Philanthropy’s Leaders Need to Get Ahead of the Curve on Reform—While They Still Can

Before I started writing about philanthropy, a major area of my research was ethics and regulation. In 2004, I published The Cheating Culture, a book that looked at ethical problems across a range of professions and industries such as finance, accounting, medicine, higher ed, and sports. Subsequently, I watched closely as all these sectors drew greater scrutiny and oversight.

One thing I learned along the way is that an industry’s leaders—and its trade groups in particular—can do a major disservice to their sectors by failing to grasp big changes eroding accountability and by reflexively fighting every reform that comes along, however modest. This can result in loss of public trust and more heavy-handed regulation than might otherwise be the case.

Today, we risk seeing a rerun of that same movie when its comes to philanthropy and nonprofits. With change afoot and new problems emerging, defenders of the status quo can do more harm than good.

How can the sector’s leaders and its trade groups—both national and regional—get ahead of the curve amid growing scrutiny and new calls for reform? Here are a few suggestions.

Recognize When the Game Has Changed

One common mistake that industry leaders make is failure to realize how much the landscape is shifting—or see how new problems might blow up in their face. Look at how the accounting profession opposed stronger voluntary safeguards to prevent corporate earnings fraud through the 1990s, even as the dangers of such fraud mounted amid the use of stock options to incentivize corporate executives. We all know how that story ended: Enron, Worldcom, and the Sarbanes-Oxley Act. Or look at how the American Medical Association failed to enact stronger rules on industry gifts to doctors—even as Big Pharma dramatically stepped up its direct marketing to physicians. That story, too, had a bad ending: Government and media probes of conflicts of interest in medicine dealt a serious blow to public trust in health care providers.

So what’s changing in the philanthropic sector right now? A lot of things. We’re seeing a historic influx of new wealth that is bringing more activist living donors to the sector who, at times, throw around their weight in troubling ways. We’re seeing the rising popularity of non-transparent donor-advised funds, along with a proliferation of pass-through intermediaries that both raise money and make grants, and are also often non-transparent. The Clinton Foundation is an extreme example of this kind of entity, but its operating model is hardly unique.

Another key shift is the decline in the resources and problem-solving capacities of government. Power seems to be shifting away from elected public officials, who face growing fiscal constraints, to unelected private funders with ever deeper pockets. This is happening at a time of growing public unease about the wealthy and elites generally. Over the past five years, don’t forget, we’ve seen two populist movements arise—the Tea Party and Occupy Wall Street.

In short, the practical challenges of overseeing powerful and opaque charitable actors are growing at the same time that Americans are growing more skeptical of these and other elite players. Those are big shifts, and if you’re a leader helping guide the philanthropic sector, you'd better be attuned to how the ground is moving below your feet.

Don’t Pretend That Yesterday’s Oversight Is Still Working Great

In responding to my recent New York Times op-ed calling for greater oversight of philanthropy and nonprofits, three nonprofit leaders—including Vikki Spruill of the Council of Foundations—suggested on Friday that such oversight is working well. They pointed to the crackdown on four bogus cancer charities as evidence that “the system worked.”

That’s a remarkable statement, given that the fraud had gone undetected for five years, and that most other observers drew the exact opposite conclusion—including the New York Times, which ran a major story on May 22, “Patchwork Oversight Allows Dubious Charities to Operate,” documenting poor oversight of nonprofits at both the federal and state level. A subsequent opinion piece in the Chronicle of Philanthropy by Pablo Eisenberg highlighted the particular failure of state authorities to properly police nonprofits. At IP, we’ve made a similar point in our Gift Adviser blog, and written often in particular about the lax oversight of restricted gifts by state attorneys general. The leaders of Philanthropy New York responded to my op-ed (which they called “disingenuous”) by citing a new commitment in that state to nonprofit oversight. But surely they know that this push is more the exception than the rule.

I could go on about why it’s wrong to suggest that oversight is working well, but let’s get to the broader point: Trade groups and other sector leaders do a big disservice to their constituents by denying problems that everyone else can see. It makes the sector look complacent and arrogant, and stirs up demands for even tougher regulation. If a sector’s trade groups are denying there are any problems, against clear evidence to the contrary, how can that sector possibly be trusted to police itself?

And here’s another point, more specific to philanthropy and oversight. Wealthy donors and foundations have a strong, obvious self-interest in ensuring that the laws governing the charitable sector are robustly enforced. That’s because it’s often their money that gets misused when watchdogs are sleeping.

Just look at the misuse of restricted gifts. Right now, state authorities routinely fail to investigate the misappropriation of restricted endowment funds by nonprofits. Wealthy people and foundations often give money for one purpose, only to have it used for something else—and nobody stands up for their rights.

As more large, restricted gifts move out to nonprofits—and more money is given away in general—philanthropy trade groups should be cheerleaders for tougher watchdogs, not defenders of “patchwork oversight.” Philanthropy New York, to its credit, seems thrilled that New York’s attorney general is finally stepping up in this way. So why knock a call to make this the norm?

I get that nonprofit leaders don’t want the sector cast in a bad light. I know that the natural reflex to say, "Hey, wait a minute, we’re the good guys!" And they’re right about that. But one thing that makes the good guys good—at least nowadays—is that they are self-aware and honest about their issues.

Think Broadly About How the Dots Are Connected

My op-ed mainly focused on problems in philanthropy, but I placed that analysis within the broader context of a nonprofit sector with “too much secrecy and too little oversight.” In its response, the Council of Foundations said that it “vastly over-simplified, and ignores the clear legal and practical distinctions between foundations and charities, let alone more subtle differences within those categories of organizations.”

