The Don Schaefer Foundation is only getting started, but it's already giving several lessons in how not to run a nonprofit organization, as Laura Vozzella chronicles in the newspaper.

1. Structure.You can't run a nonprofit of any size with only three board members. This is basically money that Schaefer has given to the public. Multiple board members are needed to watch over each other and to make sure the donor's wishes are fulfilled. Now two of the Schaefer Foundation's trustees are trying to kick out a third. From the Maryland Association of Nonprofit Organization's Standards for Excellence:

The board should have no fewer than five (5) unrelated directors. Seven (7) or more directors are preferable.

2. Conflicts of interest. Nonprofit governance experts frown on trustees steering business from the nonprofit to themselves. According to Vozzella, trustee Zelig Robinson is also the foundation's legal counsel. He's the client and the vendor simultaneously. He declined to tell Vozzella if he's working for free.

From MANO's Standards for Excellence:

A nonprofit should have policies in place, and should routinely and systematically implement those policies, to prevent actual, potential, or perceived conflicts of interest.

3. Openness. Nonprofits need to tell the public what they're doing. Their money doesn't belong to the trustees. The public has a special interest in this case because it's the legacy of a beloved public servant. Yet when Vozzella tries to find out what's going on, Robinson starts talking about attorney-client privilege.

From the MANO standards:

Nonprofits are private corporations that operate for public purposes with public support. As such, they should provide the public with information about their mission, program activities, and finances. A nonprofit should also be accessible and responsive to members of the public who express interest in the affairs of the organization.

Posted by Jay Hancock at 8:57 AM | Permalink | Comments (3)
Categories: Nonprofits
        

George Mason University economist and superblogger Tyler Cowen suggests three rules for charity: Give cash. Give to needy people who don't expect charity. And don't tie strings; let recipients do whatever they want with the money.

The Cowen rules drastically reduce transaction costs because they don't require grant applications and a big staff to identify worthy projects and recipients. They eliminate the moral hazard and dependency that sometimes come with welfare and charity: People who know they're getting aid can put less effort into working for their own account. And the rules maximize utility and freedom for the recipients. THEY, not NGO managers, decide the best way to use the money.

Now GiveDirectly has set up a model of philanthropy based on the Cowen principles, says Tyler's co-blogger, Alex Tabbarok. Says Alex:

GiveDirectly takes donations over the web, locates poor households in Kenya using people on the ground, and then transfers money directly to the recipient’s cell phone (even very poor households typically have cell phones but GiveDirectly provides SIM cards for those who do not.) Transactions costs are low, just 10%.

He has one reservation:

... it also lets recipients purchase alcohol, cigarettes and prostitutes. Even in poor countries, a substantial amount of poverty is caused by poor choices. Still, there is no special reason to think that cash grants will increase the proportion of money spent on “bad goods.”

Posted by Jay Hancock at 8:57 AM | Permalink | Comments (1)
Categories: Nonprofits
        

60 Minutes had an expose Sunday on Greg Mortenson and his Central Asia Institute. Mortenson became famous after co-writing Three Cups of Tea, the inspiring story of how he came to build schools for girls in Afghanistan and Pakistan. Apparently piggybacking on the work of author John Krakauer, 60 Minutes quoted key personalities in Mortenson's story who said he made stuff up. As I recall, the program also noted that the institute paid Mortenson's expenses for promoting his books and that the institute got little if any book royalties. It found that some of the schools the institute built were empty.

I recommend Kraukauer's written account, Three Cups of Deceit, which is even more damning than the 60 Minutes piece. It's a classic tale of a nonprofit gone wrong: Inspiring story and charismatic founder bring in millions. Charismatic founder runs roughshod over a spineless board and jeopardizes the organization and the mission. Lots of disturbing allegations, including one that Mortenson used the nonprofit as his personal ATM. (Mortenson says he stands by his book, and the CAI board, such as it is, says a lawyer found he wasn't gaining "excess benefits" from the nonprofit.)

Among other problems, CAI seemed to have pursued widespread and dirty nonprofit trick -- that of classifying its fundraising and promotion costs as "program" expense. Because selling Mortenson's books spread the message of educating young people in rural parts of central Asia, that was supposedly part of the "mission" -- on an equal footing with building the schools and hiring teachers. This kind of shuffle lets nonprofits claim they're spending a high portion of donor money on the mission even when they're just panhandling for dollars.

