lCharity: Law & Accountability

lTrends in Self-Regulation and Transparency of Nonprofit Organizations in the U.S.  

By Robert O. Bothwell

lAbstract  
            After the United Way of America/Bill Aramony scandal in 1992, and several other surrounding scandals
of high media visibility, many charitable leaders in the U.S. became concerned that the public, especially donors,
would lose their confidence in the good of charitable organizations.  The charitable community, thus, began
thinking more about what should be done in terms of self-regulation and transparency that could both prevent
similar scandals and prevent unwanted and possibly over-reaching new legislation.  What has happened in self-
regulation and transparency since? 
            Methodology:  The author conducted a telephone survey of 51 charity leaders and state regulators
over two years to seek answers to these questions.  Mostly national leaders were consulted, in the fields of
health, education, welfare, the arts, advocacy and services.  After interviewees identified significant attempts at
self-regulation and transparency, relevant documents and other research were reviewed.
            Findings and Conclusions:  Media attention to nonprofit sector scandals in the 1990s has increased
the sector’s discussion about regulation, self-regulation and transparency.  But the media spend precious little
time keeping track of nonprofits, and can only be counted on to publicize the really bad.  Governmental
regulation wasn’t effective in preventing the high profile scandals, nor is it seen to be effective generally in
ridding the sector of bad apples.  Resources are a key problem.  Thus, more attention in the nonprofit sector has
turned to self-regulation -- both to avoid future major scandals and to avoid onerous legislation. 
            Self-regulation through improving board governance is on the rise.  Yet it is a Sisyphean task with many
difficulties.  Sector-wide codes of conduct, codes of ethics, standards, principles of good practice all garnered
attention in the 1990s.  Some drew media attention, but they had no persistence.  Accreditation plans with
enforcement or tangible rewards, usually with training and education of their members in good accountability
practices as an essential component, appear to be on the increase, particularly within nonprofit sub-sectors or
membership organizations whose members undertake similar types of activity.  Independent watchdog
organizations are few and far between, with a limited growth potential, but have far-reaching influence.  One new
one emerged, while the other established national watchdogs are undergoing rethinking of how they do
business.  Cause related marketing linking business corporations and charities has expanded to $5 billion a
year, attracting state Attorneys General interest and new self-regulation by charities, but involved nonprofits’
recent self-regulation has muted the issue.
            Disclosure or transparency has become the most popular means of self-regulation, especially through
the Internet, though mostly it has been inspired by new federal government legislation that requires much easier
public access to IRS forms 990 (for public charities) and 990PF (for private foundations), and allows Internet
posting as an alternative to making paper copies of 990s available.  Effectiveness, corruption, and use of 501c3
soft money for political campaigns were only considered as relevant issues by a very few respondents.

  * This paper was presented at The European Institute of Advanced Studies in Management Workshop: The
Challenges of Managing the 3rd Sector, held in Brussels in May 2001.
** Robert O. Bothwell is Founding Executive Director, former President, current President Emeritus/Senior
Fellow of the National Committee for Responsive Philanthropy, Washington, DC.   He has authored or published
over 30 research reports concerned with private philanthropy’s responsiveness to social justice and
environmental organizations.  He created a national movement of "alternatives" to the United Way, which raise
over $300 million annually from workplace charity drives in the U.S.  He challenged foundations to reevaluate
their grant making -- in light of the conservative takeover of Congress/public policy -- through research, publicity
and educational briefings.  He initiated the first public examinations of community foundations and their
 responsiveness to the disenfranchised, and of corporate grant making to racial/ethnic populations.  He
expanded disclosure of critical information by foundations and nonprofits to grant seekers and the public.
 
Robert O. Bothwell can be reached at:
NCRP 
1710 Rhode Island Ave. NW, 4th Floor
Washington, DC 20036 USA
tel: 202-467-4495
fax: 202-467-0065
email: bob@ncrp.org website: www.ncrp.org 

Independent Watchdog Organizations

             Nonprofits are evaluated by independent watchdog organizations against standards the latter conceive,
then the results are published for public scrutiny.   Since government is nowhere involved in this process, it is
considered part of the nonprofit sector’s self-regulation scheme.  There have been four sector-wide watchdog
groups, only one of which was established recently:

· National Charities Information Bureau (NCIB), New York City (1918)

 

· Philanthropic Advisory Service of the Council of Better Business Bureaus (CBBB), Arlington, VA (circa
1974)
 

· National Committee for Responsive Philanthropy (NCRP), Washington, DC (1976)

 
· American Institute of Philanthropy (AIP), Bethesda, MD (1992).
                          Three of these four watchdogs have evaluated public charities’ governance and financial
situations, making public reports on individual national charities, information on charity standards, facts on wise
giving practices, issue alerts, and advisories on diverse subjects such as car donations and tax deductibility.  
The fourth watchdog group (NCRP) evaluates foundations, corporate giving programs and United Ways for their
responsiveness to marginal and disenfranchised populations, and makes public reports both on sub-sectors and
on individual foundations and corporations. 
                         Major changes are happening among these watchdog organizations.  First and foremost is the merger
of the two oldest and largest ones.   Failure to renew funding and departure of a new CEO left the NCIB
vulnerable, and merger with the CBBB was proposed and accepted.  The new organization, called the Better
Business Bureaus Wise Giving Alliance, became operational in early 2001.  Meanwhile, having created a
Standards Review Panel to rethink its criteria for evaluation of nonprofits, the CBBB is now completing that
process as the Alliance.  The reasons for the review were:   
1. Increased public interest in charity accountability,
2. Changes in nonprofit accounting guidelines,
3. New forms of fund-raising, such as Internet-based appeals,
4. Growth of cause related marketing,
5. Rise of local charities in importance, and
6. Rise of international charities in importance (Council of Better Business Bureaus, 1999).
 
