Nonprofit University Blog

Recently, I wrote asking whether nonprofits need to take a higher moral ground because of the public’s perception of nonprofits.  If, as so many assume, that the nonprofit sector is all about helping others and making the communities in which we live and work better places for all, oughtn’t we, I asked, adhere to the highest of moral and ethical standards?

Not being naïve, and wanting to be realistic, I am willing to lower expectations of others (though not of myself or those with whom I associate).  But that does not mean I have to give up standards altogether.   Recognizing that there is ample room for debating (which I do not want to do here) the notion of whether being moral and ethical is an absolute—you are or you are not–or allows for degrees—action a is less moral than action b–I do see degrees of immorality in people’s behavior.  I know this by my “appall meter.”  When I hear of the questionable behavior of an individual or organization, my reaction registers on the appall meter.  The further to the right on the meter the needle goes, the more infuriated and appalled I am.

Thanks to a study by Consumers Union (publisher of Consumers Reports), I am practically seething, and definitely seeing red!  Consumers Union looked at the cash reserves of 10 Blue Cross Blue Shield affiliates and found that in 2009, seven—yup, 70%–had a surplus three times the amount regulators say is needed for the organization to remain solvent.  Three times!  And as you no doubt recall, depending upon where you are sitting, if you were a Blue Cross Blue Shield client, starting around 2006, your nonprofit was getting notices of increase in your insurance premium anywhere from 8% to as high as 35%, so I heard.  Gosh, wonder where they got those surpluses?

Lest the reader forget, Blue Cross Blue Shield is, technically, a nonprofit.  (While it has allowed some of its affiliates to convert to a for-profit model, this is not the case of the ten affiliates that Consumers Union studied.)  As such, and as any nonprofit, Blue Cross Blue Shield has a legal and moral responsibility to serve its mission, which in the case of this health insurer is to provide affordable and accessible health care.   And, as is once again true of other nonprofits, Blue Cross Blue Shield has a moral responsibility to run a sound business that allows for long-term delivery of that mission and, equally important, sustainability.  It is unquestionably a best business/nonprofit practice to have six to twelve months of reserve to ensure organizational solvency during lean times. It is not a sound nonprofit practice, however, to garner those reserves on the backs of clients by raising fees beyond a reasonable standard—such as the cost of living.  And at some point, the acquisition of reserves by sticking it to the client becomes morally repugnant.  Those seven affiliates have arrived.

The Blues say it needs such a large reserve to pay its operating expenses, citing, in particular, the cost of accreditation and technological improvements.  I just wonder how many of those nonprofits that paid Blue Cross Blue Shields increased rates needed to dip into their reserves when it came time to pay its accreditation fees or the cost of making technological improvements.  Or did they forego seeking (re-)accreditation and/or make do with the current technology available to them because their reserve policy prohibited them from touching that money or, worse, they had no reserves in which they could dip?

Let’s be mindful:  Blue Cross Blue Shield is not alone.  There are other nonprofits out there that are protecting themselves at the cost of their clients, and therein forsaking their missions.  But at some point, word gets out, and the needles on the appall meters of Americans everywhere start moving to the right. What will reserves buy then?

We talk all the time about business partnerships—we must find the win-win for the nonprofit and the business, we must develop these valuable partnerships, etc., etc., etc.  (I can never say that without thinking of Yul Brynner).  Most of the times, however, it is the nonprofit approaching the business with that win-win proposition.

While not at all the same win-win proposition mentioned above—as those are more like the theatre approaching restaurants in the town to provide a discount to theatre goers showing a ticket for that night’s show—these two ideas about which I just learned have their own, very decided win-win.

Sovereign Bank Stadium in York, Pennsylvania, is now available—rent free—to nonprofits hosting community events.  Last week, the owners of the Stadium, the York County Industrial Development Authority (YCIDA), and the Stadium’s primary tenant, the York Revolution, a professional baseball team that is a member of the Freedom Division of the Atlantic League of Professional Baseball, made the announcement of this new program.

