Advancing Philanthropy

Ethics, Fundraising, and Leadership: Avoid the Seven Deadly Sins of Fundraising

You’re a good person. At the very least, you try to be a good person.

However, that’s not good enough. Effective fundraising demands more of us. Every action we take, no matter how small or large, has the potential to build or erode public trust, which could have a corresponding impact on philanthropic support.

Among other things, being a fundraising professional means you must always strive for excellence while avoiding missteps that could have costly consequences for you and/or your organization. Fortunately, you do not have to endure risky mistakes to learn from them. Instead, thanks to media headlines, you can learn from the mistakes of others.

Consistently doing the right thing will result in greater trust and confidence. People are more likely to donate—and current donors are more likely to give more—if they trust you and your charitable organization. Further, when public confidence in the nonprofit sector erodes, giving suffers, but you could be shielded from that if your donors have confidence in you.

Philanthropy researchers have demonstrated the importance of doing the right thing. Dr. Adrian Sargeant and Dr. Stephen Lee found that “there is some indication here that a relationship does exist between trust and amount donated, comparatively little increases in the former having a marked impact on the latter.”1

Trust affects both propensity for giving and the amount given. According to a report issued by Independent Sector, a U.S.-based coalition comprised of more than 700 major nonprofit organizations, foundations and corporations, “…those who have a high confidence in charities as well as believe in their honesty and ethics give an average annual contribution…about 50% greater than the amount given by those sharing neither opinion…underscoring the strong connection between public trust and giving.”2

Are you doing something wrong without even knowing it that is alienating supporters? Beyond losing support, it could result in unwanted news headlines, embarrassment (or worse) for you, and pain for your organization. Based on “Seven Ethical ‘Dilemmas’ in Philanthropic Fundraising” by Tim J. Burchill, CFRE (deceased), here are seven deadly sins committed by real nonprofit organizations that you should avoid:

1. Conflicts of Interest

A nonprofit organization in the United Kingdom was accused of awarding a lucrative contract to the husband of a senior staff member. Because of the accusations, the nonprofit drew harsh words from members of parliament and the media.

conflictsAfter an investigation, the U.K. Charities Commission found that no conflict of interest existed. While this was good news for the nonprofit, it’s doubtful the ruling has completely restored the public trust.

The AFP Code of Ethical Standards demands fundraisers and organizations avoid misconduct. Furthermore, it requires avoidance of even the appearance of misconduct. While a real conflict of interest can result in a loss of support, as well as legal sanctions, simply the appearance of a conflict could be sufficient to erode public confidence, and therefore, support.

Charitable organizations should implement policies and procedures that cover real conflicts of interest as well as the appearance of conflicts, and they should apply to both the governing board and staff. An effective set of policies and procedures will protect an organization by defining “conflict of interest,” identifying the classes of individuals within the organization covered by the policy, facilitating the disclosure of information that may help identify conflicts of interest, and specifying procedures to be followed in managing conflicts.

Once policies and procedures are created, the organization’s governing board should formally adopt them. For the measures to be truly effective, senior management should review the conflict policies and procedures with the board and staff to ensure understanding. Periodic reviews or training sessions will help people understand the ramifications of conflicts and how to avoid them.

2. Gift Restrictions

Contributors, particularly major donors, often like to restrict their support. While gifts that come with strings attached are not inherently bad, they can become problematic if charities are not careful.

gift restrictionsA museum in the Midwest U.S. negotiated a large, multi-year commitment with a wealthy couple. Before the pledge was completely fulfilled, the museum built the new structure and put the names of the donors on the building. Unfortunately, the couple ran into severe financial difficulty and could not complete their gift according to the agreed-upon schedule. Even though the couple engaged in negotiations to attempt to arrange a new payment schedule, the museum surprised them by going to court and securing a judgment against the donors. As you might expect, the situation became public when the museum went to court.

The publicity harmed the museum in three ways. First, the couple who made the pledge was blindsided by the organization’s action and immediately alienated by it, especially since they were in the midst of good-faith talks to arrange a new plan. Second, friends of the donors were unhappy with the way their friends were being treated. Third, the general public saw how harshly the museum treats donors, possibly having a chilling effect on future major donor support, as no one wants to be sued because of unforeseen and unavoidable circumstances.

The museum could have avoided a lot of embarrassment if it had a solid gift acceptance policy and thorough gift agreement. Among other things, a gift acceptance policy will outline the types of gifts and sources that will or will not be accepted. The policy will also establish when a binding or non-binding gift agreement is necessary, the provisions of the agreement, how gift agreements should be enforced, and how restricted funds will be handled. The last point is particularly important if the restricted purpose is canceled by the organization or does not come to fruition. It’s also important if a donor has legal or moral difficulties after the organization grants the naming opportunity.

