All in the Family

Arthur J. Stein and Linda Dozoretz serve as the top two officials of Children’s Wish Foundation International, in Atlanta — and they are “happily married,” a note near the end of the group’s annual filing with the Internal Revenue Service states.

Mr. Stein says the fact that he and his wife run the organization together has been a plus for the charity. “I work with somebody I can trust,” he says. “I can depend on her. Once we reach an agreement on something, we follow through with it.”

Still, he admits, such close personal and business relationships “can put a heck of a strain on a marriage. My wife and I get into some pretty heated arguments sometimes on how things should be done. Some people can take living and working together, and some people can’t.”

Involving family members can energize an organization’s mission by tapping relatives who share a passion for a cause and who sometimes agree to work for lower salaries or fees, some charity leaders say. No laws prevent relatives from working at the same organization, and nonprofit legal experts say the practice — when done with full disclosure — offers many benefits.

Checks and Balances

Yet hiring family members as employees or contractors also carries potential for trouble, say legal experts. Concerns about abuses have prompted the Internal Revenue Service and watchdog groups to call for greater public disclosure about such relationships and some policy makers to ask groups to adopt formal procedures to ensure that a charity’s best interest is served.

Normal checks and balances can evaporate, nonporfit-management experts say, when relatives are unable or unwilling to hold one another accountable. And, even in the most vigilant and open of nonprofit groups, family ties can create an appearance of a conflict of interest and impropriety that may be difficult to overcome in the minds of donors.

Mr. Stein says the Children’s Wish Foundation’s board has the ultimate say on whether the arrangement is serving the charity’s interests.

The board, he says, sets salaries, which are based on the recommendation of an independent accounting company. Mr. Stein received about $230,000 in wages and benefits in the 2006 fiscal year, according to the charity’s Form 990 filing. During the same period, Ms. Dozoretz received $233,000 for her role as executive director.

New Disclosures

In recent years the IRS has added new questions about family connections to the Form 990, the informational return that charitable organizations file annually.

Nonprofit groups also have been urged by their peers to pay attention to the matter. A committee appointed by Independent Sector — an umbrella group of major foundations and nonprofit groups — has included rules on how charities should handle relationships with family members as part of its good-governance recommendations approved in October.

Some experts on charities express concern that board members may be too close to those who run the day-to-day operations of a group to provide sufficient oversight in cases where charities employ relatives.

“We’ve seen the wheels fall off again and again when boards are just for show,” said Sen. Charles E. Grassley, the senior Republican on the Senate Finance Committee, in a written response to questions. “I hope that nepotism will be easier to spot when nonprofits have to file more than a couple of lines about their board makeup and operations” on the updated Form 990.

The current Form 990 requires nonprofit groups to disclose family relationships among officers, board members, key employees, and contractors. It also requires that charities disclose whether they have paid compensation to, or entered into other transactions with, relatives of officers, board members, and key employees — and explain why.

The revised form for the 2008 tax year asks for similar information. But it also seeks additional details.

For example, a charity must file a special form if a current or former director or key employee has a family member with “a direct or indirect business relationship with the organization” that involves significant sums of money. On the form, the organization must provide specific details about the relationship and transaction.

Not Uncommon

No good statistics exist on just how often nonprofit groups employ family members in key positions or hire them to provide specific services. But anecdotal evidence suggests the practice is not uncommon, especially among founders who turn to family and friends to get an organization started.

Charity Navigator, which evaluates financial information for more than 5,000 prominent charities, recently found 98 nonprofit groups that appeared to employ relatives. The groups were pulled from the organization’s database for charities based on a search of employees who shared the same last name.

Shared Interests

Charity leaders who hire family members say the arrangements provide many advantages.

“I find it prudent to hire individuals who share my interest and degree of compassion for those suffering with cancer,” says Rose M. Perkins, founder of the Children’s Cancer Fund of America, in Powell, Tenn. “And any relative that is in my employ does indeed meet those qualities.”

