prior to that, he was a senior legislative assistant in Washington for two members of Congress, a news reporter, and a political humor columnist for Roll Call. He also served as a lobbyist for public transit agencies. In 1987, he founded the Non-Profit Advocacy Network (NPAN), which consisted of more than 50 statewide associations that represented Pennsylvania charities. He is the author of The Nonprofit Handbook, Improving Quality and Performance in Your Non-Profit Organization, The Nonprofit Management Casebook, and other books on nonprofit management.