News and analysis
July 11, 2013

New Fundraising Guidelines Issued by Direct-Marketing Group

A national association of charities and their contractors that use direct marketing to solicit donations issued its first-ever set of fundraising guidelines Thursday, responding partly to reports that have highlighted nonprofits that spend little of the money they raise on programs.

The Direct Marketing Association Nonprofit Federation wants the principles, based on how “legitimate” groups conduct fundraising, to be instructive to all nonprofits employing contractors to raise funds through direct mail, phone calls, and other means.

Senny Boone, general counsel for the federation, said in an interview that federation members that violate the principles could lose their membership.

“Donors expect nonprofits to be accountable and transparent,” she said in a statement.

The federation first contemplated issuing a set of principles last year to counter how watchdogs such as Charity Navigator judge nonprofits’ financial performance using what the association considers simplistic formulas that do not factor in all acceptable accounting practices.

It sped up its process after CNN aired a series of reports about the relationship between a direct-marketing company, Quadriga Art, and charities that spent most of the money they raised on direct mail, were locked into long-term contracts, and were millions of dollars in debt. The Senate opened an investigation into one of the charities, the Disabled Veterans National Foundation.

The principles released on Thursday say that a nonprofit should spend a majority of its annual revenue on programs. It also offers recommendations for agreements between charities and commercial partners, for example saying a contract needs to include a clearly defined, reasonable payment schedule, and a company “should not knowingly or carelessly hurt or endanger” a nonprofit’s finances or reputation.

Ms. Boone said her group is still reviewing the scenario involving Quadriga, which is a member. Mark Schulhof, Quadriga’s chief executive, said in an online video that CNN’s reporting was biased and that his company has not made a profit in its work with the veterans group.

“So why do we do it? We do it because we believe in the long term that we will get paid and make some money,” Mr. Schulhof said in the video. He said direct-marketing firms like his help charities build donor lists that will help sustain them over the long term even if they spend more than they get in the beginning.

The federation’s guidelines underscore that not all fundraising campaigns can be judged by one formula and that fundraising may not pay off for years.

A nonprofit organization’s fundraising efficiency should be judged based on its overall results, not on the costs of a single effort that is part of a bigger campaign, the document states.

Any analysis of a nonprofit’s efficiency should consider “the cost to raise a dollar, cost to acquire a donor, long-term donor value, and net revenue available for the organization to spend on mission delivery,” the principles state, adding that “year over year fluctuations may occur” in how much is spent on programs but that organizations should always provide an explanation because not every nonprofit’s situation is the same.

A nonprofit’s effectiveness, it says, is best measured over time and on a combination of mission, impact, financial stability, and growth.”

The principles also defended the accounting legitimacy of valuing noncash donations, also called “gifts in kind,” and of counting certain expenses as both program and fundraising costs, called “joint costs”: for example, a mailing from a nonprofit that includes both a brochure with educational information and a pledge card asking for a donation.

In its guidelines on how nonprofits can properly establish contracts with fundraising companies, it recommendd written agreements that give the nonprofit control over the message, collection of funds, and donor information.

Fundraisers and nonprofits must make sure to update all filings with government regulators, the guidelines state.

Contracts should avoid conflicts of interest, for example ensuring that an executive of a vendor company does not also sit on the charity’s board of directors.

The new guidelines were issued in the wake of a major investigation by the Tampa Bay Times, the Center for Investigative Reporting, and CNN into charities that spend most of their donations on commercial solicitors, are guilty of conflicts of interest, and deceive donors about where their money is going.

Dig deeper: See The Chronicle's article on Quadriga Art.

Send an e-mail to Doug Donovan.