Charities Would be Wise to Adopt Professional Management and Oversight Standards

Doug White, director of the Heyman Center for Philanthropy and Fundraising at the New York University School of Continuing and Professional Studies, provides excellent advice for management of nonprofits.  

Sometimes it does amaze me how nonprofits operate without any business sense whatsoever.  As a business owner myself, I understand the concept of responsible money management.  However, I frequently see nonprofits that spend beyond their means, or offer compensation far beyond the capacity of the organization, or have boards of directors that haven't the first clue as to their roles and responsibilities.

The link in the title above leads you to Mr. White's book.  Might be a good idea to pick one up and pass it around your board.  Bunnie

Charities Would be Wise to Adopt Professional Management and Oversight Standards

by Doug White

Although the nonprofit world has grown tremendously over the past decade – nonprofit expenses fast outpacing GDP, for example – the management approach at charities has, in large part, stayed informal.  In the past, charities were largely comprised of a few people who shared similar heartstrings and, if nothing scandalous happened, the public pretty much thought they were doing good by society.  Although that’s true today for many charities, scrutiny by the public and by regulators has increased dramatically, and charities – large and small – would be wise to adopt professional management and oversight standards.

Unfortunately, those standards don’t exist.  At best, we’re relegated to wobbly conversations about best practices; the worst among us just don’t care, and think their philanthropy is an extension of their business ventures or their personal egos. Does the name Madonna (Raising Malawi), Greg Mortenson (Central Asia Institute), or Lance Armstrong (Lance Armstrong Foundation) ring a bell?  All have run charities where either they or their charities have run into trouble – within the last few months.  And there have been others.

Not all charities need the highest, most sophisticated levels of governance; not all charities need federal and state charitable tax experts– attorneys and accountants – to serve as either advisors or board members; not all charities need the most accomplished executive directors.  But all charities – as they all have in common that they were formed to serve the public good in a way that neither business can nor government will – must do their best to run themselves in a businesslike manner.  At least to a point – and, as important, run themselves as stewards of the public trust.

Admittedly, there is a limit to the idea that a charity is a business.  There is no question that charities need to balance their books and operate in a professional atmosphere – indeed, almost all charities are incorporated as businesses – but while business principles provide the basis for the basics, they alone do not serve a charity well in fully pursuing its mission.  For that, a nonprofit needs vision and an understanding that the enterprise is not at all private: it is public in the most literal sense of the word.  When an organization is granted tax exemption – when its donors are entitled to a tax deduction and its own profits are untaxed – it takes money from the public; it diverts money from the Treasury.   For that reason – a reason quite separate from the growing swell of public scrutiny – charity leaders, both staff and trustees, need to be fully aware of financial, governance and ethical pitfalls.

That awareness does not come about by accident or even goodwill.  It grows from a sincere commitment to serve society in an intelligent way.  And that means tomorrow’s leaders (and as many leaders of today who are open-minded about staying up on things) must take seriously opportunities for learning.   Tomorrow, take note, may be here sooner than we think: A recent study by the Meyer Foundation, “Daring to Lead,” reports that fully two-thirds of all nonprofit executive directors are planning to leave their jobs within the next five years.  Talk abut turnover.  The replacements will need solid training to prepare them to deal with issues that, quite frankly, most of them probably don’t think they should have to anticipate.  But today’s daily headlines should be a forewarning to them, as well as a warning to executive directors and board members who are on the job today.

Like anything else, running a nonprofit is a skill no one is born with.  Just as future professionals enroll in universities that offer business, law, and medical programs – as well as many other types of graduate learning – today’s nonprofit leaders would be wise to understand that their organizations will have the best opportunity to thrive if they are run by people who know what they are doing – by design, not by chance. 

Doug White is the academic director of the Heyman Center for Philanthropy and Fundraising at the New York University School of Continuing and Professional Studies. His most recently published book is "The Nonprofit Challenge" (Palgrave Macmillan).

Protection of Charitable Assets Act: What the New Uniform Law Would Mean for Nonprofits

We hear a lot in the news media about laws affecting business.  Are existing laws or tax code restricting business?  Encouraging business?  Affecting the ability of business to get the economy growing?  

