Challenges to Transparency and Accountability

University of Virginia Professor James Davison Hunter recently remarked that scholars just write one book, and they just re-write it many times. It is because they are really just asking the same question over and over again. I make no claim to being a scholar, but for those that follow me on this blog, you may think that I am just writing the same post over and over again. But the question I keep asking myself is how can we in the nonprofit or civil society sector think, live, and practice with integrity in the world in which we find ourselves where the worldview is materialistic and utilitarian.

This post is an introduction to a series of posts on the subject of Challenges to Transparency and Accountability which I will be publishing on the blog over the next few weeks that address, or at least attempt to address that question. The series reflects the substance of several talks I gave in Taiwan at the National Taiwan University for the International Conference on NPO Accountability, 2009 -- NPO Public Trust, and in Scotland at the University of Edinburgh for the World Reformed Fellowship General Assembly in April 2010. However, by way of introduction, I will also discuss in this post, the recent meeting in Canada of the board and members of the International Committee on Fundraising Organizations (ICFO).

For a number of years I have been thinking about this subject. I think, in part, because the civil society sector is so large and diverse. For some time I have been wondering just what people and organizations, whether government, the market, or third sector, understand when they speak of transparency and accountability. In absence of some consensus in defining transparency and in defining accountability, and in a culture which tends to be driven by a consequentialist or utilitarian ethic, can there be any agreed understanding about what transparency looks like and what people mean by accountability, to whom is an individual or organization accountable, and why should an organization be accountable in the first place? I wonder what is possible in the nature of some credibly enforced accountability, whether by governments acting within their respective jurisdictions and legal systems, or by some independent or self-regulation scheme.

I wonder how the third sector gains and maintains the trust of the public, and the donor public in particular, and the media, when scandals seem to provide some form of prurient interest in what is going on in the world of public benefit, and when reports of scandals are frequently the driving forces behind State legislation and regulation. In an environment of globalization and interdependence, where public benefit institutions and organizations grow larger and larger, and more powerful in informing public policy, where skepticism so often abounds, and where criminal and terrorist organizations and activities know no geographical boundaries and are often financed through charitable organizations that provide a façade of legitimacy to the solicitation of funds for seeming public benefit or charitable purposes, can there be any reasonable expectation of transparency and accountability?

During the recent Annual General Membership meeting of the ICFO, held in the Toronto area of Canada on 14 and 15 May 2010, there was significant focus on fraudulent activities with respect to charity operations, and on transparency and effectiveness. Initial attention was directed to Canada, and Canadian oversight of the sector through the Canada Revenue Agency (CRA). While there was discussion concerning the policies and procedures which have been in place in the Canada Revenue Agency, what the delegates found disturbing was the presentation of the CRA audit findings, which included essentially criminal and fraudulent conduct, such as the participation by registered charities in facilitating tax shelter arrangements and registered charities issuance of fraudulent donation receipts. What was described could, and does happen anywhere.

According to the Canadian Income Tax Act, a tax shelter included any gifting arrangement for which the promoter represented that an investor can claim deductions or credits which equal or exceed the cost of the property or for which the person will incur a limited recourse amount or debt. Under these arrangements, participants are promised tax receipts reflecting a value many times greater than what the participants experienced in out-of-pocket costs. According to the CRA authorities, the abuse of the charitable tax incentive resulted in most of the property or money involved being paid to the promoters and related companies, or it simply simply did not exist, was overvalued. In many of these arrangements, proportionately little money or property was actually retained by the charity.

In the case of false receipting, the CRA found schemes which generally involved a charitable tax receipt which was sold for a small percent of the face value of the receipt. In most of these cases, the CRA found that the charity involved was complicit in the arrangements, although this fraud may or may not have been carried on with the knowledge of the particular registered charity, such as where the receipts were created and sold entirely by the tax preparer. According to CRA, the scope of the problem was that there were between 100,000 and 135,000 donors involved between 2004 and 2009, with hundreds of millions donations involved.

