SERVICE MANAGEMENT MUST COME TO THE WORLD OF NON-PROFITS

Editor’s note: A benefactor to a local opera house pledges a seven-figure donation over four years only to find that the head of the opera insists on the entire donation be made in one shot right then and there. Wisely, the donor ignores the strong-armed tactic and walks away leaving the charity empty handed. Shortly thereafter the donor tells all of her friends of the charity’s seedy behavior. On another occasion, the same opera house invites Grand Benefactors to attend a private recital given by New Zealand soprano Kiri Te Kanawa. No mention is made of the cost as it is understood by members that this is a perk of their patronage. A week later, members receive an invoice for $20,000. Not surprisingly, many members see the ruse for what it is and refuse to pay.

Charities have customers but one would never know itfrom the way they render service to those who are their lifeblood: their donors. In fact, the service being dished out by a lot of charities, including many with marquee names, rivals the worst service to be found in the commercial world. That has to change if donor churn is to be mitigated and donations kept from drying up. The supply chain consequence of a charity’s service indifference, of course, is that those most in need will suffer the most.

I was approached by an entourage fromThe American Red Cross seeking to build a modern aquatic center for disadvantaged children in South Florida. In our meeting, the lead person from the Red Cross team said that a potential donor – we’ll call him donor B – had agreed to put up half the money if I put up the other half. In due diligence, I contacted donor B only to find that he never made such a representation. In the end, we both walked away in disgust.

My discomfiture is small potatoes, however, compared to the American Red Cross’ dreadful behavior after the catastrophic earthquake which struck Haiti in 2010 killing 100,000 people. The charity did a land-office business by raising $488 million mostly by tugging at the heart strings of Americans who were unaware that the charity couldn’t possibly spend all of the money it had raised. Four years after the disaster, the charity had spent a mere pittance of the money raised by building a hand-full of homes. Much of the charity’s spending went to 50 partner organizations which naturally took their own cut for administrative expenses. In one case, the American Red Cross paid the International Federation of the Red Cross (IFRC) $6 million to subsidize rent for people who had been living in tents. The IFRC, of course, took their 26% for administration while the American Red Cross took an additional 9% for program management. In another case, the American Red Cross took a full 24% for costs associated with another group’s efforts.

All of this led the charity’s former chief of the Haitian shelter program,Lee Malany, to turn in his resignation after indicating that agency officials “did not seem to have any idea how to spend millions of dollars set aside for housing.” Shamefully, however,the charity’s CEO, Gail McGovern, brushed aside all of the criticisms and is still employed in return for a compensation package that is well in excess of $500,000 a year. A generous pay package indeed given the executive’s bumbling performance.

THE FOX IS GUARDING THE HEN HOUSE

There is no federal agency with jurisdiction over charities. The Federal Trade Commission (FTC) does prosecute cases but only when a charity brazenly behaves more like a commercial enterprise for the benefit of its founders but those cases are rare as they are time consuming and expensive to litigate. Moreover, any proposal to expand the agency’s regulatory portfolio to oversee charities would most likely be met by opposition from those who might correctly assert that the agency has its hands full regulating commercial enterprises as it is.

Jurisdiction over charities, therefore, falls to the states which obviously creates a virtual Tower of Babel of rules and regulations which is exploited by devious and unscrupulous operators. The state of Florida is notorious in this regard domiciling some of the worst charity abusers in the nation.

Effective oversight of charities is a Sisyphean task in any event as there are over one and a half million charities in the nation raking in over $350 billion in donations annually. And, unless stiff standards are set which can be enforced to aggressively cull the number of unworthy charities corrupt entrepreneurs will continue to crowd at the horn of plenty.

There are charity watchdogs such as the BBB Wise Giving Alliance, Charity Navigator, and Charity Watch that occasionally call out the bad actors but again these groups can only scratch the surface of the bewildering number of charities operating in the marketplace. These groups focus on financial improprieties and that is well and good but I would also like to see, for example, the American Customer Satisfaction Index (ACSI) apply its rankings to charities. And, although I would not want to see the emergence of yet another federal bureaucracy it might be helpful, instead, if the states could harmonize the plethora of disparate rules and regulations currently in place. Until such time, the customer, the donor, must bear the brunt of knowing how his money is being put to use.

