Stanford Social Innovation Review: Ethics And Nonprofits

Ethics and Nonprofits
By Deborah L. Rhode & Amanda K. Packel

Stanford Social Innovation Review Summer 2009
Copyright © 2009 by Leland Stanford Jr. University All Rights Reserved

Stanford Social Innovation Review 518 Memorial Way, Stanford, CA 94305-5015 Ph: 650-725-5399. Fax: [phone] Email: [e-mail], www.ssireview.com

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Ethics Nonprofits
By Deborah L. Rhode & Amanda K. Packel

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Illustration by Richard Mia

Unethical behavior remains a persistent problem in nonprofits and for-profits alike. To help organizations solve that problem, the authors examine the factors that influence moral conduct, the ethical issues that arise specifically in charitable
organizations, and the best ways to promote ethical behavior within organizations. hose who work on issues of ethics are among the few professionals not suffering from the current economic downturn. The last decade has brought an escalating supply of moral meltdowns in both the for-profit and the nonprofit sectors. Corporate misconduct has received the greatest attention, in part because the abuses are so egregious and the costs so enormous. Chief

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contenders for most ethically challenged include former Merrill Addressing these ethical concerns requires a deeper understandLynch & Co. CEO John Thain, who spent $1.22 million in 2008 to ing of the forces that compromise ethical judgment and the most redecorate his office, including the purchase of a $1,400 trash can effective institutional responses. To that end, this article draws on and a $35,000 antique commode, while the company was hemor- the growing body of research on organizational culture in general, rhaging losses of some $27 billion.1 and in nonprofit institutions in particular. We begin by reviewing Still, the corporate sector has no monopoly on greed. Consider the principal forces that distort judgment in all types of organizaEduCap Inc., a multibillion-dollar student loan charity. According tions. Next, we analyze the ethical issues that arise specifically in to Internal Revenue Service records, the organization abused its the nonprofit sector. We conclude by suggesting ways that nonprofits tax-exempt status by charging excessive interest on loans and by can prevent and correct misconduct and can institutionalize ethical providing millions in compensation and lavish perks to its CEO and values in all aspects of the organization’s culture. her husband, including use of the organization’s $31 million private | Causes of Misconduct| jet for family and friends.2 Unsurprisingly, these and a host of other scandals have eroded Ethical challenges arise at all levels in all types of organizations— public confidence in our nation’s leadership. According to a CBS for-profit, nonprofit, and government—and involve a complex reNews poll, only a quarter of Americans think that top executives are lationship between individual character and cultural influences. honest. Even executives themselves acknowledge cause for concern. Some of these challenges can result in criminal violations or civil The American Management Association Corporate Values Survey liability: fraud, misrepresentation, and misappropriation of assets found that about one third of executives believed that their compa- fall into this category. More common ethical problems involve gray ny’s public statements on ethics sometimes conflicted with internal areas—activities that are on the fringes of fraud, or that involve messages and realities. And more than one third of the executives conflicts of interest, misallocation of resources, or inadequate acreported that although their company would follow the law, it would countability and transparency. not always do what would be perceived as ethical. Research identifies four crucial factors that influence ethical Employee surveys similarly suggest that many American work- conduct: places fail to foster a culture of integrity. Results vary but generally Q Moral awareness: recognition that a situation raises ethical issues indicate that between about one-quarter and three-quarters of emQ Moral decision making: determining what course of action is ployees observe misconduct, only about half of which is reported.3 ethically sound In the 2007 National Nonprofit Ethics Survey, slightly more than Q Moral intent: identifying which values should take priority in half of employees had observed at least one act of misconduct in the decision the previous year, roughly the same percentages as in the for-profit 6 Q Moral action: following through on ethical decisions. and government sectors. Nearly 40 percent of nonprofit employees who observed misconduct failed to report it, largely because they People vary in their capacity for moral judgment—in their ability believed that reporting would not lead to corrective action or they to recognize and analyze moral issues, and in the priority that they place on moral values. They also differ in their capacity for moral feared retaliation from management or peers.4 Public confidence in nonprofit performance is similarly at risk. behavior—in their ability to cope with