State Senator Toni Boucher (R-26) spoke to Westport Sunrise Rotary on Friday about Ethics and the Nonprofit. In addition to her legislative work, Ms. Boucher is an advisor to the Commonfund, a $24 billion money manager for some 1,500 charitable and other public sector institutions.
She gave the group the first look at a presentation she will give at a conference for nonprofit institutions in March – Sunrise Rotary as New Haven, hosting a rehearsal on the road before the show plays the big time.
Boucher noted that “nonprofits face a failure of trust that threatens their mission,” and requiring them to “create a culture of ethics.”
She framed the issue by citing Warren Buffett: “It takes 20 years to build a reputation and five minutes to lose one.” Perception is reality, and is “shared around the world in seconds.”
Ethics, Boucher stated, is a set of moral values guiding an organization’s decision making and activities,” and added that “compliance is the best risk management tool.”
Charities – 501(c)(3) and 501(c)(4) entities – account for a large and growing portion of the U.S. economy. The nonprofit sector includes over 1.6 million organizations, contributes almost six percent of the nation’s GDP and pays over eight percent of U.S. salaries. They are the third largest employer, bigger than either business or government.
Charities have grown in importance in the wake of a continuing weak economy and consequent cuts in funding to a long list of government services. They have also stepped up to do things they never done before, Boucher noted – the city of Providence, Rhode Island recently sold some of its city streets to local colleges and other charities to close its budget gap.
She continued, presenting a range of ethical lapses by a number of highly visible institutions.
Covenant House’s founder and then President was forced out following allegations of financial and sexual misconduct.
The Connecticut Board of Regents forced its President to resign after disclosures that he had unilaterally approved substantial salary increases for state college executives.
The American Red Cross was accused of mishandling $2 billion after Hurricane Katrina. 49 people were arrested for misappropriation of funds and fines of $20 million were assessed. In another incident, a president of the organization was forced out for having improper relations with a subordinate employee. And in yet another, the IRS cited the Red Cross for lacking records of certain income and expenditures.
Nor are colleges immune.
Adelphi University had two scandals in less than ten years. The first was triggered by a string of salary increases for the University’s President which negatively impacted financial aid awards and led to the ousting of most of the University’s board. More recently, a mid-level administrator was charged with embezzling university funds.
Dartmouth College trustees were accused of mismanagement and conflicts of interest for steering investment management responsibilities to firms owned by insiders and their friends.
And Penn State University recently fired senior executives following a series of child molestation incidents and a long running cover up in a scandal that could cost the University $20 million to investigate and could cost it as much as $60 million in penalties as well as the loss of 14 years of wins by its football team.
One result, Boucher said, is that one-third of the public no longer trusts charities.
And the IRS is becoming increasingly interested charities’ activities, with the potential for tightened reporting guidelines and even stripping away their tax exempt status.
To obviate these issues nonprofits must adopt a four step remedy. They must establish a code of ethics; institute a compliance process; inform all the institution’s employees about the new level of expectations; and they must train every employee to perform their tasks within the institution’s ethical standards.
One member commented after her talk that he had googled “Rotary scandal” to see if Rotary International had any dirty laundry. All the references, he reported, were to speakers addressing ethics and scandals. Another member noted that RI had been put through intensive due diligence by the Bill & Melinda Gates Foundation. They passed all the tests, and thus far have been awarded over $355 million to support Rotary’s long term commitment to eradicating polio worldwide.
Photo by Hal Levy