Non-Profit Organization Ethics

Non-profits have a special obligation to uphold the highest standards ethically, to be accountable to the public and their funders, and to avoid conflicts of interest.  Generally, ethical conflicts as they relate to non-profits, include accountability, conflicts of interest, and disclosure.  Specifically, the issues that have be dealt with, include self-dealing, charitable solicitation disclosure, and appropriateness of salaries and other payments.

Non-profits have an obligation to be accountable to the public for the results of their activities, especially in the case of 501(c)(3) organizations, which enjoy tax exemptions and other privileges.  Individuals who run non-profit organizations have a special obligation to lead with integrity, which means recognizing that the organization is accountable to the public, the individuals it serves, and its funders.  A more subtle issue is that leaders have an obligation to ensure all activities and programs support the organization’s mission.

Conflicts of Interest:
The potential for a conflict of interest to arise occurs whenever the organization’s resources are being used for the private interests of an individual who has an influence over the decision of how the resources should be used.  Some of these types of conflicts include the organization leasing property owned by a member of the organization’s leadership or a relative of that member; leaders of the organization awarding themselves salaries; the organization hiring one of its leaders as its legal representative; where a member of the organization expects to receive a favor from someone whose services the organization decides to utilize.

All non-profits have an obligation to report fundraising costs accurately on their Form 990, and to be in compliance with all state and federal reporting laws and regulations.  An even more difficult issue is deciding how much disclosure to make where there is no legal requirement.  Another disclosures issue comes when deciding whether to disclose fundraising costs at the time of solicitation.  Non-profit leaders must balance the amount of disclosure with the concern of how the disclosures would affect people’s willingness to contribute to the organization.

Surplus Funds:
A non-profits funds are to be used for charitable purposes, but  an issue can arise when a non-profit accumulates surplus funds.  Organizations must consider when it is appropriate to disclose to prospective donors the amount of the donor’s donation which will be used to accumulate a surplus and if the major purpose of the specific solicitation is to accumulate a surplus, that should be disclosed.  Most watch dog organizations suggest that a non-profit’s unrestricted net assets should be no more than 3 times the size of the past year’s budget or the current year’s budget, whichever is higher.

Outside Payment:
Another issue non-profits wrestle with, especially those run without a board, is whether a leader in the organization should turn over any money he or she makes as honoraria or consulting fees for speeches, teaching, providing technical assistance, or other work done on behalf of the organization, to the organization.  On one hand, some people argue that what the individual does with his or her time is not the non-profit’s concern.  On the other, the question becomes whether it’s ethical for a member to exploit the knowledge and experience gained on the job for personal gain.

Personal Relationships:
Non-profit leaders should ensure their organizations are free of sexual harassment or behavior that makes its employees or volunteers uncomfortable or feel threatened or intimidated.  They should also keep personal friendships from influencing their professional judgment, and not hire family members.

Addressing potential Ethical Issues:
Non-profits, whether being run by a board of directors or just volunteers with a passion for the organization’s mission, must take steps to address these and other potential ethical issues.  The best way to do this of course, is to come up with organization-wide policies that are written into the bylaws and shared with every member of the organization, with consequences for breaching the policies, being enforced consistently and fairly.  Another way to show a commitment to an ethically-run organization to voluntarily obtain certification of adherence to certain standards of excellence.  This can be done through the Standards for Excellence Institute.  In addition, the Better Business Bureau’s Wise Giving Alliance, has developed an ethics code.  The standards are not enforceable by law, but serve as a guide to both donors and non-profit leaders.

Taxpayer Bill of Rights 2:
This law became effective in 1996.  It requires non-profits to not only make their Form 990s available for public inspection, but must immediately provide copies (with a reasonable copying charge) to anyone requesting a copy in person, and within 30 days, (with a reasonable copying and postage charge), to anyone requesting a copy in writing.  The law also expands disclosures to include information about excess expenditures to influence legislation, any political expenditures, disqualified lobbying expenditures, and amounts of “excess benefit” transactions.  The law also increases the fine for not filing Form 990 on time from $10 per day to $20 per day, with a maximum of $10,000, with higher fines being applied to organizations with gross income over $1 million.  To help curb financial abuses, the law authorizes the IRS to impose a 25% excise tax on certain improper financial transactions by 501(c)(3) and (c)(4) organizations.  The law considers compensation to be reasonable if it is in an amount that would ordinarily be paid for similar services by similar organizations in similar circumstances.

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