According to a 2007 report from Johns Hopkins, nonprofits generate a significant amount of our gross domestic product, or GDP.  "' Private, not-for-profit hospitals, schools, social service agencies, symphonies, environmental groups and many other organizations — accounts on average for 5 percent of the GDP in the countries covered, and exceeds 7 percent in some countries, such as Canada and the United States. By comparison, the utilities industry — including gas, water, and electricity — in these same countries accounts on average for only 2.3 percent of GDP, the construction industry for 5.1 percent, and the financial intermediation industry embracing banks, insurance companies, and financial services firms, for 5.6 percent."  

For that reason and many others, I find myself becoming weary of lawmakers (many of whom have no idea of what goes into running a nonprofit) formulating regulations that ultimately are harmful to small nonprofits.  

Here in the U.S. we had a law called Sarbanes-Oxley that was supposed to regulate large business and prevent another mega melt-down like Enron.  But the end result was a series of regulations that none but the largest nonprofits could comply with adequately.

The IRS has recently begun a crack down on Girl Scout troops, church auxiliaries, garden clubs and a multitude of small nonprofits whose combined assets don't amount to a hill of beans.  

Now this.

A proposed new uniform law that seeks to establish reporting requirements for nonprofits with $5,000 or more in assets.  So if you have a couple computers, a copy machine and a few desks, you are now required to file an annual report with the Attorney General of your state?

Will someone please find out what drugs these regulators are taking?

This is beyond the pale and has serious consequences for nonprofit entities.  Never mind the amount of money required to enforce such ridiculousness.  

Thank goodness for the folks at Venable who keep an eye on these things.  Jeff Tenenbaum, Robert Waldman and Alexandra Megaris provide us with a glimpse of what this new law might mean.  Pay special attention and in the meanwhile, I will try to find out how you can weigh in on this knuckle-headed process and report back to you when I do.  Bunnie

Protection of Charitable Assets Act: What the New Uniform Law Would Mean for Nonprofits

By Jeffrey S. Tenenbaum, Robert L. Waldman, and Alexandra Megaris 

Jeff Tenenbaum

Alexandra Megaris

Robert Waldman

The committee tasked with drafting a new uniform law that regulates charities and charitable assets has released the newest version of the proposed law, renamed the Protection of Charitable Assets Act, which is currently under consideration by the drafting committee. If ultimately approved, the uniform act could become law in many states.

What is a uniform law? The Uniform Law Commission (“ULC”)—the same body that recently drafted and ushered through the Uniform Prudent Management of Institutional Funds Act—is an organization comprised of state commissions on uniform laws from each state, the District of Columbia, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. Once the ULC determines that a specific area of law should be uniform, it appoints a committee to draft the model legislation. The final uniform law is then submitted to a vote by the entire Commission. Once the ULC approves a proposed Model Act, the states then vote. A majority of the states present, and no less than 20 states, must approve an act before it can be officially adopted as a Uniform or Model Act.

At that point, a Uniform or Model Act is officially promulgated for consideration by the states. The state legislatures are urged to adopt Uniform Acts exactly as written, to “promote uniformity in the law among the states.” 

What would the Protection of Charitable Assets Act do? The proposed act would do four main things: 

(1) define the authority of the state Attorney General over the protection of charitable assets in that state; 

(2) impose a registration requirement; 

(3) oblige charities with assets above a minimum amount to file an annual report; and 

(4) require a charity to notify the state in advance of certain specified “life events.”

1. Authority of the State Attorney General. The model act authorizes the Attorney General of each state:

• to enforce the use of charitable assets by a charity for the purposes for which the asset was given;
• to “act to prevent or remedy” a breach of a legal duty by the charity; and
• to seek declaratory or injunctive relief to determine that an asset is a charitable asset.

