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What Works: Giving Donors Control

An article in the Spring 2006 issue of the Stanford Social Innovation Review addresses an ongoing debate over non-profit transparency and governance and the use of donations to pay for operational costs. The debate was, in part sparked by a scandal involving the American Red Cross in the wake of the 9/11 terrorist attacks. The organization received widespread criticism for allegedly not disclosing how much of its donations, which it promised donors would be used to aid 9/11 victims, it used to cover its own administrative costs. The scandal did much to damage public trust in the non-profit sector and many non-profits have responded by adopting more transparent disclosure policies, in which they inform donors exactly how much of their funding will be used to cover operational costs. Unfortunately, many have found that this can lead to a decrease in donor enthusiasm, many of whom would prefer that the entirety of their money go directly to victims.

In the Spring 2006 Issue of the Stanford Social Innovation Review Dan Gordon describes a simple but unique strategy that the United Way of New Mexico has adopted to solve this problem. As the article shows, its partnering with businesses to cover its administrative costs has hugely benefited not only the United Way of New Mexico, which increased its donations by 112% since implementing the program, but also the businesses involved who have enjoyed a deeper more rewarding relationship with the United Way and more visible and positive PR.

 

Giving Donors Control: A United Way Affiliate Has Boosted Its Fundraising By Breaking The Rules
By Dan Gordon
Stanford Social Innovation Review
Spring 2006

At a time when donors are more concerned than ever about nonprofits using charitable dollars to cover administrative costs, the United Way of Central New Mexico (UWCNM) has implemented a fundraising tactic so simple its leaders wonder why no other United Way affiliate had tried it before. The Albuquerque charity entices area businesses to foot the bill for its annual administrative expenses. It can then tell individual donors that every penny of their donations goes directly to their chosen causes. The result is that contributions from both corporations and individuals have soared.

Some of the nation’s largest corporations have signed up to support UWCNM’s 8-year-old Corporate Cornerstones program, including Intel, Wells Fargo Bank, General Mills, and Lockheed Martin. In exchange for underwriting United Way’s administrative expenses, UWCNM mounts an extensive corporate recognition program – a public relations boon that businesses particularly welcome in an era of well-publicized scandals. Corporate Cornerstones companies, which must direct at least $5,000 in annual donations toward covering UWCNM’s costs, also provide advice and oversight to ensure that administrative spending is appropriate.

Promising individual donors that their entire pledge will go toward assisting needy people proved to be an attractive selling point. Although New Mexico is a relatively poor state, the Albuquerque affiliate raised more than $15 million from individual donations in 2004 – up 112 percent since 1997, which was the year before UWCNM implemented the Corporate Cornerstones program. Corporate gifts to UWCNM totaled $2.6 million in 2004, up 132 percent over 1998. By contrast, corporate gifts to United Way nationwide declined 4 percent between 1998 and 2004.

“There’s no question that the single biggest way in which nonprofit organizations compete for donors’ attention is by telling them about the percentage of a gift that’s going to be used for programming,” says Eugene Tempel, executive director of the Center on Philanthropy at Indiana University. Nonprofits are increasingly seeking unrestricted gifts and endowments from key supporters to cover administrative costs, Tempel notes, hoping to gain a competitive advantage by being able to tell other donors that all of their contributions will go directly to programming.

A Bold Idea Takes Shape

Corporate Cornerstones resulted from a fact-finding project that UWCNM launched in 1997. The project’s mission was to find out why people object to donating to charities in general, and to the United Way in particular. The agency found that two concerns top donors’ lists: nonprofits might use part of the gift to cover administrative costs, and donors might have no say in who benefits from the remainder of their pledge.

At a board retreat, then-chair Bob Jung pointed out that corporate contributions nearly equal the amount UWCNM spends on administration. “I argued that corporations understand the importance of things like balance sheets and profitand- loss statements better than anyone,” says Jung, who recently retired from Wells Fargo as the bank’s regional president for northern New Mexico. “So why not go to the corporations in our community and tell them that rather than just writing a check, they could fulfill a fiduciary responsibility as business leaders in ensuring that our United Way is well-run, and they could tell their employees that because all costs are already covered, they could get more bang out of their buck.”

