Nonprofits under intense scrutiny reminiscent of Sarbanes Oxley

Published in the April 11, 2008 edition of Columbus Business First

In 2002 the Sarbanes Oxley Act, Securities and Exchange Commission, and Public Company Accounting Oversight Board massively increased the amount of reporting and documentation required of publicly-traded companies.  As the high cost of compliance has become more apparent, the requirement has been repeatedly delayed or diluted for small companies, and avoided altogether by companies that decided to go private.

Not surprisingly, the push for greater disclosure has reached the nonprofit sector.  Ironically, this push has not come not only from government regulators but also from organizations who represent the interests of the donor community.

In recent months, the Internal Revenue Service announced substantially expanded annual Form 990 reports and expanded public access to Form 990-T reports.  The Columbus Foundation just rolled out PowerPhilanthropy, an access and disclosure program based on the Kansas City Community Foundation’s DonorEdge program.  To this are added reporting programs of the Better Business Bureau’s Wise Giving Alliance, the Ohio Association of Nonprofit Organization’s Standards of Excellence certification program, the Greater Columbus Arts Council’s mandatory reporting for grant recipients, and the United Way’s reporting programs and time-consuming advisory committees. 

While no one has quantified the cost of complying with so many programs, I suspect that it is equivalent to the cost of at least one full-time employee, or the equivalent of a half-dozen average corporate gifts. 

An added irony is that the cost of compliance and reporting adds to the operating expenses of nonprofits at the same time that an increasing number of corporate donors are insisting that their gifts go to programs and not to operating expenses.  While for-profit companies do not face spending restrictions from their investors and can avoid the costly reporting of Sarbanes Oxley by going private, nonprofits have no such options.

It is good when the motivation for this increased scrutiny and focus on program giving is to assume a fiduciary duty to justify citizens’ trust in the nonprofit.  It is not so good when the motivation is to apply a one-size-fits-all measurement of management competence. 

John Carver, the corporate governance guru, and Jim Collins, the corporate management guru, both provide insights that suggest this explosion of reporting and program giving is missing the mark.

John Carver asked the following question of boards, which also applies to donors.  “How can a group of peers be a responsible owner-representative, exercising authority over activities they will never completely see, toward goals they cannot fully measure, through jobs and disciplines they will never master themselves?  How can they fulfill their own accountability while not … infringing … on the creativity … of management?” 

And Jim Collins applies his Good to Great “flywheel” concept to chastise restricted, program giving.  “[Program] giving misses a fundamental point:  To make the greatest impact on society requires first and foremost a great organization, not a single great program.” 

In many cases, nonprofits are asked to deal with the community’s most intractable problems, and they need to build the capacity to move flexibly and intelligently.  Program giving rarely provides this capacity and too often it reduces capacity. 

The best motivation for corporate giving is the desire to be part of a successful cause that matters to the community.  The explosion in nonprofit reporting and program giving is an effort to get a handle on success and to isolate the causes that matter. 

Borrowing Jim Collin’s emphasis that success should be defined at the organization level and John Carver’s caution that we must separate governance and oversight from management, a sustainable and successful organization needs resources in four key areas:  management, governance, unrestricted cash, and staffing. 

Here are some ways for a corporation to provide resources for a cause that matters and is successful: 

Management Resources

Few nonprofits have sufficient resources to buy or to have on staff all the skills needed for a successful organization.  Providing a loaned executive for a week, a month, or longer in a specialized area can be enormously helpful. 

Skill areas that are often understaffed are project management, facility management, information systems management, interior design and showcasing, market research, and financial analysis. 

Ask a nonprofit where it could use some specialized expertise for a special project and loan an executive with that expertise. 

Governance Resources

Corporations often place one of their staff members on nonprofit boards, but too often that person knows a lot about management but little about governance. 

While one motivation for placing staff on boards is akin to major shareholders’ seeking to protect their investment, membership on a nonprofit board should be motivated by a desire to foster the success of the nonprofit and its chief executive. 

For board membership to be effective resource, it is vital to provide board training to your prospective employee-board members lest they bring their management instincts into the boardroom, a sure path to micromanagement or passive attendance, neither of which provides useful resources to a nonprofit. 

Limited Brands has an effective board training and recruitment program for its employees that is worth emulating. 

Financial Resources

The success and sustainability of nonprofits is compromised by the pervasiveness of undercapitalization.  Nonprofits need adequate reserve funds and unrestricted cash in order to be viable as much as for-profits need sufficient equity and retained earnings. 

Program giving doesn’t contribute to unrestricted cash or reserves, and oftentimes it actually drains them by requiring nonprofits to divert resources to lower priority activities in order to meet donor requirements. 

Moreover, accumulating reserves requires running surpluses, so that nonprofits with operating surpluses are as much in need of unrestricted financial support as are nonprofits facing deficits. 

Staffing Resources

Nonprofits are service providers, which is a labor intensive business. 

Providing volunteers for short-term projects or sustained tasks is a wonderful way to supplement the resources of nonprofits and to gain insight into the nonprofit’s path to success. 

Jim Collins notes that great organizations don’t result from a single defining action, grand program, or killer innovation.  Rather they result from sustained, persistent efforts “with almost imperceptible progress.” 

Having a company put its people into the midst of the energy and commitment of a nonprofit is an excellent way to help the organization and to perceive progress and the excitement of being part of something successful. 

The definition of success is unique to each nonprofit.  As Jim Collins notes, “The confusion between inputs and outputs stems from one of the primary differences between business and [nonprofits].  In business, money is both an input (a resource for achieving greatness) and an output (a measure of greatness). 

“In the [nonprofit sector], money is only an input, and not a measure of greatness.” 

The surge in scrutiny of nonprofits is an effort to apply a one-size-fits-all approach to measuring success at the risk of achieving one-size-fits-none.  While reporting can provide benefits, its cost to nonprofits is not trivial and it should not become a shortcut in philanthropic decision-making. 

Corporations that are committed to the community should take a broad view of how they provide resources to support the success of nonprofits. 

Supplementing governance, management, and staffing, as well as providing unrestricted cash, will engage the corporation in ways that can provide the confidence that the resources it is providing are paying off for the community. 

And it should reveal the true cost of the burdensome scrutiny now confronting the nonprofit sector.  .

Allen J. Proctor was formerly chief financial officer of Harvard University and is the author of Linking Mission to Money(R) Finance for Nonprofit Board Members. Subscribe to his free newsletter at www.proctorconsulting.org.

Copyright 2008. Reprinted with permission, Business First of Columbus Inc.