In addition, the law would give the state Attorney General the power to commence or intervene in an action filed by another party to prevent or obtain damages for a violation of the law. The state Attorneys General would have the ability to initiate investigations and issue administrative subpoenas to charities in order to determine whether charitable assets are being used for the purposes for which the asset was given. While many state Attorneys General already exercise significant regulatory oversight over nonprofit organizations operating in their states, other state Attorneys General take a less active role. The proposed model law, if adopted by the states, would establish uniform standards in this area. 

2. Registration and Reporting Requirements. The Model Act, as currently drafted, would require each charity that holds or administers charitable assets above $5,000 and that meets one of the following five criteria to register with the state: is organized (e.g., incorporated) under the state’s law, has its principal place of business in the state, holds charitable assets in the state other than assets held for investment purposes, conducts activities in the state, or holds assets that are given for the benefit of a person in the state. The registration provision includes limited exemptions for governmental, political, religious and financial entities and certain individuals holding charitable assets.

3. Annual Reports. Charities with assets above $5,000 also would be required to file an annual report with the state Attorney General. The report would require basic accounting and financial information and require the charity to attach its IRS filing (e.g., Form 990).

4. Notice to State Attorney General of Reportable Events. Charities required to register under the proposed statute also would be required to notify the state Attorney General if any of the following events occur:

• dissolution or termination of the charity;
• disposition of all or substantially all of its charitable assets;
• a merger, conversion or domestication; or
• removal of the charity or of a significant charitable asset from the state.

This proposed uniform law would impose significant registration and reporting requirements on many charitable organizations across the country, especially on those that operate in multiple states. We will continue to monitor the status of the proposed model statute. A final draft of the statute is expected to be introduced and voted on at the annual meeting of the Uniform Law Commission commissioners in July 2011.

Mr. Tenenbaum is a partner with Venable and chairs the firm's Nonprofit Organizations Practice Group, as well as its Credit Counseling and Debt Services Industry Practice Group. Mr. Waldman, a tax partner, chairs Venable's Business Division. He also leads Venable's national representation of tax-exempt organizations. Ms. Megaris is an attorney in Venable's Regulatory Practice who works regularly with the firm's nonprofit organization clients. She is resident in Venable's New York office.

 

Country's Largest Charity Evaluator Expands Analysis

The folks at Charity Navigator do incredible and important work by evaluating the stewardship of donor dollars.  Every nonprofit should follow their guidelines for what information to provide the public regarding the organization's management, structure, income, expenditures, etc.  Getting a good rating from Charity Navigator is important because it will assure your donors that you are responsibly and ethically using their money for good.  Bunnie

Country's Largest Charity Evaluator Expands Analysis

Charity Navigator's Enhanced Service Helps Donors Assess a Charity's Commitment to Accountability and Transparency

Donors will be in a better position to make informed giving choices now that Charity Navigator, America’s largest and most utilized charity evaluator, has expanded its analysis.

Since launching its service in 2002, Charity Navigator’s free financial evaluations --- which examine how a charity functions day to day and how well positioned it is to sustain its programs over time --- have changed the giving habits of the general public. But financial metrics are just the starting point in choosing a charity to support. Donors must also have access to information that considers a charity’s accountability and transparency practices and assesses its effectiveness and results. Starting this month, Charity Navigator is deepening its analysis by rolling out new metrics that examine the accountability and transparency component.

“Smart donors should require evidence of accountability and transparency from the charities they support,” said Ken Berger, President & CEO of Charity Navigator. “They should require this evidence because charities that are open about their performance and follow best practices in areas such as governance and donor privacy are less likely to engage in unethical or irresponsible activities and, as a result donations to such charities are a less risky investment.

“Charity Navigator was created with the goal of advancing a more responsive philanthropic marketplace, in which donors and the charities they support work in tandem to overcome our nation's most persistent challenges. We are thrilled to go beyond our financial ratings and take our analysis to the next level. By reviewing each charity’s commitment to accountability and transparency, we can help donors make even smarter giving choices.”

When examining the accountability and transparency of charities, Charity Navigator’s new methodology seeks to answer the following questions:

Does the charity follow ethical and best practices?

Does the charity make it easy for donors to find critical information about the organization?