“There’s always been a question among employees as to where their dollar is going,” says current UWCNM board chair Michael Stanford, CEO of First Community Bank in Albuquerque. Stanford notes that recent revelations of United Way’s excessive overhead and misuse of funds at the national level have only added to these concerns. “The genius of the Corporate Cornerstones program is its simple logic. If we as companies have skin in the game through our responsibility for covering administrative costs, we’re going to be more engaged in making sure United Way is run like we run our businesses. At the same time, it’s easier for the business community to understand the importance of administrative costs than it is for average givers, who just want to know that their dollar is going into helping their community.”

Board members initially met Jung’s proposal with skepticism. Some believed the idea to be no more than a shell game. Others were more concerned about perceived risks. “When you ask corporations to direct their gifts, you’re risking that they’ll direct it to someone else,” says Jack Holmes, UWCNM’s president and CEO. “And when you open up your administrative budget to corporate givers, there’s the possibility that they might not like what they see.”

But the board’s most immediate concern was what would happen if, after the agency announced the new program, corporate gifts failed to cover annual administrative costs. With that in mind, the UWCNM board agreed to the proposal on the condition that the organization had to secure sufficient corporate commitments before it announced the program.

Putting the Program Into Action

One impediment to getting corporations to cover administrative costs was that corporate donors also want the goodwill that comes with supporting programs. So UWCNM built an extensive corporate donor recognition program into Corporate Cornerstones. “This is much more than a plaque or a picture in the newspaper,” Holmes says. “Corporations can’t pat themselves on the back, but it’s very effective when someone else does it for them.”

Corporate Cornerstones members’ names are included on the program’s literature, which is distributed to more than 100,000 employees. They are also listed in UWCNM newspaper ads, on portable banners that are placed at community events, in UWCNM training rooms, which are used by 14,000 people each year, and in a prominently displayed sign in the UWCNM lobby. The UWCNM Web site lists members by their gift level, with links to the companies’ Web sites.

The fears that corporate donations wouldn’t cover UWCNM’s administrative expenses were never realized. In fact, says Jung, while it initially took some effort to convince companies that joining Corporate Cornerstones was in their interest, the program has become so successful that it now sells itself. Since 2002, Corporate Cornerstones contributions have exceeded the amount needed to cover annual administrative costs. (In 2003, UWCNM’s administrative costs accounted for 14.9 percent of its $12.9 million budget.) UWCNM is spending the additional funds on such initiatives as a center that helps nonprofits with training board members, fundraising, and strategic planning; a family violence prevention program; and a disease management database that focuses on diabetes, pediatric asthma, low back pain, and depression.

Under UWCNM’s new program, individual donors know that their entire gift goes to nonprofits, and they have the option of designating which nonprofits will receive their money. Donors can direct their entire gift to any nonprofit agency in the world. In UWCNM’s 2004 campaign, more than 2,000 nonprofits received designated gifts, the vast majority of them in New Mexico. Donors can also contribute to UWCNM’s Community Fund, which gives grants averaging $60,000 to more than 115 programs that assist the needy of central New Mexico.

The downside of not asking individual donors to cover administrative expenses, according to Tempel, is that it perpetuates givers’ beliefs that meeting these expenses is extraneous to the success of nonprofit organizations. “No organization can deliver effective programs without good planning, management, and evaluation, and those three things cost money,” Tempel says. “For organizations that seek a fundraising advantage by dedicating 100 percent of individual gifts to programs, there also needs to be constant donor education that administrative costs are very important.”

UWCNM believes it’s going that extra mile in educating individual donors about the importance of paying administrative costs, by publicly recognizing the corporations that are covering them. The organization is also educating United Way’s 1,400 affiliates about the Corporate Cornerstones program, but so far only the United Way affiliate in Boise, Idaho, has replicated the program.

“It really hasn’t caught on yet,” says Holmes. “We give  presentations at regional and national United Way conferences and the reaction from people tends to be, ‘It won’t work in our community.’ They say they don’t have many major corporate headquarters, but neither do we. They say they don’t want such an open designation system. We tell them it doesn’t matter what they want – it’s what the donor wants that matters. If your product’s not good enough to compete in the open market, maybe you ought to change it.”

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AccountAbility - Size Doesn’t Matter in Stakeholder Reporting

A Model for Non-Profits

All non-profit organizations, regardless of size, can benefit from publishing reviews of their performance in stakeholder reports, according to AccountAbility.

The London-based standards developer and think tank has just issued its own report to stakeholders for 2004-2005 following extensive consultation with its stakeholders on how they think the organization is performing.

