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Jun 10, 2011

Trust Between Donors and Nonprofits: Part 2

Last month I posted the first part of a blog post based on my column that appeared in the Business First Corporate Caring Issue. Trust Between Donors and Nonprofits continues below.

I am not a fan of the Better Business Bureau’s rating schemes for nonprofits. It is too simplistic and has an implied philosophy that nonprofits are merely conduits so that any money that does not go directly into programs must be wasteful. For myself, if I see a nonprofit that spends a very small percentage of its money on administration and fundraising, I conclude the opposite: it is not managing well and establishing quality controls, staff training, and updated management systems to use gifts well.

Nonetheless, the BBB does have a useful and very basic checklist for nonprofit communication, which they call their Standards for Charity Accountability. These standards are not difficult. Every nonprofit should view them as a checklist of steps to establish a level of transparency, board engagement, and accountability in which donors can have confidence. These standards can be downloaded at www.bbb.org/us/charity-standards/. I view these standards as a minimum starting point for nonprofit communication and outreach. Yet the BBB reports that only 56% of the nonprofits they reviewed met all of these standards. I hope that is from nonprofits’ lack of attention rather than inability to comply. The astounding achievements of the Arts & Science Council of Charlotte, NC surely took this level of disclosure for granted and went well beyond in establishing high levels of trust with community leaders.

Here is my summary of the BBB Standards for Charity Accountability I wrote for Business First:

A Responsible Board

A board should have enough board members to prevent dominance by a small group. The Alliance views five as the minimum and virtually no voting members should be compensated. Those members need to meet in person at least three times a year and have procedures and policies in place to ensure spending is responsible, adheres to mission, is effective, and is free of conflicts of interest. Surprisingly, the Alliance found that nonprofits who were deficient failed to have a board engaged enough to have in-person board meetings the minimum number of times.

Self-Assessment

A nonprofit should have a mechanism to evaluate how effectively it meets its mission and a plan to improve its effectiveness. The Alliance suggests this occur at least biannually and be documented in a written report to the board. This is one of the most common areas neglected by the nonprofits the Alliance has reviewed.

Money is Linked to Mission

While effective nonprofits need to invest in their administration and facilities, the Alliance flags nonprofits who devote less than 65 percent of their spending to programs. It also flags nonprofits who spend more than 35 cents for every dollar raised in contributions. And while reserves are essential to a sustainable nonprofit, the Alliance believes that there should be a level at which one should question whether the nonprofit intends to use its money at all. It sets this limit at three years of expenses. Given how poor most nonprofits are, missing this standard would be a sure sign of fundraising without mission or purpose.

Budget and Verify

The Alliance believes that the breakdown of expenses into administration, program, and fundraising used by the IRS Form 990 is essential. They call for a budget that breaks down expenses in these areas, with financial statements that follow that categorization, are audited, and are made available to whoever asks for them. It particularly frowns on nonprofits who seek to impress by claiming no fundraising expenses or exclusive programmatic spending, both of which are likely to be misleading.

Report Openly

Annual reports should be widely available that describe mission, summarize accomplishments, list the names of officers and trustees, and provide basic financial information and the charity’s address. An annual report is an effective way to demonstrate that the nonprofit has a good story and is capable of telling it. A website that includes links to the annual report and the nonprofit’s IRS Form 990 return is a valuable demonstration of openness. The absence of open and web-based disclosure of financial information was a frequent reason for nonprofits to fail to meet the Alliance’s standards. Since much of this information is available at guidestar.org, it is counterproductive for any nonprofit to neglect becoming the principal source of information about itself.

Use Gifts in the Way You Promised

Whether in advertisements, phone calls, letters, or personal visits, nonprofits create expectations regarding the use of gifts. Nonprofits should be able to document that gifts were used when and for the purpose implied. In the emerging practice of cause-related marketing, the duration of the sales offer, the benefiting charities, the amount of proceeds going to charity, and any cap on this amount should be clearly stated.

Vigilance in Protecting Donor Information

Nonprofits should be proactive in offering to keep donors’ names anonymous. Since nonprofits acquire contact information and often credit card information, nonprofits need to disclose their privacy policies no differently than for-profit companies must do. This includes whether they will share information with third parties and, if so, they should provide an option for non-disclosure.

These standards are not difficult to implement. They should become a routine expectation fulfilled by every nonprofit. With that foundation, building the kind of trust that led Charlotte to rally behind its arts and science nonprofits may become a reality in more communities.