Michael Van Pelt, the President of Cardus Canada, addressed the topic of public policy option for private generosity. Cardus Canada is a public policy think tank focusing on ideas for social innovation, building intellectual capacity and policy alternatives to promote social renewal of North American social architecture. While his discussion centered on Canada, I think the issue of private generosity vs. government generosity is particularly relevant today in an era of failing economies and globalization of national economic instability and recession. This issue is particularly significant where the demands for charitable services are growing and the "civic core" is shrinking, where the "civic core" is the people who give and volunteer. General societal factors that limit public policy options include: diminished social, religious, cultural, and educational commitments, all of which tend to be more influential in informing public policy options and promoting public benefit services, politicized public dialogue, demands for accountability, and in the case of major donors, strings attached to major gifts.

What Michael said made a lot of sense to me. So much so that I went to the Cardus website to try to understand a little more clearly what he was talking about when he spoke about civic core, social architecture, impediments to effective functioning for charities, and edges of public policy.

As I read his inaugural address for the launch and mission of Cardus, formerly the Work Research Foundation, in October 2008, I was reminded of something I read of Pablo Eisenberg of Georgetown University in Washington, D.C. and contributor to the Chronicle of Philanthropy. Michael wrote that he lives between the realm of ideas and the frontline of action. Pablo Eisenberg wrote that we need a place for reflective thinking and writing about the sector. This has been my purpose in writing this blog and inviting others in to engage the discussion. My purpose has been suggestive, to prompt thinking about some of these core issues that are below the surface of how we do public benefit better.

Too often, much of what we find in writings about the sector, in workshops, and in conferences are those practical hints about how to do things better, how to govern the charitable organization more effectively and responsibly, how to raise funds more efficiently and effectively, how manage people and financial resources more responsibly, and how to communicate the mission and operations of our specific charitable organizations. All of these things are most important and exceedingly good and necessary.

But what Cardus does, and I think what One World Trust in London, UK does is to look at the sector from a more reflective and thoughtful perspective, asking some of the more basic and foundational questions. Thus, for example, Michael Van Pelt in his inaugural address, and also to a lesser extent in his presentation to the delegates attending the 2010 ICFO AGM in the Toronto/Waterloo area of Canada, addressed this realm of ideas and some of the practical implications of the ideas on the work of civil society organizations.

His central argument is this:

Let's think about the first argument: that civic, social, cultural and economic flourishing requires a new and different arrangement of social institutions. The last two generations have increasingly built an undifferentiated society. What do I mean by this? Simply put, we naturally default to fewer and fewer institutions to solve the problems of the day. Today our default is toward the government or markets. The coinage of our contemporary debate is the left or the right -- what governments should do and what they shouldn't do.

This conversation has run its course. These deep assumptions about the possibility of governments and the markets are simply unable to tackle the challenges we face.

Michael probed deeper into this argument both in his inaugural address and in his presentation at the ICFO meeting when he asked the question about whether the principles of the market driving our economic sphere could sustain themselves without the key social, cultural, and religious values that we hold so deeply?

The afternoon session of the Public Program of the ICFO AGM focused on transparency and effectiveness. The initial part of this program was sponsored by the Organization for Security and Co-operation in Europe (OSCE), focusing on transparency, and transparency specifically in the context of the financing of terrorism and worldwide initiatives that promote NPO transparency and accountability through monitoring and certification tools. It is amazing just how much is going on in this regard around the world.

As pointed out by Professor Radha Ivory of the Faculty of Law, University of Basel, Switzerland, financing of terrorism is an extreme form of abuse of the public benefit sector, and is the one area in which the international community has been able to come to a consensus on how to regulate the NPO sector, at least with respect to this particular matter. In other words, addressing the subject of the financing of terrorism has resulted in the most regulation at the international level and has resulted in United Nations Security Council Resolutions 1267 and 1373.

