Onprofit Bserver

SUMMER 2013 Nonprofit O bserver

Fundraising costs under attack Why charity watchdog groups are taking aim

Walk the talk with a code of ethics Are you ready to respond to a PR crisis? Why nonprofits need audits — even when they aren’t required Fundraising costs under attack Why charity watchdog groups are taking aim

Most in the philanthropic community would likely agree that watchdog groups such as Charity Navigator, CharityWatch and the Wise Giving Alliance generally benefit organizations, Mtheir supporters and the people they serve. That doesn’t stop charities from regularly locking horns with watchdogs over how they evaluate and rate their subjects, though. As a couple of recent controversies illustrate, almost no issue is as contentious as the cost of fundraising.

Joint allocation divide Last fall, Charity Navigator announced it was changing the formula it used to rate nonprofits. Specifically, the watchdog group would no lon- ger regard “joint allocation costs” as anything other than fundraising expenses. Traditionally, many nonprofits have characterized a portion of some fundraising costs as program or education expenses. For example, a charity might allocate 70% of the cost of a direct mail appeal to fund- raising and the other 30% to programs.

When used by professionals familiar with an F for fundraising organization’s finances and accounting rules, The fundraising debate goes beyond just joint allocation is generally an acceptable prac- joint allocation costs. CharityWatch issued tice. Charity Navigator, however, believes that, “F” grades to two start-ups — the Disabled by tucking a percentage of fundraising expenses Veterans National Foundation (DVNF) and SPCA under the programs or education umbrella, non- International (an animal welfare charity) — profits are hiding high overhead — and possibly because 90% of the funds they raised were spent questionable financial stewardship. That said, on direct-mail campaigns. Both groups were the watchdog expects its new policy to affect deeply in debt to a direct-marketing company. the ratings of only a small percentage of the charities it evaluates. But in his expert opinion on the two charities’ fundraising costs, economics professor and Nevertheless, some nonprofits and members of philanthropy specialist Richard Steinberg gen- the direct-marketing community have cried foul. erally supported their decisions. Steinberg has Charity Navigator’s critics claim that the watch- argued that early-stage nonprofits shouldn’t be dog is usurping the role of the independent measured by the same standards as established auditor — that it doesn’t have the expertise to charities. Start-ups need to spend more to attract assess joint allocation decisions, let alone restate attention and build a donor base, similar to an organization’s audited financials. how young for-profit companies invest in future

2 growth. His assertions, however, have been only a small percentage of donors refer to their greeted with skepticism by many in the non- websites when making philanthropic decisions. profit world. In fact, donors are more likely to give based on information they receive directly from your The big question organization. So prioritize transparency by All of this begs the question: How much is too providing Form 990 and audited financial state- much to spend on fundraising? It depends, of ments to anyone who asks for them. And take course, on the organization — its mission, life- every opportunity to clearly communicate your stage and funding sources, among other factors. mission, ethical standards and record of fiscal responsibility. Q In his book Fund Raising: Evaluating and Managing the Fund Development Process, James Greenfield reports that the average cost to raise a charitable dollar is 20 cents. But such How much for the gala? benchmarks probably are of little value to most nonprofits. They fail to consider that it’s cost- lier to raise funds for some missions (such as As every charitable event chairperson human services) and in certain markets (such knows, you’ve got to spend money to raise as lower-income communities), or that the money — and lavish dinners, open bars and fundraising costs of an organization vary from live bands cost plenty. In 2011, Crain’s Chicago year to year. Business looked at what local charities were spending on their annual galas as a percent- age of funds raised. Focusing on 16 events with net proceeds Charity Navigator’s critics claim around $1 million, the newspaper found that that the watchdog is usurping the most came in under 30% — a few, far under. The Chicago Shakespeare Theater’s gala, which role of the independent auditor. boasted gross proceeds of $1.25 million com- pared with expenses of $194,000, spent only 15.5% on fundraising. But as several nonprofit leaders and philan- A more effective way to gauge what’s rea- thropists were careful to caution Crain’s, such sonable is to compare your charity to similar numbers don’t tell the whole story. Even galas nonprofits over a three-year or longer period. costing more than 30% of funds raised might So, for example, if your homeless advocacy be considered successful if they boost a char- ity’s public profile or attract new supporters. group spends 40% of its budget on fundraising, while your peers average closer to 25%, you may want to investigate the discrepancy. In such cases, ask your financial advisor to review your budget and expenditures and suggest more effi- cient ways to gain support.

