Can donor trust be restored?

To debate what's needed to restore donor confidence to the nation's unregulated charity sector, CONTRIBUTE convened a roundtable of five charity experts — a professor, a charity watchdog, a nonprofit consultant, a noted reformer, and a Capitol Hill insider. Participating in the October forum at the National Press Club were: NYU Professor Doug White; Pablo Eisenberg, a senior fellow at Georgetown University’s Public Policy Institute; Dean Zerbe, a senior tax counsel for the U.S. Senate Finance Committee; Trent Stamp, president of Charity Navigator, and Rick Cohen, former chief of the National Committee for Responsive Philanthropy. Keith Epstein, an investigative reporter in the Washington bureau of BusinessWeek and a contributing writer for CONTRIBUTE, served as moderator. What follows is an edited transcript of that conversation. Pablo Eisenberg, what are the top problems facing the philanthropic sector in terms of fraud and waste? We hear about things like executive pay, embezzlement, self-dealing, and inefficiency. How bad is it? EISENBERG: The lack of transparency and public accountability is the top problem. The Senate Finance Committee is still questioning the operations of nonprofits, foundations, and some of the big nonprofits like hospitals and universities. So many nonprofits don’t really believe in serious measures to ensure accountability. They’re pushing for self-reform, but self-reform has almost never happened, and it never will. The challenge is how to get better regulations and to enforce them. This is not a new problem. What are the big things that we ought to worry about? EISENBERG: I think there are a number of ways, in the foundation world, where self-dealing continues in excessive fashion, which could easily be eliminated by removing one sentence or changing one sentence in the IRS regulations. And yet, neither the Finance Committee nor nonprofits have seen fit to do that. We’re getting United Way directors at the national level hitting slightly less than a million dollars. You have university presidents bucking a million, going on to two, and where does that stop? And that’s very hard to tackle. There is no definition for it. The IRS claims to be concerned, but there are no standards which they have really defined for meeting excessive compensation. And there’s a question of public information. We still don’t know to whom corporations give their charitable contributions because that’s not required by law. Dean Zerbe, given your years on the Hill, what would you say are the biggest issues facing these times? ZERBE: I think people are beginning to realize that these are entities that receive billions of dollars from the taxpayer. Some obviously do a good job, but there’s no requirement that they do a good job. It’s always about what’s legal. No one seems to stand up and say, Geez, that didn’t seem to make a lot of sense. We just get counsels to stand up when they’re looking at these selfdealings and say, Why are we doing this? The only time people get serious and say, ‘we’re with you on reforms’ is when they start hearing drum beats coming from the Hill, from the IRS, or from somebody else. Why do you think donors are not paying attention that way? We hear so much about metrics and measuring outcomes. ZERBE: You hear so many donors give to charity for reasons that come from the heart — I give to the church, I give to my school. The reasons they’re being tugged to something is not to look at what’s actually happening. One of the greatest tragedies is the inability of the charities, themselves, to call out their own profits. Community foundations want to play the role of the leading charity in their area, but to do that, they would need to say, Nonprofit hospital, why aren’t you doing more to help poor people? University, why are you not doing more to help encourage people to go to school? There’s no effort being made to call out problem charities. COHEN: You can think about this in a slightly different way, though — that this is not the donor’s money, this is not the nonprofit’s money. It’s all of our money. We entrusted it to nonprofits for stewardship and to spend it in the public interest. We rarely ask how we’re using this money for the public good and what kind of demands we’re making on charities, nonprofits, and, of course, foundations for the utilization of that money. The discussion about accountability has focused on the mechanics of how people function with the money and not what kind of social good it is achieving.ZERBE: We focus on “isn’t it great that all this money’s been donated?” But what’s this actually doing to help poor people? The New York Times at the end of their discussion about university endowments said, “How dare Congress tell us what to do?” You don’t want Congress to tell you what to do? Don’t take a tax break. STAMP: Donors are confused. The number of nonprofits in this country has increased 100 percent in the last ten years. And [donors] think that 501(c)(3) tax exemption means something. It doesn’t. The IRS gives out that tax-exempt status like people giving candy to babies. And they don’t ask them to come back and prove that they deserve to be