Association Of Fundraising Professionals
Research Council Think Tank
Regulation, Ethics and Philanthropy
Discussion Guide—Introduction
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The purpose of the 2011 think tank was to discuss integration of ethics and regulation in the nonprofit sector – issues such as: How does ethical practice strengthen charities? Would external regulation improve or diminish the value-added work of nonprofits? What are the major ethical challenges facing nonprofits? How can a strong ethical stance strengthen the sector so that external oversight is less necessary? How does one build an ethical organization?
Funding for the think tank was provided through the AFP Foundation for Philanthropy with a generous grant from the Edyth Bush Charitable Foundation, Inc. that made it possible to engage nationally recognized presenters for two webinars in 2010 and a face-to-face meeting in Orlando, Florida in February 2011.
Moral Courage and Ethical Fundraising
Rushworth Kidder, Ph.D.
President and Founder
Institute for Global Ethics
Preventing and Managing Director Conflicts of Interest
Melanie Leslie
Professor of Law
Benjamin N. Cardozo School of Law, Yeshiva University
Government Regulation and Ethical Fundraising
Mike DeLucia
Trustee, The Agnes Lindsay Trust
Former Director of Charitable Trusts, New Hampshire Attorney General’s Office
Webinars and plenary presentations by these leaders analyzed some current issues in the nonprofit sector with regard to regulation and ethics and articulated possible scenarios for in-depth discussion sessions in which all attendees participated.
In addition to the content presenters, the think tank is indebted to Paul Pribbenow, Ph.D., CFRE, president of Augsburg College, who designed and facilitated breakout discussions on the issues raised by plenary speakers and how the sector can respond.
The material presented in this discussion guide follows the think tank’s organization. The printed material is keyed to the PowerPoint slides.
Doing Your Own Think TankThe Research Council encourages local chapters to organize their own discussions on Regulation, Ethics and Philanthropy. One suggestion for facilitating discussions is the following.
1. Select a focusing statement or question for your gathering that frames the higher purpose and widest context for your discussion in a positive way. You may also want to ask participants to do some preparatory reading for the discussion.
2. Write the focusing statement or question on news print and post in a prominent place.
3. Open a free form conversation, recording observations, ideas, questions, etc. on newsprint. Edit only to be sure a statement is clearly stated.
At the end of a predetermined time period (e.g. 30-45 minutes), begin to organize the newsprint list into groups of related statements. These groups may point toward assertions, questions, a need for more information, recommendations—whatever is appropriate to the discussion.
When the initial group is larger than 15 people, it is advisable to extend step 2 by inviting participants to propose sub-themes derived from the primary focusing statement or question. The facilitator determines how many discussion groups are appropriate to balance size and to assure easy communication in each one. Participants self-select to discuss a subtheme as described in step 3. Time should also be allowed to reconvene the entire group to debrief, sharing highlights, “ahas” and key learnings.
Neither the think tank nor this discussion guide purports to provide specific answers or outcomes. Rather, it follows the dictum—you have to know enough to ask the right questions. Thus, the content provided by presenters can be compared with participants’ actual situations, with critiques being directed toward the presenter’s content or towards a participant’s reality.
[Slide 1] title slide
Regulation, Ethics and Philanthropy
[Slide 2]
Appreciation
[Slide 3]
Moral Courage and Ethical Fundraising
Rushworth Kidder, Ph.D.
President and Founder
Institute for Global Ethics
[Slide 4]
Dr. Kidder’s webinar formed the basis for the first think tank session. He spoke about the concept of building ethical fitness and a culture of integrity by examining core shared values, making ethical decisions, and acting with moral courage.
[Slide 5]
Five core values related to ethics are respect, compassion, honesty, fairness, and responsibility, all of which are important to building trust between fundraisers and those with whom they work. Ethical issues arise not only when there is a clear right versus wrong, but also when two or more core values are in conflict (right versus right).
[Slide 6]
Five tests might be used to guide ethical decision making: Is it legal? Does it conform to government regulations? Does it pass the “stink test?” Would you want your decision to appear on the front page of the newspaper? What would Mom (or Dad) think?
[Slide 7]
Kidder’s third component of ethical fitness is moral courage, defined as “the willing endurance of significant danger for the sake of principle.” If we do nothing to act on our ethical decisions, he said, it’s no different than having no values or not making a decision.
