CharityVillage® Research: Accountability the key to keeping the nonprofit sector on course

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Accountability the key to keeping the nonprofit sector on course
by Dennis R. Young
August 28, 1996; Canadian FundRaiser
To appreciate where American nonprofits stand today, it is necessary to take a long view of where they have come from, going back at least thirty years to the 1960s. In the late 1960s and early '70s a great deal of money was allocated by the federal government to address social problems and to advance certain areas of public life, including the arts. These initiatives included President Johnson's War on Poverty and the formation of the National Endowments for the Arts and the Humanities.
The federal government funneled most of this money, often through local governments, to private nonprofit organizations, under contract or as service providers that would be reimbursed for services provided to individuals. These initiatives fueled not only a significant expansion of the American nonprofit sector but also its dependence on governmental funding.
Impetus for professional development
The blooming of the nonprofit sector in America was an early stimulus for professionalization of the sector. As nonprofits became a larger part of the economy and of the system of public service delivery, it became much more important for them to be well managed and better stewards of the more significant resources controlled under their auspices. This impetus for professional management was further accelerated in the late 1970s and 1980s, when government funding spigots began to contract and nonprofits began to face a future of severe competition for resources.
At the same time, they were expected to provide greater levels of public service as government retreated from its own direct service commitments. Nonprofits took up the challenge, by and large, and found other ways of doing business. They continued to professionalize their management. They became more businesslike. Charitable fundraising became a high art, the numbers of professional fundraisers increased significantly, and charitable dollars were chased with a vengeance. Some new sources of government support were found at the local and state levels to compensate for losses of federal dollars.
Sales revenues now nonprofits' largest source of income
The real change, however, was the commercialization of the American nonprofit sector. Nonprofits began to charge for some of their services for the first time, and charge more for others, and they diversified their offerings with a variety of goods and services that they could sell. Sales revenues are now their largest single source of income, easily outdistancing charitable contributions.
American nonprofits have also been strongly affected by events in the business sector, especially changes that have reinforced their commercial tendencies. The downsizing of large corporations has undermined the viability of United Ways as a mainstay of nonprofit agency support and has required nonprofits to become more competitive in seeking support from corporations, large and small, in a variety of ways. International competition and downsizing have caused corporations to become more strategic in their giving to nonprofits, less generous with unrestricted cash gifts, but more likely to offer help through workforce volunteering and through strategic alliances or sponsorships that help sell corporate products. Cause-related marketing is now all the rage.
Potential of corporate/nonprofit alliances is enormous
Corporate giving in America has never been a large part of the revenue stream of nonprofits overall, nor even a large fraction of philanthropic giving per se - perhaps 2% of the latter. Nonetheless, while researchers do not yet have a good handle on the future potential of corporate-nonprofit alliances that can help sell products for corporations, the potential seems enormous. Sponsored credit cards and special events have become commonplace, and some charities are becoming major vendors for key commercial products. If you want to buy aspirin you can look for the Arthritis Association brand, and if you need insurance you can go through the American Association for Retired Persons.
We are working with a very different nonprofit sector than thirty years ago … one that, buffeted severely by the changes in government and business, is having some trouble navigating. Indeed, a number of major, respected American nonprofits - the United Way, the NAACP, Covenant House, the New Era for Philanthropy Foundation, Blue Cross, and others - have gone seriously, if temporarily off course, helping to undermine public confidence in the sector. These few but dramatic scandals are merely the flash points for more fundamental public concerns. The media, politicians and others are asking hard questions: How are these organizations different from businesses? …What do they do that merits special tax treatment? …Why should they be allowed to compete with profit making businesses that do pay taxes? …Why should their executives be paid so much for doing charitable work?
Nonprofits need help to fill the funding gaps
Ironically, alongside this swirling stream of criticism and questioning, there is also continuing governmental retrenchment and growing expectations that public responsibilities be taken up under private auspices. Unfortunately, however, the budget balancing and tax cutting agendas of the federal government often work at cross purposes to these expectations. Proposals such as the flat tax or reductions in income tax rates undermine tax incentives to give, and fiscal pressures resulting in part from losses in federal funds have even led some local governments to challenge the property tax exemptions of nonprofit institutions in their communities. Nonetheless, there is a slowly growing realization now that this won't happen by itself. Hence, new proposals for tax credits for giving and other initiatives have entered public discussion in the hope that private giving levels can somehow be increased substantially above historical levels.