a nonprofit in the first place. The state regulation system is, in most cases, nonexistent. We see charities banned from fundraising in the State of New York that are free to ply their trade in New Jersey. It’s preposterous. We see charities registered to fundraise in every state except the state in which they’re headquartered, because that way it’s easy for them to evade prosecution from the state attorney general. So state regulation means nothing. Federal regulation means little. Donors are left on their own, and it really is the Wild West out there. COHEN: We need the public taking action on this. We don’t have any kind of good system for enforcing accountability. The accountability comes from the press, it comes from an occasional watchdog organization. And it comes occasionally from citizens raising their voices and nonprofits raising their voices. This system should be working better for the services that we deliver as nonprofits, and right now it’s just not working. ZERBE: Just real quickly on that point. I agree with you, Rick, and I think you make a good point, Trent. But does the public care? I think they do, but what I find troubling is that the charities have said, People want to know how much we are spending on charitable activity, people want to know how much is going to salaries, but we can tell people better what it is. The Form 990 is getting completely altered, the front page of it, because of Brahmins at the IRS. Charities said: Throw that off the front page, or let’s get rid of it completely. It’s very discouraging that they’re going to tell the public what they need to know and now what they want to know. Dean Zerbe, a new series of questions will be instituted on the 990 by the end of 2009, and charities will have to describe whether they have a written conflict of interest policy, a whistleblower policy, and have an audit committee. To some people, that sounds like things are happening. ZERBE: The IRS has done quite a bit; there’s an enormous amount more that could be done. Right now you’ve got some of the nonprofit hospitals fighting tooth and nail: God forbid they would actually have to explain what they are doing to help poor people. They want to delay and defer and diffuse what is being asked so that they can renew as little as possible towards knowing what’s going on. Why isn’t it tougher on them? Is this just a formidable lobby that pushes back? ZERBE: It’s a matter of IRS resources. It’s amazing how much the IRS has done with the limited resources it’s got. One of the great things that [former IRS] Commissioner [Mark] Everson did and the Senate Finance Committee’s hearings did was to bring back to the IRS the mindset that they actually had to be paying attention to these taxpayer dollars. I’m just very worried about what we’re seeing now, where they put out a fairly good, aggressive document but are already signaling retreat on certain areas. “You have university
presidents bucking a
million, going on to
two, and where does
that stop?”
Pablo Eisenberg Do you think that’s a resource issue? ZERBE: The retreat issue is more of a politics issue. Every time they put out a tax thing, it’s rare to have anybody on the other side. [If] Exxon says, You can go cut down trees, then you get all the folks who think about trees coming out and saying, No, we don’t like it. You have a natural tension there. [If] Exxon comes in for a great big tax break, I can assure you there’s no one on the other side saying, Why are we giving Exxon a big break? Shell’s saying, How do I get one, too? There’s no natural tension between them. COHEN: You don’t have an organization of donors as consumers who say, Look, something’s got to be done here. EISENBERG: The IRS has been plagued by two major things. One, a lack of political will. The second is that there aren’t the resources, and when you combine lack of will with lack of resources, you have a terrible situation. Toughening the 990s is okay, but Sarbanes-Oxley hasn’t cut out all the corruption in Corporate America. It’s a lack of leadership in the nonprofit sector. There are few people who are running nonprofits who are willing to go on principle and say, This is wrong, fellas. Look at the payout: we have $600 billion in assets in foundations, and the payout is at 5 percent, including staff. That’s an outrage. Where are the nonprofit leaders? Nowhere. They’re scared to death to say boo for fear that one foundation may not fund them. WHITE: I come out of the world of the nonprofit, having worked in it and consulting day to day. And I couldn’t disagree with mostly any of this, but I do wonder what the solution is. I don’t think the solution is a lot more legislation. I would be happy if I anticipated more of a scalpel than a hammer coming into some of the legislation because I think that a lot of things do need to be changed. At the same time, a lot of what’s really important and wrong at charities probably will never be within the reach of legislation. The lion’s share of the work has to be done by the charities themselves. They have to be self-motivated to say, you know, that the American University president was just downright wrong. I don’t feel like nonprofits look at