            Meanwhile, after 23 years of operation under a founder/CEO, a new CEO took over at NCRP in 1999.  Changes
in program direction are anticipated, but unclear yet. 
                         The American Institute of Philanthropy has made some big waves in its short tenure.  Deciding to
publicize the charities which had huge reserves yet continued soliciting for operating money, AIP gave Father
Flanagan’s Boys Home (Boys Town) a failing grade for having reserves that could fund operations for five
years.  The charity hauled AIP into court, saying donors would think Boys Town was corrupt.  The two parties
settled out of court with neither backing down, but agreeing on a clarifying statement (Dundjerski).
                         While supportive of the concept of independent watchdog organizations, Law and Philanthropy
Professor Harvey Dale is concerned about how few charities and foundations actually are evaluated by these
organizations, and about the small number of donors who avail themselves of the evaluation results.
 

1.1Disclosure/Transparency as Another Means to Self-Regulation

                         Supreme Court Justice Louis Brandeis is credited with the mantra for transparency: “Sunshine is the
best disinfectant.”  (Although, according to Dale, he also wrote a celebrated treatise on “The Right to Privacy”
which counters his sunshine prescription.) 
                         The publication Trusts and Estates called this the “era of transparency” in its September, 2000 issue. 
Transparency, though mostly legislatively stimulated, and increasingly Internet stimulated, is on many charity
leaders’ minds as a better way to self-regulation. 
                         Disclosure has been a hallmark of leading charities and grant-making foundations for many years. 
They have voluntarily been publishing annual reports, brochures, newsletters and grant guidelines to inform the
public, potential and actual donors and grant-seekers.  Data usually include financial balance sheets and
statements of income and expenses; lists of officers and key staff; mission statements, organizational and
program goals; reviews of history and accomplishments; future plans; lists of donors; and more.  Foundations
usually also report lists of grants made, to whom, for how much, and for what purposes (National Committee for
Responsive Philanthropy, 1980).  
                         However, according  to the Foundation Center, only 41% of large foundations with assets of $25 million
or more voluntarily publish annual reports, and only 25% of the 11,000 largest foundations (assets $1 million+ or
grants $100,000+) publish anything at all.  These figures are lower than they were 20 years ago (Renz, 1998).
            Legally required public reporting, through the IRS forms 990 (public charities) and 990PF (private foundations),
can help to redress this information gap.  Legally required disclosure means that key items of information must
be publicly reported whether an organization wants to or not.
                         Federal and often state laws require filing of 990s/990PFs as public documents.  These documents
contain all the basic information identified above that nonprofits and foundations usually voluntarily publish, but
they also include expenses by program; lobbying expenses; complete lists of directors or trustees, with any
compensation, expense accounts and/or allowances; identification of the five employees and five consultants
who are highest paid; analysis of income producing activities (including program service revenue, government
fees and contracts, member dues and assessments); and more.
                         New federal laws and regulations require greater public access to 990s/990PFs.  Any citizen visiting a
charity’s or foundation’s office can request immediate access to the 990/990PF for the  past three years and the
organization’s original application for tax exempt status.   Any citizen posting a written request can expect to
receive these documents within 30 days for no more than nominal costs of duplicating and postage (Williams,
2000). 
                         Public charities do not have to provide their contributor lists, private foundations do.  However,  private
foundations only have to provide the 990PFs they file after March 13, 2000 (Williams, 2000).
                         A major new development is that publication of 990s/990PFs on the Internet is now a legal alternative
to making paper copies available.
                         Some survey respondents predict that mandatory electronic filing of 990s/990PFs will be here in a few
years, leading to instant public Internet access.  (The Securities and Exchange Commission now requires all
corporations selling to the public to file 10K forms electronically.)
                         According to many survey respondents, these new laws and regulations regarding 990/990PF
disclosure and Internet postings are already making disclosure more popular.
                         The Foundation Center has been posting more and more 990PFs on the Internet to assist grant-
seekers.  Guidestar (Philanthropic Research, Inc.) has been putting on the Internet many charities’ 990s and
foundations’ 990PFs plus selected other information from annual reports, brochures, etcetera, to permit active
donor research.  According to John Edie, General Counsel of the Council on Foundations, the Internet posting of
990PFs is a “non-issue” with the Council’s 1800 members.
                         Scanned versions of all 990s and 990PFs received by the IRS were posted on the Internet by
Guidestar in 2000 in a program worked out by Guidestar, the Urban Institute’s National Center for Charitable
Statistics and the IRS.  “Timely, in-depth disclosure of this public information will revolutionize our understanding
of charitable organizations – their structure, missions, investments, administrative costs and interactions with the
government and business sectors,” says Elizabeth T. Boris, Director of the Center on Nonprofits and
Philanthropy at the Urban Institute.
                         As of April 2001, Guidestar’s website claimed to have reports on more than 700,000 charities and
foundations.  Of these, 32,000 are posted voluntarily, says Guidestar President Arthur W. Buzz Schmidt, the
rest from IRS files.  Former President of the National Society of Fund Raising Executives, Pat Lewis, however,
is concerned that churches and other organizations that do not have a 501c3 IRS tax exempt designation are
not experiencing the same transparency. 
                         Several survey respondents thought that Internet exposure might encourage charities to put up more
information than the 990 requires, in order to explain or provide a context for salaries, board of directors’ fees,
consultant fees, unusual expenses and other data.
                         Meanwhile, the Congressional Joint Committee on Taxation last year issued “a massive set of
proposals that would expand substantially the disclosure requirements for tax-exempt organizations,” reports
Bruce Hopkins, noted author on nonprofit tax law.  “The litany of recommendations is overkill, way beyond
anything that can be considered reasonable...(This set of proposals, if enacted,) threatens to stifle the nation’s
750,000 charitable organizations.”  No action has yet been taken, according to Hopkins, except for a new law
requiring political organizations to file with IRS information about their contributors which must be made public. 
                         But more data/information is not a panacea for accountability, since potential donors do not have time
to search through everything, nor necessarily the capacity to evaluate same, says Chuck Bell of Consumers
Union.  And there is little in the way of analysis, criticism or comment, adds Dan Borochoff of the American
Institute of Philanthropy.
                         Quality reporting on 990s is an increasing issue: (1) to improve the quality of the required data and
information, eliminating blanks and improperly filled out forms; and (2) to improve the user-friendliness of the
990 document.  Sponsors of a Quality 990 Project are the Urban Institute’s National Center for Charitable
Statistics, National Council of Nonprofit Agencies, Independent Sector and Association of Fund Raising
Professionals (see www.qual990.org).  And Peter Swords, formerly President of the Nonprofit Coordinating
Council of New York and long-time student of the 990, is developing a document for the public identifying the 10
most important things one can learn from the 990 about a nonprofit organization.  Meanwhile, fund raising
professional Pat Lewis is concerned that many organizations are not seeing the posted 990 for what it can do for
them -- they still let their lawyers and accountants fill out the form as before instead of using the 990 to
showcase important program and financial information.
                         Dan Borochoff, American Institute of Philanthropy, and Bennet Weiner, Better Business Bureaus Wise
Giving Allicance, while both clear exponents of greater charitable disclosure, worry about the privacy of donors. 
Borochoff especially is concerned about those who contribute to controversial causes.
                         While some nonprofits are worried that all this increased transparency will provide easier access for
troublemakers (Planned Parenthood of America, UJA Federations of North America, Alliance for Children and
Family).  And according to an e-mail from Independent Sector, Marcus Owens, when Director of Exempt
Organizations at IRS, was “expecting the number of complaints about tax-exempts to increase dramatically now
that Form 990s are widely available on the web”  (Rumbaugh).
                         But Peter Swords has discovered that “large numbers of cases of abuse (of the charitable trust) that
(IRS and state agencies) investigate and prosecute are originally brought to their attention from outside sources,
 particularly by stories appearing in the newspapers and other media.”  Disclosure, thus, helps society deal with
several issues. It helps to:
 
