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How Ethical Is Your Nonprofit Organization?

November 2004

Almost every day, it seems, newspaper headlines shout out the details of another corporate scandal. Those of us in the nonprofit sector are tempted to think that we are above such shenanigans—and the accompanying headlines. We are, after all, do-gooders who are uncorrupted by the desire for profit. Our motives are so noble, how could anyone question our actions?

Unfortunately, nonprofits are run by people with the same range of ethical standards as the rest of society, and we have our share of bad apples. In recent years, the Nature Conservancy, the Red Cross, a handful of United Way chapters, and local foundations in several communities have found themselves the target of negative headlines. Such ethical lapses—or perceived ethical lapses—undermine the trust the public holds in the entire sector.

Procedural Responses

Most of the responses to these scandals have been procedural. The common reaction is to encourage nonprofits to develop a code of ethics and perhaps become certified as ethical organizations by the Maryland Association of Nonprofit Organizations or the Better Business Bureau.

Writing such a code will make you and your organization think through the issues, and if the entire organization is involved at an early stage, the resulting code is far more likely to be relevant to your day-to-day operations. Moreover, you can and should train your employees to follow the ethical precepts of your policy. This training allows you to reinforce values, explain the language of the code, and to discuss hypothetical and actual situations that others have faced. Codes of ethics and training are important procedural steps, but they are only a small part of the larger ethical picture.

The Buck Stops at the Top

Whatever a code says, the leaders of an organization—the executive director, his or her lieutenants, and the board—set the stage for the actual ethical behavior. Enron, for example, had adopted a 64-page ethics policy, which clearly did not prevent unscrupulous actions.

Better training may not have helped, either. Fully 99 percent of the chief ethical officers attending the Conference Board's annual Business Ethics Conference in 2002 believed that the Enron scandal would have erupted even if senior management had received extensive ethical training (although almost half thought the behavior would have been stopped more quickly)1. A truly ethical organization can exist only when its leaders embrace ethical decision making and recognize the importance of values other than the bottom line.

Principles of Ethical Decision Making

Many nonprofit ethical principles, such as honesty and treating people with respect, are parallel to those in the for-profit world. In both the for-profit and nonprofit worlds, a good rule of thumb when making a decision is to ask whether you would want to be treated the same way and whether you would be comfortable seeing your decision on the front page of the local newspaper.

The nonprofit world has another guiding principle, however, that is irrelevant to the for-profit sector: no one individual is to profit from the organization. Losing sight of this principle has led to many of the scandals in the nonprofit world. In general, discussions about nonprofit ethics cover the topics of honesty, transparency, conflicts of interest, fundraising issues, and treating employees, volunteers, and clients with respect.

Honesty: Being honest is perhaps the most obvious ethical principle and the one that, when not followed, most quickly damages an organization's reputation. In theory, honesty is easy; in practice, it is more difficult. A few typical nonprofit situations come to mind. Are you being truthful when you present a rosy picture on a grant application, knowing that your organization, like all others, faces some problems? How honest are you when you estimate the proportion of your budget that goes to fundraising and the percentage that goes to programs?

In both cases, being scrupulously honest might lose your organization some much-needed funding. Being less than honest, however, can be even more costly in the long run. All nonprofit organizations need to consider the truthfulness of their statements, avoid exaggerations and statements that have an air of untruth, and recognize that omitting a statement can be the same as telling a lie.

Openness: A corollary of honesty is transparency. Nonprofits can maintain the public trust by being particularly open about their operations. By law you must make your Form 990 available to the public, but you can and should do more to let the public know about your organization.

Your Web site and your fundraising appeals should clearly articulate your mission, values, scope of activities, and uses of revenue. You should also release audited financial statements and your annual report, if you have them, and you should provide information about your goals and accomplishment to GuideStar, which will post the information on its site. Your CEO or executive director and board should be fully informed about the organization's finances, and their reports to the public should be scrupulously honest and consistent.

Conflicts of Interest: Conflicts of interest appear with regularity in the nonprofit sector. Board members are often chosen because their professional abilities can provide a service to the nonprofit. Moreover, they are likely to be involved with several boards in the same community. Volunteers, employees, and even clients can also face conflicts of interest.