In fact, though, all these entities are supervised by the same weak regulatory regime. Is it really so alarmist to imagine that if lax oversight can fail in one spot it can fail in others, for instance, in regard to a big grantmaking foundation or a DAF? Also, of course, the sector’s various entities are deeply enmeshed with each other, since nonprofits are funded by foundations and donors. And with the rise of more big pass-through funders, the lines within the sector are becoming more blurry—and potentially problematic. Maybe the Clinton Foundation saga is a one-off episode; or maybe it’s the canary in the coal mine.

The Council of Foundations dismissed my reform agenda, which had four parts, as a “kitchen sink” approach. The Forum of Regional Grantmakers Associations said my “overstatement of the problem and confused recommendations are not helpful.”

Actually, though, the many questions surrounding the philanthropic sector—who it does or doesn’t help, who it ultimately answers to, how it’s subsidized, how efficient it is, and so on—are interrelated. These questions are related to larger ones very much on the national agenda regarding equity and accountability in U.S. society, and they need to be addressed in a holistic way. (Higher education is another sector currently confronting a broad critique of this kind, which is further along.) If top leaders in philanthropy can’t see the larger picture now troubling a growing slice of Americans, that’s a problem. Far from overstating the issues before the sector, I merely scratched the surface.

Industry leaders and trade groups that think too narrowly about their world are making a big mistake. Just ask university presidents, who once thought they were kings who could do as they pleased in a private realm that seemed untouchable by outsiders. Now they’re fighting to justify their basic operating model and pushing back against new oversight on multiple fronts.

One other thing: Philanthropy’s leaders should never forget that the public—and often politicians and the media, too—tend to lump all nonprofit and philanthropic entities together. Which means that what happens in one part of the social sector can affect the perception and regulatory treatment of the sector overall. If your outfit is a grantmaker, a grantseeker, or both, don’t fool yourself that you’re living on an island unto itself. If an accountability typhoon hits the nonprofit archipelago, everyone will be affected.

Listen to Criticism, Embrace Debate

When industry leaders are reflexively defensive and treat friendly internal critics with disdain, they’re asking for trouble.

I mention this not because I got my feelings hurt when PNY called my op-ed disingenuous or COF attacked it in an email blast to all its members, saying it “takes strong exception to this piece, and will continue our work to dispel such misguided notions about philanthropy.”

Nor do I mention it because I’ve heard from many reform voices in the past year who’ve felt squelched by a foundation world that holds all the power. (More about that simmering pot another time.)

Rather, my point here is that automatic pushback against all critics, particularly ones who share your overall values and goals, just isn’t a smart strategy. I could give many examples of where this has gone awry, but let’s skip those and suggest a better approach: Which is to welcome a robust debate, listen closely to thoughtful critics, and see where you might find common ground. Maybe you won’t be able to find that ground, but you never know. And along the way, you’ll get credit for creating an open, inclusive process.

The debate over raising the foundation payout requirement (and imposing one on DAFs) illustrates what I’m talking about. It’s become a third rail in philanthropy circles, generating a red alert at places like COF, which direct heavy fire at anyone who dares broach the idea.

That smackdown impulse doesn’t make sense, given that there are now good reasons to revisit the payout issue. For starters, many new philanthropists setting up foundations don’t believe in perpetuity and routinely spend far beyond what the law requires. So it’s not just wild-eyed outsiders questioning the low payout dogma; Bill Gates, among others, questions it also. As well, the vast influx of new wealth into philanthropy raises a fresh question, one that didn’t come up a generation ago, prior to our second Gilded Age: Why do we need to conserve charitable resources in the first place? There’s plenty where that came from.

But here’s a more practical reason for philanthropy trade groups to be flexible on payout: to protect the tax break for giving. Federal charitable tax expenditures, which will cost the treasury $740 billion over the next decade, are coming under new scrutiny in an era of austerity. One critique of these breaks, voiced in my op-ed, dwells on the lag time between wealthy people getting a tax write-off and society seeing any benefit from exempted income. More and more such wealth is piling up every year, sitting on the sidelines, even as harsh budget cuts become routine. Raising the payout requirement, however modestly, would help address this imbalance and perhaps forestall a serious challenge to the charitable tax break down the line. Likewise, better documenting the benefits of those breaks, another of my “misguided” recommendations, could help mollify tomorrow’s critics.

A lot has changed since current payout rules were established in 1981, and this issue is a microcosm of my broader point about how philanthropy, and the terrain around it, is in flux. Yesterday’s talking points don’t cut it anymore.

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During the past half century, philanthropy has bankrolled a great many efforts to bring greater accountability and transparency to various sectors of U.S. society. But while this world talks a good game about openness to such scrutiny and to reform itself, its actual record on this front is quite mixed.

These aren’t easy challenges, to be sure. And you can understand the lack of urgency to walk the walk. The sector has internal disagreements on many issues, and right now, few outsiders seem to care one way or another. It’s been over forty years since philanthropy found itself under real fire from congress and no current foundation leaders remember what it’s like to sweat under klieg lights. Who’s to say that business as usual can’t just go on and on?

But make no mistake: Philanthropy lives on a fault line, in an era when the tectonic plates are prone to move, and fast. The sector needs nimble and broad-minded leaders who don’t just want to raise the accountability bar to maximize resources and impact, but also to anticipate whatever disruptions and challenges may lie ahead.

David Callahan is founder and editor of Inside Philanthropy (davidc@insidephilanthropy.com)