· Provide information to potential clients, members, constituents;         
 

· Provide information to potential donors and volunteers;   

     

· Provide basic data to media;       

 

· Provide basic data to researchers;       

 

· Establish norms for peer organizations;       

 

· Provide information about NPO salaries;       

 

· Provide information about trustees’ and directors’ fees;        

 

· Provide information about total revenues;       

 

· Provide information about the mix of revenues; 

 

· Provide information about total expenses;      

 

· Provide information about the mix of expenses;     

 

· Provide information about fund raising costs as a percentage of revenues;       

 

· Provide information about performance;     

 

· Identify possible conflicts of interest;      

 

· Identify possible corruption; and      

 

· Identify possible illegal activity.

 
                                 While much of charities’ information disclosure today stems from laws and regulations of the
government, additional disclosure and action is happening voluntarily.  If only government review of disclosed
documents and subsequent action were involved, as already discussed in the beginning of this paper, not much
regulation of charities would result because of the limited staff of government regulators.  However, the
increasing transparency becomes the means for effective self-regulation of the nonprofit sector because it
involves many people and organizations in evaluating nonprofits, especially those who are outside the staff and
board power structures, such as junior staff, board members who don’t sit on executive committees, clients,
members, other  constituency, peer nonprofit organizations, funders and potential donors.
Introduction
            The 1990s were a great trial for U.S. charities: the aftermath of the 1989 conviction of Jim and Tammy
Faye Bakker for illegal activities connected with their televangelism; the conviction of  Bill Aramony, CEO of the
United Way  of America, for misuse of funds; the conviction of John Bennett, the founder/CEO of the Foundation
for New Era Philanthropy, for a pyramid scam; the forced resignation of Peter Diamandoupoulos, the President
of Adelphi University, for lavish spending; the forced resignation of the President of Feed the Children in
Oklahoma for misuse of funds; the expose of fraudulent advertising by child sponsorship charities -- the list goes
on and on when recounting the charity scandals exposed by the media in the past decade.  Add in the
Philadelphia Inquirer’s blockbuster book, Free Ride: The Tax-Exempt Economy (Gaul & Borowski).
            “Media reports leading to Congressional action have subjected public charities to an unusual and
growing amount of public scrutiny and criticism over the past several years,” began The New Age of Nonprofit
Accountability, published by the National Committee for Responsive Philanthropy in 1994 (Covington).
            Participants at the Fall,1994 annual meeting of the Independent Sector were reported by The Chronicle
of Philanthropy:   "...still not recovered from recent high-profile scandals involving misuse of funds by officials of
well known charities....non-profit officials had been forced to look at themselves more critically and to come to
terms with increased scrutiny from regulators, the press, and donors...The discussions covered a spectrum of
topics that included establishing ethics codes, avoiding conflicts of interest, and creating new ways of penalizing
charities that violate the law.  A number of participants said they worried that unless non-profit groups cleaned
up their own house and turned out cheats and frauds, regulators and lawmakers would step in and punish all
charities collectively for the transgressions of the few” (Murawski).
            Two years later, a Chronicle of Philanthropy poll of “292 people who gave at least $10,000 to charity in
the past year found that almost 99 per cent said that the scandals had made them ‘highly skeptical of claims
made by fund raisers and non-profit executives’” (Moore).
            Also in 1996, the Harvard Business Review opined, “Unless we are provided with credible, systematic
information, fresh scandals will fill our daily newspapers and public trust in these critically important institutions
will erode” (Herzlinger).
            In 1999, Joel L. Fleishman, Duke University Professor of Law and Public Policy, wrote, “...almost
invariably, the press presents a picture badly out of focus, one that is unnecessarily alarming to the public, and
even worse, that frequently undermines the public’s confidence in the possibility of effective action.  The
result...is to create an atmosphere of hysteria which can sometimes lead to throwing out the baby with the bath. 
That is the single greatest threat to the (nonprofit) sector today.”
            Also in 1999, Lester M. Salamon, Johns Hopkins University, sounded cause for alarm, writing,
“...important questions have been raised about the effectiveness and accountability of nonprofit
organizations...this (and more have) undermined public confidence in the sector and prompted questions about
the basic legitimacy of the special tax and legal benefits it enjoys.”
 