Resolution 1267 was unanimously adopted in October 1999 to establish a sanctions regime to cover individuals and organizations associated with Al-Qaeda, the Taliban, and Osama bin Laden wherever located. Resolution 1373 was unanimously adopted in September 2001 following the attacks of 9/11. It marked a shift in international law and was binding on all member states of the UN. This Resolution placed barriers on the movement, organization, and fundraising activities of terrorist groups. What was missing from this Resolution was any definition of terrorism, and as a result, national laws and attempts to comply, or maybe avoid compliance, have been uneven. Notwithstanding, there have been attempts to define terrorism elsewhere, such as in Art. 2(1) of the International Convention for the Suppression of Terrorist Bombings.

The emphasis here was on governments and was the subject of the finance ministers meeting at the European Commission in February 2009 which I briefly addressed in an earlier blog.

The Financial Action Task Force (FATF) issued special recommendations which provided some of the legal framework on terrorist financing. Specifically, FATF Special Recommendation VIII (SR VIII) dealt with terrorist financing. All the FATF Special Recommendations focus on money laundering and set out the basic framework to detect, prevent, and suppress the financing of terrorism and terrorist acts. SR VIII, Non-profit organisations, provides:

Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organisations are particularly vulnerable, and countries should ensure that they cannot be misused:

(i) by terrorist organisations posing as legitimate entities;

(ii) to exploit legitimate entities as conduits for terrorist financing, including for the purposed of escaping asset freezing measures; and

(iii) to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

As professor Ivory pointed out, implementing SR VIII requires the understanding of the nonprofit sectors; awareness of terrorism financing risks amongst national NPOs; transparency through publication of aims, objectives, financial accounting, auditing, and corporate governance; quality assurance through the comparison of project objectives and outcomes; and enforcement through civil, criminal, and administrative sanctions, and cooperation between states.

There are challenges in implementing SR VIII that are important to note and that are relevant to the topic of this series, Challenges to Transparency and Accountability. These include discomfort with government regulation, power imbalances between NPOs and beneficiaries, defining values of nonprofit work both in terms of impeding open discussion of power and its misuse and lack of awareness and/or capacity to address governance gap, the difficulty of detecting terrorism financing because of the small transactions and ordinary accounts, as well as non-bank financial channels, lack of public awareness about the severity of the problem, and government misuse of terrorism financing laws to curtail or suppress legitimate community organizing and charity. Sharing and giving create blind spots. Market forces generally do not apply in the same way as they do in the market sector. Moreover, NPOs are seldom regulated.

The second part of the session on transparency and effectiveness focused on effectiveness. In May 2009, the New Philanthropy Capital in London, UK hosted a conference on effectiveness impact. The thesis of this conference and the presentations and workshops was the importance of evaluating, both internally and externally, the impact of the NPO in promoting change in society consistent with the mission and goals of the NPO.

This emphasis on charity effectiveness assessment is quite new. In a 2001 public survey performed in the United States, the question on charity effectiveness was rated very important or somewhat important by 94 percent of the respondents. In other words, donors are interested in making a difference in society, maybe in providing relief from natural or human caused disasters, curing or preventing diseases, scientific research, alleviating poverty or homelessness, providing cultural enrichment through the performing arts, promoting education, or propagating religious teaching. Due to the diversity of the sector, there really is no possibility of a common standard for the entire sector that would provide for a uniform method of measuring and evaluating effectiveness. There must be flexibility in goals and the impact.

Part of the evaluation of effectiveness relates to the allocation of program costs and administrative costs. From the donor's perspective, how much of the donor's gift goes to the charitable purpose or public benefit purpose for which it was given. From the charity's perspective, how much does it cost to raise the funds, and how much of the money raised goes to the fundraising and administrative cost pools. In Switzerland, the approach includes assessment of efficiency with bench marks for charities as part of the certification by sector. What we are seeing in ICFO is an increasing focus on impact.

