06/16/2011 04:22 pm ET | Updated Aug 16, 2011

State of the Nonprofit Sector

Mohandas Gandhi, the great leader most responsible for ending British colonialism in India, visited London shortly after Indian independence. On his arrival he was asked by a journalist how he liked western civilization and democracy. He replied," It could be a good idea". Were Gandhi resurrected to visit the U.S. today, and asked whether he liked American democracy, would he once again say, "it could be a good idea"?

I cite this because these are trying times for both American democracy and the nonprofit sector, times that are testing our traditional democratic values, our sense of tolerance, decency and civility, our commitment to social and economic justice, our yearning for a political system based on fairness and integrity and our desire for public and nonprofit institutions that are transparent and accountable.

Our faith in government at all levels is perhaps at an all-time low, driven by anti-government ideologues, opportunistic politicians and, not infrequently, poor performance. We have absolutely the best Congress that money can buy -- and at bargain rates -- one that has flaunted standards of ethics, honesty and public service. We have raised gerrymandering to a high art form, entrenching incumbent elected officials, depriving many constituencies of political influence.

And as a country, we refuse to provide our federal, state and local governments with the revenue needed to strengthen our infrastructure, improve our educational and health systems and successfully tackle our extensive poverty and rural problems. We prefer, instead, to undermine our economy by lowering taxes on the very wealthy and upper middle class taxpayers and maintaining gaping tax loopholes on special interests, costing us hundreds of billions of dollars a year. We, moreover, may well be on the way to becoming a rigid class society.

Our nonprofit community faces no less a crisis.

The sector is in flux, besieged by increasing responsibilities, limited resources and higher public expectations. The recent reductions in public funds have left us desperately seeking private money to fill this huge gap and trying to do more with less... an impossible task. While the sector has grown exponentially over the past 25 years, it may have become weaker, not stronger, less influential in shaping the direction, priorities and policies of the country.

Why should this be? Because nonprofits are more fragmented than ever before, increasingly composed of one-issue groups, finding it difficult to collaborate with one another to address the fundamental issues that challenge our society. Recent nonprofit history is the story of policy battlefields littered with the dead bodies of nonprofit lone wolves. If there is one lesson the sector needs to learn, it is that major policy victories can only be won by coalition efforts.

Desperately in need of leadership, our nonprofit world requires a huge dollop of vision and courage. Its philanthropic institutions have not sufficiently changed to meet the times and needs of their grantees. And nonprofits that, historically, have served as a check on and balance between government, corporate influence and civil society, have not done an adequate job in fulfilling this critical mission. In many cases, our watchdogs have turned into timid lapdogs.

Trying as these times may be, there is some cause for optimism. The floodwaters of political extremism may be cresting. Our younger generations are proving more tolerant than their parents, anchored by a healthy balance between idealism and pragmatism. Our citizenry is slowly facing up to the critical challenge of ensuring a more effective and inclusive national health system and providing quality education that is more accessible and affordable.

Yet the sector still must overcome strong obstacles to progress: corporatization with its twilight zone of ethics; extensive incidents of malfeasance, self-dealing and inappropriate expenditures; spiraling, inflationary increases in compensation to top executives; poor management practices and dysfunctional boards of directors; philanthropic institutions that refuse to provide adequate resources; and an ineffectual oversight, regulatory and enforcement system.

And, yes, there is another...the absence of a sense of humor. Like many of you, I have attended many conferences and meetings of nonprofits in recent years. Have we heard any jokes or come across a sense of humor at these sessions? Glum, serious faces seem to pervade their proceedings. As a sector, we have become too self righteous and serious about our work. We should derive joy from our what we do. In short, we need to lighten up.

However, it is not my intention to portray a doomsday picture of our nonprofit world.

There are an enormous number of success stories that we all take for granted: the many thousands of local, grassroots agencies providing outstanding social, mental health, housing, employment and other services; many of the finest institutions of higher education in the world; cutting edge hospitals and community health centers; cultural and arts organizations that are outstanding; and advocacy groups that are trying to ensure the integrity and honesty of our government and private sector institutions. All these excellent groups are responsible for our dynamic democracy, for what is the strongest nonprofit sector in the world.

But, as the pressures of modern times demand more self-awareness and greater performance, our potential for meeting these needs is being put to the test. We have the capacity, but do we have the will to change? It's too late to fall back on outmoded notions of American exceptionalism. We have to work hard every day to prove that our institutions can perform at a high, even higher level. Past performance is no longer an adequate measure for our future efforts.