Put in perspective It’s smart to keep an eye on fundraising costs, but don’t spend too much time worrying about the algorithms watchdog groups use to rate charities. For one thing, research has shown that

3 Walk the talk with a code of ethics

You and your staff know that your nonprofit is Also consider policies on: ethical — but that doesn’t mean those outside u your organization do. A formal code of eth- Conflicts of interest, such as paying board ics can help you communicate your values and members for their services, Yassure donors and other stakeholders that your u Responsible stewardship of funds, group deserves their trust and support. u Openness and disclosure, From mission to code u Inclusiveness and diversity, You probably already have a mission statement that explains your values and goals. So why u Program evaluation, and would you also need a code of ethics? Think u Professional integrity, including in fundraising of it as a statement of how you practice ideals. and grantwriting. A code of ethics not only guides your organi- zation’s day-to-day operations but also your For each topic, discuss how your nonprofit will employees’ and board members’ conduct. abide by the law, be accountable to the public and responsibly handle resources. When the The first step in creating a code of ethics is code of ethics is final, your board needs to for- determining your values. Start by reviewing your mally approve it. strategic plan and mission statement to identify the ideals specific to your organization. Next, look at peer nonprofits to see which values you Integrating your ideals share with them, such as: fairness and justice; Next, it’s time to communicate and implement commitment to the community; accountability the code. Training employees and board mem- to the public; and adherence to the law. Also bers can be particularly helpful, because every consider ethical and successful behaviors in nonprofit faces issues that may result in illegal or your industry. For example, if your staff must be unethical behavior. With a thorough understand- licensed, discuss those requirements. ing of the code, your staff and board members will find it easier to make the right decisions. You may also want to include practical stan- dards that address current issues or behaviors common to your workplace, such as cooperativeness and prompt- ness. Although these principles aren’t ethical in nature, they’re relevant to your nonprofit’s image.

Expectations and policies Now you’re ready to document your expectations and the related policies for your staff and board members. The type and size of your organization will help determine the scope of your code of eth- ics. But most nonprofits should address such general areas as mission, gover- nance and legal compliance.

4 Be sure to present examples of situations that A continual process they will encounter. For example, what should Many organizations treat their codes of ethics as an employee do if a board member exerts pres- static documents and not the continual processes sure to use his or her company as a vendor? You they really are. To avoid making this mistake, can integrate your ideals in your policies and review and revise your code of ethics once a procedures by addressing real-life scenarios and year. At that time, review how policies are work- how your organization handled them. ing, discuss strategies to revise those that aren’t and ensure that your nonprofit is following the Finally, if your nonprofit doesn’t already have law and acting ethically. one, put in place a mechanism, such as a confi- dential tipline, that staff, board Your code of ethics may change considerably members and others can use to over time as your organization adapts to com- raise ethical concerns. If mul- munity needs and expands to include new tiple complaints suggest that your programs and projects. To bring attention to nonprofit has some serious ethical the values and procedures the code addresses issues, create an open forum for and any changes, ask your staff and board stakeholders to discuss them members to read and sign the code each time without repercussions. you revise it. Q

Are you ready to respond to a PR crisis?

You can mentally rehearse your nonprofit’s people you serve, could potentially generate response to every conceivable public relations devastating publicity. crisis and still get blindsided by something you’d never anticipated. One policy decision — New reality to stop funding Planned Parenthood — and the Y At one time it might have been possible for non- resulting firestorm decimated 30 years’ worth profits to keep a lid on embarrassing incidents of goodwill for Susan G. Komen for the Cure, such as a staff member caught stealing cash which raises money to fight breast cancer. The donations or a board member making inappro- charity’s slow and, according to some, inad- priate remarks in a speech to a local business equate response to the controversy suggests that group. Not anymore. Social media platforms and its leaders weren’t prepared. 24-hour-a-day news operations enable rumors Although your nonprofit will likely never face and misinformation to spread like wildfire. If so severe or complex a PR disaster, it must you aren’t prepared to immediately step in, you develop a plan to respond to the “unimagi- may never be able to contain a story or control nable.” Anything related to your operations the message. and executive decisions, and involving your This “new reality” means that every nonprofit staff, board members, prominent donors or the needs a presence on sites such as Facebook

5 and Twitter. If your organization has followers and is already well known on these platforms, it’s much easier to counter any negative rumors that might arise. Also, be sure to take advantage of free tools, such as Google Alerts. This service notifies you whenever someone online makes comments about your group.