Specifically, the methodology, which was developed in partnership with Charity Navigator’s staff, Board, Advisory Panel (http://www.charitynavigator.org/advisory), donors and nonprofit leaders, tracks the following:

1) A review of the charity’s website to determine if

Board members listed

Key staff listed

Audited financials and Form 990 included

Privacy policy posted

Inclusion of information about effectiveness and results

2) A review of the newly expanded Form 990 to determine if

The charity has made loan(s) to related parties

There has been a material diversion of assets

There are minutes for Board meetings

Copies of the Form 990 were provided to organization’s governing body

The charity has a conflict of interest policy

The charity has a whistleblower policy

The charity has a records retention policy

The charity disclosed its CEO’s name and salary

The charity has a process for determining CEO compensation

The Board is paid

The audited financials were prepared by independent accountant

An audit committee exists

As soon as the accountability and transparency data is gathered on a particular charity, it will be posted on its ratings page. However, no charity’s rating will be impacted by the results of this richer analysis until the data has been collected for all 5,500 charities in Charity Navigator’s database. For more information about Charity Navigator’s new Accountability / Transparency Methodology, please visit: www.charitynavigator.org/accountability. And to see a sample of a charity that has been reviewed for its accountability / transparency data, please visit: www.charitynavigator.org/accountability/list (more charities will display this data in August).

About Charity Navigator (http://www.charitynavigator.org/)


Charity Navigator is the largest charity evaluator in America and its website attracts more visitors than all other charity rating groups combined. The organization helps guide intelligent giving by evaluating the financial health of over 5,500 charities. Charity Navigator is a 501 (c)(3) organization which accepts no advertising or donations from the organizations it evaluates, ensuring unbiased evaluations. Charity Navigator, can be reached directly by telephone at (201) 818-1288, or by mail at 139 Harristown Road, Suite 201, Glen Rock, N.J., 07452.


Media Contact
Sandra Miniutti, Vice President, Marketing
(201) 884-1051
media@charitynavigator.org

Spotlight: Mercy Medical Airlift

There are so many people in the nonprofit world that are doing great work. One such organization is Mercy Medical Airlift. Mercy Medical Airlift and its various components arrange for people with serious, and often life threatening, illnesses to be transported by air to much needed medical care. They do this through direct flights piloted by volunteer pilots or by arranging for transport on commercial carriers using donated frequent flier miles.

I am working on an upcoming blog on mission statements and found Suzanne Rhodes (Director of Public Affairs) article regarding "mission" to be interesting. Those nonprofits with a clearly defined sense of mission are more likely to succeed through good times and bad.

Acquaint yourself with the work of Mercy Medical Airlift, go to their website, read the various stories of the people they have helped and then make a donation of cash or frequent flier miles. And tell your friends. Someone you know may very well benefit from the services they provide. Bunnie

Keeping the Mission Torch Burning

by Suzanne Rhodes, Director of Public Affairs

Our business at Mercy Medical Airlift puts us in touch with hurting humanity 24 hours a day but also brings hope when we offer the gift of flight to patients who need to travel to distant, specialized medical facilities. I’m reminded of a phrase used by Jesus as He offered relief for people’s grinding weariness, saying, “My burden is light.”

This is what we do here—we help make burdens light. And while, like any organization, we have to tend to the business side of things—finances and efficiencies, technologies and marketing, forecasting, staffing, and trends as sudden and diverse as newly-spotted stars—keeping faith with the mission is what matters most. In our case, the mission is to make sure no patient in need is denied access to specialized, medical care because of inability to pay for air transportation.

We offer charitable flights in small, private planes through our volunteer pilot program. We offer donated commercial airline tickets through our special lift program. We offer discounted air ambulance flights through a program called Air Compassion America. We match patient needs with appropriate travel resources through our National Patient Travel Center Helpline that is operational day and night. In fact, the numbers just came in from 2009 showing we served 21,003 clients. That’s a lot of veterans and children, cancer patients, burn victims, the elderly, and patients with rare disorders whose lives have been improved or saved because, as we often hear from those we serve, “I was able to get the best medical care in the world.”