Here's Krakauer:

What this statement fails to
disclose is that for accounting purposes, CAI reports the millions
of dollars it spends on book advertising and chartered
jets as “program expenses,” rather than as fundraising or
other overhead. Were they reported honestly, CAI’s fundraising
and administrative expenses would actually exceed 50
percent of its annual budget. In 2009, according to an audited
financial report, CAI spent just under $4 million building
and operating schools in Pakistan and Afghanistan, a sum
that includes construction costs, school supplies, teachers’
salaries, student scholarships, and travel expenses for program
managers. In the same year, CAI spent more than $4.6
million on “Domestic outreach and education, lectures and
guest appearances across the United States”—an amount that
included $1.7 million to promote Mortenson’s books. CAI
reported all of this $4.6 million on its tax return as expenses
for “programs.”...

(Since 1998, Mortenson has served as both CAI’s
executive director and as a board member; presently, the
board of directors consists solely of Mortenson and two other
members.)

Posted by Jay Hancock at 2:41 AM | Permalink | Comments (0)
Categories: Nonprofits
        

GiveWell has very sensible advice for those who are thinking about making donations to charitable organizations for relief in Japan. It kind of boils down to this: If a nonprofit is asking you to give for Japan, that may be a signal to say no to that group.

Charities are using the Japanese tragedy as a fundraising pitch, GiveWell says, when the capacity for meaningful aid at the disaster sites may be already saturated. Any aid you give in the name of Japan will probably be used in other countries or in Japan for non-emergency needs. If you feel the need to do something, GiveWell says, donate to the Japanese Red Cross or to Doctors Without Borders. Doctors Without Borders is well-run, transparent and efficient. And its good faith is proved, Give Well says, by the fact that it is NOT soliciting for Japan.

More from GiveWell:

* Those affected have requested very little, limited aid. Aid being offered far exceeds aid being requested. (Details below.)

* Charities are aggressively soliciting donations, often in ways we feel are misleading (more on this in future posts).

* Any donation you make will probably be used (a) by the charity you give it to, for activities in a different country; (b) for non-disaster-relief-and-recovery efforts in Japan.

* If you’re looking to pursue (a) and help people in need all over the world, we recommend giving to the best charity you can, rather than basing your giving on who is appealing to you most aggressively with images and language regarding Japan.

* Overall, though, a gift to Doctors Without Borders seems to us like the best way to effectively “respond to this disaster”. We feel they are a leader in transparency, honesty and integrity in relief organizations, and the fact that they’re not soliciting funds for Japan is a testament to this. Rewarding Doctors Without Borders is a move toward improving incentives and improving disaster relief in general.

Posted by Jay Hancock at 6:00 AM | Permalink | Comments (4)
Categories: Nonprofits
        

Jamie Smith Hopkins has a short piece on the continued growth of jobs in the nonprofit sector even as the recession plastered employment at for-profit companies. The research was done by the Johns Hopkins Center for Civil Society Studies. I can't get the study to load on the Center's site, but I'm betting that nonprofit job growth was fueled largely by hospitals and other aspects of health care. Health-care employment has been fueled by the aging population and lack of controls on Medicare spending.

Posted by Jay Hancock at 7:54 AM | Permalink | Comments (1)
Categories: Nonprofits
        

Still getting intelligent feedback on Sunday's article by Andrea Walker and my column on executive pay at metro-Baltimore hospitals. Walker's piece reported that 8 hospital CEOs pulled in more than $1 million in year for which documents were most recently available, and more make just under that. I argued that the pay is too much for highly subsidized, charitable organizations that call themselves nonprofit.

Some readers were surprised and shocked that the pay was so high; others argue that these are complex institutions and that the people who lead them should be handsomely compensated. Thanks everybody for the ideas, a sampling of which are below:

Are you kidding me? I work at one of the hospitals in the article and think the CEO is worth every penny of his salary. When nurses make $100,000 and IT professionals make $150,000 and so on up the food chain, how much do you expect a CEO who runs a small city to make? These are smart, successful business men who keep the expenses down and the OR's humming. You are dreaming if you think they are overpaid. Sometimes I think you write this rubbish just to get readers' juices flowing. You did it this time.

And:

They only made $1.4 million? Seems to be paltry considering the job. Pick on Oprah instead.

And:

What do you think is fair and just compensation for the people who run the world's premiere medical institutions? I was struck more by the fact that the CEO of the U of MD Medical System earns 2.5 times the compensation of the President of the Hopkins Hospital and Health System. The relative sizes of these two numbers is remarkable in itself. And, unlike the CEOs of for-profit corporations, the most important responsibility of the non-profit CEO is fundraising. Would you put these people on commission?

I am not one to argue that excessive pay produces excessively good results. The "turndown" has revealed that notion to be fantasy. But rational policies dictate that there be a relationship between one's responsibilities and one's compensation...professional athletes and other celebrities excluded.