Government Regulation
            With so many bad apples in the basket, greater government regulation of charities surely must be
necessary.  Yet Harvey Dale, Founder of the New York University’s National Center on Philanthropy and the
Law, stated in 1993 that state charity bureaus were “inactive, ineffective, and overwhelmed” (Mehegan, Bush
and Nacson).
            At a Philanthropy Roundtable conference in 1995, the lawyer for the Heritage Foundation made a
presentation about the diminishing capacity of the federal government's Internal Revenue Service (IRS) to
monitor and regulate private foundations, using statistics of the declining number of IRS audits of foundations in
recent years to prove his point. 
            This situation was no better two years later.  At a National Center for Philanthropy and Law conference
in 1997, Peter Swords, the lawyer who then ran the Nonprofit Coordinating Committee of New York, presented
statistical evidence that neither IRS nor state governments had the personnel capacity effectively to monitor and
regulate nonprofits.  Neither the IRS nor the representative of state government at the conference contradicted
the speaker. 
            The same year, The Chronicle of Philanthropy reported that James J. McGovern, former IRS Assistant
Commissioner for Exempt Organizations, said, “Without significant changes in the way the federal government
oversees nonprofit groups, ‘I believe that a credible compliance program is in jeopardy’” (Williams, 1997).
            In 1998, the Independent Sector's Government Relations Committee launched a lobbying campaign to
persuade Congress to commit more tax revenues to beef up the Exempt Organizations Division of the IRS so it
could more properly fulfill its responsibilities of monitoring and regulating the nonprofit community.  It was
unsuccessful.
            In 1999, according to Fleishman, “The present accountability-enforcing arrangements of the state and
federal governments are entirely inadequate, as they currently function, to detect, deter, and punish illegal
actions by a tiny number of organizations...”
            Late in 2000, Rebecca Carr reported for the Cox News Service that the IRS in recent years has given
only a “cursory” review of nonprofit organizations and has decreased the number of nonprofit audits. Carr
continued by noting that the number of IRS staff dedicated to regulating nonprofits had decreased, while the IRS
budget for this activity had not increased in a decade.  Carr also reported that staff of state regulators of
nonprofits were stretched thin in going after abuse. 
            And private colleges and universities don’t have to worry about any federal or state regulations (except
for Massachusetts), according to CASE Currents, the publication of the Council for the Advancement and
Support of Education (M.M.).
            Without effective government regulation to provide solace, charity leaders have wrung their hands and
felt tortured in their souls publicly and privately about the perverted state of charitable affairs the media has
reported to the public.  So, during the 1990s, more and more charity leaders talked about the need for greater
self-regulation.  Also, they talked about disclosure and transparency as a means to promote better public
accountability and self-regulation.
Methodology
            With this in mind, in 1999 the author conducted a telephone survey of 41 charity leaders and state
regulators to identify what then existed as effective self-regulation and transparency and what trends were
emerging.  Mostly national charity leaders were consulted, in the fields of health, education, social services,
religion, arts and culture, and advocacy, also from charitable trade associations, watchdog groups and state
regulatory offices.  In April 2001, the author re-contacted 26 of the 41 interviewed earlier (the others were
unavailable) and interviewed 10 additional charity leaders, for a total of 36 interviewed in 2001, and 51 different
charity leaders interviewed over the two year period. 
            Interviewees were asked to identify any significant activities concerning self-regulation and transparency
among nonprofits.  The question was completely open-ended, and interviewees encouraged to report on
activities involving other organizations than their own.  After interviewees identified significant attempts at
self-regulation and transparency, relevant documents were solicited and reviewed.  The complete list of those
interviewed is attached.
 
The Media as Regulator 
            Interestingly, only two (4%) of the 51 people surveyed mentioned the media when asked about trends. 
They mentioned the Feed the Children expose by The Oklahoman, New York Times' reporting on inappropriate
or unusable corporate donated goods to Bosnia, a recent article by the Wall St. Journal on corporations sending
unwanted products to charities along with items in high demand, and the Chicago Tribune’s critical coverage of
child sponsorship groups. 
            Back in 1992, right after the huge Bill Aramony/United Way of America scandal, noted foundation
executive-turned critic Waldemar Nielsen reviewed all the possibilities of how to “make sure that the nation’s
charitable resources are not being misspent” and concluded that only the news media were truly available “as a
protection for the public interest.”
            Nevertheless, writing in The Washington Post in 1999, Geneva Overholser of the Post’s editorial page
reported that “Surveys over recent years show public confidence in, and approval of American media (generally)
decreasing steadily and substantially.”   She quotes Paul McMasters, the Freedom Forum’s First Amendment
Ombudsman, as saying, that studies discover that Americans view “the press (as) part of the problem, rather
than part of the solution.”  While these comments followed the media’s feeding frenzy over the President
Clinton-Monica Lewinsky affair, nevertheless, they reflect the cumulative change in American public opinion
about media reporting about all matters over many years. 
            Fleishman, focusing on the media’s reporting on charities, adds that “the press almost always neglects
its...vital duty to put the ‘bad’ news it reports into the context of the ‘good’ news that forms the backdrop.  It is
almost always the case, too, that there is far more ‘good’ news to report than ‘bad,’ and that it takes much more
effort to gather it than does the ‘bad’ news that comes in over the transom...”
 