Less federal government money, but more local spending control
Finally, recent developments in the public sector centre not only around reduction of government spending, but also the locus of control of public resources. There is, in the words of Professor Richard Nathan of the University at Albany in New York, a "devolution revolution" in progress which may have surprising effects on the nonprofit sector in the future. In the short run, there is considerable anxiety as categorical federal programs on which many nonprofits depend are dismantled in favour of "block grants" that will give state governments less money but more discretion to allocate resources to local priorities.
... and a growing need for accountability
This public schizophrenia about American nonprofits - their commercial tendencies, unfavourable media attention and unfortunate incidents - is reflected in a new atmosphere of skepticism, and a realization that the sector must play a much greater role in promoting the welfare of society and providing a context for public life in a future of smaller and more decentralized government. The result is the current concern about the "accountability" of nonprofit organizations. How, we are asking ourselves, can the public be assured that nonprofits will behave responsibly in their roles as stewards of public resources?
But how do we measure nonprofit accountability?
The issue of accountability of nonprofit organizations is a tricky one because they cannot rely solely on the conventional sources of accountability. While nonprofits are increasingly involved in markets, it is inappropriate for them to be judged solely on how profitable they are, how much they sell, or how much they are worth. And while nonprofits provide goods and services in the public interest, they cannot be judged by the extent of their political appeal or support, or even the mandates set for them by majority-driven government. Indeed, nonprofits are more likely to be organized around minority interests.
Moreover, there is a limit to which government itself can regulate nonprofits and hold them to account. In particular, a certain arms-length distance and insulation from government is required for nonprofits to be able to advocate independently for causes in which their constituents believe, or to hold government itself accountable for its actions and policies. Indeed, recent Congressional proposals (the infamous Istook amendment) which would strictly limit advocacy activity by any nonprofit receiving government funds, demonstrate the great dangers associated with heavy-handed government regulation.
Multiple sources of accountability
So, to whom and how can nonprofit organizations be made responsible and accountable? Nonprofits are complex institutions with multiple sources of accountability. They must worry about their public image, especially as it influences donors of charitable gifts ad those who volunteer their time. They have legal and historical obligations to their founding donors and to their governing boards. They serve paying, non paying and part-paying clients. They enjoy tax exemptions, based on their public service missions, and they must adhere to various laws and regulations enforced by governmental authorities. Given all of these specific accountabilities, how can they coherently and realistically approach the issue of accountability as a whole?
A further complication is that nonprofits must not lean too far in one direction or another. While for-profit businesses can be unequivocally responsive to paying customers to maximize value for stockholders, nonprofits (which also have paying customers) cannot be simply driven by market imperatives. Similarly, their service in the public trust obliges many of them to follow the requirements of their funding government agencies, but they are or should be, more than just contractors to, or extensions of government.
Should donor response become the measure of nonprofit organization accountability?
Economist Burton Weisbrod argues that his "collectiveness index", which measures the proportions of revenues a nonprofit is able to generate from charitable contributions, is a good proxy for the "publicness" of its output, and should therefor be instrumental in judging its performance and determining its eligibility for tax exemption. Economists Avner Ben-Ner and Terri VanHoomissen argue further that nonprofits should be understood as consumer cooperatives or membership organizations, with donors and volunteers effectively being the consumers or members who should dominate their governing boards. Finally, attorney Janis Balda argues that donors should have legal standing in court to challenge the actions of nonprofits to which they contribute.
Granting the considerable merit of these arguments, such strict accountability to donors remains problematic. On average, American nonprofits receive less than 20% of their support from donors, the connection between the donor and the consumer or client interests is not always strong, and more general public interests are involved as well as those reflected in individual donor preferences.
More effective self-regulation and scrutiny of nonprofit governance
The answer is neither stronger customer-orientation, nor donor responsiveness, nor governmental regulation of nonprofit organizations. It lies rather in much more effective self-regulation by the nonprofit sector itself, which in turn calls for an improved awareness of how nonprofit organizations govern themselves.