And:

Wonders never cease, CEO's getting a big bulk of the money while the hospitals continue to harass people over unpaid bills, I know one family out here in Harford County that lost every thing they including their home because they couldn't afford a hospital bill of over $30,000, and then having to read that the CEO of that very same hospital pulled in 7 million a year, it sort of make me wonder about the Doctor' Creed that they will do no harm? Hospital destroy people doesn't matter if the person lives or dies, it's seriously connected to Free Market System that continues to Rob and Steal billions from the people and make life happy and sustainable for the rich and miserable and nerve whacking for the poor and middle-class

And:

Continue reading "Are hospital CEOs worth their million-dollar pay? " »

Posted by Jay Hancock at 6:00 AM | Permalink | Comments (2)
Categories: Nonprofits
        

The Internal Revenue Service is reminding the charity world that even small nonprofit organizations now have to file a Form 990 990-N or 990-EZ, under a new law. If you normally have less than $25,000 in receipts you can file 990-N, which the agency calls the e-Postcard. says the IRS:

If you do not file your e-Postcard on time, the IRS will send you a reminder notice but you will not be assessed a penalty for late filing the e-Postcard. However, an organization that fails to file required e-Postcards (or information returns – Forms 990 or 990-EZ) for three consecutive years will automatically lose its tax-exempt status. The revocation of the organization’s tax-exempt status will not take place until the filing due date of the third year.

So by all means get those 990s filed. Of course, feel free to put totally bogus information on the returns. There are hardly any penalties for nonprofits that file false information.

Posted by Jay Hancock at 11:15 AM | Permalink | Comments (0)
Categories: Nonprofits
        

Is it crass for restaurants and stores to solicit business by promising that part of the proceeds will be donated to Haiti? (Or any other cause?) Here's a discussion on Don Rockwell's DC dining site, which contains good views from both sides. Rockwell starts it off by saying:

"Restaurants and bars that donate an insignificant portion of their revenue to Haitian relief organizations are both trite AND self-serving. Here's an actual example, if you can believe it: One restaurant group has the chutzpah to say that they're going to "donate $1 to the Red Cross every time certain appetizers and entrees are ordered between Jan. 19 and Feb. 19." Guess who gets to take the tax deduction on that dollar?"

My view: A donation to a good cause is a donation to a good cause, as long as it gets to the right nonprofit. But there is something bathetic about tying charity for catastrophe victims to an order of nachos. Or certain other products.  

Posted by Jay Hancock at 7:05 AM | Permalink | Comments (1)
Categories: Nonprofits
        

Pulled from comments. This is a terrific point. By pulling punches on disclosure requirements, the IRS hurts charities that work hard to keep expense ratios low. Better disclosure would make these nonprofits look good on Form 990, which many donors use to direct giving. Without the relevant ratios front and center on the IRS forms, the groups' light is hidden under a bushel.

People need to understand these ratios and know where there money is going. I sit on a board of a national non-profit out of Rockville and know what sacrifices the staff, including the Exective Director, take to keep the admin and fundraising costs low. They have a clear understanding of the fact that if those costs are low, there is more going to the programs which is why anybody should be working for a charitable cause.

Posted by Jay Hancock at 10:52 AM | Permalink | Comments (0)
Categories: Nonprofits
        

The Internal Revenue Service just blew a beautiful chance to give donors the most relevant, accessible financial information about charities.

Scandals at United Way, the Nature Conservancy, the Red Cross and other nonprofits helped prompt the agency to revamp Form 990, on which charities report activities to the public. But the unveiling of the new form on Thursday shows that the IRS caved in to pressure from nonprofits to keep disclosure as full as it should be.

A draft form proposed earlier this year included statistics on a summary page giving a clearer idea about how much donations pay for executive salaries and other non-charity items. But the IRS scrapped requirements to disclose the number of employees making more than $100,000; fundraising expense as a portion of contributions; total expenses as a percentage of assets and executive compensation as a portion of total compensation.

Charities dismissed the IRS proposal to list easily accessible fundraising expenses as "value laden." You bet it's value laden. If 90 cents out of every donated dollar goes to pay some for-profit fund raiser, that's valuable information for givers.

Although the new form will require disclosure of first-class air travel and club dues for executives, the IRS rejected proposals to list all executive expense reimbursements and allowances. The agency will require better disclosure of loans, business deals and other transactions with insiders, but even this could have been improved.

The new requirements stop far short of information available on publicly traded, for-profit organizations. Donors are investing in charities no less than shareholders are investing in Merck and Exxon. The information they receive should be at least as comprehensive.

