Independent Sector Should Stop Pushing Self-Regulation

Last month Independent Sector, the coalition of big foundations and nonprofits, held a major event on Capitol Hill calling attention to newly updated guidelines on accountability it hopes every nonprofit will follow.

Some of the updates it has made to the guidelines, which were first issued in 2007, are strong, but the entire endeavor misses the point: Asking nonprofits to voluntarily transform their behavior has done little to stomp out the biggest problems in the nonprofit world. The only way to end bad behavior is to pass more stringent laws and to put teeth into enforcing them.

That’s what Independent Sector should have been asking for when it visited Congress. After all, the numbers of scandals in the nonprofit world is a key reason the news media, state lawmakers, and others have continued to express concern about a major breakdown in nonprofit accountability.

Let’s look at what’s happened since the guidelines — which cost $2 million to develop — were first issued after Sen. Chuck Grassley announced legislation to crack down on charity abuses.

Little has changed in the year since Independent Sector took action. Transparency and public accountability are still problematic. The sums nonprofits pay in salary and perks to their chief executives are going through the roof, rivaling the salaries and benefits of people in corporate America. Sweetheart insider deals and other forms of "self dealing" seem to have become a more frequent, if not commonplace, nonprofit practice. Government oversight and enforcement activities have broken down.

The long arc of justice does not seem to have bent toward equality and public accountability. If anything, nonprofits and foundations are more skewed toward wealthy donors and large nonprofit groups, seemingly impervious to the plight of the neediest Americans and grass-roots nonprofit groups.

While the updated guidelines will do little to change that situation, they should, nonetheless, help organizations steer their course more wisely and effectively. The emphasis on the responsibilities of boards is particularly welcome, given the key role nonprofits play in ensuring the integrity and accountability of their organizations.

The new guidelines also provide more flexibility on administrative and overhead costs, urge greater caution about fundraising and online-solicitation procedures, and encourage more effective retention and protection of organizational data and documents.

And the drumbeat of attention the guidelines give to the importance of transparency and accountability is particularly positive because nonprofits have struggled for so long to measure up on both counts.

Even though I don’t believe self-regulation will solve the thorniest problems in the nonprofit world, I would have hoped that Independent Sector would have offered stronger language on several key issues.

For example, it should have encouraged foundations and other nonprofits to issue an annual or biannual report to the public, perhaps making an exception for small groups that can’t afford to do this kind of reporting.

Among the other areas for improvement:

Do more to discourage payments to board members. The report smartly acknowledges that nonprofits have a tradition of not paying board members but then does little to encourage organizations to stick to this principle. What’s more, the guidelines ignore the fact that some nonprofits are increasingly willing to pay above-market rates to board members who provide legal, accounting, and fundraising services.

Make clear that excessive pay has no place at nonprofits. The updated guidelines do not offer much guidance about executive compensation, even though so many scandals at nonprofits are caused by the enormous compensation packages many nonprofit CEOs receive. Are salaries of over $500,000, $1 million, or more reasonable? Are huge bonuses reasonable? What should be the standard of reasonableness?

What’s more, the guidelines urge nonprofits to compare salaries not just to comparable nonprofits but also to businesses. The corporate world should not be the model for nonprofits.

Add accountability guidelines for foundations. Perhaps because Independent Sector gets most of its money from foundations — both as members and in grants to support its work — it decided it was too touchy to say anything in its guidelines about grant makers.

The foundation world is in desperate need of transformation, so Independent Sector erred by focusing its guidelines only on charities. In its discussions of governance and accountability, it never mentions the problems caused by the growth of big foundations run by just two or three family members, even though they are a real threat to democracy and lack public accountability, as are boards composed mostly of elite individuals.

The guidelines don’t raise questions about the adequacy of the 5-percent minimum distribution rate or about ways that foundations can help nonprofits, like accelerating board meetings to review grants to shorten the amount of time nonprofits have to wait for their money. Nor does it make any useful suggestions about how foundations could be more accountable by allowing more nonprofits to apply for funds; today, so many foundations fail to accept solicited proposals that many worthy nonprofits have nowhere to turn.

Strengthening the guidelines in such ways would be useful, but the most important thing Independent Sector could do if it wants to improve accountability is to call for new legislation and tougher enforcement.

As Dean Zerbe, managing director of the Alliant Group and former tax counsel to the Senate Finance Committee, told The Chronicle, voluntary guidelines are useful, but tougher government laws and regulations are necessary.

But Independent Sector appears perfectly comfortable with the status quo, failing to acknowledge that the IRS has been so decimated by staff cuts that it does little to enforce the law. Nor have state attorneys general demonstrated that they are capable of enforcing the rules that govern nonprofits. Why isn’t Independent Sector lobbying Congress for additional revenue to enable the regulators to do their jobs?

The answer is that Independent Sector doesn’t want any tightening of federal regulations or enforcement. It believes that self-regulation can do the job.

But self-reform by itself has never worked, and it never will.