Ethics and Accountability in the Nonprofit Sector

America’s charitable nonprofits rely on the public trust to do their work. That is why it is so important that charitable nonprofits continuously earn the public’s trust through their commitment to ethical principles. If only one donor loses confidence in a charitable nonprofit because the nonprofit behaves unethically, that’s one too many. That’s why the National Council of Nonprofits is taking this opportunity to showcase excellent resources that charitable nonprofits can use to demonstrate the core values of accountability and transparency.

What demonstrates accountability and transparency in a charitable nonprofit?

Does your nonprofit have a "code of ethics?"

It's useful to adopt a set of principles to guide a nonprofit organization’s decision making and activities, as well as the behavior of its employees, volunteers, and board members. These principles might be called the nonprofit's "statement of values" or "code of conduct," or something else. Honesty, integrity, transparency, confidentiality, and equity are each examples of values that are typically expressed in a charitable nonprofit's code of ethics.The purpose of adopting such a statement formally is to provide employees, volunteers, and board members with guidelines for making ethical choices and to ensure that there is accountability for those choices. When board members of a charitable nonprofit adopt a code of ethics, they are expressing their commitment to ethical behavior. Such a committment goes a long way to earning the public’s trust.

The Council of Nonprofits encourages all nonprofits to craft an appropriate "statement of values" or "code of ethics" for your nonprofit. For some charitable nonprofits it may be appropriate that their codes incorporate standards already adopted by certain professional groups. (An example might be a charitable nonprofit that employs licensed clinical social workers may incorporate the Code of Ethics of the National Association of Social Workers into its own ethical code.) Other nonprofits may create their own statement that reflects that particular charitable nonprofit's unique mission, activities, and interaction with clients, volunteers, and the public. Whatever the nomenclature, crafting (and revisiting periodically) a written document that articulates the core beliefs of the charitable nonprofit can be useful for practical as well as ethical reasons: Having a code helps attract talented employees, recruit board members, retain donors, and of course ensure that all transactions are aligned with the values of the organization. Many organizations post their statement of values/code on their websites to be fully transparent and to demonstrate their organization's committment to accountability.


Why is ethical leadership so significant in the nonprofit sector?

Nonprofit organizations are “public benefit” corporations; the purpose of their existence is to benefit the public as opposed to the private interests of their board members, staff or even of individual clients. The mission of a charitable nonprofit expresses the particular way that the organization will fulfill its public benefit purpose. Fittingly, board members are often referred to as “trustees,” which reinforces the concept that the assets of a nonprofit are entrusted to the oversight of its board members who have a legal duty to ensure that the nonprofit uses those assets to fulfill its public benefit mission.

It is one thing to exist for the benefit of the public; it is another to earn the public’s trust through ethical leadership and responsible practices. The good will earned by accountable and transparent nonprofits is one of, if not the most important, of its assets. Donors will give to organizations they trust will use their contributions wisely. Volunteers will invest their time in causes when they trust that the nonprofit is acting ethically. And clients and consumers will return to a nonprofit for services, and recommend that nonprofit to others, when the nonprofit has shown it is accountable for its actions, transparent in its financial dealings, and responsive when concerns come to the nonprofit's attention.

Laws affecting nonprofit ethics and accountability

In addition to the IRS regulations that require charitable nonprofits to operate for public benefit, a prominent law primarily affecting publicly traded companies that also affects nonprofit conduct and accountability is the federal law known as the Sarbanes-Oxley Act of 2002, which includes two provisions that apply to nonprofits: (1) a prohibition against destruction of documents that are tied to a criminal investigation, and (2) a prohibition of retaliation against whistleblowers. As a result of the Act (and questions posed on the IRS Form 990) most nonprofits are now aware of the "best practices" of having a board-approved whistleblower protection policy, and a document retention/destruction policy.  

The IRS Form 990 includes several questions focusing on accountability and transparency, such as questions about the composition of the board of directors, and questions specifically designed to elicit whether the organization has a written conflict of interest policy, procedures for managing conflicts, a whistleblower protection policy, and a document retention policy.  For more background on nonprofit governance and the revised Form 990, visit the Council of Nonprofits’ website resources on Governance.

Some state laws also address accountability and transparencypractices of charitable nonprofits: for example, some state nonprofit corporation laws dictate the procedures a board of directors must follow to address conflicts of interest, and several states’ laws prohibit loans to board members. State laws and regulations also typically dictate a threshold level of financial transparency through annual filing and charitable registration requirements. We are unaware of any state law that requires a nonprofit to adopt a code of ethics.

The ethics of confidentiality

Nonprofits often engage with clients and consumers in ways that touch on confidential matters and it's important for the nonprofit to maintain the trust of those it serves. All nonprofits should consider whether adopting a confidentiality policy is appropriate.