ethics very well. Ethics, a proper attention to the process of how we come to decisions, is totally vacant in the nonprofit governance world. Consider places like Harvard with a nearly $30 billion endowment. I don’t think it should be too much heresy to say that if you’re going to sit on an amount like that, then why can’t we tax part of it? There are some things that I don’t think the new 990s will help. Some of the important things are going to have to be driven by the sector itself. So it does sound as if, to some extent, you’re talking about education and sort of a balance more on the side of some self-regulation, self-analysis. WHITE: Yes. You find the bad apples [but] they’re not everywhere. Most places are trying very hard to follow the rules and try to govern well and so forth, and they struggle. When we talk about the Harvards and the Smithsonians, we’re talking about a very small slice of elite organizations in the United States. When we see them not behaving, it sends a bad message through the sector, and I want to see that stopped. COHEN: I remember the head of the U.S. Chamber of Commerce, after the Enron controversy, said, You know, 99 percent of corporations are not Enron. That’s right, 99 percent aren’t. The question is how do you deal with the Enrons and how do you deal with the Nature Conservancies? The unfortunate part of self-regulation is it doesn’t work. The large organizations create the rules so that they get protected better. Look, even, at the nonprofit panel of the Independent Sector. Who’s missing in that picture? Foundations. Foundations are virtually invisible in that picture. Do they sit on too much of their money? COHEN: Oh, yeah. The payout rate of foundations should be much higher than it is. Right now, it’s a mandatory minimum of 5 percent, which most foundations are turning into a ceiling of 5 percent. It should be easily 6 percent, if not higher. What we have is not simply an IRS that is not up to snuff or a 990 that’s not up to snuff; we have a sector that is an antiregulatory sector. Nobody wants to deal with the fact that as a sector we need to have better standards that are regulated, that are put into law, and then given the resources to be implemented. What do you think about that? WHITE: I think of charities as the ethical sector of our society. We have government, and we have business. It’s often called the third sector; I think it’s the ethical sector — that’s why charities say they want self-reform. This idea of upholding the ethical standards of our society comes from the charities, and we’re not doing that enough: 99.9 percent of the charities being good is not an excuse for the others to be bad. So, yeah, bring in the scalpel. As charities become larger and more people are giving, the charity sector says, Isn’t that great? And I’m thinking it could be great, but that fact doesn’t make it great.What does everybody think? Would a scalpel approach to reform accomplish anything? Pablo Eisenberg? EISENBERG: We have a nonprofit sector that has been increasingly corporatized with the twilight zone of ethics of Corporate America. We have the cult of the CEO where the big guy or gal — rarely a gal — gets all the benefits and all the kudos, and we have decreasing collegial leadership in nonprofit sectors. We have salaries that are shooting through the sky á la corporations, and there seems to be no restraint. Everybody is money hungry, and there is a lack of ethics probably because there’s a lack of leadership, which I said before. How you deal with it is really a tough problem. Look at the business schools. Look at all the professional schools. Very little ethics is hammered in. In fact, it’s almost a counterethics thing. Get the money, be a good fundraiser — that’s the emphasis. Money is the guiding light. Until people think, Gee, there are other rewards of this important sector — public service, doing a good job, terrific innovative programs — we’re still going to be in trouble. WHITE: At New York University, where I teach a master’s class in fundraising and philanthropy, Naomi Levine, [who] heads that organization, has gone to the state legislature in New York to make that a required course for fundraisers, which I think is a slam-dunk, but charities in New York have kept it from happening. We just don’t do enough self-regulation. We don’t speak the truth about the bad apples in our business. COHEN: The issue of ethics is not simply what’s illegal and what’s stealing. It’s the abuses. Remember the [Carl B. and Florence E.] King Foundation in Dallas, where the president and the secretary took, what, $800,000? It was actually more than their actual active grant-making. People knew what was going on. Who blew the whistle? It was the sister of the president of the foundation, who was disgusted by her brother’s behavior, and she died before the issue actually got resolved. There’s not enough in this self-regulatory and ethical DNA to support those people, and they’re forced to go solo. In terms of policing, if there’s more regulation, specifically what should that be? What do we need? What would it take? Dean Zerbe, would Congress ever adopt this idea of an SEC-like charities bureau?