The report – known as The AccountAbility Accounts – assesses whether the organization has delivered against its stated strategic and operational objectives.

For the first time, AccountAbility has built an element of third party assurance into its reporting and responsiveness – the basis of Accountability’s AA1000 process in the form of a stakeholder panel. The panel reviewed the report in line with the principles of materiality, completeness assurance standard - to decide whether it:

1. focused on the most important issues for stakeholders;
2. addressed those issues comprehensively; and
3. responded appropriately to areas of concern previously highlighted by stakeholders

AccountAbility aims to have its annual report fully audited by external practitioners by 2007.

‘Non-profit organizations are often quick to demand that corporations be accountable to their stakeholders, yet frequently fail to demonstrate how they walk their own talk. Sometimes the excuse is that NGOs are too small and short on resources to report.

‘As a small non-profit of only 40 people, we hope that our example proves size is not an issue when it comes to stakeholder reporting,’ said AccountAbility MD Maria Sillanpaa.

According to AccountAbility, civil society organizations have much to gain from stakeholder reporting, including the opportunity to:

1. gain credibility and trust by providing tangible proof of their own accountability;
2. learn about the real impact of their work direct from stakeholders through structured;
    feedback;
3. adopt policies and processes for smarter working; and
4. ensure that their activities are in line with their mission

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Accountability in the Non-profit Sector as Seen by United Way

 

United Way of America is a major charitable organization that has had its own share of internal ethics scandals. It has moved ahead from these experiences and has important insights to share.

Statement: For the nonprofit sector, trust is the universal currency. To earn that trust, non-profits need to demonstrate more clearly than ever how we deliver on our mission, while operating in an efficient and transparent manner. Those organizations that deliver on these expectations will strengthen their reputations and increase their competitive standing. Those that fail to do so risk their very existence. The non-profit sector needs to become more market drive and more responsive to the needs of community investors, in addition to maintaining higher standards of accountability and transparency.

Answering the Wake-Up Call - Change is Necessary for America’s Nonprofits
By Brian Gallagher
President & CEO, United Way of America.

At United Way, we know full well the steep price that is paid when the public’s trust in a charity has been undermined and we also know apologies alone do not do enough to restore faith.

In recent years, a spate of scandals have involved some of America’s best known charities and according to a recent study by the Brookings Institution, confidence in charitable organizations stands roughly 10 to 15 percent lower today than in the summer of 2001. Only 11 percent of Americans believe that charitable organizations do a very good job of spending money wisely, which ranks almost two-thirds lower than the percentage who believe charities do an effective job helping people. No less troubling, the United Way’s own polling results find that merely 51 percent of Americans trust non-profits to do what they say they’re going to do with donations they receive.

The Senate Finance Committee has held substantive hearings on the governance and operational standards of America’s charities and among other considerations, are reviewing whether the IRS should review a nonprofit’s tax exempt status every five years to ensure that they continue to operate exclusively for charitable purposes. Multiple states attorneys general have urged their respective state legislatures to enact the local equivalent of Sarbanes-Oxley for nonprofit organizations, which would require CEOs of these groups to legally certify their financial statements. If we, as non-profit leaders, cannot or will not take the steps necessary to institute real change, we have no choice but to accept new legislation governing charities.

However, in a recent United Way Internet poll, we found that while trust in nonprofits is low, more regulation isn’t what a majority of people are looking for to increase their trust, since only 35 percent of respondents said they thought there should be more regulation of charities by the Federal government. The number one reason people don’t have faith or trust in the non-profit sector is that individuals don’t know how charities spend their money – 71 percent of respondents that don’t trust charities said their trust would be greater if they knew how the money was spent.

The fact is, today’s increased expectations of nonprofit organizations by policymakers and the general public actually constitutes a positive development for our sector. Those organizations that deliver on these expectations will strengthen their reputations and increase their competitive standing. Those that fail to do so risk their very existence. The non-profit sector needs to become more market driven and more responsive to the needs of community investors, in addition to maintaining higher standards of accountability and transparency. Good intentions alone don’t merit good will.

Accordingly, United Way of America established new Standards of Excellence, a comprehensive description of aspirational benchmark standards and best practices that are designed to enhance the overall effectiveness of the 1,350 United Way affiliates. They reflect the organization’s fundamental shift from its traditional role as a “pass through” fund raising organization to working with community leaders to identify and address long-term societal needs and improve people’s lives.