[Slide 8]
Using a diagram of intersecting circles depicting values, danger, and endurance, he noted that moral courage occurs at the intersection of these three elements. It involves “sticking your neck out” for a moral principle. As John Wayne would say, “Courage is being scared to death, and saddling up anyway.”
How should AFP help its members think about ethical issues before problems arise? Audrey Kintzi, ACFRE, chair of the think tank planning group, offered the example of the Southern Minnesota AFP Chapter, where every chapter meeting begins with discussion of an ethics case and the values inherent in ethical decision making. Ethics training can help to build a culture of integrity in our organizations.
[Slide 9]
Preventing and Managing Director Conflicts of Interest
Melanie Leslie
Professor of Law
Benjamin N. Cardozo School of Law, Yeshiva University
Professor Leslie challenged participants to think about how to prevent and manage conflicts of interest in governance of nonprofit organizations. “We like to think that nonprofit boards make decisions that are in the best interest of the nonprofit, but sometimes transactions involve conflicts of interest that can open the nonprofit to scrutiny by legal authorities,” she said.
[Slide 10]
As of tax year 2008 the IRS requires all conflict of interest transactions to be disclosed on the nonprofit’s tax return. The IRS also requests that the nonprofit provide a statement on why each transaction was made.
[Slide 11]
The IRS presumes a transaction is good for the nonprofit if: 1) it is approved by a majority of independent board members (or a committee of the board), 2) those approving relied on appropriate data, and 3) there is adequate documentation of the basis for the decision.
[Slide 12]
Most states also have laws that require a transaction have advance approval by a majority of disinterested directors after full disclosure, and that the transaction is “fair.”
[Slide 13]
Legal guidelines provide a general framework for decisions by boards, but they can’t completely eliminate bad decision making. Even if transactions involving a conflict of interest are within the law, they may make the nonprofit look bad to constituents, which can do more harm to the nonprofit than any other form of liability.
[Slide 14]
To avoid problems, Professor Leslie recommended that the safest course of action (the bullet proof approach) is to avoid transactions in which board members might obtain a benefit, either directly or indirectly. She also recommended that every nonprofit have conflict of interest policies in place that require board members to disclose conflicts and that structure transactions to eliminate conflicts. Policies should be easy to understand and should be made clear to board members.
[Slide 15]
The second best approach is to develop sound procedures that work against “bad groupthink,” a situation in which board members self-identify with the board and it becomes difficult for them to dissent from a board decision. Sound procedures include: 1) bring it to the full board (not a subcommittee), 2) full disclosure of the conflict and the terms of the deal (with the interested director out of the room during the discussion/decision), 3) ask if this deal is the best deal (Does the nonprofit need this quality of good or service? Is the price better than market price?), and 4) document that there is no better deal available on the market.
[Slide 16]
Government Regulation and Ethical Fundraising
Mike DeLucia
Trustee, The Agnes Lindsay Trust
Former Director of Charitable Trusts, New Hampshire Attorney General’s Office
Michael DeLucia spoke about government regulations and charitable fundraising.
[Slide 17]
“There is a great need for both effective government regulation and greater self-regulation in the nonprofit sector,” he said, “and there is a need for more collaboration between government regulators and the sector.”
[Slide 18]
Mr. DeLucia is a proponent of government education programs for nonprofits on what is meant by compliance and legal behavior. He cited examples of this, including collaboration by state attorneys general to simplify state regulations affecting nonprofits and to develop videos and webinars for nonprofits on state regulations. He also mentioned the Governance Check-list on Part VI (Governance) of IRS Form 990, which asks questions that can help guide nonprofits toward developing good governance procedures.
[Slide 19]
There are four major trends that affect regulation of the charitable sector, he said:
1) The proliferation of charities. Thirty-two nonprofits are created/approved each hour in the United States, based on a 40-hour work week at the IRS. Is this a positive or a negative development? How does it impact fundraising, regulators, duplication of services, and quality of boards/fiduciary duties?
[Slide 20]
2) Increased scrutiny by regulators and the media. Entities including the IRS, state attorneys general, the U.S. Senate Finance Committee, and the U.S. House Committee on Government Oversight are all responsible for some aspect of nonprofit oversight in the United States.