As you know, there is a close connection between democracy, government and civil society. The vibrancy of both our democracy and government will depend on the future strength of our nonprofits. Much of what has recently been negative about our governments and politicians has been a reflection of the failure of nonprofits and we as citizens to hold them accountable.

To a large extent, we have received what we deserve: lackluster, narrow-gauged politicians; an unfair tax system; a crumbling infrastructure, and disinvestment in education... all leading us to possible third world status. If our nonprofits don't measure up -- and we as citizens don't -- we will be in danger of losing a great deal of what we cherish about this country... its values, its sense of community, its optimism and its democratic institutions.

So what are the challenges facing the nonprofit sector today? Let me briefly discuss a few that I believe are among the most critical.

1) Ensuring Public Accountability

No problem is more important to the nonprofit world than to assure the public that it is transparent and publicly accountable. Events of the past decade have shaken public confidence in the work of many nonprofits. It has been the subject of Senate Finance Committee hearings, the focus of continual media investigations, a succession of financial and management scandals among both foundations and nonprofits, and a growing debate about the role of federal and state regulations and enforcement.

Contrary to popular belief, it is not a new issue. It was part of the nonprofit world that was hidden from public view until the media began its exposes some nine years ago. Nor is it a question of just a "few bad apples in the barrel". There have been and still are many bad apples. Reporters all over the country are uncovering new abuses every day. The problems are widespread.

The stakes are much too high for all of us to sit on the sidelines, ignore the problem and wish it would go away. The scandals -- inappropriate expenditures, self-dealing, malfeasance, conflicts of interest and excessive compensation -- have hurt the reputation of nonprofits and continue to do so. With persistent, on-going media coverage, nonprofits can't afford not to be transparent and clean. As you well know, integrity and public confidence are the keys to nonprofit fundraising. Without them, nonprofits will face additional, severe financial troubles.

Until the Senate investigations, nonprofits as a whole didn't seem to worry much about cleaning its dirty laundry. Now the sector is very worried, but it seems more disturbed about the possibility of additional government regulations and enforcement than about eliminating the problems. Many charities, influenced by trade associations like Independent Sector and the Council on Foundations, urge greater self-reform rather than effective measures to prevent future abuses. I have been observing the nonprofit sector for over forty years and have rarely seen any effective self-reform efforts. They just don't work. Nothing less than stronger regulations, increased monitoring and tougher enforcement will work. Nonprofits should embrace the latter, as well as self-reform, if they really want to clean up the sector.

2) Strengthening Oversight and Enforcement

Until federal and state regulators take a tougher stand on accountability, the abuses and excesses of nonprofits will not be eliminated. Yet the regulators seem either unwilling or unable to strengthen their efforts to police the charity world.

Both federal and state agencies that oversee nonprofits have too few staff members and too little money to do their job effectively. The Internal Revenue Services' tax-exempt division has some 850 employees, fewer than half of whom are charged with overseeing the operations of more than 1.2 million charities...that's right, 1.2 million charities. State charity regulators are even more short-handed. Probably no more than eight attorney generals' offices have more than a handful of staff supervising nonprofits in their states.

But money and staff are not all that is needed. What charity regulators lack most are the political will and courage to police nonprofits effectively. The Senate Finance Committee and state legislatures have failed to demand and authorize strong action and enforcement from their federal and state regulators. The latter, quite simply, are too often afraid to tackle large and wealthy organizations and rich individuals who are politically influential and powerful.

Nowhere is this more evident than the special treatment of the Hershey School, here in Pennsylvania,whose board of directors for years has been permitted to indulge in questionable management practices, self-dealing, unsavory real estate deals and excessive compensation practices.

The regulators' lack of political will and courage is often compounded by their misunderstanding of nonprofit values and the way nonprofits operate. Few have actually run nonprofits or struggled with compensation or conflict of interest problems. They have been reluctant to move against egregiously excessive compensation abuses, tending to think that large charities are not that much different from for-profit corporations.

