How did one Illinois non-profit organization become a national model of transparency with a board so involved that one board member reads the organization's newsletter aloud to her husband?
Julie Tye, president of The Cradle adoption agency in Evanston, Ill., describes the process as simply making all information available all the time: "Transparency is inside out."
The Cradle is cited as a model of non-profit board development, its innovations taught at Northwestern University's Kellogg School of Management. Among other things, the organization provides a dedicated board Web site that only board members have access to — with monthly updates on activities and finances. The board has access to updated financial information within 24 hours of its completion.
Such immediacy has its benefits in keeping board members constantly and directly involved: "Board members don't want to be on boards just to hear good news," says Tye. "They want to contribute to advances in the organization."
In Kentucky, non-profits — especially ones that receive public money — have come under scrutiny after a spending scandal last fall at Blue Grass Airport. Since then, questions have been raised about expensive travel, meals and perks at other organizations, as well as oversight by board members who were often surprised to read about salaries and expenses in news articles.
Non-profits like The Cradle and organizations like the Kellogg School say there are ways to build better non-profit boards, ones that are transparent, that get the right services at the right price while keeping an ever-watchful eye over potentially excessive spending.
The recipe includes picking the right people for the board, training them for oversight and making sure that board members know not only how to find out how money is used, but how to assure that it is used responsibly.
The key, Tye thinks, is to provide board members a stream of constant information about the organization's performance — and make them responsible for it.
Accountability was a theme underlying 28 recommendations for public and non-profit boards developed by State Auditor Crit Luallen after her investigation of the airport. Among them, Luallen recommends developing policies for travel, meals and other expenses; tightening controls on credit cards and having a detailed orientation process for new and returning board members to ensure that they understand their responsibilities.
"It's our responsibility to communicate how efficient and effective we are," says Jim Clark, president of LexArts, which provides funding to arts and cultural organizations in Lexington. "You have to build ... a structure and a culture within the organization that reflects that."
IRS increases monitoring
Spending at public service organizations is not just a Kentucky issue: In 2007, for example, the ex-chief of the Smithsonian Museum's business unit was slammed for $202,659 in expenses that were deemed largely unallowable, poorly documented or unauthorized.
The expenses included lavish travel and meals. The Smithsonian, which receives most of its annual budget from Congress, asked Gary Beer to pay back $29,647 in expenses and file tax forms to restate $65,345 in expenses as personal income.
The Internal Revenue Service has already thrown down the gauntlet on better monitoring of non-profit organizations.
The new Form 990, filed by charities and tax-exempt organizations and then made available to the public at Web sites such as guidestar.org, demands increased transparency at non-profits and tries to limit the potential for abuse of tax-exempt status.
The new form requires additional information about the organization's operations, including more disclosure on payments made to employees, directors and independent contracts.
In recent months, the UK Nonprofit Leadership Initiative, an outreach program of the UK College of Agriculture, has been seeing increased interest in training board members and helping them with the new IRS reporting requirements: "We're big believers that one size does not fit all .... Organizations are different size and scope and mission. ... It's just not always black and white," said program director Danielle Clore.
Non-profits are big business: The CommonFund Institute, which offers investment fund advice and services such as best practices education to non-profits, put it bluntly in a 2008 report: "At the most extreme, the removal of non-profits' tax-exempt status in circumstances of significant ethical violations is a real threat."
A 2004 IRS sampling, dubbed the Executive Compensation Compliance Initiative, found that significant reporting issues exist among non-profits, but concluded only that the IRS needs to continue looking at executive compensation.
The IRS does have penalties if it finds what it calls "excess benefits transactions" in non-profits: when a person "who was in a position to exercise substantial influence over the affairs of the tax-exempt organization" receives improper personal gain from that organization. If it finds that such improper transactions have occurred, the IRS can impose an excise tax against the person and possibly also the organization's manager.
William Jarvis, the managing director of CommonFund, notes that the non-profit sector is moving to a more formal business model, from being viewed as a form of well-intentioned private organization to "a matter that is much more public," from expecting to be opaque in its practices to expecting to be transparent.
"Our expectation is over the next few years there will be a tightening of practices at non-profits generally," says Jarvis.
Reputation at stake
How did the non-profit sector become so like big business — with similar ethical quandaries and its own set of spending scandals?
"When executives become larger-than-life leaders, accountability does become more challenging," says Tom Adams, president of Transition Guides Inc., a Maryland-based company that provides executive search services to non-profits. "It sometimes takes a crisis for the board to say, 'Gee, we do have a fiduciary responsibility here to be good stewards of the resources we have."
One of the pitfalls for founders of such organizations "is that the identity does get blurred between the individual and the organization," says Adams.
He adds that boards working with a long-tenured executive may come to trust the executive to give them the results they want, lessening attention to financial information such as expense accounts.
Directors of such organizations who do not demand constant, rigorous, from-the-top accountability risk damaging their group's biggest asset — its reputation in the community, said Keith Darcy, executive director of the Massachusetts-based Ethics & Compliance Officer Association, which offers assistance for those in charge of their organization's ethics and business conduct programs.
Board seats — widely considered plums for the people who hold them — are not simply name-only, occasional-meeting oversight, Darcy says. Board member responsibilities include supervising hiring and setting appropriate compensation for the chief executive, making a strategic plan and providing oversight "that protects not only the assets of the organization, but the reputation of the organization."
Darcy says that such constraints — including a dual signoff on expenses beyond a certain threshold — are not onerous to executives. At one point in his career, Darcy says, he was a banker who could lend vast sums of money but who had strict limits on his own expenses.
Darcy did not see that as punitive: He saw it as the organization protecting itself "so no one person is allowed to go out and commit the organization or spend on behalf of the organization" in a careless or exorbitant manner.
Non-profit organizations are headed by volunteer board members who might not have received training in how to oversee spending, might not routinely see how executives spend money — or might not even understand that they hold that responsibility.
"There's nothing unethical about paying talented people well, even in public institutions," says Chris McDonald, who is a visiting fellow at the Centre for Ethics at the University of Toronto and who writes about ethics at businessethicsblog.com. "Even very large salaries might be justified, if there's evidence that doing so is necessary in order to attract the kind of talented people that can really contribute to the success of the organization.
"But the key is accountability. The people making the decisions about compensation need to be well informed, and they need to be very clearly independent of the people whose salaries they're deciding on."