[Slide 21]
3) The persistence of fraud and embezzlement. Authors in a recent publication estimated that the cost of fraud in the charitable sector is approximately $40 billion annually – a staggering percentage of the charitable giving that donors contribute annually to nonprofit organizations. The authors concluded that fraud may be easier to perpetrate in nonprofits because of factors such as (i) an atmosphere of trust, (ii) weak internal controls, (iii) lack of financial expertise, and (iv) reliance on voluntary boards, whose members may lack skill in scrutinizing financial statements or in providing the tough oversight that is needed. DeLucia suggested boards need to implement internal controls, work with their auditors to identify vulnerabilities in their organizations, and create an anonymous reporting (whistleblower) system for employees that ensures confidentiality.
[Slide 22]
4) The movement toward self-regulation. DeLucia cited Independent Sector’s work in developing the 2005 report to Congress “Strengthening Transparency, Governance and Accountability.” Another model for moving toward self-regulation is the collaboration in New Hampshire among the Attorney General’s Office, the New Hampshire Center for Nonprofits, the New Hampshire Charitable Foundation, and Certified Public Accountants. Results of this collaboration include a guidebook for directors and officers and video presentations on fiduciary responsibilities of nonprofit board members. He also mentioned AFP’s Code of Ethical Principles and Standards and AFP’s ethics enforcement policies and process as a good example of self-regulation.
[Slide 23]
For more information on the think tank topics, see:
• Kidder, Rushmore, Moral Courage, Institute for Global Ethics, 2005.
• Ethics Newsline® , free on-line weekly ethics newsletter, www.globalethics.org.
• Pribbenow, Paul, Notes for the Reflective Practitioner, free bimonthly on-line newsletter, .
• Pettey, Janice Gow (editor), Ethical Fundraising: A Guide for Nonprofit Boards and Fundraisers, Wiley, 2008.
• DeLucia, Michael, “Preventing Fraud: From Fiduciary Duty to Practical Strategies” New Hampshire Bar Journal, www.nhbar.org/uploads/pdf/BJ-Fall2008-PreventFraud.pdf.
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At this point in the think tank, Paul Pribbenow, Ph.D., CFRE, president of Augsburg College, described a process for reviewing three case studies related to ethics, law and regulation. Participants broke into small groups to discuss the case studies and later came together to report on their findings. Following is a description of the process.
[A copy of the case studies may be found at the end of this discussion guide. If you are planning to use this discussion process, the case studies should be made available to participants as a handout.]
* * *
Discussion: Case Studies
[Slide 24]
We will now break into smaller groups to discuss in-depth three case studies related to ethics, law and regulation.
[Slide 25]
Each breakout group will read the case studies and:
• Identify the “is” and the “ought” – what are the opportunities and gaps?
• Discuss how we (individually and in common) might respond
[Slide 26]
Instructions for analyzing the case:
• Begin by reading the case
• Make sure the facts make sense
• What else is important about the situation described? Missing context, implications, what else do I need to know? Feel free to embellish!
[Slide 27]
Given the issues raised by the case, what are the points of contention?
• Relationships, values, power dynamics, the nuances of real life, etc.
• What is our ideal state re: these issues?
[Slide 28]
Based on findings, begin to explore potentials next steps.
• What can I do? What can we do together? What is the role of our associations?
• How might we realize our aspirations?
A brief description of each case study follows:
[Slide 29]
Case Study 1: A Particularly Challenging Monday
This case relates to two letters received by Bill, a new development officer with an arts organization.
1) An event planner notifies him that she will be charging the nonprofit a finder’s fee for a sponsorship she has secured for a dinner auction event to raise money for the nonprofit.
2) A donor to his previous nonprofit notifies him that she intends to change her will, removing a $100,000 bequest previously intended for his former employer and substituting the organization for which he now works.
[Slide 30]
Case Study 2: Serving Two Masters: How Should a Board Handle an Unusual Conflict of Interest?
This case is about a board member of Friends of Marine Animals (FOMA) who has been aggressively trying to convince the rest of the board to support his idea to focus solely on the plight of the manatees. Frustrated by the continued lack of response from the board, he has recently started a new organization – Save the Sea Cows (SOSC), and he asks the FOMA board to support it. The board is worried that his new organization is a competitor that will draw on their donors and volunteer base.