Self-Regulation through Improvement of Board Governance    
            Analysis of many of the major scandals in the 1990s reveals that controls on heads of organizations
were ineffective (because of inadequate procedures or insecurity and fear among dependent staff) and boards
of directors failed to detect the wrongdoings or denied they existed (because the organizations seemed to be
very effective in their missions). 
             A nonprofit board of directors is a “beauty” and a “beast” (Bothwell, 1994).  It is a beauty because any
few people can form a nonprofit for almost any purpose imaginable.  It is a beast because it can act
“improperly.”  Take the case of the United Way of America board prior to the 1992 scandal.  It had looked at the
huge size of the organization (raising $3 billion a year with its affiliates) and its substantial growth over the years,
credited Aramony for this, slapped him on the back and said, “Good job, ole buddy.  How can we help you
today?” 
             The board, however, was acting like a beast!  It failed significantly in its oversight of the organization’s
CEO.  The scandal wouldn’t have happened if the board had been doing its job.  But the real issue here is that
such a scandal could happen anytime, anywhere, to any size charity – especially when an organization appears
to be doing very well.  And it happens more than the media reports. 
             Keeping the beast, however, is the price we pay for keeping the beauty.  There is no silver bullet to
slay the beast in the board.  There are no ways to guarantee selection of good, conscientious people as board
members, nor to keep them focused on proper board oversight matters.  The beauty of the current legal
framework for nonprofits – that a few people anytime, anywhere, can organize a nonprofit for almost any
purpose imaginable – outweighs the horror of the beast. 
             Nevertheless, improvement of board governance as a means to keep scandals at bay and charities on
track was mentioned by 11 (22%) of the 51 surveyed. 
             In 1999, Bennett Weiner, then CEO of the Better Business Bureaus' Philanthropic Advisory Service,
one of the two largest independent charitable watchdog organizations, reported that improvement of board
governance was a “big trend.”  Weiner cited the growth of the National Center for Nonprofit Boards (NCNB) as
an example. 
             Judy O’Connor, president of the National Center for Nonprofit Boards (NCNB), cites recent growth
statistics as demonstrating expanded interest from all parts of the nonprofit spectrum:  monthly “visits” to her
website grew from 80/month in 1997 to 38,000/month thus far in 2001; publication sales increased by 60% from
1995 ($880,000) to 2000 ($1.4 million).  Earlier, in 1999, she reported increasing interest of nonprofit academic
centers and business schools in board governance and accountability issues.
             Marion Fremont-Smith, nonprofit lawyer/author, reports that the State of Massachusetts has been
holding annual educational conferences for nonprofit trustees on accountability issues, with attendance
“unbelievably high.”   But she worries that so few in the nonprofit universe receive such education.
             Nancy Axelrod, founding head of NCNB, now consulting, notes that she and others working closely
with a wide variety of boards are observing five trends: (1) A greater incidence of self-assessments by boards. 
(2) A greater demand for developing procedures for boards to evaluate constructively the performance of the
chief executive officers (and to review compensation).  (3) An increase in establishment of "Governance" or
"Board Development" committees dedicated to the orientation, continuing education and assessment of the
board, as well as identification and recruitment of  new board members.  (4) More scheduling of special sessions
or board retreats to focus on strategic planning, governance reform or evaluation of programs and services.  (5)
Greater reliance on ad hoc committees (rather than permanent standing committees) to address strategic,
emerging issues with governance implications.
             According to Eric Wentworth, formerly with the Council for Advancement and Support of Education
(CASE), the influential Association of Governing Boards has been working to improve selection and competence
of college and university boards, but mostly this has involved large public institutions with lots of political
appointees.
Self-Regulation through Codes of Conduct, Codes of Ethics, Standards of Accountability and
Principles of Good Practice
             Many survey respondents mentioned codes, standards and principles as tools for encouragement of
self-regulation and public accountability.
             On contract for the Independent Sector, the Maryland Association of Nonprofit Organizations studied
70+ nonprofit organizations’ accountability efforts, and reported in 1999 “a ‘continuum’ of accountability services
and programs...(ranging) from the most basic code of ethics or organizational values statement to the most
comprehensive and sophisticated credentialing program involving multiple layers of evaluation, monitoring, and
improvement...
             “Such statements may cover employees, board members, volunteers, and their affiliated
organizations...
             “Some of these codes are aspirational in nature or values based in nature...Others more specifically
address conduct.  Codes which focus on conduct tend to set forth specific performance standards by which the
actual behavior of the organization (or individuals within the organization) may be judged.”
             They cover “topic areas relating to governance and management practices, such as: mission and
program, governing board, human resources, volunteers, financial accountability, legal compliance, public policy,
communications, public relations, fund raising, conflicts of interest, disclosure and information technology.”
             However, it is clear from survey interviews that many respondents believe codes of ethics, codes of
conduct, accountability standards and principles of good practice are ineffective without enforcement.   While
other respondents, asked to recall some major efforts to establish new codes in the 1990s, either could not
recall them, or, when prompted, commented that such codes had disappeared from sight.
             The Independent Sector’s Ethics and the Nation's Voluntary and Philanthropic Community:  Obedience
to the Unenforceable was a major attempt at a national code of conduct.  Published in 1991 after a huge
membership involvement, this code of ethics was absent from the minds of all but one of the 51 survey
respondents, and he mentioned it only to say that it was a “useless” exercise.
             The 1993 “Donor Bill of Rights,” which outlined the guarantees and information that the public is 
entitled to receive from charities, was another such effort.  Developed by the National Society of Fund Raising
Executive and four other national organizations, only one respondent, a co-author, mentioned the Donor Bill of
Rights as on the radar screen.
             “The Accountable Not-for-Profit Organization” was developed in 1995 by a group of charity leaders
brought together by the Mandel Center for Nonprofit Organizations at Case Western Reserve University.  Again
only one of the 51 survey respondents recalled this code effort, the same co-author.
             Herein lies the heart of the matter about codes, standards and principles:  Can purely voluntary
compliance provide effective self-regulation for the nonprofit sector?  Or can compliance with rewards or non-
compliance with penalties increase the possibilities for effective self-regulation?
             The foregoing three attempts at national codes of conduct appear to have failed miserably. 
Commitment of organizational leadership beyond the drafters of the codes did not develop.  There were  no
educational programs implemented beyond the initial take-back to members and affiliates.  There were no teeth
to bite those in non-compliance, nor were there tangible rewards for compliance with the codes.  Today no one
knows the codes exist.
             Membership organizations have a penchant for codes, standards and principles.  Since the early
1980s, the Council on Foundations -- with over 1800 members -- has had "Principles for Effective
Grantmakers."   A foundation not willing to agree to the principles will either be denied membership or have its
membership terminated.  Since 1994, Independent Sector -- with over 700 national organizations as members --
has had by-laws requiring members to "be committed to the corporation's values of openness, accountability
and ethical behavior," otherwise membership could be denied or terminated. 
             Clearly these codes have acted as deterrents for applicant agencies not wanting to comply (in fact, a
whole new council of foundations, the Philanthropy Roundtable, was created by right-wing foundations which did
not want to commit to the “Principles and Practices”).   Nevertheless, there has been no public record of ever
activating these codes to kick out existing members.
             According to the National Council of Nonprofit Associations (NCNA), at least three of its 40 state
association members have developed comprehensive codes, and several more are flirting with the idea.  One of
the leading and most outspoken associations, the Minnesota Council of Nonprofits, worked long and hard 1993-
1998 on developing a “Principles & Practices for Nonprofit Excellence.”   In the end, though, the Council made
compliance purely voluntary, “Because of the diversity of the sector by size, region, and activity area, each
organization must make a determination of whether or not an individual practice is appropriate for the
organization in its current situation.”  The Utah Nonprofits Association’s “Standards of Ethics” are also voluntary,
though buttressed by a formal self-certification process.
             Meanwhile, another active state association, the Maryland Association of Nonprofit Organizations, has
developed a “Standards for Excellence” program which has drawn very positive reviews from several of the
survey respondents.  The code has a strong educational component for member organizations to learn what is
expected of them.  However, the program also involves accreditation (Maryland Association of Nonprofit
Organizations, 1998).
 
