A Missed Opportunity to Ensure Real Charity Accountability

When the Panel on the Nonprofit Sector, a committee of experts appointed by Independent Sector, issued its report suggesting 33 principles of governance, fund raising, and management that charitable groups should follow, it missed a key opportunity to take a step that would truly bolster the public’s confidence in nonprofit groups.

While the report says it examined more than 50 existing efforts through which charities and other institutions regulate themselves, the report does not promote a meaningful self-regulation system. Instead, it simply urges groups to read the principles in its report and consider whether or how to apply them.

That is a fine first step, but nothing more than that. Real self-regulation means that charities must have access to a voluntary system in which their operations can be reviewed by independent, knowledgeable third parties.

Already, some parts of the nonprofit world have good self-regulation systems in place. Many evangelical Christian charities, museums, land trusts, and international humanitarian organizations, for instance, are accredited by independent groups, and when experts determine that those groups have failed to meet widely agreed-upon standards, they must make changes or face the consequences. Nothing like that happens when it comes to the management and governance of most nonprofit groups.

Without a comprehensive system of self-regulation, nonprofit groups cannot make a compelling case to Congress, state legislatures, or the general public that the nonprofit world is capable of getting its own house in order. The specter of unnecessary, burdensome regulation at all levels of government continues to loom on the horizon.

Far from advancing systems of self-regulation, Independent Sector’s committee of experts has instead emphasized a very narrow, albeit common, conception of self-regulation as primarily a matter of individual organizations regulating themselves. Yet buried deep within the 136-page reference volume accompanying the panel’s report is a compelling case that a more rigorous approach to self-regulation is needed.

An accompanying paper included in the reference volume, “Study on Models of Self-Regulation in the Nonprofit Sector,” written by Harvey P. Dale and his colleagues at New York University’s National Center on Philanthropy and the Law, describes self-regulatory structures as “situations in which one organization sets standards for, oversees, accredits, or regulates other organizations” and examines 22 systems of self-regulation drawn from both the nonprofit and business worlds.

A second paper in the reference volume, “Self-Regulation in the Nonprofit Sector: A Portrait of Current Issues in the Field,” written by the Farkas Duffett Research Group, in New York, examines several self-regulatory organizations and shows that effective systems of self-regulation include three components: standards established by the industry, resources to help organizations meet the standards, and a system of recognition that rewards groups that comply and, in some instances, penalizes groups that do not.

Both those papers catalog issues and challenges affecting the success of self-regulatory programs and organizations.

It was surprising then that Independent Sector’s Panel Report contained no recommendations to advance such a system of self-regulation. For as Professor Dale argues, “Self-regulatory structuresare not merely important but are absolutely critical to the nonprofit sector, and most crucially to charities and social-welfare organizations within it.”

Noting the lack of resources available for federal- or state-governmental oversight, Professor Dale explains that “in the resulting partial vacuum of governmental oversight, self-regulation is an indispensable tool for setting standards, identifying malfeasance and misfeasance, and improving the integrity and efficiency of the nation’s social-welfare organizations.”

As is well illustrated in the reference volume, self-regulatory systems in the nonprofit world are far from well developed.

While the report recognizes that many self-regulatory organizations exist for specific types of nonprofit groups, the vast majority of nonprofit groups working at the state and local level are not covered by any self-regulatory group. While two self-regulatory programs serve the entire nonprofit world — the BBB Wise Giving Alliance and the Standards for Excellence Institute, which I oversee — rank-and-file nonprofit organizations do not yet participate in those efforts in significant numbers.

While the issue of self-regulation is contentious and complicated, it would only take a few simple steps to strengthen and expand the system of self-regulation by nonprofit groups.

First, nonprofit leaders have to unite behind the idea that self-regulation means more than just asking groups to monitor themselves.

When individual organizations are expected to vouch for the integrity of their own operations, that does little to reassure the public. More important, nonprofit groups do not get the benefit that third-party reviews provide to deal with real and perceived lapses in accountability before they become crises.

Independent Sector and the nation’s largest national nonprofit organizations, umbrella organizations, and associations need to lead by their actions, not merely their words. They should subject their own organizations to one or more of the existing self-regulatory programs, applying for accreditation and putting themselves through rigorous reviews by their peers.

As Michael Piraino, chief executive of the National Court Appointed Special Advocate Association, said after his organization became the first national nonprofit organization to be accredited under the Standards for Excellence program, “We cannot expect the public to assume we are doing our jobs well. Having someone take an objective look at CASA can assure that public trust in nonprofit work is well placed.”

Second, Independent Sector and other nonprofit leaders should make a call for action, actively encouraging their member organizations and other nonprofit groups to participate in relevant self-regulatory programs as well.

Third, Independent Sector and the Council on Foundations should forcefully urge grant makers to finance the development of a comprehensive system of self-regulation for nonprofit groups. Money is needed to pay for the operations of self-regulatory organizations, as well as management-support organizations and state and regional nonprofit associations that are working to assist individual groups, particularly small and medium-size charities, to improve their governance, management and operations. Over the past several years philanthropic support for efforts to improve the management of nonprofit groups has been dwindling; that trend now needs to be reversed.

Fourth, private foundations, community foundations, corporate foundations, and corporate-giving programs should provide positive recognition to nonprofit groups that have attained third-party accreditation. While accreditation should not be used as a litmus test for whether an organization should get or be denied a grant, groups that take these steps should be rewarded. The fact that an organization is accredited should be viewed as a positive factor in the course of grant-proposal review. Grant makers should also recognize that when an organization has been accredited by a third party, it saves the foundation’s own staff the time and money involved in the due-diligence review of a potential grantee.

Finally, nonprofit groups that have attained accreditation must more forcefully promote that fact. The more groups talk about their accreditation, the more donors and others will know that such reviews matter.

The need for Independent Sector and other national nonprofit groups to play a more visible and aggressive role in promoting participation in systems of self-regulation is not a new idea. Independent Sector’s own Ethics and Accountability Committee voted in March 2006 to push the idea. But the Independent Sector board voted not to consider the idea further while the Panel on the Nonprofit Sector was at work.

Now that the panel’s work is done, it is time for Independent Sector and other nonprofit leaders to make clear that self-regulation cannot be achieved if charities do little more than read, consider, and endorse a set of principles.

Meaningful self-regulation requires us to hold one another accountable. Individual nonprofit organizations must be open and willing to change. National nonprofit groups and foundations must provide resources and practical tools to help even the smallest charitable organizations improve. And perhaps most important, leading nonprofit organizations must be willing to put themselves to the test of independent peer review.

Peter V. Berns is chief executive of the Standards for Excellence Institute and executive director of the Maryland Association of Nonprofit Organizations.