Multiple Constituencies and Nonprofit Accountability

1. Readings • Chapters 26-28 (Herman and Renz, 1997) • 26: Multiple Constituencies and Nonprofit Effectiveness • “stakeholders” might be a better term • All parties that the nonprofit should be answerable to, including donors, boards, and recipients of largesse. • Authors list 2 different approaches – will focus on multiple constituency model • Social construct model believes organizations function is a result of the belief system of its management (sort of alternative reality) • Developing objective criteria that measure outcomes • Survey may then be used to determine how well different constituencies believe the organization is doing

2. Principle-agent problem • Principle (donor) assumes that agent (nonprofit) will carry out his/her wishes • If the management of organization has different priorities, donation may go to a cause that is entirely different – even one that might be opposed by the donor • Oversight by board helps prevent wholesale redirecting of donated funds • Or, the misuse of donated monies • Board must be independent – scandal at United Way shows how a compliant board can allow malfeasance

3. Stating problem another way- • In most circumstances, stakeholders (e.g. stockholders) have a persistent interest in the behavior of management • Donors to charities really do • Only when malfeasance is highly visible and damaging do potential donors take notice

4. Measuring organizational effectiveness • Ott & Dickie (page 203) note that there are various ways people view “effectiveness” • Authors develop an instrument in an attempt to measure stakeholders views of how effective an organization is judged to be. • Criteria include financial management, fundraising, program delivery, public relations, community collaboration, working with volunteers, human resource management, government relations and board governance • Similar to some of the criteria used by Charity Navigator and Charity Watch

5. Different stakeholders have different ideas of effectiveness and its measurement • e.g. outputs or inputs (corollary to the federal government) • Subjective vs. objective criteria • Authors spend considerable time on this – it is a thread in their own research agendas. • Key Point: • Essential to establishing agreed-upon criteria and ensure management structure exists to evaluate those criteria. • Authors’ assertion is that criteria can be naturally subjective and that may influence whether something is judged a “success”

6. Chapter 27 (kim) • Nonprofit accountability – multiple layers • Accountable to donors, recipients, funding agencies and public • Text covers experience at “The Center” • Undergoing state audit due to malfeasance on the part of employees • “Center” accepted State funds, so was more accountable than many nonprofits

7. Chart on page 314 • Multiple and potentially competing requirements of accountability • Management team, legal (contract with State), Professional (belief in mission, ethics, coupled with training) and Political (need to keep “public” happy to ensure funding)

8. State funding makes this very different from nonprofits that rely entirely upon donations • Much less accountability in the latter case • Public shaming (e.g. Charity Watch) is about all the pressue that can be brought to bear short of criminal charges • Kim lays out the changes made at the “Center” in order to improve accountability and management • Alternative for other organizations may be double-bottom line accounting and a “benefits” director (as in Bcorps)

9. Chapter 28 – outcomes at United way • United Way was one of first “Charity Aggregators” • Formed under assumption that people could not evaluate all of the various donating opportunities without help • Each Dollar distributed to numerous local agencies • Evaluation critical – If donors feel dollars are going to ineffective groups, the system collapses • Scandal at the national level in 1992 (William Aramony convicted of fraud)

10. Chapter covers UWA approach to assessing outcomes: • Emphasize outcomes rather than outputs • Encourage quantitative measures of outcomes • Ensure that outcomes are measured repeatedly • Emphasis on improving program outcomes • Concentrates on “local” measurements, rather than national • Strengths and drawbacks of the UWA approach are listed on page 323.

11. Remainder of chapter deals with roll-out of program at the national level and its replication at the local level • Keep in mind, that part of process was to undo past problems at United Way (scandals) so as to overcome donor resistance.

12. Meeting #8 – Nonprofit malfeasance • Characterization (ranked by seriousness): • Running a wholly corrupt organization • Theft from an organization or use of funds for personal gain • Most problematic at organizations that receive large amounts of donated cash • Misuse of a nonprofit’s resources (United Way) • Misdirection of donations • Huge problem with bequests

13. Examples – Covered before • Angel Food Ministries • Foundation for New Era Philanthropy • USNVA - RICO

14. Central Asia Institute • Hugely visible due to Greg Mortenson’s best-selling “Three Cups of Tea” • Charity purported to fund improved schools in Afghanistan • Scandal broke in 2009 • CharityWatch became aware of accusations that donor funds were being mishandled • 60 Minutes eventually pressed Mortenson for an interview • Reputation of charity fell apart • Problem: • Mortenson’s finances and those of the CAI intermingled. • People’s donated money used to fund book promotion tours that benefited Mortenson, not the charity • When financial audited, apparently owed $7.2 million to charity • Eventually repaid $1 million as part of a plea agreement

15. Scandals can be attributed to the P-A problem and poor management structure • Hard malfeasance versus soft malfeasance • Analytical model: • Benefits of corruption: Higher returns • Costs of corruption: Moral cost, projected penalty if caught

17. Problem: • Hard to imagine that hard corruption actually ever makes sense • Unless chance of getting caught (P) is near zero • Makes more sense to simply siphon off funds as salary and expenses, rather than commit fraud • FNEP and USNVA makes little sense in this context

18. Public Policy Issue • If soft malfeasance is the norm for unsavory charity managers, how do you stop it? • Buyer Beware seems to be working poorly • Discussion of alternatives • Oversight • Self governance solutions (charity self-regulation) • New IRS regs (problem arising from IRS scandal) • Other? (mandate an independent board)