Independent Sector Releases Watered Down Principles for Nonprofits

The IS-sponsored Panel on the Nonprofit Sector announces principles that aren't that different from ones that other nonprofit groups adopted decades ago.  And they still don't address over-indulgent executive compensation—much less fundraising phone calls and junk mail. 

As far as I can tell, no news source outside the charity industry noted that the Independent Sector (EIN 52-1081024 Form 990) finally released its principles for good governance and ethical practice developed by its panel on the nonprofit sector (which were issued in short form as a guide and in a longer reference edition with background discussion).  When the panel released its draft back in March, we discussed its major shortcomings

• failing to address the issue of out-of-line executive compensation and the imbalance of power between boards and CEOs and
• not directly addressing the most disliked aspects of nonprofit fundraising, namely telemarketing and junk mail

Not surprisingly, these lapses were not remedied in the final draft.  If you're interested, I compared the discussion draft with the final version to see what changes came out of the public comment period.  The public was mostly concerned with changing the wording slightly, mostly, it seems, in the direction of making the principles less specific:

• The final dropped a reference to avoiding conflict of interest.  Charities are just expect to manage conflict of interest, not avoid it. 
• There was clarification that only whistleblowers acting in good faith are entitled to confidentiality and protection from retaliation.  I am concerned that in practice this will mean that the disgruntled-employee whistleblower (a common enough type) is not entitled to protection. 
• The draft encouraged charities to share the results of program evaluations, but the final only says that they should consider doing so. 
• The final eliminated of a requirement that boards have five members.
• This version added specific mention of racial, ethnic, and gender diversity in board composition, along with deletion of a requirement that boards include individuals with financial literacy.
• The frequency of board reviews of programs reduced to once every five years (from once every three years in the draft).
• A draft requirement for independent external review of board compensation was dropped.

The only published comment I found on these new principles was an opinion piece in the Chronicle of Philanthropy by Peter V. Berns of the Maryland Association of Nonprofit Organizations (EIN 52-1749231 Form 990).  His complaint was that the standards lack a mechanism for self-regulation, such as the  Standards for Excellence certification program developed by Maryland Nonprofits, which currently certifies some 63 of the organization's over 1,600 members.  There was also a blog entry by Trent Stamp expressing nonspecific support for the principles (in principle). 

Disclosure: six years ago I worked for Maryland Nonprofits, which included writing supporting materials for the Standards for Excellence. 

What baffles me is that both Mr. Berns and Mr. Stamp say that these principles are a start.   Whatever they are, these principles are not a start.  One of my first Internet projects back in 1999 (eight years ago!) was to provide a survey of standards for nonprofit accountability.  Later, Independent Sector copped the idea (which was hardly original with me!) and generated a longer list of 100 standards, including some from individual organizations and from trade associations for industries that include a large number of nonprofit organizations (like hospitals).  The prototype standards setting and certification program is that of the Evangelical Council for Financial Accountability (EIN 93-0744698 Form 990), which goes back to 1979.  One predecessor organization to the BBB Wise Giving Alliance (EIN 52-1070270 Form 990) focused on ethical standards for large national charities only, but dates back to 1918.

The problem with these principles is that they are largely obsolete due to the rise of CEO power in organizations, as reflected by the large and disproportionate increases in CEO pay.  A glance around the Independent Sector panel shows some cases in point:

• Independent Sector itself reported revenues of $9.4 million in 2004 (which is the most recent Form 990 available—why?).  Its CEO Diane Aviv received $258,878 in compensation & $55,892 in benefits, which was over 80% greater than that of the next most highly paid staffer.  And there is no financial officer in sight. 
• In 2005-2006, Surdna Foundation (EIN 13-6108163 Form 990), with $827 million in net assets, paid its executive director Ed Skloot $638,556/$42,698, which included $235,000 as a supplemental retirement benefit.  But even without the supplement, the $403,556 compensation exceeded that of the next most highly paid (CFO Marc De Venoge $239,918/$49,508) by almost 50%. 
• We have already seen that the Ford Foundation (EIN 13-1684331 Form 990-72Mb!) was able to hire a replacement for its CEO (and nonprofit panel member) Susan V. Berresford for $42,000 less than she received, undercutting the common assertion that salary increases are justified because it costs more to bring in new talent.  Even at that, the new Ford CEO Luis A. Ubiñas will be making almost double what the most highly paid program officer makes (though as we saw, the investment managers at the second largest foundation in the US make considerably more). 
• At the Charles Stewart Mott Foundation (EIN 38-1211227 Form 990), CEO William S. White has a compensation package of $395,000/$249,359, which is more than 85% greater than that of the next highest staff (excluding the investment managers, who make more than the president in this organizations with $2.4 billion in net assets). 

And among the critics:

• At Charity Navigator (EIN 13-4148824 Form 990) in 2006 CEO Trent Stamp pulled down $114,804/$4,252, which was 36% more than the next staffer, IT guy Timothy Gamory at $84,982/$2,571 in an organization with $666,561 in income and $1 million in expenses. 
• Peter V. Berns at Maryland Nonprofits received $210,230/$27,195 in an organization with $3.2 million income in 2005, more than double the pay package of the next highest, senior advisor Nancy Hall at $104,230/$14,230.

What this quick survey of CEO pay shows, I think, is why neither the Nonprofit Panel nor its supporters nor its critics in nonprofit circles have identified executive pay as an ethical issue with charities, even as those pay packages zoom up into the stratosphere, far from the levels of other administrative and program staff.  In a very real sense, they all appear to be players in the game, all beneficiaries of the strong CEO/weak board syndrome the pervades the charity sector.   

And the lack of attention to the executive pay issue could well be the real reason the rest of the world pays no attention to the charity industry's latest attempt at self-regulation.  The press knows where the real issue lies, and they know that all these codes have nothing important to say in 2007. 

Comments

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Thank you so much for highlighting these facts, Dan. I think it's important for us as a sector to be walking the talk when we say that we're accountable and capable of self-regulation. And if I were a highly paid CEO, I would probably be keeping my mouth shut about executive compensation unless I was willing to make some course corrections within my own organization. Perhaps that is what your post suggests. Along with creating principles, we need to be sure we're living them!

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