Posted by Jay Hancock at 9:15 AM | Permalink | Comments (1)
Categories: Nonprofits
        

What are endowments for, anyway? Harvard has long been pressured to invest some of its $35 billion endowment in making its tuition more affordable. Now it seems to have done so in a significant way, cutting the cost of attendance by as much as half for students in families making between $120,000 to $180,000 a year and by more for families making less. From Bloomberg:

These families [making 120k to 180k] will pay just 10 percent of their yearly earnings to send a child to Harvard, the Cambridge, Massachusetts, university said today. The payments decline on a sliding scale, with those making less than $60,000 attending for free. The school also eliminated student loans, saying students will get additional grants as needed.

The newest initiative expands a program started in 2004, when former president Lawrence Summers added a tuition-free financial aid program for students from low-income families. The program, which begins next year, will cut costs for a family earning $180,000 to $18,000 per student, compared with $30,000 this year, according to the school.

``What you see here is a real commitment to try to identify a response to the enormous stress that a particular group of families feel about the cost of higher education,'' President Drew Faust said in a conference call. The new program focuses on a ``middle-income group,'' she said.

Excluding home equity from financial aid formulas, another part of the initiative, may save some students about $4,000 a year, according to a statement from Harvard.

Here's Senator Charles Grassley, who has been pushing for this:

“This is big news. Universities hold at least $340 billion in endowments. Harvard has the biggest endowment of all. This could inspire other expensive colleges to make tuition more affordable. Choosing a college should be based more on brain power than bank account size. As a society, we need to avoid saddling families with tuition they can’t afford and students with sky-high debts. I hope the colleges that are taking steps to reduce tuition will make the costs known up-front, so families can comparison-shop ahead of enrollment and don’t get any rude surprises afterward.

"I hope Congress is motivated by Harvard’s action to continue a discussion of whether to impose a mandatory endowment pay-out requirement on well-funded colleges. Colleges are tax-exempt, and other tax-exempt entities, such as most private foundations, have a mandatory pay-out requirement of 5 percent a year. Tax-exempt organizations are supposed to provide public benefit in exchange for their special status. Helping the next generation afford college is a public benefit. It’s good to see a top college recognize that.”

Posted by Jay Hancock at 3:56 PM | Permalink | Comments (1)
Categories: Nonprofits
        

Apropos of my post on Maryland Nonprofits' Standards for Excellence, TJ Harris says:

It is generally true that the "Standards of Excellence" are a good way to minimize the chances that the organization is infested with the "incompetent, negligent, venal or larcenous."

But the Standards themselves are onerous and bureaucratic and somewhat redundent with basic non-profit state and federal laws and general corporate principles.

Meeting the Standards will guarantee that the organization has squandered hundreds of board and staff hours coming up with the pointless documentation and "written policies" required by the Standards of Excellence program.

Not to take away anything from Parks and People's achievement (and they are an outstanding organization), but smaller, but quite effective and non-larcenous non-profits will do fine work without meeting the Standards. Donors should look to a record of effectiveness rather than this particular overly-bureaucratic seal of approval.

Standards for Excellence DO overlap with "basic non-profit state and federal laws and general corporate principles." Problem is, state and federal laws purporting to keep nonprofits honest are lightly enforced, at best. Nonprofit enforcement by the IRS, which is in the best position to do so, has been a joke, although it's getting better. On a state level it takes blatant, ham-handed embezzlement to spur prosecution, and many people profiting from private inurement at nonprofits are too sophisticated to get caught doing that. (The accountant taking money from the till goes to jail while the executive director steering exorbitant contracts to his/her for-profit company gets a pat on the back.)

As for "general corporate principles," nonprofit boards tend to be disengaged, undertrained and ambivalent about enforcing ethical and financial standards. And by definition nonprofit organizations have no shareholders, so there is nobody left to watch the ball. So what's left? The nonprofit industry, if it values its reputation, must undertake to promulgate and enforce standards itself.

Posted by Jay Hancock at 10:45 AM | Permalink | Comments (2)
Categories: Nonprofits
        

I know nothing about the Baltimore Parks and People Foundation except what I just read in its press release and on its Web site. "Since 1984, Parks & People Foundation has worked to improve the quality of life in Baltimore’s neighborhoods, developing innovative solutions for restoration of natural resources and the academic enrichment and motivation of the city’s children."

But I know that Parks & People just qualified for Maryland Nonprofits' Standards for Excellence program, which reduces chances that certified organizations will turn out to be incompetent, negligent, venal or larcenous. Standards for Excellence is a bright signaling device saying, "This nonprofit is likely to use your philanthropic donations and government grants in a productive, efficient manner." Not a bad screen to use when deciding on your year-end donations. Here is a list of qualifying organizations.

Posted by Jay Hancock at 11:50 AM | Permalink | Comments (1)
Categories: Nonprofits