Why Aren’t Nonprofits More Regulated?
A series of scandals at Oxfam and other charitable organizations raise troubling questions.
A group of University of Washington scholars writing at The Monkey Cage point to a series of scandals in the non-profit community that I’d missed amid all the Trump drama (“The Oxfam scandal shows that, yes, nonprofits can behave badly. So why aren’t they overseen like for-profits?“):
Last week, news media reported that Oxfam — well respected for its humanitarian work — had employed aid workers in Haiti who hired prostitutes. As the Haiti scandal has unfolded, new allegations have surfaced, including that other workers at U.K. charities had sexually abused teen volunteers, and that overseas staff traded humanitarian aid for sex. Moreover, Oxfam’s top management seems to have ignored warnings about what was going on.
Oxfam now faces an existentialist crisis. It has depleted its moral authority. Donations from individual donors have plummeted. Corporate support from Heathrow, the Co-Op Bank, Visa and M&S might be withdrawn. The U.K. government is threatening to withhold £32 million of annual support and the European Commission has made a similar threat regarding its £29m grants. Celebrity ambassadors like Minnie Driver and Archbishop Desmond Tutu have resigned.
Many other similar organizations have been accused of harboring sexual abusers as well. In 2017 alone, more than 120 workers in leading British charities including Save the Children, Christian Aid and the British Red Cross were accused of sexual abuse.
Their explanation for why this happens:
Here’s the problem: many scholars and practitioners insist that nonprofits, and civil society groups in general, are principled actors, unlike greedy and instrumental for-profit firms, because their organizational purpose has virtue. In addition, because nonprofits cannot legally distribute profits (although some, like hospitals, might generate them), they do not face shareholder pressure to increase profits.
This presumption of virtue leads regulators and stakeholders to neglect issues of nonprofit governance and accountability. Compared to firms and governments, nonprofits face less scrutiny by outside stakeholders. This leads to poor governance, accountability shortfall and mission drift.
They note that many nonprofits, and especially many of the bigger, name-brand ones, receive substantial government funding:
In part, these problems are compounded by how nonprofits raise funds. Nonprofits are supposed to be nongovernmental, a communitarian response to big government and big business. Scholars imagine them as local organizations raising funds from the community, subject to active local scrutiny. But most global nonprofits receive a significant portion of their funds from the government. Not surprisingly, nonprofits are focused on managing their political environment. Internal governance and effective service delivery become peripheral.
A large number of nonprofits are locally rooted, staffed by volunteers and provide local public goods — food banks, homeless shelters and the like. But alongside, there are visible nonprofit “brands” with a global presence and sizable budgets, staffs and bureaucracies. The global nonprofits substantially rely on funding from governments, intergovernmental organizations, private foundations and corporate sponsorship. In 2016, UK’s top 1 percent of charities accounted for about half of the sector’s £10 billion income.
Why do governments fund any nonprofit, local or global? After all, nonprofits are supposed to be nongovernmental. At the domestic level, starting in the 1980s, many Western democracies began relying on nonprofits to deliver public services in the Reagan-Thatcher approach to shrinking government. In the 1990s, both the Clinton-Gore initiative that was called “reinventing government” and Tony Blair’s New Labour ideology encouraged governments to outsource service provision to nonprofits. Some observers wrote about a nonprofit “associational revolution,” comparing this expansion to the 19th-century emergence of the modern nation-state.
At the international level, since the 1990s, global nonprofits have become an important vehicle for delivering foreign aid. When frustrated that foreign aid hasn’t promoted economic development and democracy, donors blame recipient countries’ governmental corruption. Of course, with the dominant notion that nonprofits are virtuous and above temptations, donors saw nonprofits as the appropriate aid contractors. In any case, involving nonprofits in aid delivery was a good political defense against the criticism that foreign aid is a waste of money. Whether nonprofits are more effective and efficient than state-run development agencies remains to be seen.
They argue, not surprisingly, for more oversight:
The loose oversight over nonprofits allows even real charities to abuse public trust. Charity managers give themselves inflated salaries, use charity money for lavish lifestyles, expensive retreats and so on. One revealing example is the Wounded Warrior Project, a U.S. charity aimed at helping military veterans. Established after 9/11, this charity has raised more than a billion dollars to date. But as CBS News reported, the organization’s leaders have used charity funds for extravagant lifestyles and parties. By some accounts, the charity spends 40 to 50 percent of their resources on overhead — compared to other veterans’ charities that spend only 10 to 15 percent on overhead.
Most countries do not require nonprofits to file annual reports. The U.S. nonprofit sector is an exception; nonprofits are annually required to file Form 990 with details of their finances, activities and governance, which are made public. Yet very few Americans are aware of this requirement, and even fewer use it regularly to guide their charitable giving. To varying degrees, U.S. states have established their own charity regulations. Both the Federal Trade Commission and state attorneys general can investigate charity fraud, but they rarely do.
In contrast, the for-profit sector, working outside the presumption of virtue, is overseen by several layers of regulators, including private bodies such as the stock exchange. For-profit organizations are required to regularly disclose information on finances, governance and policies, information that is scrutinized by financial analysts and shared over television, blogs and newspapers.
Even beyond regulatory filings, however, shareholders can assess how firms are performing by tracking sales. If firms provide shoddy products, they will probably lose customers. Top CEOs get fired if the firm does not meet its quarterly sales targets. By contrast, nonprofits typically serve “customers” who cannot show their displeasure. Often they depend on a particular nonprofit and have no other place to turn to even if they are unhappy about the product. Donors cannot assess how well the nonprofit is doing based on customer feedback.
I’ve long found it unseemly, at best, that ostensibly charitable organizations pay lavish salaries and provide Fortune 500-type amenities to their leadership. Yet, they argue, they’re competing with the for-profit sector for talent. And, really, there’s no reason one should take a vow of poverty in order to help the poor.
Yes, charities, churches, and other non-profits ostensibly in the business of helping children sometimes harbor predators and even cover it up to protect their own reputations. That’s shameful. I don’t know that there’s any reason to believe it happens more in the non-profit sector than the for-profit world but, yes, there’s more of a breach of faith in the former. Still, I don’t see any need for different treatment here; child abuse and abetting it are criminal actions whether you’re Baylor University or the Catholic Church.
And, while farming out social welfare programs paid for by government to the private sector may create problems, there are surely times where it makes sense. I don’t know that a bureaucracy could replicate the Red Cross, for example. Churches and volunteer organizations may well be better equipped to distribute services than governments, particularly to low-trust communities such as drug addicts and illegal immigrants.
Any organization receiving a large distribution of public funds, whether they be for-profit or non-profit, ought to be audited. Otherwise, it’s not obvious to me why nonprofits ought be singled out for special scrutiny.
At the same time, it’s not obvious why organizations who claim a primary mission of charity or education ought to be given a special tax status. Huge for-profit corporations like Amazon and Walmart are able to write their charitable donations and expenses. Similarly, the issue of executive compensation largely goes away if we treat all entities as corporations; employee salaries would simply be written off on the same basis as they are at General Motors or Microsoft.
Doing away with the various 503(c) sections would also end the perennial problem not discussed in the op-ed of organizations ostensibly in the religious, educational, or charity business conducting activities that look an awful lot like lobbying government or engaging in political advocacy, including campaigning. It simply wouldn’t matter anymore: we’d tax and regulate MoveOn.org in the same way we do Hobby Lobby.
Lede updated to incorporate the original Monkey Cage headline to provide context for my own.