3. Accountability

A national U.S. charity, established to help low-income individuals, attracted media and regulator attention. The charity refused to be transparent about how it spent donor funds because, as state investigators alleged, the executive director was syphoning off hundreds of thousands of dollars of charitable money for personal use. The charity also caught the attention of the Internal Revenue Service, which revoked the organization’s tax-exempt status.

Illegitimate charities often use a lack of transparency to hide misdeeds that could lead to legal action.

accountabilityIllegitimate charities often use a lack of transparency to hide misdeeds that could lead to legal action. To distinguish themselves from those organizations, legitimate charities should be transparent to earn public trust.

“America’s Worst Charities: The Effect of Bad Press on Philanthropic Giving Behavior,” a research paper published in the International Journal of Nonprofit and Voluntary Sector Marketing, sheds more light on the subject:

    Nonprofit organizations must continuously manage public perception about them in particular and the sector in general. There is good reason for nonprofit leaders to worry about this: A decrease in public confidence can lead to a decrease in philanthropic dollars. Negative media stories—even negative media stories about a few so-called ‘bad apples’—can sour the public on nonprofits in general.3

The public grants charitable organizations a variety of special benefits, chief among them is tax-exempt status. For example, in most U.S. jurisdictions, charities are exempt from corporate taxes, sales taxes, and property taxes. In exchange, society demands a higher level of transparency than it does from other business entities. Furthermore, charities are expected to provide services or goods that benefit the public. To ensure this compact is maintained, society has a reasonable expectation that the nonprofit sector be fully accountable.

4. Tainted Money

A national U.K.-based charity that raised more than 20 million British pounds for children’s charities over the years was recently embroiled in a sexual harassment and sexual misconduct scandal which received significant media attention. After a number of beneficiary organizations refused to accept contributions from the group, the scandalized charity dissolved.

tainted moneyIn the U.S., when a famous entertainer was convicted of a felony, higher-education institutions he had donated to removed his name from facilities, and some even returned his financial contributions.

If a nonprofit organization accepts funds from a tainted source or any money that is illegally acquired, it could raise questions of impropriety among the organization’s stakeholders who might then call into question the recipient organization’s own integrity. Stakeholders want to know that the organizations they support act on the values they promote. A nonprofit organization should never knowingly accept illegal money. Gift agreements with major donors and gift acceptance policies should outline what happens after a gift is made if the recipient charity learns that donated funds are tainted or the donor becomes embroiled in moral or legal misdeeds.

5. Donor Privacy

A preparatory school based in the Northeastern U.S. shared confidential information with volunteer fundraisers. The fundraisers were told whether or not a prospect’s child was admitted to the school or not. When donor prospects learned of this, many were outraged, and the school was forced to apologize and evaluate its prospect research and information sharing policies. That’s not something you want to have to do in the midst of a capital campaign.

donor privacyFour questions charities should ask are: 1) What information is acceptable to collect? 2) Who should have access to prospect/donor information? 3) How will those entrusted with the information be trained on its use and protection? 4) How will the information be stored?

A nonprofit organization should have a policy about what information it will gather and what sources it deems appropriate. It’s not enough to say that all public, legally available information is fair game. For example, divorce records, which are often public information, can contain a great deal of material about a prospect’s family and assets. However, just because it might be legal to review such information doesn’t necessarily mean your organization’s staff should be permitted to do so. How would prospective donors feel if they knew you regularly reviewed divorce records?

AFP’s Code of Ethical Standards requires development professionals to respect the privacy of prospects and donors. In addition, it demands that fundraisers protect the confidentiality of all privileged information. To protect donor privacy, charities should not sell, share, or trade donors’ personally identifiable information with any other organization without permission. Furthermore, as per the Code, all donor records must remain with an organization when the fundraiser leaves. In addition, the Code explicitly prohibits fundraisers taking donor information from one organization to another. A prospect who feels their privacy has been violated is not likely to become a loyal donor.

6. Compensation

A report in Australia revealed that face-to-face solicitors, those in public spaces or who go door-to-door, are most often paid a commission rather than an hourly wage. The objective is to secure monthly donors for charity clients. A for-profit company managing a campaign can be paid as much as 17 times the monthly donation amount. That fact is seldom disclosed to the public, who instead believe the solicitor works directly for the charity or is a volunteer, according to a survey by Frost and Sullivan summarized in the Huffington Post.4

Analysis of charity data suggests extremely high compensation is linked to poor results from charities. But intriguingly, so is extremely low compensation.

That news is troubling as it exposes a violation of the AFP Code on multiple counts. Charities are prohibited from being misleading and from paying commissions to staff and contracted service providers.

compensationThe nonprofit sector faces other compensation issues as well. If you do an internet search on “overpaid charity staff,” you’ll get well over a million hits. While the mainstream media periodically report on high salaries for senior charity staff, they tend not to report on low salaries. Both can be problematic, as a study by Canada’s Maclean’s discovered. Charities that significantly overpaid or underpaid chief executives, relative to peer organizations, were less likely to be transparent or efficient. “Analysis of charity data suggests extremely high compensation is linked to poor results for charities. But intriguingly, so is extremely low compensation,” according to the report.5

A study released earlier this year by AFP points to another compensation problem for the nonprofit sector. Women earn 10% less than their male counterparts.6 Fair and equitable pay will allow organizations to attract and retain the best talent while demonstrating integrity to the public.