Accreditation
             Accreditation is a significant move beyond simple codes, standards or principles.  The Maryland
Association has a voluntary certification program which involves peer review by other member agencies.  The
program has recently certified its first thirteen organizations (out of 1100 members) as demonstrating their
compliance.  They are now eligible to utilize the program’s “Seal of Excellence” on their fund raising appeals and
other literature.  According to a recent public opinion poll conducted by the Association, “85% of Marylanders
asserted that whether or not a charity has a seal of approval for ethical standards and accountability given by a
reputable association is an important factor in making giving decisions.”
             According to the Maryland Association study, “Credentialing programs are important accountability
mechanisms among nonprofit organizations today, particularly in the association community.  Certification,
Standards, and Licensing programs have all increased in prevalence in recent years...Self assessment, peer
review, site visits, and extensive review of organizational documents are common place....Ultimately, one of the
critical considerations in structuring any credentialing program is enforcement” (Maryland Association of
Nonprofit Organizations, 1998).
             National accreditation programs have long existed for trade associations, colleges, universities,
hospitals and even the fairly new health maintenance organizations, often involving both private and public
entities. But national accreditation programs for other private nonprofit organizations are not so ubiquitous. 
             Part of the problem in creating sector-wide codes or accreditation programs is the diversity of
organizations by type of activity, certainly at the national level, but, also at the state level, as illustrated by the
fact that only three of the NCNA’s 40 members have actually adopted codes, and only one has a serious
accreditation program. 
             The Evangelical Council for Financial Accountability (ECFA) is seen by several survey respondents as
the epitome of an umbrella organization with a code and accreditation program that is effective.  Scandals
certainly were the instigation for ECFA, though not the 1990s scandals, but ones many years earlier. 
Threatened with legislation, the evangelicals banded together, developed effective peer regulation, and today
have nearly 1000 organizations as members of ECFA, paying annual dues of $290-$8000.  As Paul Nelson, the
President, says, “It’s the church caring for its own.” 
             ECFA has a standards committee which acts as the investigative arm of the board.  It includes various
types of experts, some from members, others not; however, all are part of the religious culture.  The committee
has no power by itself, but makes recommendations to the board.  The committee reviews extensive
questionnaires filled out by the members and made 80 random site visits in 2000, during which members had to
pass, according to Nelson, the “red face and smell test.”  
             Nelson believes the peer regulation works because any bad member organization “threatens the good
image of all the others.”  ECFA also separately investigates when complaints are made about a member’s 
possible non-compliance.  Nelson reports that they added 66 new member organizations in 2000, but they also
expelled seven members.  The ECFA seal of approval thus provides donors with assurances of members’
legitimacy.  This is a code with the teeth of a serious accreditation program.
 
Cause-Related Marketing and Government-Encouraged Self-Regulation
             Six (15%) of 41surveyed in 1999 mentioned charity-corporate relationships as a growing concern,
including three independent watchdog agencies and two state regulators.  By 2001, only one of 36 persons
surveyed noted this as a serious issue, and he said that self-regulation and experience had laid the issue to rest.
             In 1998, 16 Attorneys-General issued a preliminary report and held a public hearing about the issues
surrounding the use of charities’ good names in marketing corporate products and services (Spitzer et al).  The
report estimates this action at $5 billion/year (corporations grant around $9 billion a year).  Health charities were
a prime concern.   The health agencies get money and rent their logo or name, while the corporations market
their products or services as identified with the health agencies.  The report concludes with recommendations
for how charities can maintain their good names, while engaging in cause related marketing.  One might call this
government encouraged self-regulation.
             According to Bob Goldberg, Vice President for Operations and Membership, National Health Council,
the health agencies and Attorneys-General were close to agreement in 1999 on principles for charities’
involvement in corporate advertising -- except that they differed about what should be told to the public about
what they are not doing.  For example,  if the health agencies are not actually endorsing a product or service,
the Attorneys-General want the ads to state that the charities are not making an endorsement, while the
charities say the ad should say nothing if, indeed, they are making no endorsement.  
             By 2001 the Attorneys-General, after issuance of their preliminary report, public hearings and review of
additional information, decided to stand pat and issue no final report, reports Barbara Turkheimer of the
Wisconsin Attorney-General's office.  Goldberg explains that the 48 health agency-members of the National
Health Council have agreed to abide by "Guiding Principles for...Corporate Relationships" and the Attorneys-
General "were convinced that health charities could self-police themselves." 
             The American Association of Museums is now developing guidelines for its members on corporate
giving and cause related marketing, reports Ed Able, President and CEO.
Independent Watchdog Organizations
             Nonprofits are evaluated by independent watchdog organizations against standards the latter conceive,
then the results are published for public scrutiny.   Since government is nowhere involved in this process, it is
considered part of the nonprofit sector’s self-regulation scheme.  There have been four sector-wide watchdog
groups, only one of which was established recently:

· National Charities Information Bureau (NCIB), New York City (1918)

 

· Philanthropic Advisory Service of the Council of Better Business Bureaus (CBBB), Arlington, VA (circa
1974)
 

· National Committee for Responsive Philanthropy (NCRP), Washington, DC (1976)

 
· American Institute of Philanthropy (AIP), Bethesda, MD (1992).
                           Three of these four watchdogs have evaluated public charities’ governance and financial
situations, making public reports on individual national charities, information on charity standards, facts on wise
giving practices, issue alerts, and advisories on diverse subjects such as car donations and tax deductibility.  
The fourth watchdog group (NCRP) evaluates foundations, corporate giving programs and United Ways for their
responsiveness to marginal and disenfranchised populations, and makes public reports both on sub-sectors and
on individual foundations and corporations. 
                         Major changes are happening among these watchdog organizations.  First and foremost is the merger
of the two oldest and largest ones.   Failure to renew funding and departure of a new CEO left the NCIB
vulnerable, and merger with the CBBB was proposed and accepted.  The new organization, called the Better
Business Bureaus Wise Giving Alliance, became operational in early 2001.  Meanwhile, having created a
Standards Review Panel to rethink its criteria for evaluation of nonprofits, the CBBB is now completing that
process as the Alliance.  The reasons for the review were:   
1. Increased public interest in charity accountability,
2. Changes in nonprofit accounting guidelines,
3. New forms of fund-raising, such as Internet-based appeals,
4. Growth of cause related marketing,
5. Rise of local charities in importance, and
6. Rise of international charities in importance (Council of Better Business Bureaus, 1999).
 
            Meanwhile, after 23 years of operation under a founder/CEO, a new CEO took over at NCRP in 1999.  Changes
in program direction are anticipated, but unclear yet. 
                         The American Institute of Philanthropy has made some big waves in its short tenure.  Deciding to
publicize the charities which had huge reserves yet continued soliciting for operating money, AIP gave Father
Flanagan’s Boys Home (Boys Town) a failing grade for having reserves that could fund operations for five
years.  The charity hauled AIP into court, saying donors would think Boys Town was corrupt.  The two parties
settled out of court with neither backing down, but agreeing on a clarifying statement (Dundjerski).
                         While supportive of the concept of independent watchdog organizations, Law and Philanthropy
Professor Harvey Dale is concerned about how few charities and foundations actually are evaluated by these
organizations, and about the small number of donors who avail themselves of the evaluation results.
 