We keep the torch of mission burning in many ways. Staff members rotate pager duty so they can answer after-hour calls from patients. The mission statement is displayed in all our offices. Our CEO inspires us at special luncheons and events when he shares from the heart. Many of us post pictures of our patients on bulletin boards and share their stories with each other and through our electronic and print newsletters. Compassion is our core.

When a sense of a higher cause infuses the workplace—especially when the place is a nonprofit charity like Mercy Medical Airlift—the details of daily operation—from running the overhead to sharpening a pencil—become significant as elements of a purposeful whole.

Suzanne Rhodes is the director of public affairs at Mercy Medical Airlift in Virginia Beach, Virginia, and the author of Angel Flight Mid-Atlantic, Sacred Glances and several books of poetry. She assisted in the creation of an award-winning documentary, Compassion Takes Flight.

Links to Mercy Medical Airlift websites:

www.MercyMedical.org
www.AngelFlightMidAtlantic.org
www.AirCompassionAmerica.org
www.PatientTravel.org
www.AirCompassionforVeterans.org
www.CrossandFlagProductions.com

Charity Accountability Standards: How Do You Measure a “Good” Charity?

My husband will not give money to a Nonprofit until he has looked them up on Charity Navigator. Ken Berger, President of Charity Navigator gives us a glimpse into how charities are not measuring their outcomes. I was a bit shocked at the numbers (even if they are hypothetical), but even in my own experience, I would be willing to lay money on those numbers being fairly accurate. This piece is a good lead-in to a blog I am working on about "horror stories" in the Nonprofit sector. Stop right now and ask yourself "How do we measure outcomes?" If you don't have an answer, it might be time to start creating a system. Bunnie

Charity Accountability Standards: How Do You Measure a “Good” Charity?

by Ken Berger, President and Chief Executive Officer of Charity Navigator

We have surveyed hundreds of charities across all causes to determine what data is compiled in this area of outcome measurement. We also intend to use the information to help us in developing our system. If there are some universally agreed upon outcome measures in a particular category of charities, it could help inform us on good standards. We assumed that most charities have SOME system of evaluating their outcomes. We were wrong. So far, only about 10% of the charities we have polled were able to provide us with information in this area. Furthermore it is likely that, of those that measure their outcome, a much smaller subset can prove from the data that they have truly meaningful outcomes.

We recently met with a colleague who funds organizations who can provide him with evidence of effective outcomes. He is getting similar results. The scary reality, he suspects, is that most charities (the overwhelming majority) have not even taken their first step down the outcome road. A couple of other experts with whom we have bounced this around have corroborated our findings.

We know that day-to-day survival mode is often the overriding focus and concern for most charities. In the current economic climate that reality has only intensified for most charities. So the lack of focus on outcome measurement is not likely to change any time soon, unless there are outside forces that demand it and resources that facilitate the process. We continue to assume that the larger agencies may be compiling this information, but may be reluctant to make it public. Even if this is true, only 4% of all charities have annual revenues in excess of $10 million. So our suspicion remains that the vast majority of charities are doing very little or nothing in the area of outcome measurement.

We think that the experts, foundations and charity advocacy groups are going to need to educate government policy makers and the general public about the significant importance of publicly available outcome measurement information before this situation will change. All grants, whether from government, foundations or corporations, should include a percentage to fund outcome measurement.

Why is this so important? We believe that an outcome driven culture is vitally important for a charity to be at its best and to be trusted. With all of the scandals and lack of confidence in charities, objective data will become more and more important in the public's perception of a charity's ongoing legitimacy. In such a climate, it's scary news that most charities probably are not measuring and documenting their outcomes.

HOW MIGHT CHARITIES RATE ON OUTCOMES?

Note: This is entirely hypothetical from discussions with experts and anecdotal information

2% **** Excellent
9% *** Good
23% ** Needs Improvement

36% * - Poor
30% 0-Star Exceptionally Poor

Nonetheless, we are going to continue down this road and implement an outcome measurement system once we are confident it contains the right elements. We will also be a voice for the importance of outcome measurement to whoever will listen! However, I now anticipate that whenever we begin to evaluate charities on outcomes (probably no time soon), most will not do well, if for no other reason than that they are not documenting what they are doing.

