Not-for-Profit Governance: Too Much or Not Enough?

By Julie Lynn Floch

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Accountability means different things to the many parties interested in not-for-profit governance. The AICPA, FASB, IRS, Congress, state regulators, independent watchdogs, the media, researchers, grantors, service-users, donors, peer groups, and, of course, the public all have different expectations that must be addressed.

While some call for regulating the not-for-profit sector as stringently as the Sarbanes-Oxley Act regulates public companies, others have maintained that accountability should not be measured by rules, but rather by performance and effectiveness criteria. Others, citing the problem of frequently incomplete, inaccurate, and late filings of Form 990, call for a more regimented system of public disclosure and financial reporting. There is understandable outrage over much-publicized compensation abuses and improper related-party transactions. These concerns all have a measure of validity, but the problems cannot be solved by simplistic overregulation or calls for more “transparency.”

What should the not-for-profit sector really care about? Focusing on some basic questions is a good start. What are not-for-profits doing right? What are they doing wrong? What can they do better? What will it cost? Are the resources available? What will be the impact on the organization’s mission? The more attention not-for-profit organizations give to these questions, the sooner reliable governance models will emerge.

On June 22, 2004, when the Senate Finance Committee hearing touched off the continuing not-for-profit governance firestorm, could anyone have envisioned that an entire industry devoted to such concerns would spring to life? That seminars, articles, research, training tools, and studies would develop? That organizations, their boards, their service providers, and others would start looking at these issues as dominant definitions of “good” versus “bad” charities? That questions about governance would be asked on an IRS tax form? That many studies would come to varying conclusions on how the sector should function?

One of the more prominent recent studies, conducted by Lester Salamon and Stephanie L. Geller of Johns Hopkins University and based on a nationwide survey of nonprofit organizations, concluded that the so-called breakdown of governance and accountability in the not-for-profit sector is likely significantly exaggerated. The study suggests that if governance and accountability can be measured by board involvement and awareness, financial disclosure, ethics protections, best practices, and organizational structure, then solid evidence exists of effective adherence to these measurements by the majority of respondents. Although this study has been criticized, its view is one expressed by many in the sector.

Another report, released by the Public Agenda, a nonpartisan research organization, found that, based on its focus-group work, donors are passionate about the organizations they support and are not overly concerned by, or sometimes even aware of, the oversight and regulatory issues fueling the debate. Donors believe that most charities are ethical, and few donors look at the Form 990s of the charities they support. The study also found that giving to a particular organization was severely compromised if the organization became associated with scandal and waste, but giving to the sector remained unaffected.

Where does this leave the not-for-profit sector as it prepares for the possibility of tougher regulation and braces itself for the next wayward charity in the news? Should it embrace the same governance standards that public companies must? Should organizations disregard the clamor as dollars spent on governance arguably detract from dollars spent on the mission? In a world of governance guidance, what “best source” should organizations look to?

As to the threshold questions of governance, this sector has a big advantage. Although it might not approve of the increased scrutiny, it has the opportunity and tools to “get it right.” There exists a plethora of guidance. It would be hard to claim ignorance of these basic tenants of governance, or to claim that implementation is too expensive.

While it is possible that new legislative measures will be passed, it is also true that, unlike public companies, not-for-profits have been asked for input in the process. The hearings that have been held, the Independent Sector’s response to the Senate Finance Committee, and other responses have aired many different points of view. The not-for-profit sector has had the unfortunate benefit of watching what has happened to the corporate sector when too many scandals arise, and it still has the opportunity to prevent such a tarnish on the good works that it does.

Too much governance or not enough? If the not-for-profit sector and its service providers strive to achieve the best possible results in the best possible manner, then it will achieve the high quality of governance that is the goal of all interested parties.