Feedback the key to effective governance
Governance is not just about boards of trustees. It is rather a more fundamental concept involving the mechanisms by which an organization guides its performance over time. A key to understanding governance is feedback, an engineering concept, in which you feed information about the output of a given machine or device back to the input side, for the device to use to adjust its output. The difference between desired and actual performance on the output side is used to modify performance to bring it closer to the desired level.
For nonprofits to use the feedback principle of governance to regulate themselves, they need firstly, clear and relevant performance information, and secondly a mechanism for that information to be used for course corrections. Nonprofit organizations have recently begun to put substantial emphasis on the first element of the feedback model - the disclosure of meaningful information which the various constituents of nonprofit organizations can use to evaluate performance and shape whatever actions may be appropriate to influence future behaviours.
A variety of American watchdog institutions, such as the National Charities Information Bureau and Better Business Bureaus, promulgate standards and make systematic information about nonprofit charitable institutions widely available to the public - especially to donors wishing to investigate potential recipients of their philanthropy.
Openness and disclosure the key strategy
A recent set of principles devised by a group of twenty chief executives of major national American health, social service and other nonprofit associations, under the auspices of a think-tank program sponsored by the Mandel Center last year, emphasized the role of openness and disclosure as a key strategy for effective nonprofit organization accountability. More than a dozen national American associations, with local affiliates, have formally adopted these principles, the two-page statement of which includees:

The accountable organization clearly states its mission and purpose, articulates the needs of those being served, explains how its programs work, how much they cost, and what benefits they produce.

The accountable organization freely and accurately shares information about its governance, finances and operations. It is open and inclusive in its procedures, processes, and programs, consistent with its mission and purpose.

Enforcement of accountability
The second part of the feedback mechanism has to do with the use of performance information to make adjustments, and begins with the nonprofit federation. According to Independent Sector, approximately 20% of all American nonprofits are part of some overall umbrella association or federation. An important mechanism of nonprofit self-regulation these associations can provide both "top-to-bottom" and bottom-to-top" accountability within their systems.
When local affiliates, such as local Girl Scout councils or Red Cross chapters, deviate from desired norms, the national organization is there to detect and correct the problem. The adjustment mechanisms include the ability of national headquarters to penalize affiliates that fail to conform to membership standards, potentially depriving them of membership benefits and the national seal of approval that facilitates their success in attracting support within their communities.
The feedback model, however, also works in the reverse direction. Some of our most serious problems have recently been with the national organizations themselves. The United Way of America case is particularly instructive. When the administration of United Way of America went astray, the board of directors was slow to react and not sufficiently sensitive to the problems at hand. The association structure of United Way did the trick. The local United Ways knew they had a problem, provided feedback to the United Way of America in the form of criticism and withheld support, and insisted on changes in board structure and other parameters to redress the shortcomings of the national organization. The feedback from the donor market, in the form of a fall-off of charitable contributions to United Ways, also made a big difference. These changes in support from the bottom were the mechanisms that effected the adjustments which brought the association back on course.
Accountability potential of umbrella associations largely unresearched
If only 20% of American nonprofit organizations belong to umbrella associations, there is a vast potential to extend their reach. Existing associations, too, can be more effective mechanisms for top-to-bottom and bottom-to-top accountability. Faced with the risk of the imposition of yet more heavy-handed policies of governmental regulation and restrictions that could do substantial damage to the character and vitality of the American nonprofit sector, these should be high-priority options.
Professionalization, commercialization and greater reliance on nonprofits to carry out the public's business - are powerful trends in both Canada and the USA. In both countries, the new age of accountability for nonprofits will require a stronger focus on self-regulation, in turn demanding improvements in the mechanisms by which these organizations govern themselves.
We must improve the operations of governing boards, adopt public disclosure of information more widely, and examine the potential for enlarging the role of umbrella associations. Finally, both government and business must find new ways to support the work of the nonprofit sector, without making nonprofits completely subservient to market or political forces.
Based on a presentation, The New Age of Accountability: Lessons from America, to the 1996 Summer Institute for Nonprofit Management & Leadership at York University, by Dennis R. Young, Governing Director of the Mandel Center for Nonprofit Organizations, Case Western Reserve University, Cleveland, Ohio.