Ken Berger in his blog post of 25 May 2010 has an excellent discussion of some of these issues, and the evaluation of effectiveness. In his blog post, The Battle for the Soul of the Nonprofit Sector, Ken argues that over the past few decades, "the sector's, 'thought leaders' have been thrashing it out over the two most important questions ever to face the sector: how to define the value of all the work we are doing, and how to measure that value." While Ken acknowledges that Charity Navigator has been criticized for its fiscal rating system as one-dimensional, he and his colleagues at Charity Navigator believe that the larger issue at stake is how to identify high-performing nonprofits and how to better direct donors' contributions to them.

Like the BBB Wise Giving Alliance, Charity Navigator is now incorporating in its evaluation scheme, effectiveness impact. As Ken wrote in his post, the theory is this: much of the effort in the sector has been activity-driven rather than results or outcome driven, and secondly, for much of its history, the sector has not been investing in change, but relying instead on the notion of making services available as a way to stop harmful behaviors and alter negative situations. John Pellowe made this point in his presentation at the ICFO AGM in Waterloo, Canada, that is, that we focus on activity rather than on actually doing good. Ken in his blog post spoke of the idea that charitable donations should not be merely "giving," but rather social investments, and that the informed donor is the best social investor.

What Ken also argues that I am not sure I am ready to buy is that "effective organizations represent the wisest and most efficacious social investments." While it is true that many donors, and perhaps the general public, are interested in effective social investment, measuring that impact is not often easy, particularly when the emphasis invariably turns on short term results or change. I think of medical and scientific research that is directed to providing prevention or healing of certain disease, often leading to failure or dead ends, except in the enrichment of scientific or medical knowledge, or relief efforts in places such as Haiti as a result of the recent earthquake, or maybe religious mission in remote and unreached areas where immediate results are not seen. My sense is that this is why it is so important that effectiveness evaluation tools remain flexible to cover the diversity represented in the third sector.

Ken and his co-writers end this excellent post with the following thought:

So the battle over the future course of our sector -- for its very soul -- is being waged. The question we must answer is whether we measure, manage and deliver true, verifiable and meaningful results, or simply continue "the work" with no reliable idea of where our efforts are leading and whether they are truly helping.

Ken argues that charities must be held accountable for the claims they make regarding the changes they are bringing about, and I agree. Performance measurement, whether critics like it or not, is according to Ken, absolutely necessary, and I guess for the most part, I can agree with this to a certain limit. But, then he goes on to argue that the information regarding performance is to be made not only "available," but readily accessible to the public. I agree with this and discuss this issue as one of the challenges to transparency and accountability in future posts in this series.

While I acknowledge the arguments concerning effectiveness impact or performance evaluation represent a valid perspective, I cannot help but wonder whether all of this is really the case, or if there are certain types of givers that are driving this emphasis. Or maybe that certain evaluating or monitoring organizations and think tanks are driving this focus on effectiveness evaluation concept while the rest of the donor public could basically care less. Cynical, perhaps. But, in my concluding remarks at the AGM, I wondered out loud does any of this stuff on transparency and accountability really matter? Who cares? My last post on the relief efforts in Haiti following the earthquake on 12 January 2010, suggests that a lot of people give a lot of money to causes that attract national, or international attention, and do so in response to emotional fundraising appeals without any regard to matters of transparency and accountability, or even effectiveness impact. Are the statistics cited in the 2001 public survey about the importance of charity programs being successful in achieving their purposes or mission accurate, or do they merely reflect what people think we want to hear so that we think that they are responsible with their financing of charity.

These questions will be explored in this series regarding the challenges we face as a society in expecting that NPOs and CSOs are transparent and accountable with respect to their practices. Is it possible to think, live, and practice in this world in which we seek to provide public benefit and influence society for the better through our good works when the models we see around us are built on materialism and utilitarianism, where efficiency and success however defined trumps all? In other words, are doing good and doing it well incompatible?