Communities

At Nonprofit Organizations, a Lack of Regulation Invites Failure

by Mark Hay

May 1, 2015
Cooper Union. Image by I, DavidShankbone via Wikimedia Commons

This April, New York’s Attorney General Eric T. Schneiderman announced plans to crack down on Cooper Union, a private college renowned for its arts and design programs and the practice of offering a tuition-free education. Until two years ago, that is, when the school suddenly started charging a non-trivial $20,000 annual fee to students. According to Schneiderman (and previous investigations by reporters in 2013) the decision to charge directly stems from the failure of the nonprofit institution’s board to manage their endowment and physical assets—which include the land under the Chrysler building. The board allegedly took on unnecessary debts, failed to cultivate donor bases, and never really attempted to diversify their holdings, even in the face of financial instability. As a nonprofit, Cooper Union technically falls under Schneiderman’s regulatory oversight, allowing him to propose and foist a bevvy of procedural reforms and monitoring regimens on the institution, which he says he’s now glad to do. But this willingness goes beyond Cooper Union—according to Schneiderman, he’s apparently planning to put nonprofits on notice, bringing increasing scrutiny to organizations that often fly under the radar.

Schneiderman rightly points out that for years in New York (and around the world), regulators have exercised little scrutiny over non-profit and non-governmental organizations. That’s likely because there’s an assumption of moral authority and good will about such organizations. But in this grey space, warns Schneiderman, it’s easy for well-meaning donors to become ill-informed managers, running their organizations into the ground (as New York’s seen in recent years with the City Opera and Long Island College Hospital). There are 80,000 nonprofits under Schneiderman alone, and nationwide they account for over 5 percent of America’s GDP and 9 percent of all wages, according to the National Center for Charitable Statistics. Given the size of the industry, Schneiderman views it as imperative that we begin to more actively intervene, restoring governance and accountability to the sector, and making sure that charities do not collapse, harming the city, the people they serve, and the workers they employ.

Eric Schneiderman

“I consider it my responsibility to promote and protect the nonprofit sector,” the New York Times recently quoted Schneiderman as saying. “In part, we do that by aggressively investigating and prosecuting fraud. But we work just as hard to prevent mismanagement before it starts and, whenever possible, get troubled charities back on track.”

This is a nice sentiment. But unfortunately the issue of creating effective governance and accountability structures for nonprofits is an incredibly difficult task that goes far beyond making sure an organization’s financial house is in order—especially for charities that operate internationally. Unlike traditional businesses, the operations of NGOs are not scrutinized by shareholders, nor in most cases, are there well-established mechanisms or standards for accountability, better management, and execution of a group’s mission. We’ve been puzzling out how to manage such organizations, long known as some of the least regulated in the world, since they were created well over a century ago. Universities teach entire courses on the confounding mystery of how to ensure good NGO management.

And while regulators with fiduciary oversight like Schneiderman can make sure that an organization doesn’t fold or fall into graft and corruption, they have no power to make sure that nonprofits are efficient in their services, nor that the recipients of their services are benefiting and appreciating their work. Unless taxpayer money goes into nonprofits (opening a door for some micro-management of projects and procedures), financial oversight just wards away scandal and collapse, allowing murky self-direction to reign supreme.

Students occupy Cooper Union's clocktower to protest the introduction of tuition to the formerly free school. Image by Michael Fleshman via Flickr

Since the early 2000s, NGOs have joined together, trying to agree on varying codes of conduct that would promote transparency, efficiency, and accountability to donors and the beneficiaries of their services. Yet none of these guidelines actually have teeth. Most of these plans rely on the idea of self-regulation. And none of them have taken on umbrella status, uniting organizations under common principles of governances such that aberrations can clearly be named and shamed by donors and fellow nonprofits.

Right now, the best we have is limited financial management to ward off corruption and scandal, like that in New York. If that’s better implemented, as Schneiderman hopes it will be, then we can at least be sure that nonprofits won’t fall into a morass of corruption and ill-repute, or fail outright for lack of sense. We also have informal monitors who point out poor service and transparency to donors and the public at large. To a certain degree, we have to trust nonprofits to do what they believe is right. But we do have some power to vote with our wallets, yanking our donations when we don’t agree with the services or procedures of an organization. Unfortunately that’s just more market research than most of us end up taking on when it comes to selecting what feel-good organization to put our tax-deductible cash in.

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At Nonprofit Organizations, a Lack of Regulation Invites Failure