Organizations can avoid difficulties by benchmarking compensation packages and policies with peer organizations. Just keep in mind that compensation can include any of the following: salary or wages, bonuses (though not commissions), severance payments, deferred payments, retirement benefits and fringe benefits. Other financial arrangements or transactions can also be treated as compensation, including personal vehicles, meals, housing, personal and family educational benefits, low-interest loans, payment of personal or spousal travel, entertainment and personal use of an organization’s resources.

7. Cooking the Books

U.S. News & World Report revealed that a major university in the Southwest U.S. provided false information to secure a higher place in the magazine’s “Best Colleges” rankings. For 20 years, the university provided inflated alumni giving percentages. As a result of the revelation, the university is listed as “Unranked” in the 2019 edition.

cooking booksThere are limitless ways nonprofit organizations can manipulate numbers. To raise more money, charities can sow fear by providing inflated or misleading numbers about a problem. Some charities underreport how much money they spend on fundraising when completing their IRS Form 990, which provides the public with a nonprofit’s financial information. For instance, nonprofits can mislead the public by promoting a challenge grant that is simply an existing gift but has been repurposed, rather than a legitimate challenge.

To raise more money, charities can sow fear by providing inflated or misleading numbers about a problem.

Audited financial statements and reports can give the public a certain level of confidence. While audited statements and reports are more expensive to produce than those that are merely reviewed, they will usually pay for themselves in increased financial support. Many funders even require audited statements. Complete and accurate Form 990s are another way to demonstrate integrity. Charity Navigator uses data culled from the 990 to rate charities. Fourteen of the 20 accountability and transparency categories it uses to evaluate charitable organizations come from the 990s submitted by charities. If a charity fails to submit an answer to any of the 14 items, Charity Navigator deducts points from the base Accountability and Transparency score.7 Unfortunately, many charities submit incorrect 990s due to errors of omission, innocent mistakes, or intentionally fraudulent statements.

Providing the public with accurate financial information is an ethical and legal responsibility.


Sidebar: Resources to Help You Be an Ethical Fundraiser

Mark Twain, the great American author and humorist, once said, “Always do right. This will gratify some people and astonish the rest.” To help you be the most effective fundraising professional you desire to be, here are a few valuable resources to make sure you are doing the right thing and performing your job at the utmost levels of integrity and ethical behavior:

Books
Ethical Decision Making in Fund Raising
By Marilyn Fischer

The Nonprofit Policy Sampler
By Barbara Lawrence

Nonprofit Fundraising Strategy: A Guide to Ethical Decision Making and Regulation for Nonprofit Organizations
Edited by Janice Gow Pettey

Ten Basic Responsibilities of Nonprofit Boards
By Richard T. Ingram

Fundraising Principles and Practice
By Adrian Sargeant and Jen Shang

For more great book titles, visit the AFP Bookstore at www.afpbookstore.org.

Article
“Doing Well by Doing Right: A Fundraiser’s Guide to Ethical Decision-Making”
By Michael J. Rosen
The International Journal of Nonprofit and Voluntary Sector Marketing
www.bit.ly/WLlD48

Websites
Association of Fundraising Professionals Ethics Page
www.afpglobal.org/ethics

Association of Fundraising Professional Tools and Resources
www.afpglobal.org

Association of Professional Researchers for Advancement Ethics Page
www.aprahome.org/page/ethics-and-standards


1    www.bit.ly/WLlD48
2    www.bit.ly/WLlD48
3    www.onlinelibrary.wiley.com/doi/full/10.1002/nvsm.1616
4    www.huffingtonpost.com.au/2017/11/26/charity-fundraisers-can-get-17-times-your-donation-in-commission_a_23288645
5    www.macleans.ca/society/be-wary-of-charities-that-pay-their-staff-too-much-or-too-little
6    www.afpglobal.org/new-research-finds-gender-gap-persists-fundraising-salaries-identifies-key-factors-compensation
7    www.charitynavigator.org/index.cfm?bay=content.view&cpid=1283

 

michael j. rosen, cfreMichael J. Rosen, CFRE, a past recipient of the AFP/Skystone Partners Prize for Research on Fundraising and Philanthropy, is president of the fundraising and ethics consulting firm ML Innovations. He is also publisher of the nonprofit blog www.MichaelRosenSays.wordpress.com. Michael can be reached at mrosen@mlinnovations.com.

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15 Nov 2019 President's Perspective Blog
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