1.2Disclosure/Transparency as Another Means to Self-Regulation

                         Supreme Court Justice Louis Brandeis is credited with the mantra for transparency: “Sunshine is the
best disinfectant.”  (Although, according to Dale, he also wrote a celebrated treatise on “The Right to Privacy”
which counters his sunshine prescription.) 
                         The publication Trusts and Estates called this the “era of transparency” in its September, 2000 issue. 
Transparency, though mostly legislatively stimulated, and increasingly Internet stimulated, is on many charity
leaders’ minds as a better way to self-regulation. 
                         Disclosure has been a hallmark of leading charities and grant-making foundations for many years. 
They have voluntarily been publishing annual reports, brochures, newsletters and grant guidelines to inform the
public, potential and actual donors and grant-seekers.  Data usually include financial balance sheets and
statements of income and expenses; lists of officers and key staff; mission statements, organizational and
program goals; reviews of history and accomplishments; future plans; lists of donors; and more.  Foundations
usually also report lists of grants made, to whom, for how much, and for what purposes (National Committee for
Responsive Philanthropy, 1980).  
                         However, according  to the Foundation Center, only 41% of large foundations with assets of $25 million
or more voluntarily publish annual reports, and only 25% of the 11,000 largest foundations (assets $1 million+ or
 grants $100,000+) publish anything at all.  These figures are lower than they were 20 years ago (Renz, 1998).
            Legally required public reporting, through the IRS forms 990 (public charities) and 990PF (private foundations),
can help to redress this information gap.  Legally required disclosure means that key items of information must
be publicly reported whether an organization wants to or not.
                         Federal and often state laws require filing of 990s/990PFs as public documents.  These documents
contain all the basic information identified above that nonprofits and foundations usually voluntarily publish, but
they also include expenses by program; lobbying expenses; complete lists of directors or trustees, with any
compensation, expense accounts and/or allowances; identification of the five employees and five consultants
who are highest paid; analysis of income producing activities (including program service revenue, government
fees and contracts, member dues and assessments); and more.
                         New federal laws and regulations require greater public access to 990s/990PFs.  Any citizen visiting a
charity’s or foundation’s office can request immediate access to the 990/990PF for the  past three years and the
organization’s original application for tax exempt status.   Any citizen posting a written request can expect to
receive these documents within 30 days for no more than nominal costs of duplicating and postage (Williams,
2000). 
                         Public charities do not have to provide their contributor lists, private foundations do.  However,  private
foundations only have to provide the 990PFs they file after March 13, 2000 (Williams, 2000).
                         A major new development is that publication of 990s/990PFs on the Internet is now a legal alternative
to making paper copies available.
                         Some survey respondents predict that mandatory electronic filing of 990s/990PFs will be here in a few
years, leading to instant public Internet access.  (The Securities and Exchange Commission now requires all
corporations selling to the public to file 10K forms electronically.)
                         According to many survey respondents, these new laws and regulations regarding 990/990PF
disclosure and Internet postings are already making disclosure more popular.
                         The Foundation Center has been posting more and more 990PFs on the Internet to assist grant-
seekers.  Guidestar (Philanthropic Research, Inc.) has been putting on the Internet many charities’ 990s and
foundations’ 990PFs plus selected other information from annual reports, brochures, etcetera, to permit active
donor research.  According to John Edie, General Counsel of the Council on Foundations, the Internet posting of
990PFs is a “non-issue” with the Council’s 1800 members.
                         Scanned versions of all 990s and 990PFs received by the IRS were posted on the Internet by
Guidestar in 2000 in a program worked out by Guidestar, the Urban Institute’s National Center for Charitable
Statistics and the IRS.  “Timely, in-depth disclosure of this public information will revolutionize our understanding
of charitable organizations – their structure, missions, investments, administrative costs and interactions with the
government and business sectors,” says Elizabeth T. Boris, Director of the Center on Nonprofits and
Philanthropy at the Urban Institute.
                         As of April 2001, Guidestar’s website claimed to have reports on more than 700,000 charities and
foundations.  Of these, 32,000 are posted voluntarily, says Guidestar President Arthur W. Buzz Schmidt, the
rest from IRS files.  Former President of the National Society of Fund Raising Executives, Pat Lewis, however,
is concerned that churches and other organizations that do not have a 501c3 IRS tax exempt designation are
not experiencing the same transparency. 
                         Several survey respondents thought that Internet exposure might encourage charities to put up more
information than the 990 requires, in order to explain or provide a context for salaries, board of directors’ fees,
consultant fees, unusual expenses and other data.
                         Meanwhile, the Congressional Joint Committee on Taxation last year issued “a massive set of
proposals that would expand substantially the disclosure requirements for tax-exempt organizations,” reports
Bruce Hopkins, noted author on nonprofit tax law.  “The litany of recommendations is overkill, way beyond
anything that can be considered reasonable...(This set of proposals, if enacted,) threatens to stifle the nation’s
750,000 charitable organizations.”  No action has yet been taken, according to Hopkins, except for a new law
requiring political organizations to file with IRS information about their contributors which must be made public. 
                         But more data/information is not a panacea for accountability, since potential donors do not have time
to search through everything, nor necessarily the capacity to evaluate same, says Chuck Bell of Consumers
Union.  And there is little in the way of analysis, criticism or comment, adds Dan Borochoff of the American
Institute of Philanthropy.
                         Quality reporting on 990s is an increasing issue: (1) to improve the quality of the required data and
information, eliminating blanks and improperly filled out forms; and (2) to improve the user-friendliness of the
990 document.  Sponsors of a Quality 990 Project are the Urban Institute’s National Center for Charitable
Statistics, National Council of Nonprofit Agencies, Independent Sector and Association of Fund Raising
Professionals (see www.qual990.org).  And Peter Swords, formerly President of the Nonprofit Coordinating
Council of New York and long-time student of the 990, is developing a document for the public identifying the 10
most important things one can learn from the 990 about a nonprofit organization.  Meanwhile, fund raising
professional Pat Lewis is concerned that many organizations are not seeing the posted 990 for what it can do for
them -- they still let their lawyers and accountants fill out the form as before instead of using the 990 to
showcase important program and financial information.
                         Dan Borochoff, American Institute of Philanthropy, and Bennet Weiner, Better Business Bureaus Wise
Giving Allicance, while both clear exponents of greater charitable disclosure, worry about the privacy of donors. 
Borochoff especially is concerned about those who contribute to controversial causes.
                         While some nonprofits are worried that all this increased transparency will provide easier access for
troublemakers (Planned Parenthood of America, UJA Federations of North America, Alliance for Children and
Family).  And according to an e-mail from Independent Sector, Marcus Owens, when Director of Exempt
Organizations at IRS, was “expecting the number of complaints about tax-exempts to increase dramatically now
that Form 990s are widely available on the web”  (Rumbaugh).
                         But Peter Swords has discovered that “large numbers of cases of abuse (of the charitable trust) that
(IRS and state agencies) investigate and prosecute are originally brought to their attention from outside sources,
particularly by stories appearing in the newspapers and other media.”  Disclosure, thus, helps society deal with
several issues. It helps to:
 
· Provide information to potential clients, members, constituents;         
 

· Provide information to potential donors and volunteers;   

     

· Provide basic data to media;       

 

· Provide basic data to researchers;       

 

· Establish norms for peer organizations;       

 

· Provide information about NPO salaries;       

 

· Provide information about trustees’ and directors’ fees;        

 

· Provide information about total revenues;       

 

· Provide information about the mix of revenues; 

 

· Provide information about total expenses;      

 
 · Provide information about the mix of expenses;     
 

· Provide information about fund raising costs as a percentage of revenues;       

 

· Provide information about performance;     

 

· Identify possible conflicts of interest;      

 

· Identify possible corruption; and      

 

· Identify possible illegal activity.

 
                                 While much of charities’ information disclosure today stems from laws and regulations of the
government, additional disclosure and action is happening voluntarily.  If only government review of disclosed
documents and subsequent action were involved, as already discussed in the beginning of this paper, not much
regulation of charities would result because of the limited staff of government regulators.  However, the
increasing transparency becomes the means for effective self-regulation of the nonprofit sector because it
involves many people and organizations in evaluating nonprofits, especially those who are outside the staff and
board power structures, such as junior staff, board members who don’t sit on executive committees, clients,
members, other  constituency, peer nonprofit organizations, funders and potential donors.