December 01, 2015

Fidelity Charitable’s Executive Pay Strategy Shows Arrogance — and an IRS Flaw

It’s common knowledge that transparency rules the day for disclosure of the salaries paid to nonprofit executives.

Tax-exempt organizations can’t hide their top compensation numbers: Salary and benefit information for the most-highly-compensated executives is only a few mouse clicks away, displayed for all to see in the 990 informational tax returns available from GuideStar and other sources. This disclosure reflects the Congressional requirement that in return for tax-exempt status, nonprofits must make their informational returns — including top salaries — available for public inspection.

But one salary you won’t find listed is that of Amy Danforth, chief executive of Fidelity Charitable.

On Fidelity Charitable’s 2014 informational return, the salary for Ms. Danforth and other executive officers of the organization is put at zero, along with a footnote explaining that "Fidelity Charitable engages FMR LLC pursuant to a Master Agreement under which all services are provided to Fidelity Charitable." The note then directs us to Schedule O, which in turn tells us that Fidelity Charitable paid FMR LLC $32,548,005 in that fiscal year.

If that’s all clear as mud, that’s because it’s intended to be.

Fidelity Charitable doesn’t want us to know what its top people get paid. Officially, Fidelity Charitable doesn’t pay its chief executive a penny. Instead, it pays a third party, which in turn pays the chief executive and presumably nearly everyone else at Fidelity Charitable. It’s a blatantly transparent attempt to avoid transparency.

And the plot thickens.

It turns out that FMR LLC is the parent company for Fidelity Investments. It was not so long ago that I was dressed down at a conference by a Fidelity executive for referring to Fidelity Charitable as a commercial gift fund.

"There’s nothing commercial about it!" he admonished. "Fidelity Charitable has an independent nonprofit board and has no affiliation to Fidelity Investments."

Except, he failed to add, that most of the money to run Fidelity Charitable’s operations flushes through the same parent company as Fidelity Investments.

How does Fidelity get away with this?

According to Paul Streckfus, the longtime editor of EO Tax Journal and a former IRS official, this evasive maneuver dates to a 2001 IRS announcement ruling that nonprofit trade associations could have their staff members hired by a third party, and thereby avoid public disclosure of salaries. That seems to have been an illogical and unfortunate decision by the IRS, but, as Mr. Streckfus noted at the time, the genie was out of the bottle. And apparently that same genie is now granting Fidelity Charitable its wish that top salaries not be disclosed.

When I recently approached Fidelity Charitable’s spokesman about the salary information, she said that the organization was disclosing all that was required by law.

My interpretation of this tortured, legalistic, and arrogant approach to public disclosure is that it reflects the underlying Fidelity corporate culture.

Because Fidelity Investments (unlike most other corporations affiliated with major commercial donor-advised fund sponsors) is privately held, its leaders perhaps are not accustomed to — nor tolerant of — the kinds of questions about its operations that a publicly-traded company would routinely receive. And yes, clearly, the corporate culture of Fidelity Investments extends to Fidelity Charitable, because for all intents and purposes, they are the same organization. (For further evidence, I’ve seen job searches for Fidelity Charitable have been conducted by Fidelity Investments.)

If Fidelity Charitable so stubbornly refuses to release information that virtually all other charitable organizations routinely make available, why should we trust anything Fidelity does choose to say?

For example, Fidelity Charitable asserts that very few of its donor-advised funds are inactive, but because the organization won’t release account-by-account information, we have no way of knowing if what it says is true. Fidelity annually releases self-serving reports of donor surveys (highlights of which are often picked up by journalists and quoted verbatim), but we have no access to the survey questions, methodology, or complete results, and we consequently have no way of independently verifying the conclusions.

Fidelity brags about how much it distributes in charitable grants, but it uses a formula (the year’s charitable distributions divided by a five-year trailing average of total assets) that is misleading and designed to exaggerate the actual payout rate. (Fidelity calculates the payout rate as that year’s charitable distributions divided by a five-year trailing average of its total assets. Because Fidelity Charitable have grown so dramatically over the past few years, using a trailing five-year average significantly understates the assets in this formula and hugely overstates the distribution ratio.)

Fidelity Charitable is not a small institution. It is the second-largest fundraising organization in the United States, according to The Chronicle’s 2015 Philanthropy 400, and raised a cool $3.85 billion last year. It is the largest of the dozens of commercial donor-advised funds that have fundamentally reshaped American philanthropy. Many of us see donor-advised funds as an unregulated black hole. Donors get the same charitable deduction as if they were giving to operating charities, retain de facto control of the assets indefinitely, do not have to distribute a single penny to charity in a particular year — or ever — and can receive complete anonymity for their gifts to and from these accounts. All the while, the Wall Street firms affiliated with (and usually sharing the name of) these entities rake in management fees. Given that total donor-advised funds in the United States have topped $70 billion in assets, those fees are considerable.

That the largest of these institutions doesn’t feel that it has to share even the most basic bit of information, about what it pays its chief executive, is worrisome. How much Amy Danforth receives in compensation in and of itself is not the issue. Rather, it is Fidelity’s arrogance, which raises far more questions than the simple one it has refused to answer.

Alan M. Cantor is a consultant to nonprofits.