Because the IRS definition of excessive compensation is unclear -- actually mushy -- the regulators prefer to adopt a permissive, "anything goes" policy. Many also overlook the nonprofit tradition that nonprofit board members should not be compensated for board service and that self-dealing among board members is not to be tolerated. And in only a very few cases have regulators pressured irresponsible board members to resign their positions.
Clearly, the IRS and state regulatory agencies need more money to do their job. Nonprofits should lobby both Congress and state legislatures to give them more resources to oversee the sector. I would also argue that state legislatures need either to make their charity regulators independent of state attorneys general offices or insulate them from political pressures if they remain under the supervision and control of their Attorney Generals.

3) Foundation Reform

If the nonprofit sector is to become stronger and more effective, many, if not most, foundations will have to change the way they do business.

While foundation assets have grown enormously in recent years -- amounting to well over $600 billion today -- foundation performance in general remains pedestrian, lackluster, safe and restrictive. Foundation priorities, governance and procedures often seem to be geared more to their own perceived needs than to the interests and needs of their grantees and the sector in general. In some cases, one is moved to recall Mrs. Cheverly's words about philanthropy in Oscar Wilde's play the Ideal Husband: "Philanthropy seems simply to have become the refuge of people who want to annoy their fellow citizens".

During the recent recession foundations, as well as wealthy individual donors, reduced their giving -- in some cases severely -- thereby hurting the grantees and nonprofits they are supposed to serve. Had they been willing to prime the economic pump, many good organizations and programs might have escaped serious injury. Not exactly a moment of honor in foundation history!

Despite their recent massive growth, foundations are still required to pay-out only 5% of their assets annually, a figure that can and usually does include all their administrative costs. Many foundations, especially the large ones, treat this minimal requirement as a ceiling, not a floor. As a result most of the large foundations are giving out only 4 to 4.5 of their assets in grants. The taxpayers are simply not getting their money's worth.

At a time when public funds have been greatly reduced and nonprofits are struggling to make their budgets, foundations should be paying out at least 6%, if not more, of their assets in grants. Foundations that are paying out only the minimal amount should rethink their policies in the light of critical nonprofit needs. After all, they are grantmakers, not bankers.

If the Obama administration were really interested in helping nonprofits, it would be pushing the Congress to increase the payout to at least 6% in grants, a measure that would add more than $10 billion to the coffers of nonprofit organizations. Instead, it has launched a pitifully funded and ineffectual Social Innovation Fund that will have no impact on the nonprofit sector or the growth of its resources.

Other foundation practices need to change as well. The life blood of nonprofit organizations is general operating support, that flexible money that allows them to build strong organizations and leadership. Yet not more than 20% of all the money distributed by foundations annually goes for this purpose. Aren't foundations listening to their grantees, or do they refuse to hear what their grantees are saying?

Shamefully, foundations are still reluctant to fund public policy, advocacy and organizing efforts that are so crucial to social and institutional changes. Status quo boards, avoidance of risk-taking, unenlightened staff and fear of government intervention are the reasons cited for this practice. The latter -- government intervention -- is a sham argument, since conservative foundations have been funding activist activities for over 30 years with impunity.

We grantees and nonprofits are partly responsible for the behavior of foundations. We have acted as beggars on our knees, not equal partners in the philanthropic process. We have allowed foundations to run roughshod over us, succumbing to what might be called the "mystique of philanthropy". We have sought to be loved instead of respected. This approach, I submit, has to stop. Nonprofits collectively have to pres shard for changes that can bring greater rationality and reasonableness to grantmaking and, at the same time, improve foundation performance.

There won't be much philanthropic reform unless there is growing pressure for change from nonprofits... from the public... from all of us.

4) Democratizing Nonprofits

Class is rapidly becoming the great divider in our society, threatening the very foundations of our democracy.

We see it in the growing inequality of income and wealth; experience it in our colleges and universities and the abject way adjunct faculty are treated; witness it in the expansion of corporate power and influence; observe it in the decline in status of blue collar workers; and view it in the daily depiction of our lives on our television screens.

Nowhere are class divisions more visible than in the most elite of American institutions...our foundations. Their boards are composed almost entirely of wealthy and highly paid professionals. With very few exceptions, they exclude the diverse faces that are representative of our vast nation. Teachers, ministers, community based leaders, social workers, small business owners, blue collar workers, union officials, youth service employees and disabled are rarely found among our foundations, large and small, private and public. While the number of women and people of color on foundation boards has substantially increased over the past 25 years(although not adequately), they resemble their white, male, rich and corporate counterparts.