Should a lawyer on the board offer to do legal work for the nonprofit? Does it matter if the lawyer offers the services on a reduced basis or for free? Should the headmaster of a private school in a market with very high housing costs obtain a loan from the nonprofit to pay his or her mortgage? Should a major donor be given special privileges? Should a client/board member receive the organization's services before other clients? Can an employee ever accept a gift from a client?

The first step in answering these questions is to recognize that a conflict of interest exists. In some states, the answer to the conflict is obvious. In New York, for example, it is illegal for nonprofit officers and directors to accept loans from the nonprofit.

In other situations, such as when a board member can provide a service for less cost than the nonprofit could obtain otherwise, the answer is less obvious. Some argue that it is important to keep the interests separate in all instances. Others argue that it is all right to provide such services, so long as the conflict is fully disclosed and the conflicted person does not vote on whether he or she should provide such services.

Each organization handles such cases in its own way, assuming state law or its umbrella organization has not already dictated a decision. At the very least, these situations call for full disclosure and a disinterested vote. (For a fun test of your ability to spot conflicts of interest, try the site that Mentoring Canada has created.)

Privacy: Some types of nonprofits have always been particularly sensitive to privacy issues. Medical organizations, for example, must protect patient confidentiality, and libraries fiercely guard their patrons' information. The rest of us should also consider whether to protect our clients' and customers' privacy, even when the fact that they use our services is less sensitive.

Donor lists create their own privacy issues. Although many nonprofits rent or sell their donor lists without asking the contributors' permission, codes of ethics increasingly forbid doing so without at least giving the donor the ability to remove his or her information from such lists. The Internet adds another layer to this discussion, as donor addresses, credit card numbers, and other personal information can easily be sent to many unscrupulous people.

Fundraising Issues: Nonprofit fundraising raises special ethical issues. Among them is whether it is ever ethical to pay a fundraiser a percentage of the money raised. The Association of Fundraising Professionals (AFP) forbids this practice among its members, reasoning that donors who contribute to a nonprofit deserve to see those funds go to the organization. Complaints about this practice make up by far the largest number of complaints AFP handles2.

But fundraising has other ethical issues. Not only should the fundraising materials and solicitations be honest3 but the organization should use the funds for the purpose specified before the donation was made. Sometimes, especially when situations change, it becomes difficult to keep these promises, but they should be kept unless the donor agrees to the change.

What if a donor makes unreasonable demands on an organization, such as asking for benefits not accorded to other donors? Should you accept a large gift from someone for a purpose that veers from your mission? What if the donor will give money only if you forego funds from a different source? These are not easy questions, but they are ones that nonprofits deal with frequently, and they should be considered before such situations actually arise.

Treating employees, volunteers, and clients with respect: Finally, it should go without saying that employees, volunteers, and clients should be treated with respect. Nonprofits should never engage in discrimination or harassment. These are not difficult ethical issues; unfortunately, they are sometimes difficult for ordinary humans to follow.

Conclusion

All nonprofit organizations need to pay attention to ethical issues, for an organization without a clear ethical compass can lose the trust of the community, damage its clients' interests, and indirectly hurt the entire nonprofit sector. A nonprofit with a clear code of ethics, on the other hand, can concentrate on its mission and complete the good works it is set up to do.

Our goal should be to have all our employees be as naturally honest as the one in a Grantland cartoon. This character turned down a gift, refused to divulge customer information, and kept competing bids confidential but thought he had not been confronted by any ethical situations4. He just knew the difference between right and wrong.

Sources Cited

  1. Taub, Stephen, "Crisis of Ethics," CFO.com, June 19, 2002.
  2. The AFP will answer questions relating to the ethics of fundraising., select "Ethics" from the subject drop-down box, and type your question in the comments box.
  3. Grant Land.
Elizabeth Schmidt, October 2004
© 2004, Elizabeth Schmidt

Elizabeth Schmidt teaches Nonprofit Law and Practice at the College of William and Mary Law School.