Old media relationships are also critical, of course. Educate local newspaper, television and radio reporters about what you do and how your work benefits the community — before a negative story involving your nonprofit hits their desks.

A formal plan detailing the whos, to embellish on the bare facts. That said, you whats and whens is another crucial task. Your can’t bring out the heavy artillery every time executive director or media relations manager someone starts a rumor on a blog. Create guide- should lead this effort, as one or both of them lines that will help you evaluate threats as they will likely act as spokespeople during a cri- emerge. Some situations may warrant a “wait sis. Designate a crisis team that includes your and see” attitude. board chairman, legal advisor and department managers, and assign roles appropriate to each 2. Clarity. Develop a standard script that sum- person’s expertise. marizes your nonprofit’s mission and values and that can be customized to specific crisis situ- ations. But don’t use this script as a crutch or try to “spin” a crisis with rhetoric. Honesty and candor are critical when addressing the media. Social media platforms and If you’ve made a mistake, admit it (assum- 24-hour-a-day news operations ing you’ve first vetted it with your attorney), and reveal as many details as you can without enable rumors and misinformation resorting to speculation or editorializing.

to spread like wildfire. Keep in mind that, in addition to the media and general public, you’ll need to talk with grantmakers, donors, volunteers and others upon whom your nonprofit’s financial solvency 2 priorities depends. Communicating with these groups Your specific plan will depend on the size requires some delicacy. Phone calls and in- and nature of your organization. But all non- person meetings may be appropriate, depend- profits should prioritize two things in their ing on the severity of the crisis. initial response:

1. Speed. In a PR crisis, time is of the essence. Be prepared Delays in your organization’s response to a Your nonprofit’s good name is one of its most negative story may be interpreted as a sign of valuable assets. It could be lost in a flash if you “guilt.” At the very least, delays give people time don’t have a plan in place to defend it. Q

6 Why nonprofits need audits — even when they aren’t required

Depending on your organization’s annual gross Aside from your balance sheet and income and receipts and other factors, you may be required cash flow statements, such documents include to hire an outside CPA to audit your books. those relating to banking, accounts payable and Even when external audits aren’t mandated, receivable, donations, grants, payroll, leases and Dhowever, they often are recommended. These mortgages, inventory, budgeting, and board meet- audits can provide assurance that your orga- ings. The auditor also may interview your staff nization is operating with integrity and within about internal controls and any unusual findings, acceptable accounting guidelines. such as excessive unrelated business income.

After completing the fieldwork, an auditor will Mandate or not issue a formal opinion about the accuracy of Generally, nonprofits that expend more than your financial statements and, in most cases, $500,000 in federal funding over the course meet with your board’s audit committee. Be of a fiscal year must submit to independent sure to take advantage of this opportunity to audits. States impose their own guidelines. In ask questions and discuss specific issues raised California, for example, nonprofits with more by the audit, particularly if your auditor has than $2 million in annual gross receipts must file rendered an “adverse opinion.” Such opinions independently audited financial statements. In indicate that the auditor discovered material Tennessee, that threshold is only $500,000. But misstatements or accounting irregularities. Also in many states — including Florida, Ohio and discuss any recommendations the auditor has Texas — the law remains silent on the issue. made about improving operations, accounting processes or internal control procedures. If your organization isn’t subject to any independent-audit mandates, perhaps one of your staff or board members regularly con- No substitute ducts internal audits — reviewing financial In-house audits are essential, but they’re no sub- statements and accounting policies. Such audits stitute for an external audit by a qualified CPA. promote fiscal responsibility and are essential Even if your nonprofit isn’t required to submit to good governance, but they don’t necessarily professionally audited statements, you’re sure to arrive at the most accurate conclusions. After benefit from your independent auditor’s report. Q all, they’re conducted by people who may not have had extensive audit training and experi- ence and who have a vested interest in issuing a clean bill of health.

Outside advantage External auditors are in a better position to deter- mine whether your statements offer a fair picture of your finances and adhere to recognized stan- dards. External auditors usually work closely with accounting staffs and audit committees to ensure access to all necessary documents.

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