But there is more.  There is a competition involved, and having use of the Stadium rent free is the prize for all runners-up.  First prize—or what they call Diamond status—comes not just with free rent, but a $5,000 marketing package, $500 donation to off-set the other costs of the event and a 25% discount on the cost of lights and sound.  Platinum status will receive free rent, the marketing package and the donation, while three organizations will receive Gold status and get the free rent and $500 donation.  Not shabby at all!

Without taking anything away from the YCIDA and the York Revolution, there is something in this for them—as well there should be.  As their press release announced, YCIDA wants to “increase community visibility” of the Stadium and maximize its use for “public and community purposes.”  Again, not only is there nothing wrong with that, it is a great idea.   How many days of the year and how many hours of a day does a Stadium—or any other locus of entertainment–go unused?  But there are costs involved for unused space; why not get some good civic credit for those bucks?  Certainly, YCIDA could rent the space out and try to recoup some of the costs of unused space, but it has chosen not to do that.  And, in fact, the YCIDA and the York Revolution are taking this good deed one-step further by adding, for the winners of the competition, some other costly benefits.

Across North Carolina, malls with empty spaces—know any malls like that?—are letting nonprofits use the spaces for free or nominal rent, and sometimes even free utilities are included, making the malls’ gifts even greater.  Granted, in exchange for free or nominal rent nonprofits face a very short turnaround for moving out should a full-paying tenant be found.  But in the meantime, rent money is saved.  And equally, if not more important, great exposure is gained.  (Imagine the price tag for that!)  People walking by see the nonprofit at work, drop in, learn, volunteer, donate, whatever.

Again, this is a win for the mall owners.  Mall owners don’t like empty spaces.  Done: space filled, responsible tenants found.  Like all businesses, mall owners reap the reward of being (perceived as) a good corporate citizen.  Done:  nonprofits are helped with an in-kind donation and good citizenship easily displayed and noted.  Associations develop in consumers’ minds:  nonprofit X and mall Y.  Mall owners do better with consistent tenants and low tenant turnover.  Done:  nonprofits can turn into paying tenants.

As with Sovereign Bank Stadium, this civic goodness is costing mall owners some bucks.  But they, too, recognize that subsidizing rent or the cost of utilities is in their own best interests and the interests of the community of which they are a part and which they serve.  Kudos all around!

Let’s hope other businesses will follow suit.

This is a most vulnerable time for nonprofit executive directors.  Already stressed by having to do more with less, too many now are threatened by the very thing that should be their greatest partner—their board.  Yet, in too many cases, rather than providing that vital assistance, boards are using executive directors as the scapegoat to hide their own ineffectiveness.

I have railed before about boards failing to do their job, either in whole or in part—and I am sure I will do it again in these pages.  But when their failure leads to capable and exemplary executive directors losing their jobs, my blood truly begins to boil.

But first, let’s get one thing straight:  there are quantities of executive directors who do deserve to lose their jobs because of their performances.  Those executive directors who delegate more than they do, are absent more than they are present, who blame others for problems and failures, have excuses for everything that happens, who don’t understand the basics of running a business or managing people, who can not lead and/or manage, should absolutely be removed from their positions.  Unfortunately, however, too many of the boards with this kind of executive director haven’t yet awakened from their somnolent state, or the one thing these executive directors are doing well is snowing their slumbering boards.  So, if you are a member of one of these boards:  please, wake up! Develop a performance review process for the executive director, with clear benchmarks, preferably tied to your strategic plan, and start holding your executive director accountable.  If s/he is found lacking, develop and implement an improvement plan.  And if that doesn’t work, then let him/her go.

The ineffective executive director, however, is not my concern today.  Today, I am concerned with the performing executive director who is doing her/his best in an extremely tough economy that for so many nonprofits has produced diminished funds for increased delivery of services, and a board that is not pulling its weight.  With increased focus on just what nonprofit boards are actually doing, brought on by the new Form 990, watchdog groups and just heightened awareness by donors of all shapes and sizes, boards are coming to understand that they need to be actively—even proactively—engaged in their roles and responsibilities and not just absorbing information and rubber stamping what the executive director suggests.  So more and more boards are getting engaged:  they are beginning to really look at those financials, to ask questions about program performance and achievement of goals, to assess the executive director’s performance, to look at the diversification of income streams, etc.  And in so doing, they are realizing that the organization may be falling short:  the financials may not suggest a rosy, sustainable future; the programs may not be cost effective or meeting those promised outcomes; raised dollars have fallen sharply off (beyond what the economy would predict); even the executive director’s performance may not be as strong as they would like.