The diversity issue, then, has become largely a matter of class. It reflects the absence of a broad range of perspectives in priority-setting and decision-making, the capacity of institutions to feel the real pulse of localities and regions, and the ability to assess the urgent needs of a variety of constituencies and institutions. Non upper class members are a rarity on private foundation boards. What is startling, however, is that board membership among community foundations, chartered as public charities to care for local communities, reveals the same pattern of board membership that we see among private foundations.

To be fair, one should point out that class diversity is also a serious problem and challenge for many nonprofit organizations, especially large and well-financed institutions like hospitals, universities, large social agencies and many other civic groups. Their boards closely resemble those in the foundation world.

Class divisions have increasingly permeated the nonprofit sector in recent years, a development incisively described by Harvard professor Theda Skocpol in her book, Diminished Democracy. Unlike past times, few nonprofits today, according to Skocpol, are places where rich and poor, blue collar and professional, highly educated and high school graduates and dropouts come together for discourse and mutual benefit. Many nonprofits have lost touch or are losing touch with their base. They have increasingly been transformed from grassroots membership-led organizations into professionally run groups, the participation of whose members is often limited to paying dues. A large part of our citizenry is being left out of our civic engagement efforts. That is not good enough for a vibrant democracy.

If American juries, with power over the life and death of people accused of crimes, are composed of diverse groups of Americans from all classes, why is it that electricians, teachers or grassroots leaders aren't qualified to be board members of foundations and nonprofits with far less responsibility? It just doesn't make sense.

Democratizing our nonprofit sector is a challenge that all of us need to take seriously, unless we are willing to slide even farther into a society dominated by fewer and fewer people.

5) Reenergizing the Role of Nonprofit Advocacy

Nonprofit advocacy is the hallmark of both American history and nonprofit history. It is that dimension of our civil society that distinguishes us from all other civil societies and is most admired overseas. This activism has been responsible for almost all of the social and institutional changes in the past 125 years, ranging from the rural reforms of the late 19th century, to the settlement houses in the early 20th century, to the unemployment associations in the 1930's and the civil rights and other social movements of the last 60 years.

Yet, over the past three decades nonprofit activism has been on the decline, undermined by the increased conservatism of the country, the reduction in union influence, the influence of big money on politics, the loss of social movements and poor leadership. The issue of poverty, the Achilles' heel of our democracy, has fallen off our political radar screen. It no longer seems to be viewed as an issue of importance by the mainstream of both parties, despite the impact of the recession on our poor and working poor populations.

Poverty remains a national disgrace for a country claiming leadership in an increasingly global world. Not only have our poverty and unemployment rates sharply increased, but our social safety net programs are being shred on the altar of fiscal irresponsibility and ideological rants against government programs.

Where have our nonprofit defenders of social and economic justice been? They apparently have been muted by an Administration they consider friendly, by uncertainties and paralysis and, simply, by a lack of courage to speak out boldly and act accordingly. Their potential for legal lobbying has not been tapped; only about 1% of nonprofits have been engaged in legislative activity. They have been, in a real sense, the silence of the lambs.

This needs to change if the hungry, homeless, poor and powerless among us are to take their place as first class citizens in our society.

The Task Ahead

The challenges I have outlined are daunting and demanding. They will require an extraordinary effort by you, by all of us. It all boils down to the question of leadership. Unfortunately, if any quality defines our current nonprofit leadership, it is its lack of courage.

The heads of many, if not, most of our nonprofit organizations, large or small, traditional or non-traditional, seem afraid to speak out publicly on important public issues, go on the record with their positions, confront controversial problems or critique their weak or unethical colleagues and failing organizations. Their timidity would be laughable were it not so damaging to a sector that begs for vision, introspection, intellectual rigor and integrity. We appear to have socialized a large group of nonprofit executives more interested in promoting their own careers and turf, in being collegial to a fault and in avoiding all risks than in pursuing what is best for the field and the public.

Because of their conspiracy of silence on key matters of ethics, accountability and performance, they are abdicating their responsibility to taxpayers and the public interest. We must demand more of our institutional leaders than we have in the past, and we must hold them accountable for their actions.

It is time for all of us to join in a common effort to improve and strengthen our nonprofit organizations and sector, develop courageous and visionary leaders, maintain and ethical foundation for our work and fight for a nonprofit community that is publicly accountable.
After all, when Gandhi's ghost returns to this country to ask us what we think of American democracy and its civil society, we will want to say with conviction, not that it could be a good idea, but that it is a great idea that actually works.