How Charities Can Set Up Ethical Guidelines in an Era of Increased Scrutiny

TOOLS AND TRAINING

By Peter Panepento

Rand Wentworth, president of the Land Trust Alliance, has always been proud of his group’s statement of

ethical guidelines. But in the wake of a spate of charity scandals, the alliance knew it could do better.

The document, which includes 15 standards ranging from board activity to the accurate valuing of property, has guided the Washington organization’s activities for 15 years and has established the ethical ground rules for the 1,200 nonprofit groups it represents nationwide.

But last year it decided to review its standards — partly, says Mr. Wentworth, in reaction to the controversy another environmental group, the Nature Conservancy, faced after The Washington Post published a series of articles about its land deals involving trustees and staff members. The result, says Mr. Wentworth, has been a massive and thorough process that has brought together representatives of the group’s member organizations to debate the new guidelines. “There have been some heated sessions where very good people have gotten into intense arguments,” he says. “I’m surprised, but in the end, pleased. It encourages us to think more deeply and broadly about the right and ethical things to do.”

While most nonprofit organizations have long driven by strong values, many charity leaders are paying increased attention to ethics in light of the scandals that have gripped the nonprofit and for-profit worlds in recent years. Those incidents have also prompted lawmakers to create tougher ethics laws to govern businesses and nonprofit organizations (such as the Sarbanes-Oxley Act of 2002, which focused largely on the governance of publicly traded companies, but may be applied broadly to nonprofit organizations). High-profile charity scandals have also pushed some donors to become more selective in their giving.

As a result, a growing number of charities are deciding it is time to review — and in some cases, create — ethics codes. “The entire nonprofit sector is being placed under more scrutiny than ever before,” says David B. Mulvihill, vice president and general counsel of the Make-a-Wish Foundation of America, in Phoenix. “Nonprofits have a legal, moral, and ethical responsibility to do everything they can to make sure their assets are being managed responsibly.”

Helping Small Charities

For the Make-a-Wish Foundation, the increased scrutiny has been the starting point for internal discussions on ethics and conflicts of interest — a discussion that will soon lead to the adoption of a new, more in-depth ethics code for employees and volunteers.

But for many other charities, particularly those with small budgets and time-strapped staff members, rewriting or creating a code of ethics is a difficult task. And enforcing those codes can be even tougher.

A survey conducted last year by Grant Thornton International, an accounting and business advisory group, shows that an overwhelming majority of nonprofit organizations have made no changes to their policies as a result of the recent scandals.

The Grant Thornton survey asked more than 300 nonprofit executives if they had made any changes at their organizations as a result of the Sarbanes-Oxley Act. Only 20 percent of the nonprofit organizations surveyed reported that they had changed any of their policies in light of Sarbanes-Oxley. Fewer than two in five — 38 percent — responded that they had discussed how the new law would affect their activities. Of the organizations that did make changes, 24 percent said they had instituted conflict-of-interest policies; 20 percent developed procedures for internal financial controls; 17 percent wrote codes of ethics; 16 percent created audit committees; and 11 percent drafted recommended standards for board members.

Larger nonprofit organizations — or those with a national membership, such as the Make-a-Wish Foundation — were more likely than small or local groups to have established ethical guidelines and to have made changes to their policies in light of the recent scandals, the survey said.

As a result of their greater progress in this area, several state and national umbrella groups are helping other nonprofit organizations devise ethics codes.

“People need more than just ‘here’s the goal mark, ‘” says Melissa Flournoy, president of the Louisiana Association of Nonprofit Organizations, which next month will start helping its members draft ethics codes. “It can be overwhelming. The organizational capacity issues are something that small organizations deal with every day.”

The association’s Louisiana Standards, derived from a similar program established in Maryland during the 1990s, cover eight areas of nonprofit management — mission, governance, conflicts of interest, human resources, financial accountability, disclosure, fund raising, and public policy.

The standards have helped dozens of Maryland nonprofit organizations, such as Interfaith Housing Alliance, in Frederick, create sound ethical codes and build trust with donors.

Jeanne Vasold, Interfaith Housing’s fund development officer, says her group’s embrace of the Standards for Excellence created by the Maryland Association of Nonprofit Organizations has helped it make its case to prospective donors.