This is all very fine and good, as recognizing a problem is the first step in fixing that problem.  But too many of these boards are seeing the solution at as letting go the executive director.  This, however, is totally a knee jerk reaction; additionally, it is completely lopsided reaction, completely freeing the board from taking any responsibility for the organization’s less than wonderful position.  And let’s face it:  if it was totally the executive director’s fault, we wouldn’t need a board of directors in the first place.  But we do.

Let’s remember:  the structure of a healthy nonprofit is one part board, one part executive director and one part staff and volunteers.  A healthy nonprofit needs each of the three legs of this three legged stool functioning to its fullest so that the synergy that happens when those three totally functioning legs work together can be realized.  When the reaction of the board is to fire the executive director without assessing its own performance and contributions to the current status quo, without holding itself equally accountable for performance, it turns a three legged stool in a two legged one.  And that isn’t a stool at all!

A colleague here in Philadelphia (though he consults internationally), David Curry coined what I call a rallying cry:  “disruptive governance—be responsible, provoke performance.”  I’ll add to it:  save the truly hard working executive director:  be responsible, provoke performance and accountability for all legs of your nonprofit.  For that is the only true way to become a high performing organization.

It is not often that the IRS gives us a clear “heads up” as to what are some of its favorite things to “catch” nonprofits doing wrong.  But such a heads up has come in its interim report (released May 2010) on research it has been conducting on how well colleges and universities comply with reporting regulations.  DO NOT STOP READING THIS JUST BECAUSE YOU ARE NOT A COLLEGE OR UNIVERSITY; THIS APPLIES TO YOU!

The IRS sampled 400 public and private colleges and universities offering four year degrees or higher; they received responses from 344.  When I initially read this number, I thought to myself—“Hmm, the other 56 weren’t spooked by the IRS?  Wonder what will happen?”  The answer?  Thirteen of these nonresponders are receiving a full examination by the IRS!  (No clue what is happening to the other 43).

So, message #1:  when the IRS asks you for something, respond!

While the subjects of this current research were colleges and universities, the IRS has made it clear that the issues uncovered by this research are not unique to this portion of the nonprofit sector.  Most importantly, it intends to apply the lessons learned through this research to the whole sector.

So, what piqued the IRS such that it is now going to pay greater attention to these areas for all nonprofits?

1. In responding to the survey, colleges and universities reported more unrelated business income—advertising, corporate sponsorship and facility rental—than they reported on their 990-T.  (Form 990-T must be completed by every nonprofit earning $1000 or more in gross unrelated business income.)  The IRS is now conducting “full examinations” of those schools with discrepancies!  Message #2:  when sharing information with the IRS—provide the same data to the same questions, regardless of how many times the question is asked or on how many different forms.

1. In reporting how much they were paying their highest paid “officer, director, trustee, or key employee” (otherwise known as ODTKE, in the report!), it seems the majority of schools claimed a “rebuttable presumption” in determining the compensation.  (Arguing a rebuttable presumption means the school—or any nonprofit—used “an independent body to review and establish the amount of compensation in advance of actual payment, use of appropriate comparability data to establish the compensation, and contemporaneous documentation of the process used to establish the compensation in the particular instance.”)  And what this means is that the burden of proofing that the compensation awarded the ODTKE is “excessive” falls to the IRS.  (And it seems that everyone and her and his brother want to cry “Excessive compensation!” when it comes to how much the head of a nonprofit is earning.)  Obviously, therefore, the IRS would not like an over-reliance on that rebuttable presumption.  (Which probably explains why the IRS is also doing a “full examination” of those schools!)  Message #3:  Truly do your homework in determining your highest paid ODTKE’s compensation, and should you claim a rebuttable presumption, a) be prepared for your “full examination” and b) make sure your rebuttable presumption is solid!

My messages have been, intentionally, a little glib.