The release of the Standards of Excellence follows the implementation of new, stringent membership requirements for financial reporting and accountability. For United Ways across the nation, these standards reaffirmed the values of transparency, accountability and disclosure through compliance with our robust membership accountability requirements. However, over the last three years, there have been more than 50 United Ways that could not meet one or more of our stringent standards and have been disaffiliated.

Today, the primary measure of the United Way’s success is no longer the fundraising thermometer, but rather how well we deliver on our mission to make measurable improvements in communities nationwide. Local United Ways throughout America will offer an accounting of their operations against this key metric and we look to our investors, volunteers, partners and society as a whole to hold us to this higher standard.

(United Way of America 701 N. Fairfax Street, Alexandria, VA 22314
2006 United Way of America. All Rights Reserved.)

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Governance in the Non-Profit Sector

The Independent Sector is a leading U.S. umbrella organization for not-for-profit organizations. Its website includes an excellent section on accountability, funded in part by the GE Foundation.

“Public trust is the single most important asset of the nonprofit and philanthropic community. Without it, donors will not give and volunteers will not get involved. In recent years, the actions by some in the charitable sector have eroded the trust of the public. Thus, the sector as a whole is called upon to address these issues in order to maintain public confidence in its work. Leaders in voluntary and philanthropic organizations need to make a lifelong commitment to paying attention to ethical practices and responsible stewardship of resources.”

INDEPENDENT SECTOR recommends that each charitable organization take the following steps to demonstrate accountability. Adapt them to fit your unique circumstances, and check back for updates as the checklist is expanded.

  1. Develop a Culture of Accountability and Transparency
  2. Adopt a Statement of Values and Code of Ethics
  3. Adopt a Conflict of Interest Policy
  4. Ensure that the Board of Directors Understands and Can Fulfill Its Financial Responsibilities
  5. Conduct Independent Financial Reviews, Particularly Audits
  6. Ensure the Accuracy of and Make Public Your Organization’s Form 990
  7. Be Transparent
  8. Establish and Support a Policy on Reporting Suspected Misconduct or Malfeasance (“Whistleblower Protection Policy”)
  9. Remain Current with the Law

Statement of Values and Code of Ethics for Nonprofit and Philanthropic Organizations

The Independent Sector Statement of Values and Code of Ethics for Nonprofit and Philanthropic Organizations is intended as a model for use by nonprofit organizations and foundations nationwide. IS strongly recommends that all nonprofits and foundations have a code of ethics and provides this model as a tool to help them develop a code or review an existing one.

What You Can Do:

  • Read the Statement of Values and Code of Ethics and share it with your board and staff.
  • For organizations that have a code of ethics—Work with your board and staff to review your organization's code to ensure it covers the relevant areas mentioned in this model and addresses other elements unique to your organization. Make sure that you have a process in place to review adherence to the code on a regular basis.
  • For organizations that do not have a code—Discuss with your board and staff the need for a code of ethics. Consider whether this model code can be adopted as is or how it needs to be revised to fit your organization's mission and structure.
  • For all—Share your experiences and feedback with us so we can incorporate lessons learned into future tools and resources. Please email us at ethics@IndependentSector.org.

The process by which a code is adopted and implemented is just as important as the code itself. The board and staff should be involved in developing, drafting, adopting, and implementing a code that fits the organization's unique characteristics. We encourage you to set aside time in your board meeting or at a retreat to discuss in detail all aspects of an ethical code—and be sure that new board members understand and embrace your code of ethics and practices. In the coming months, IS will provide additional information to guide you in this process and share other resources that you may find helpful.
 

Process:
This document was drafted by a special taskforce of the Independent Sector Ethics and Accountability Committee, distributed to IS members for review over a four-month period from October 2003 through January 2004, and approved by the IS Board of Directors on January 29, 2004.

Note:
A code of ethics is, by necessity, general in outlining broad ethical principles. It is not a detailed set of recommended practices on a specific issue. In many cases, those more specific recommended practices are provided by existing standards of national, regional, and subsector-specific groups. (For a comprehensive list, please visit IS's Compendium of Standards, Codes, and Principles of Nonprofit and Philanthropic Organizations.) In cases where such standards do not exist or need strengthening, we plan to offer recommendations in the future. This statement of values and code of ethics is not intended in any way to duplicate or substitute for the work of organizations promoting standards of practice, but rather is intended as a model that organizations can draw from in reviewing or adopting a code of ethics.

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