CAVEAT EMPTOR

I once got a call from a woman who runs the local Cystic Fibrosis chapter. Would I be willing to give a donation? Sure, I said, would you please send me a copy of your most recent Profit and Loss Statement? “Well, I’m not sure I have one,” the woman said. Fine, then why don’t you send me a copy of the charity’s IRS Form 990 (this form, Return of Organization Exempt from Income Tax must be filed by charities grossing more than $50,000 a year). Okay, Mr. Pupo, let me see what I can do. I’m still waiting.

Cases of charity abuse are rampant and some are nothing less than grotesque. Here is but a sampling that has been made public:

  • The Cancer Fund of America located in Knoxville, Tennessee boasts that it is at the forefront of the fight against cancer. The charity, it says, provides aid to anyone suffering from over 240 types of cancer. The charity also states that it drives cancer victims to chemotherapy appointments, pays for groceries, and provides medication to suffering children. This charity from 2008 to 2012 raised an astounding $187 million from unwary donors. Sadly, only 3% went to direct aid. The charity did, however, spend generously on salaries, perks, cars, and trips. Founder James T. Reynolds Sr.’s son, for example, garnered $371,000 in 2010 as CEO of the affiliated Breast Cancer Services. The FTC did catch up to this bunch and was able to successfully reach settlements against two affiliates of the charity by arguing that the charity was in fact a commercial operation organized to defraud the public.
  • The Kids Wish Network in Holiday, Florida raised an eye-popping $127.8 million in donations for kids with life-threatening conditions. Incredibly, only 2.5% of the money raised went to help the children.
  • The International Union of Police Associations AFL-CIO, not to be outdone in its meager investment of those in need, spent a miserly .5% of its $57.2 million in total donations on direct aid. Of the total amount raised, $41.4 million went to companies that helped the organization raise money.
  • Connecticut-based National Veteran Services Fund devoted less than one-third of the $8.6 million it spent in fiscal 2015 on its charitable programs and nearly 69% on fundraising.
  • In the United Kingdom, two of Prince Charles’ charities have been tarnished by impropriety. One, a charity set up to sell the Prince’s watercolors took in over $5.5 million dollars over a two-year stint without dispensing any monies to the needy. A second charity, The Prince’s Foundation for Integrated Health, had to be shuttered after the foundation’s finance director was found to have embezzled over $300,000.

Philanthropy in the United States operates much like a cartel. Of the one and a half million charities in the nation roughly 25% of all donation dollars are concentrated in the top 400 nonprofit organizations. This doesn’t bode well for the smaller, more efficient, and younger nonprofits. The American Red Cross, hardly a paragon of efficiency, has over 30,000 employees on its payroll and countless more contractors. Clearly, a donor dollar will have little stretch in a bureaucracy this large. Big name charities do have huge budgets, and employ sophisticated fundraising techniques. A donor who fails to do his research, therefore, will likely fall prey to the onslaught of media advertising which only the big boys can afford.

A CALL FOR TRANSPARENCY

I would like to see all charities be mandated – who is to do the mandating is a much thornier question but it might best be in the hands of the organization’s Board of Directors – to publish an annual report which would include the following information as a minimum:

  • A copy of the organization’s mission statement.
  • A reaffirmation of the charity’s commitment to donor data privacy.
  • Customer satisfaction ratings compiled by an independent third party.
  • Disclosure of all litigation and formal consumer complaints.
  • Names and contact information of all officers and board members.
  • All executive officer and board member compensation.
  • A detailed Profit and Loss Statement clearly stating the amount and percent spent on fundraising, and on relief programs.
  • A description of the previous year’s relief programs.
  • A link to electronically access IRS Form 990.
  • The amount of financial aid distributed domestically as well as internationally.

No singular piece of the aforementioned information can illuminate a charity’s malfeasance. The donor, therefore, must seek as much of the above information as he can get his hands on unless the prospective donation constitutes a trivial sum. A charity that fails to pony up the requested information should be met by a donor’s commensurate failure to pony up any funds.

Management Advisor

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