Accountability in Nonprofit Organizations (NGOs)

1. Accountability in Nonprofit Organizations (NGOs) Kevin P. Kearns Graduate School of Public and International Affairs University of Pittsburgh March 10, 2009

2. Research Questions What does it mean to be “accountable” and what types of accountability requirements face nonprofits? How does the diversity of the U.S. nonprofit sector affect discourse on accountability? Can the quality of the public discourse on nonprofit accountability be improved by using “life cycle” analysis as a framework for accountability?

3. Recent Trends and Controversies Growth of nonprofit sector in the U.S. - no longer invisible 1.5 million organizations 8% of GDP Nonprofit scandals: United Way, Foundation for New Era Philanthropy, American Red Cross, Universities Some regulatory initiatives: IRS Reporting Requirements (new 990 Forms), Watchdog agencies, Senate Hearings, Recommendations from Independent Sector

4. Context of Scandals Organizational complexity: more difficult for volunteer governing boards to understand details of the organization Court of popular opinion: Media scrutiny and “talk show” politics. Competition for competent leaders: High pay and benefits for nonprofit executives become an issue Increased entrepreneurial activities: Unfair competition and loss of charitable values

5. Impacts Loss of community confidence Erosion of donor support Low morale among staff and volunteers Distraction from mission - damage control consumes the agency

6. A Narrow Definition of Accountability The extent to which one must answer to a higher authority - legal or organizational - for one’s actions” 2) “An obligation for keeping accurate records” (Shafritz, 1986).

7. Essential Components of an Accountability System There must be a rule, law, regulation, internally sanctioned procedure or organizational policy that is accepted by all stakeholders as a valid and legitimate standard of performance. There must be some type of overseeing authority that is recognized by all stakeholders as legitimate and qualified to judge compliance or performance. The oversight body must have sufficient internal capacity, including resources and management expertise, to effectively and fairly monitor compliance. All stakeholders must embrace the same or substantially similar measurement systems as well as reporting procedures. There should be appropriate sanctions for non-compliance and rewards for compliance. Ideally, there should be a feedback loop that gives organizations the opportunity to learn from their mistakes and to improve their future performance.

8. Compliance: The “Easy” Part of Accountability Accountability for Legal Requirements Incorporation Governance (Duties of Care, Loyalty, Obedience) Commercialization, non-distribution constraint Accountability for Financial Probity Financial Accounting (external oversight) Managerial Accounting (internal oversight) Financial Policy Statements

9. Performance: The “Difficult” Part of Accountability Accountability for Performance Mission adherence, mission accomplishment Program performance Performance relative to industry standards Performance relative to “best practices” A Broader Definition of Accountability: “Accountability involves the means by which [nonprofit] agencies and their workers manage the diverse expectations generated within and outside the organization.” (Romzek and Dubnick, 1986)

10. Why the Broader Definition of Accountability is Superior to the Narrow Definition Captures “compliance” expectations but goes further Implies that diverse stakeholders also have expectations (donors, employees, volunteers, partner agencies, media, etc…) Implies that accountability is a dynamic (changing) construct, not static Notes that employees can “manage” (influence) expectations by their actions or inactions Makes accountability a strategic (versus tactical) issue for NGOs

11. Discussions about accountability typically emanate from three fundamental questions Accountability for what? Accountability to whom? Accountability through what mechanisms? These three questions are complicated by the fact that many people don’t know WHAT constitutes the “nonprofit sector”

12. What’s In a Name? Nonprofit Sector Voluntary Sector Charitable Sector Third Sector All are accurate, but only partially so

13. Diversity of the Nonprofit Sector 26 categories of tax exempt organizations in section 501 of Internal Revenue Code Wide diversity of Missions (National Taxonomy of Exempt Organizations) Nearly 400 discrete categories of nonprofit organizations in America!

14. A Simple Classification of Nonprofits Public-serving Nonprofits (501c3) Human services Health Education Animal protection Crime prevention Community development Food and nutrition Housing Etc … Member-serving Nonprofits Advocacy organizations (501c4) Social clubs (501c7) Business leagues (501c6) Labor unions (501c14) Mutual insurance companies (501c15) Etc …

15. The Nonprofit Sector is Big and Growing In 2006 the nonprofit sector contributed $666.1 billion to the U.S. economy and received $1 trillion in total revenue, an increase of 5.7% over 2005. The U.S. nonprofit sector consists of roughly 1.4 million organizations, up from 1.1 million in 1998. The private nonprofit sector accounts for 5% of the gross domestic product in the U.S., 8.1 % of the country’s wages, and 9.7% of the jobs. Total nonprofit employment jumped over 16% between 1998 and 2006.