STAMP: We need to quit fooling around and go to an SEC for nonprofits in this country. [We need to] quit leaving it to the states and quit leaving it to the whim of self-regulation. We’re talking about a $300 billion industry. This is a massive component of American society, and I think that it’s time to regulate it for the big business that it is.

WHITE: We might also have some problems that the SEC currently has with its own clientele. There would probably be too few people, and the regulations would be very hard to kind of pinpoint. I don’t disagree with the sentiment but I would like us to fix it better.

ZERBE: If the charities themselves have an interest in something like this, it would at least begin to have the dialogue with Congress about creating something like that. You really have to be cautious because these are tax-exempt entities. You cannot have a tax entity that is separate from the work of the IRS. One of the biggest problems we’ve seen is tax-exempt entities would be more than happy to sell, lease, or rent their tax-exempt status to help full profit entities avoid their taxes. You can’t — I think you have to be very worrisome about that. When you say scalpel, it always sounds nice. [But] we have to think more broadly, because if you [make too many exceptions] — like, wear a gray outfit on a Monday with a fedora — you can’t do this. Well, guess what, you only wear a straw hat on Monday. You got to kind of think what is the next step, how are they going to get around this, and sometimes it leads to broader issues.

EISENBERG: Barring an SEC-type organization in the near future, I think you can strengthen IRS and the attorneys general’s offices. You got to give the IRS more resources and a political mandate. You’ve got to have a tougher intake on new 501(c)(3)s, a real examination, and you’ve got to recertify the 501(c)(3) every five or eight years. That’s doable. You need some congressional support on that.

ZERBE: In a lot of areas there are no laws, which can enforce certain bad behavior. I agree we need staffing at the AG level, we need staffing at the IRS level. What I see mostly is the charities running up to the Hill to their new best friends forever saying, We don’t like this.

Does Congress have to wait?

COHEN: We now have people in Congress and we have Presidential candidates that are, I think, abusing the ethical positions of nonprofits. So it becomes very hard to advocate for new regulation and new statutes when you have charities established around or affiliated with members of Congress, where donors can basically curry favor by making anonymous donations. I’ve tracked 40 or 50, and it’s pretty sad stuff that we have major politicians that realize that they can use the 501(c)(3) status to benefit their own mechanisms of trading and buying favor and so forth. Senator Baucus at least tried to come up with a minor mechanism to control the charities associated with members of the Senate, and that didn’t get very much support. And, again, going to Dean’s point, where were the charities saying this is important to us? The charities were quiet or actually even opposed.

WHITE: I’m thinking that maybe legislation or total legislation isn’t the entire answer, and so we’re going to continue to have these problems. A place like Charity Navigator is in a prime position to help us. Maybe it can’t do everything, but it can do things that it’s not yet doing to bring this kind of problem to the fore.

STAMP: Legislation is not the answer because legislation isn’t going to happen. Not because it shouldn’t happen. We saw what happened here with the 990, where we basically tried to toughen an informational tax document to provide a little bit of volunteer information that would help donors make informed giving decisions, and they acted like you were asking them to set their children on fire. They lined up, the trade groups, the lawyers, the accountants, in resistance to what was a relatively benign proposal to make the sector a little more user-friendly. I thought it was shameless. I was embarrassed that the IRS would stand up and say, Here it is, we’ve been waiting 25 years for it, and we finally got this right, and then with a summer’s worth of complaining, they went, Well, we weren’t really that serious.

What do you think, Pablo?

EISENBERG: I was going to go back to governance. If you look at the almost now 100,000 foundations that are in this country with probably now 600 billion or so assets, all but a very few foundations are governed by the elites. So it’s not surprising that a tiny sliver of that pie goes to lowincome, social change, minorities, gay and lesbian groups. They are the wealthiest people in this country and is it surprising that the inequities in grant-making of that world occur? It is not. The inequities in grant-making of institutional philanthropies will widen unless something is done about it, and because the governance is so skewed against the majority of low-income, powerless folks in this country, that nothing is going to change.

We’ve talked a lot about obstacles to reform — our class system, politics and the benefits to politicians, the beneficial nature of things in that way, the IRS shortcomings and a lack of resources, among other things, on the Hill. Realistically, what are some things that could be done now or soon to turn things around?

ZERBE: The last thing I want to say is the press can help. There are a lot of magazines that are happy to kind of show the ocktail dress that was worn by Betty Sue at the latest charity fundraiser, but how much time are they spending looking at these very, very important issues? It’s 10 percent of the economy. Why are [newspapers] not on this? Every one of them should be doing a series on the nonprofit hospitals and what they’re doing. If it’s important and it matters and it’s 10 percent of the economy, they should at least be able to send one reporter.

That’s what it’s going to take to move members on some of these things, is that it?

ZERBE: I can write memos till I’m blue in the face. There’s nothing like having a story in The Washington Post, The New York Times, the Wall Street Journal, on ABC News, and say this is what’s going on.

COHEN: There’s nothing simple and easy in front of us. There’s a four-legged stool that we have to work on — self-regulation is part of it, which has to be better and more ethical and have people believing in it. I would not write off government regulation, as miserable as the effort is to get it. We have to do that. We need better resources devoted at the state level and at the federal level.And I agree the press has a very valuable role. The SEC signed off on Enron all the way across, and when it finally got into action, it was because it read something in the Wall Street Journal. So the press has to play a valuable role in this, otherwise a lot of this stuff doesn’t happen.

STAMP: There is a quick and easy solution short term, and that is for donors to get better informed. We are in the golden age of information. You can find out information if you will take your philanthropy as seriously as you take your investing. Stop giving solely to those people that you work with because they want you to buy a table at their gala and you have no idea. If you take your philanthropy seriously, donors can take back a little bit of this and ease some of the problems we’re having.