“Some of the challenges faced by nonprofits over the past few years has put us in a position of having to prove ourselves even more,” Ms. Vasold says. “With these standards, we are able to prove that other well-respected organizations have put us to the test, and we’ve passed the test.”

Getting Started

On a more national scale, Independent Sector, a national coalition of charities and foundations, in Washington, unveiled a new model code of ethics in February that can be used as a starting point for organizations looking for a template to create their own codes. The organization, however, does much more than provide a cut-and-paste code. It offers an expansive list of tips and suggestions to help charities not only draft effective guidelines, but also make sure they are followed.

Independent Sector suggests nonprofit organizations start the process by deciding who should be involved in their ethics committee. The committee, the suggestions say, should include some of the charity’s staff members and trustees, as well as major donors, volunteers, or beneficiaries.

Once the committee is formed, it should focus on creating a statement of values that spells out those that are particularly relevant to the charity’s mission, those that all nonprofit organizations uphold, and those that guide the conduct of the organization’s employees, board members, and volunteers. The statement of values should then form the core of the organization’s code, which should be written as a broad framework of principles — not as a detailed handbook of policies and procedures, Independent Sector says.

The Land Trust Alliance, in putting together its new ethics standards, has followed Independent Sector’s lead, including all of its member organizations in the creation of its updated document.

A formal committee created a first draft of the updated standards in January, which was then circulated among all of the alliance’s members, more than 550 of whom responded with comments and suggestions, Mr. Wentworth says. The group expects to incorporate those notes into a second draft this summer and hopes its board will approve the final document in the fall.

Mr. Wentworth says the process has been both time-consuming and rewarding. It has helped the organization create new guidelines on topics such as conflicts of interest and how to appraise donations for tax purposes.More important, he says, it has also included everyone in the organization — a necessity if the code is to be followed once it is adopted. “If we just made a pronouncement from on high, people would just put it on a shelf and forget about it,” he says.

From Policy to Practice

The key to a successful ethics code, says Mr. Mulvihill of Make-a-Wish, is making sure it becomes much more than just a well-worded document. The most effective nonprofit organizations use an ethics code as a mere starting point — a reference that is reinforced by training, discussion, and practice.

Mr. Mulvihill says that theory is ingrained in his charity’s culture and is nurtured by an extensive system of ethical checks and balances. All employees and volunteers at all of its chapters are required to read and sign a statement of values, which they agree to follow.

The system is designed to make sure not only that the organization has a code of ethics, but also that it clearly communicates its standards to employees and volunteers and encourages them to think regularly about their actions.

“Certainly, you can’t just have a piece of paper,” says Mr. Mulvihill. “We’ve got to do everything we can to make sure our values are top-of-mind.”He says it is important that employees and volunteers who violate the code be disciplined — even fired if necessary. “It’s certainly grounds for dismissal, depending on the circumstances,” he says. Because Make-a-Wish has more than 25,000 volunteers nationwide, it is difficult to formally audit each individual’s activities. Instead, the charity relies on other staff members, volunteers, donors, and beneficiaries to come forward if they suspect someone has violated the group’s rules

In many cases, that means regularly reviewing and tweaking an ethics code, even if it is fairly new. The National Alliance for Choice in Giving, a Portland, Me., organization of more than 50 funds that raise money through on-the-job drives, created its first set of ethical standards in 2000, but is already working to update them to include a guide for online campaigns.

When devising its original code, the group’s board spent more than a year reviewing the ethical guidelines of other charities and taking a look at its own challenges to pinpoint what to include. The document, which is posted on the group’s Web site, includes sections on general principles and standards, financial practices, management standards, and general ethical standards.

Matthew Howe, the National Alliance’s executive director, says his group assembled its code to keep up with donors’ concerns about on-the-job drives. It has since become an important part of the organization’s mission, defining how its on-the-job giving programs differ from programs offered by other charities. The code puts a limit on fees that can be collected by member organizations and offers stringent guidelines on how organizations that use office giving campaigns should report their revenues.

“It’s a darn good thing to have one, and you’ll find all kinds of ways to utilize them that you hadn’t thought of before,” Mr. Howe says of ethics codes. “It’s become a strategic tool — a way to solve problems.”

Has your organization created an ethics code? How was it developed and what does it cover? Tell about it in the Tools and Training online forum.