“The greatest threat to the not-for-profit sector is the betrayal of public trust, the disappointment of public confidence. Virtually all knowledgeable observers of the not-for-profit scene believe that an overwhelming proportion of not-for-profits are honorably run...that admirable context, however, does not provide much protection to the sector when a sequence of highly publicized disgraceful not-for-profit misdeeds occurs.”
Joel Fleishman, Scholar, Author, Professor of Law and Public Policy, and Director of the Heyman Center on Ethics, Public Policy and the Professions, Duke University
This section provides background on ethics and accountability issues that impact the nonprofit sector. This section also provides resources for nonprofits seeking to formally incorporate ethical practices into their operations and stay abreast of regulations and changing laws that shape accountability practices of nonprofits.
A code of ethics is 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. The purpose of adopting a formal code is to provide employees, volunteers and board members with guidelines for making ethical choices in the conduct of their work on behalf of the organization. Honesty, integrity, and fair practices create a solid foundation that earns the public’s trust. A code of ethics is the expression of that solid foundation. When board members of a nonprofit adopt a code of ethics, they are expressing their commitment to ethical behavior.
The Council of Nonprofits encourages all nonprofits to convene a working group of board and staff to craft an appropriate Code of Ethics for your nonprofit. Some nonprofits will want to their codes to reflect or incorporate specific standards, such as those articulated in the Code of Ethics of the National Association of Social Workers, or other sector-specific codes. Other nonprofits will want to reflect their own unique culture, activities and interaction with clients, volunteers, and the public.
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 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 to use their charitable gifts 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 to be accountable for its actions. Increasingly, regulators, charity watchdogs, and the media have raised their voices and thus the pressure on nonprofits to act ethically by forcing nonprofits to be transparent in their financial dealings and also to be responsive and accountable when complaints surface about their conduct.
Two aspects of ethical practice have been most prominent in shaping the recognized ‘best practices’ of nonprofit organizations: accountability and transparency. Read about cultivating a culture of accountability and transparency.
One of the most prominent laws affecting nonprofit accountability is the federal law known as the Sarbanes-Oxley Act of 2002, which created significant accountability requirements for publicly traded companies and included two provisions that are also applicable to nonprofits: (a) a prohibition against destruction of documents that are tied to a criminal investigation, and (b) a prohibition of retaliation against whistleblowers. As a result of the Act (and recent revisions to the IRS Form 990) most nonprofits are now aware that they should have a board-approved whistleblower protection policy, and a document retention/destruction policy.
All states have statutes governing the nonprofit corporations incorporated in that state and some of those laws specifically address accountability and transparency issues: 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 (available to the public in many states). No state law requires a nonprofit to have a Code of Ethics, however.
In 2004, the California legislature passed the Nonprofit Integrity Act establishes various requirements of accountability applicable to nonprofits (including private foundations) operating in California. Thus far other states have not followed suit. (The National Council of Nonprofits monitors state legislation in this area and will update this information as applicable.)
The recently revised 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.
Nonprofits often engage with clients and consumers in ways that touch on confidential matters. All nonprofits should consider whether adopting a confidentiality policy is appropriate.
There are a variety of organizations referred to as “Charity Watchdogs” that rate charities against various measurement standards. Many of these standards include specific expectations for ethical conduct and accountability, primarily in relation to a nonprofit’s relationship with its donors.
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