How Does Charity Navigator Work?

Charity Navigator has long been a gold standard in evaluating the fiscal health and well being of Nonprofits. Now, more than ever, people are determined to make informed decisions about where their charitable dollars will go and whether the charity they are considering will spend their contribution wisely and efficiently. Ken Berger provides a glimpse into how Charity Navigator rates charities. Bunnie

How Does Charity Navigator Work?

by Ken Berger, President and Chief Executive Officer

Charity Navigator (www.charitynavigator.org) is the largest evaluator of charities in the United States. Our team of professional analysts has examined tens of thousands of non-profit financial documents. As a result, we know as much about the true fiscal operations of charities as anyone. We've used this knowledge to develop an unbiased, objective, numbers-based rating system to assess the financial health of over 5,400 of America's best-known mid to large sized charities.

CHARITY NAVIGATOR’S RATING SYSTEM

What Kinds of Charities Do We Rate?

Criteria are based on our goal to help individual donors.

• Tax Status: 501(c)(3) public charities.

• Sources of Revenue: Depend on support from private contributions (at least 33%).

• Type of Programs: All types of programs and Services.

• Length of Operations: At least 4 years.

• Location: All parts of the country.

• Size: America's largest charities.

HOW DO WE RATE CHARITIES?

Charity Navigator's rating system examines two broad areas of a charity's financial health – how it functions day to day as well as how well positioned it is to sustain its programs over time. Each charity is then awarded an overall rating, ranging from zero to four stars. To help donors avoid becoming victims of mailing-list appeals, each charity's commitment to keeping donors' personal information confidential is assessed. The site is easily navigable by charity name, location or type of activity.

It also features, among/other things, the CEO’s salary for each organization we evaluate, opinion pieces by Charity Navigator experts, donation tips, and top-10 and bottom-10 lists which rank financially efficient and inefficient organizations in a number of categories. Charity Navigator accepts no funding from the charities that we evaluate, ensuring that our ratings remain objective. Furthermore, in our commitment to help America's philanthropists of all levels make informed giving decisions, we do not charge our users for this data. Accordingly, Charity Navigator, a nonprofit 501 (c) (3) organization itself, depends on support from individuals, corporations and foundations that believe we provide a much-needed service to America's charitable givers.

The two broad areas of a charity’s financial health mentioned above are their organizational efficiency and their organizational capacity. We use a set of financial ratios or performance categories to rate each of these two areas, and we issue an overall rating that combines the charity's performance in both areas. Our ratings show donors how efficiently we believe a charity will use their financial support today, and to what extent the charities are growing their programs and services over time. We provide these ratings to help donors in the process of making intelligent giving decisions, and so that the philanthropic community can more effectively monitor itself.

At its most general level, our rating system is relatively simple. We base our evaluations on the financial information each charity provides in its informational tax return, or IRS Form 990. We use that information to analyze a charity's financial performance in seven key performance categories, described below. After analyzing those performance categories, we compare the charity's performance with the performances of similar charities. We then assign the charity a converted score ranging from zero to ten in all seven performance categories.

SEVEN PERFOMANCE CATEGORIES MEASURING FINANCIAL HEALTH

• Program Expenses: Percent of total functional expenses spent on programs and
  services (higher is better).


• Administration Expenses: Percent of total functional expenses spent on
  administration (lower is better).


• Fundraising Expenses: Percent of total functional expenses spent on fundraising
  (lower is better).


• Fundraising Efficiency: Amount a charity spends to raise $1(lower is better).


• Average Annual Growth of Operating Revenue: Measures growth of grants and contributions, revenue generated from programs and services, and membership fees and dues over 36 months.


• Average Annual Growth of Programs and Services: Measures growth of program expenses over 36 months.


• Working Capital Ratio: Determines how long a charity could sustain its level of spending using only its net liquid assets, as reported on its Form 990.

Contact Ken at http://www.charitynavigator.org/