Charities and the Shibboleth of Accountability

Rhetoric emanating from public and private sources suggests a big problem with non-profit accountability.

In fact, despite a few well-publicized cases to the contrary, there is little evidence of significant wrongdoing or irresponsible behavior by non-profit organizations. Nor is there a lack of accountability. The real problem is the growing tendency to confuse the accountability standards for government agencies with those for private organizations that work toward the public good. The standards for one set of organizations are different — and should be different — from the standards for the other.

In San Francisco, for example, the Board of Supervisors recently passed a “sunshine ordinance” that imposes new levels of governmental oversight on non-profit organizations that receive city contracts. The new law subjects any non-profit organization that receives city contracts worth more than $250,000 to a number of regulations, including those that require such groups to conduct their affairs in ways similar to the procedures required of public agencies. For example, they must hold some board meetings in public, include an open-microphone period at those meetings, and allow the public to nominate candidates for seats on the board.

Several supervisors said that although they did not know of any abuses by non-profit organizations — indeed, they repeatedly praised the fine work of charities that take on the burden of delivering public services in low-paid and challenging environments — they decided to vote for the measure because, in the words of one, “accountability is a good thing.”

No one can dispute that organizations that are exempt from tax because they provide public benefits — especially those organizations that also receive direct financial support from the government — should behave responsibly and provide information about their finances and activities to the public. But non-profit organizations are based on the principle of private volunteerism and operate best when they are self-guided and flexible. Although government agencies have the right to require full reporting and disclosure by non-profit organizations when the agencies establish contracts with them, it is inappropriate and ultimately counterproductive for government, in the name of accountability, to impose substantial restrictions on non-profit groups’ private operations.

Historically and philosophically, the American non-profit sector is grounded in a vision of an independent, voluntary resource for the public good, unconstrained by the demands of profit making or the requirements of political acceptability of governmental actions. As Laura Chisolm argued in an insightful article in the academic journal Nonprofit Management and Leadership, “The fact that those who run nonprofit organizations are not politically accountable (at least, not through election) is not an oversight or a defect but rather a deliberate policy choice.”

The original, definitive legal case establishing the principle of independence of non-profit organizations was Trustees of Dartmouth College v. Woodward, in which Chief Justice John Marshall issued his famous opinion arguing that there is a clear distinction between private charitable corporations, which the government creates but cannot thereafter control, and corporations established by the legislature to carry out a public function, such as turnpike authorities. The 1819 case established the basis for the construction of a pluralistic system in which private voluntary organizations stand equal to government in providing for public welfare.

In recent years, cases have been reviewed in state courts — including those in Connecticut, Florida, and Ohio — that deal with the line between non-profit groups that act, in effect, as proxies for government agencies and non-profit groups that simply receive government funds to support activities that further the public welfare. In the former case, the courts have ordered the use of governmental operating procedures, such as the requirement to hold open meetings; in the latter, they have not. The crucial distinction has been whether the non-profit group was operating as the functional equivalent of a state agency or as a private organization serving public purposes.

It is extremely important for boards and staffs of non-profit organizations to be clear in their own minds of their need to operate as voluntary, privately governed organizations — and to communicate the need for that freedom to an increasingly skeptical public. The field needs to educate itself — through academic programs, training seminars for new staff members, and other forms of learning — about the history and philosophy of the non-profit world in the United States. The associations representing charities need to articulate the rationale for private efforts that work in the public interest to both the public and to governing bodies.

The popular notion that the non-profit world is somehow not accountable for its actions is particularly distressing, since it simply is not true. Indeed, current federal, state, and local reporting and regulatory requirements provide a high level of public accountability.

For example, except for churches and groups with annual expenditures of under $25,000, all organizations exempt under Section 501(c)(3) of the Internal Revenue Code must file and make public Form 1023 (application for tax exemption) and Form 990 (a detailed annual report concerning their finances and activities). The 990s contain such information as salaries of the highest-paid employees, extensive financial data about expenditures and sources of income, and descriptions of their major activities. The forms are now available on request from the organizations, and a newly passed law will make them even easier for journalists, donors, and other interested parties to obtain.

In addition, most non-profit groups must report annually to state attorneys general, to state offices that regulate charitable solicitations, or to both. Charities that receive government grants and contracts are subject to a broad range of federal, state, and city auditing and reporting requirements, such as those imposed by the federal Office of Management and Budget, which add yet another layer of accountability.

Beyond the reporting measures required by federal, state, and local governments, non-profit groups typically provide additional information to the public on their finances, activities, and operations. In some cases that flow of information could be improved, and it is incumbent on the field to insure high standards of openness and accessibility to the public.

Indeed, self-accountability is a vital goal for the field and should be encouraged through the promulgation of accountability standards and effective management practices by professional associations and non-profit policy groups. The “Standards for Excellence” issued by the Maryland Association of Nonprofit Organizations in May are an excellent example of these. Developed by a team of the association’s members over the past two years, the Maryland principles set clear standards for practice by non-profit organizations that provide for strong accountability without demanding additional bureaucratic procedures. The Maryland association offers a peer-review certification program for non-profit organizations interested in demonstrating that they abide by the “Standards of Excellence.”

The problem with the San Francisco ordinance is that it confuses the city’s role in monitoring the use of its funds with the exertion of control over the charity itself. Proceeding from an inaccurate premise — that the receipt of government funds entitles the public to oversee all of a charity’s operations, not just its use of public funds — the ordinance establishes an unfortunate precedent for even greater government intrusion into what are now and should continue to be private decisions by private institutions.

The government has both the right and the obligation to supervise its grants and contracts to insure that they are used for their intended purposes. Beyond that, however, decisions about the programs that charities should undertake, as well as the way in which they conduct their business, should be left in the hands of their directors — the people who, without expectation of personal profit, have taken on the burden of raising money, setting policy, and making the myriad decisions needed to establish and maintain a voluntary organization.

Charities work best, and have been able to achieve great benefits for the public good, by maintaining the independence and flexibility rightfully accorded to private institutions. Government must tread lightly if it is to avoid transforming private entities into public ones.

Janne G. Gallagher is a lawyer in the firm Caplin & Drysdale, in Washington. Bruce R. Sievers is executive director of the Walter & Elise Haas Fund, in San Francisco.