News and analysis
February 25, 2015

New Charity Guidelines Deal With Online Fraud, Overhead, and Executive Pay

In a continued effort to self-regulate, Independent Sector, a membership organization of nonprofits, today released a set of 33 principles for charities to follow when their members meet in the boardroom, solicit donors, manage their operations, and report their finances.

“Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations” is an update on a similar set of guidelines the group compiled in 2007.

The guidelines were vetted by an advisory panel that included foundation presidents, legal experts, academics, and members of charity-oversight groups. The principles offer guidance on executive compensation, online fundraising, financial management, and other issues facing nonprofits.

One of the updates gives charities more flexibility on “overhead,” saying administrative expenses are often essential to carry out a charity’s mission “responsibly and effectively.”
Previously, the Independent Sector principles said charities should spend a significant amount of their expenses on programs, with a target of at least 65 percent — a threshold suggested by some watchdog organizations. The updated guidelines say that spending less than 65 percent of total expenses on program activities, -- and more on overhead, is sometimes necessary.

Too often, charities will seek to lure donors by cutting their administrative cost to the bone, said Diana Aviv, president of Independent Sector.

“There’s a race to the bottom,” she said.

The principles also reflect changes in technology. When they were first issued in 2007, online fundraising was in its infancy and crowdfunding was unheard of.

The new guidelines warn that online fundraising channels provide “many opportunities for inappropriate or fraudulent solicitations in the name of a charitable organization.”

Charities should provide such warnings in their solicitation materials and make sure online fundraising pitches provide donors with contact information in case they have questions. The new guidelines say charities that contract with outside organizations to process online donations should have a written contract that details how much the contractor will take in fees, how it will protect donors’ personal information, and what process is in place to prevent fraud.

Executive Pay

The report also seeks to get nonprofit board members to think harder about executive pay. Rather than letting smaller board committees determine salaries and benefits before bringing their decisions to the entire board for a “rubber stamp” vote, Ms. Aviv says boards in full should consider pay and vote on all compensation issues.

The original report was issued when charities faced withering criticism from lawmakers on Capitol Hill. Independent Sector compiled the principles out of concern that the reputation of all charities had been sullied by the misdeeds of a few.

The approach preferred by Independent Sector is for nonprofits to police themselves. “The best bulwark against misconduct will always be well-informed vigilance by members of the nonprofit community themselves,” reads the report.

Meanwhile, criticism from Congress continues. Sen. Chuck Grassley (R-Iowa) is still pressing for investigations of nonprofits, including charity hospitals and the American Red Cross. Last year, then-Rep. Dave Camp, who was chairman of the House Ways and Means Committee, sought caps on executive pay at nonprofits.

Sen. Grassly said guidelines like those from Independent Sector can be useful. “Many organizations would rather have the flexibility to go above and beyond what’s required of them than have regulations and legislation spell out every detail,” he said in a statement. “Our whole tax system is based on voluntary compliance, but those who break the law still face accountability for it.”

Dean Zerbe, a managing director at alliantgroup and a former tax counsel for the Senate Finance Committee under Grassley, applauded the use of voluntary guidelines but said laws governing nonprofits need to be strengthened.

The Independent Sector guidelines allow nonprofit executives and board members to respond to colleagues who want to “cut corners,” and justify their actions by saying they have acted within the law, he said. “The law is so weak in this area that most lawyers will tell you something is legal,” he says. “That doesn’t mean that it is right or proper.”

Send an e-mail to Alex Daniels.