So, message #4:  be aware!  You are on your own.  It is a rare oversight agency that is about helping the organizations it oversees.  Rather, for the most part, oversight agencies tend to be about compliance:  did you dot your i’s and cross all of your t’s?  And if not, and here they come down hard, why not?  What are you hiding? With what are you trying to get away? How are you trying to cheat?

My final message is anything but glib.  The IRS has put the nonprofit sector on notice:  the 990 is a serious document; treat it as such!  It is reading them—closely.

The world looks to the nonprofit sector as the caring, nurturing sector of the economy.  We think of ourselves in that way, as well.  But honestly, we do not have a lock on those descriptors.  While there are many nonprofits that, regardless of their mission, do truly embrace, and live, a caring nurturing mantra for their clients, employees, volunteers, communities, and the world, there are for-profits that do so as well.  And there are certainly many nonprofits and for-profits where ideas such as caring, compassion, kindness are never discussed, let alone lived.

All of that said, however, I do believe that there is a spoken—“Of course nonprofit employees don’t expect to be paid a decent wage; they work for doing good, not a pay check”—and unspoken expectation that nonprofits will live by a strong(er) moral order and code, where equity, fairness and inclusivity dominate and clear distinctions between right and wrong are noted and abided.  But do we really and fully?  Or, do we pick and choose how and when.

For example, how many scandals that stem from illegal activity happen at nonprofits about which the world—including donors–never knows?  Too many!  (And yes, the same question can be asked of for-profits, and answered similarly.  But sadly, society’s expectations, as noted above, seem to differ for the two sectors).

While your mind may have immediately raced to the abuse scandals of the Catholic Church, I’m thinking of many more examples:  sexual harassment that leads to a dismissal but not a criminal prosecution; embezzlement that leads to a termination and an effort to recoup the stolen assets, but not a criminal prosecution; the theft of organizational property that leads to a firing but no criminal prosecution.  Making these situations even worse is the fact that when called for a reference, many organizations will not reveal the wrongdoing, advised by attorneys to simply acknowledge that the person was an employee from time A to time B.

Thus, unless the terminated employee decides to tell his/her story, the nonprofit never need reveal to the general public the wrongdoing that took place within its organization.  But, by failing to call the wrongdoing what it really was—a criminal act—and prosecuting accordingly, is the organization condoning such illegal activity?  Is silence, in this case, condoning?  By possibly allowing this alleged criminal to find a new place of employment and repeat the criminal activity, is the nonprofit complicit in the wrongdoing?  Has the moral compass of these organizations gone amuck?  Or should we expect nothing other, as organizations’ responsibility are to themselves and their immediate clients and not to teaching lessons to the larger community and taking moral stands?

So, is there a moral stand on this?  Do we, as the expected protector of decency, good and community well-being, have a moral obligation to invest only in socially responsible companies and to accept donations only from socially responsible organizations and individuals?  Is our job, as a board of a nonprofit, to maximize the return on our investments even if we invest in a company not included on the Domini Index of social investments, for example?  Or, is it our job to balance that desired return on our investments with attention to the product, work conditions, employee practices, etc., of the companies in which we are investing?   Should a youth-serving organization invest in Pepsi and Coke or accept grant or sponsorship money from them? Should an organization serving ex-cons invest in Smith and Wesson, a company with a 52 week low and high of $3.75 – $6.98, respectively?  (This provides a very accessible entre into the stock market for many small nonprofits, and quite a nice return if bought and sold at the right time in that 52 week period.)  Do we as nonprofits have a moral responsibility to sacrifice return for cause?

Recently, it was announced that Philadelphia Mayor Michael Nutter’s program to provide a $10,000 tax credit to businesses that hire ex-cons was a failure as no businesses signed up.  Do we, as nonprofits, the sector that is expected to champion the underdog, have a responsibility to lead the way—meaning no incentives needed—in hiring those with checkered pasts?  Do we have a moral responsibility to give people a second chance—even if that isn’t what our mission is directly about?

I end where I started, for I do not have an answer on this.  Which road do we take?  There’s the low road of minimum standards of compliance, the high road of moral integrity, or a hybrid of the two — that leads us to where?