March 04, 2011

Transparency Can Keep a Nonprofit Out of Trouble

In rare instances following an investigation of a nonprofit, my office has decided it’s best for the target nonprofit to shut down. We then usually create an agreement with that nonprofit for it to dissolve its existence. This generally happens when the legal violations or futility of trying to continue are so stunningly obvious, it's in everyone's interest just to stop.

But once I had a nonprofit make an unsolicited offer to dissolve. I was surprised, since my office was still in the initial stages of review, but I agreed. The nonprofit's conduct had been questionable, but I was not sure any state laws had been broken.

So what could a nonprofit do that was so bad that it voluntarily invoked one of the harsher penalties under Missouri law, even though it may not have broken any state laws? Simple: It completely failed to meet its constituents' expectations for openness, and the resulting perception of its actions became so bad, it could not continue.

About 12 years ago, the nonprofit was launched to support an agency created by the state legislature. The agency set up the nonprofit to act as a fiscal agent under Section 501(c)(3) of the Internal Revenue Code. That status allowed donors to get deductions for donations to the agency, and the nonprofit could own the real estate that housed the agency’s operations.

At the time the charity was created, the management of the nonprofit and the state agency was the same. The organizations' leaders didn't think they needed to draft a good operating agreement, but later the groups came under separate management, and that turned out to be a bad decision.

About three years ago, the nonprofit began to refuse to provide any information to the agency on donations it had received or details about real estate.  It said it was not legally required to do so more than once a year.

Leaders of the agency filed a complaint with my office, the Missouri Attorney General's office. Its leaders said, in essence, their organization's money and real estate were going into an information black hole. They couldn't get any data, and the nonprofit's president could be stealing everything, for all they knew.

My office quickly decided to review the situation. We received documents, made sure there was no criminal conduct, and then met with the nonprofit's officials.

At that meeting, the nonprofit's leaders offered to dissolve and give everything to the agency.  Thus, at the end of the day, I never found out if Missouri's laws on nonprofit transparency had been violated, but the perception of the nonprofit's actions were so bad, it simply could not continue.

The lesson from this is to be as open as you possibly can. Nonprofit donors and the public expect complete transparency, and every year their expectations get higher. The expected level of nonprofit transparency is often well beyond the minimum required by state laws.

Lack of transparency, failure to disclose information, and other related topics are at the source of more complaints to state attorneys general than almost any other issue. People expect information, and if they don't get it, they will complain.

But those complaints are not just a matter of unmet expectations. Those who complain to the authorities often leap to conclusions. Accusations of theft, waste, and conspiracy thrive in the absence of information. And while usually untrue, such allegations are not what you want a state regulator to read about your organization, nor do you want that accusation on a blog or Twitter feed.

What's more, an information vacuum can create distrust, meaning potential donors may decide not to support your organization. I only receive the angry complaints or suggestions that something really bad is occurring at a nonprofit. I can only imagine how many more people decide simply to withhold donations or quietly discourage others from giving.

State laws do not always go so far as to require what is widely considered to be a best practice in the nonprofit world. But even so, I do tell nonprofits to operate with as much transparency as possible. For instance, financial information should not just be disclosed but also made easily accessible. The board chairman of the Carnegie Corporation of New York offered an excellent guideline in 1952: He said that foundations should operate with glass pockets. So, too, should all nonprofits.

Transparency sheds light on an organization's practices, and that enhances incentives for ethical, efficient, and effective operations and facilitates oversight by the public and others, as noted by a Government Accountability Office report on tax-exempt groups.  All are worthy goals.

An organization that tries to follow the best practices on transparency can prevent government investigations.  On more than one occasion, when I have received a nasty complaint about a Missouri charity, I have decided that the allegation might be true. But upon doing a preliminary review online, I have found that the nonprofits in question were so transparent that I could verify that the complainers had it wrong, all without leaving my desk. Those nonprofits have no clue how close they came to large and embarrassing investigations.