Emerging issue: How much donor involvement is too much?
February 27, 2001
Donor Direction: How Much Is Too Much?
This article is excerpted from the November/December 2000 issue of Advancing Philanthropy.
'Undue influence by donors' is the number-one issue in fundraising today, says Jon Dellandrea, PhD, vice president and chief development officer, University of Toronto. With donors increasingly seeking philanthropic control, fundraisers are more likely to encounter directions that push ethical boundaries. No prescribed answers exist -- it's a matter of case-by-case negotiation and judgment -- but nonprofit mission statements, tax law, and AFP codes and standards do provide guidance. Here are a few reminders, in a nutshell:
- 26 USC Section 501(c)(3): Exempt organizations must operate exclusively for exempt purposes; no earnings may inure to private benefit.
- AFP's Statement of Ethical Principles: Charitable fundraisers have obligations to (a) honor public trust, (b) adhere to a nonprofit's standards and plans, (c) consider affected individuals, and (d) avoid the appearance of impropriety.
- AFP Standards of Professional Practice 1 and 2: These standards (a) prohibit conflicts with fiduciary obligations and (b) require disclosure of real or potential conflicts of interest.
- AFP Donor Bill of Rights, I: A donor has the right to be informed of a charitable or nonprofit organization's mission. Putting these principles into practice case by case is the trick, of course. Ask three basic questions when you are evaluating the terms of a conditional gift:
The new venture philanthropists 'often don't have a good understanding of the boundaries between philanthropy and self-interest,' says Peter Hero, MA, MBA, president, Community Foundation Silicon Valley, and past AFP Fundraiser of the Year. Venture philanthropists -- successful as scientists and engineers but novices at charitable giving -- think of philanthropy as investing. They don't want to give up the hands-on management style that has worked for them.
Yet, too much donor control is hazardous to a nonprofit organization's integrity. When the terms of a proposed gift would redirect an institution's core mission, that gift usurps control that rightfully belongs to the nonprofit, for which image and branding are sine qua non. For example, a gift endowment of a university chair that is contingent on naming specific faculty members or on teaching a particular point of view would be an inappropriate donor infringement on academic freedom.
Many organizations are turning to donor-advised funds -- donors contribute funds, then give advice as to their use -- to strike an acceptable balance. However, even then, notes Bob Bothwell, president emeritus/senior fellow, National Committee for Responsive Philanthropy, 'Ethical tension can arise for public foundations if donor advice interferes with the obligation to involve grassroots organizations.'
Problems with donor advice can occur on two fronts: tax code violations and conflicts of interest. 'The public is the stakeholder,' explains Colette Murray, JD, CFRE, incoming AFP chair-elect and past chair of AFP's Ethics Committee. She warns that even minimally diverting a gift's benefit from public to private purposes jeopardizes an organization's tax-exempt status.
Preferred treatment for donors is suspect unless carried out at arm's length. If a board member donates funds for a concert band, then seeks a contract for a relative's musical instrument supply company, there may be no conflict of interest if the relative's firm submits a winning bid in a competitive process. 'If the donor gets no special consideration and everyone involved has notice' of the relationship, potentially inappropriate benefit problems may be resolved, says Marianne Briscoe, PhD, ACFRE, and founding principal, Hayes Briscoe Associates, Petaluma, CA.
Who pays in the long run?
Fundraisers must exercise due diligence even when gifts are legal, conflict-free, and consistent with organizational objectives. Program improvements can cost the recipient money and heartache if they can't be sustained after the gift is expended.
Help donors avoid mistakes
Gifts contingent on agreeing to let a donor perform services -- for instance, an architect who wants to design the building she donates -- can drain rather than augment resources. Fundraisers must be satisfied that the building will serve organizational and program purposes, that design features and construction quality will pass muster, and that the structure can be maintained. Help avoid costly mistakes, program disappointments, and bad publicity by educating donors:
- Before development: 'Planning comes first, then development,' emphasizes Dellandrea. Before raising a single dollar, an institution should have a clear sense of its mission, aspirations, and priorities--and take the lead. When meeting with a new donor, a fundraiser is in a position to say, 'Here's what we're trying to do. Where do your interests coincide?' His university also provides a 'Guidelines for Donors' document and draws up donor agreements acknowledging the overriding importance of academic freedom. 'Under these circumstances,' Dellandrea says, 'it's almost impossible for a donor to suggest an inappropriate gift.'
- Before giving: 'Most problems arise because donors are 'innocent' of applicable ethical and legal standards,' explains Barbara H. Marion, CFRE, senior principal, Hayes Briscoe Associates, past chair, AFP Foundation, and past member, AFP Ethics Committee. In her experience, donors comply readily once they understand the issues. In this belief, the Community Foundation Silicon Valley helps donors to develop their own strategic philanthropy plans and links its Donor Relations and Program departments so that donors can see Foundation priorities in action before giving. Its donor website discusses ethical issues and community needs, as well as promoting donor networking so the word will spread.
- Before trouble: Fundraisers who understand that organizational and donor goals may not be the same discuss legal and ethical issues up front. Because they work with donors from the start of the relationship to determine what level of involvement makes sense, these fundraisers may never find themselves having to walk away from a gift--or wishing, too late, that they had turned it down.
Casebites: scenarios of potential conflict
A donor wants to contribute an important art collection to a local museum, contingent on the paintings being hung in perpetuity in a separate, named gallery that will often be closed to the public for private events. The collection must be placed exactly as it had been in the donor's home, and the individual paintings must never be sold or loaned.
Issues at stake: Do the gift's static nature and stringent conditions 'unduly influence' the museum's mission? Does the gift jeopardize the museum's 501(c)(3) status by failing to serve a public purpose and conferring a private benefit (creating a personal memorial)? Will the gift's terms prevent the generation of income, causing it to eventually become unsustainable?
One possible resolution: The museum's board must weigh the contribution of the paintings against the museum's mission and against the gift's constraints on public access and the museum staff's administrative discretion. Given the additional litigation and financial risks, the museum must confer with the donor about dropping some of the conditions. If the donor refuses, the museum may seriously consider declining the gift.
A donor responds to a university's appeal for funds to expand its Classical Studies program, but the donor -- a leading authority on ancient Greek language and culture -- suggests playing a close advisory role.
Issue at stake: Does the donor's involvement in program development compromise academic integrity?
One possible resolution: The donor is offering genuine expertise as opposed to pushing personal theories. As the donor's advice is likely to enhance the quality and reputation of its academic program, the university should probably accept the gift.