She says the organization she started two years ago has two members of her family on the payroll. She did not specify her relationship to them.

Ms. Perkins says her organization is not affiliated with her former employer, the Cancer Fund of America, in Knoxville, Tenn., which is run by Ms. Perkins’s former husband, James Reynolds Sr. That organization currently employs three of Mr. Reynolds’s relatives: two sons and a son-in-law.

Mr. Reynolds says hiring family members has its “pluses and minuses.” Seven or eight years ago, for example, he says he had to lay off some relatives, which “caused some problems and hard feelings within the family.”

As founder of the organization, Mr. Reynolds says it made sense to employ relatives, but if he had to do it over again, he might reconsider the idea or at least hire fewer family members. That’s because news media and watchdog groups, he says, tend to imply that all such ties indicate some kind of wrongdoing, even when everything is handled ethically, he says.

At this point, however, “I’ve been in this some 38 years, and I can’t worry about the cosmetic things,” he says. “I just do my job.”

Negative Fallout

Publicity about family connections and charities has resulted in serious consequences for some organizations.

In Missouri, David Lovell’s role as head of an organization he spent 12 years carefully building ended weeks after the St. Louis Post-Dispatch revealed that the charity had hired a marketing company that was co-owned by his wife — paying it more than $3-million in fees.

Members of the board of Reach Our Children, which helped cancer patients and their families, had not known of Nancy Lovell’s involvement in the company until they read about it in the newspaper, according to outside lawyers who conducted an investigation at the charity’s request. The lawyers raised several questions about potential conflicts of interest related to the organization’s operations, the newspaper reported.

Mr. Lovell has denied any wrongdoing.

In an interview with The Chronicle, Mr. Lovell said that most of the fees paid by the charity to the company co-owned by Nancy Lovell were in turn paid out by the company for postage, printing, and other costs associated with direct mail. Mr. Lovell said the company made, at most, a very small profit of $10,000 to $20,000 over three to four years from doing business with the charity.

Mr. Lovell says his wife’s involvement in the company was disclosed to the board, and board members handled the matter properly. Looking back, he said, board members did know about the relationship, but apparently “they did not understand it.”

Mr. Lovell says he resigned from the organization because the lawyers who conducted the investigation recommended that it would help repair the organization’s image with the public.

The departure of Mr. Lovell and the publicity surrounding it came very close to destroying the organization, says his successor, Renee Kirkiewicz. Since then, the charity has changed its name (to the Foundation for Children With Cancer), increased the size of its board, hired a new accountant, and adopted new rules for overseeing the hiring of employees and outside companies.

Management experts say charities that hire family members should be sure to disclose that information — and to be certain that the family members’ work is overseen by strong, independent boards.

As part of its governance principles for charities and foundations, Independent Sector recommends that at least two-thirds of the board members of a charity be independent, without close family ties to people paid by the charity.

The Better Business Bureau Wise Giving Alliance warns groups against transactions in which a board or staff member has “material conflicting interests with the charity resulting from any relationship or business affiliation.”

Bennett Weiner, chief executive of the Wise Giving Alliance, says that while his organization does not prohibit charities from making transactions between relatives, officials of charities that engage in them must be able to explain in detail why they were necessary. Even then, he says, they may continue to face suspicion.

In those cases where a charity crosses legal lines involving family conflict-of-interest situations, the charities are often difficult to prosecute, says William Josephson, a longtime nonprofit-law expert and New York’s top charity watchdog under Eliot Spitzer, when he was the state’s attorney general.

“The basic problem is that law enforcement varies across the states,” he says. “Many states do not have anywhere near the staff or resources they need to do the job.”

Jack Siegel, a lawyer and author of the book A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, says regulators are smart to take a closer look at organizations that hire family members to be sure there aren’t conflicts involved.

“Whenever you see an organization blow up, you almost inevitably see conflicts of interest,” he says. “The blowup may not directly relate to the conflict, but it often signals poor governance in other areas.”