16. The Nonprofit Sector is Astonishing in its Asymmetry Over 70% of nonprofit organizations in the U.S. spend less than $500,000 per year. Only 30% of the organizations in the sector, primarily hospitals and universities, account for 97% of all nonprofit expenditures. Healthcare and education organizations account for over 36% of all nonprofit assets and nearly 63% of all nonprofit employees.

17. Dangers of “One Size” Approach to Accountability Example: Better Business Bureau Wise Giving Alliance Organizational size has impact on organizational capacity Mission is related to expectations Unintended negative consequences of simplistic measures

18. What “Expectations” Should be Managed and How? Throughout history, NGOs have been influenced by competing forces (“impulses” – Salamon, 2009) that affect: Roles and objectives of NGOs The strategy and style of operation of NGOs The principle reference groups (stakeholders) The funding and resource base

19. Organizational Life Cycle of Nonprofits Birth and Start-up Stage: In this stage the founder(s) of the organization sense that there is an unmet need for a good or service, and they develop a vision for an organization to meet that need. Typically, they must enlist the support of others to support the vision. Growth and Development Stage: Typically at this stage of development we see the organization evolving toward more formal management and governance structures to handle the increased demand and the higher community expectations that accompany growth. Maturity Stage: At this stage in the life cycle, the organization has become well-established in its particular field of service. Typically mature organizations have a relatively sophisticated management infrastructure and governance systems. Often mature organizations have a strong culture, and sophisticated internal compliance systems to ensure that the culture tolerates no deviation from an ethical code of conduct. Decline (and Renewal) Stage: During this challenging stage in the life cycle, the leaders of the organization may need to confront the fact that demand for the organization’s products or services is falling, either because of poor performance or simply because of changing community needs and market forces. The challenge is to respond to this by deciding if the organization can renew itself or if it should responsibly divest itself and downsize or terminate operations.

21. Accountability MatrixKearns, 1996

22. Four Impulses Shaping the Future of NGOsLester M. Salamon, 2009

23. Each “Impulse” Has A Unique and Significant Impact on Accountability

24. The Voluntarism Impulse Accountable To Whom? Accountable to “value driven” stakeholders who bring passion and conviction to the mission Accountable to volunteers who provide significant human capital Accountable to donors and members who voluntarily support the organization and who embrace the values of the organization Accountable to clients who embrace value driven service model Accountable for What? Accountable for providing “outlet” for expression of values (including spiritual values) in the civic space Accountable for “value-based” explanations of and solutions to social problems and issues (e.g., Jubilee 2000, Alcoholics Anonymous) Accountable for transforming lives of individuals via application of value-based interventions and treatments Accountable for maintaining tradition Success or failure usually illustrated with personal stories or anecdotes, not aggregate empirical data

25. The Professionalism Impulse Accountable to Whom? Accountable to professional staff who bring skills and professional standards of performance to the mission Accountable to professional associations Accountable to informed clients who expect professional treatment Accountable to funders and donors who understand the “logic model” of the organization Accountable for What? Accountable for mission accomplishment via theory-based (versus value-based) logic model Accountable for demonstrating results and outcomes that can be empirically verified and tested Accountable for continuous learning and improvement Accountable for meeting professional (“guild”) standards of performance and quality Accountable for “best practices”

26. The Commercialism Impulse Accountable to Whom? Accountable to “the market” (need and demand) Accountable to partners, venture philanthropists, “investor” philanthropists, social entrepreneurs Accountable to clients who expect to be treated like “customers” Accountable for What? Accountable for market based measures of performance such as market share, Social Return on Investment, Cost-Benefit Ratios, Various Financial Ratios of sustainability Accountable for exploiting “comparative advantages” to capture niche markets Accountable for catalyzing entrepreneurial culture via franchising, replication, and other growth strategies

27. The Civic Activism Impulse Accountable to Whom? Accountable to supporters who view NGOs as vehicles for social change Accountable to coalitions and partner organizations Accountable to beneficiaries, including future generations Accountable for What? Accountable for changing the allocation of valued goods in society or the rules by which those goods are allocated Accountable for future outcomes that can’t be accurately measured in the present time frame

28. The Most Significant Challenges of Accountability Arise from Tensions Between the Impulses Voluntarism vs. Professionalism Voluntarism vs. Commercialism Professionalism vs. Commercialism

29. Thank You! Questions / Discussion?