frustration and make good A 2008 Brookings Institution survey found that about one third on their commitments. of Americans reported having “not too much” or no confidence in Cognitive biases can compromise these ethical capacities. Those charitable organizations, and 70 percent felt that charitable organi- in leadership positions often have a high degree of confidence in zations waste “a great deal” or a “fair amount” of money. Only 10 their own judgment. That can readily lead to arrogance, overoptipercent thought charitable organizations did a “very good job” spend- mism, and an escalation of commitment to choices that turn out to ing money wisely; only 17 percent thought that charities did a “very be wrong either factually or morally.7 As a result, people may ignore good job” of being fair in decisions; and only one quarter thought or suppress dissent, overestimate their ability to rectify adverse concharities did a “very good job” of helping people.5 Similarly, a 2006 sequences, and cover up mistakes by denying, withholding, or even Harris Poll found that only one in 10 Americans strongly believed destroying information.8 that charities are honest and ethical in their use of donated funds. A related bias involves cognitive dissonance: People tend to supNearly one in three believed that nonprofits have “pretty seriously press or reconstrue information that casts doubt on a prior belief gotten off in the wrong direction.” These public perceptions are or action.9 Such dynamics may lead people to discount or devalue particularly troubling for nonprofit organizations that depend on evidence of the harms of their conduct or the extent of their own continuing financial contributions. responsibility. In-group biases can also result in unconscious discrimination that leads to ostracism of unwelcome or inconvenient Debor a h L . R hode is the Ernest W. McFarland Professor of Law at Stanford views. That, in turn, can generate perceptions of unfairness and Law School and director of the Stanford Center on the Legal Profession. She is the encourage team loyalty at the expense of candid and socially reauthor of 20 books, including Moral Leadership: The Theory and Practice of Power, Judgment, and Policy (Jossey-Bass, 2006), and Legal Ethics (Foundation Press, 5th sponsible decision making.10 Edition, 2009). A person’s ethical reasoning and conduct is also affected by orgaA m a nda K . Packel is the associate director of the Stanford Center on the Legal nizational structures and norms. Skewed reward systems can lead Profession. Before joining Stanford University she was an associate at the law firm to a preoccupation with short-term profits, growth, or donations at Covington & Burling, where she practiced white-collar criminal defense.
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the expense of long-term values. Mismanaged bonus systems and backgrounds were asked for their personal views on the same hycompensation structures are part of the explanation for the morally pothetical, 97 percent believed that continuing to market the drug irresponsible behavior reflected in Enron Corp. and in the recent was socially irresponsible.14 financial crisis.11 In charitable organizations, employees who feel These dynamics are readily apparent in real-world settings. Enexcessive pressure to generate revenue or minimize administrative ron’s board twice suspended conflict of interest rules to allow CFO expenses may engage in misleading conduct.12 Employees’ percep- Andrew Fastow to line his pockets at the corporation’s expense.15 tions of unfairness in reward systems, as well as leaders’ apparent Some members of the United Way of the National Capital Area’s lack of commitment to ethical standards, increase the likelihood of board were aware of suspicious withdrawals by CEO Oral Suer over the course of 15 years, but failed to alert the full board or take correcunethical behavior.13 A variety of situational pressures can also undermine moral con- tive action.16 Experts view the large size of some governing bodies, duct. Psychologist Stanley Milgram’s classic obedience to authority experiment at Yale University offers a chilling example of how readily the good go bad under situational pressures. When asked to administer electric shocks to another participant in the experiment, about two-thirds of subjects fully complied, up to levels marked “dangerous,” despite the victim’s screams of pain. Yet when the experiment was described to subjects, none believed that they would comply, and the estimate of how many others would do so was no more than one in 100. In real-world settings, when instructions come from supervisors and jobs are on the line, many moral compasses go missing. Variations of Milgram’s study also documented the influence of peers on individual decision making. Ninety percent of subjects paired with someone who refused to comply also refused to administer the shocks. By the same token, 90 percent of subjects paired with an uncomplaining and obedient subject were equally obedient. Research on organizational behavior similarly finds that people are more likely to engage in unethical conduct when acting with others. Under circumstances where bending the rules provides payoffs for the group, members may feel substantial pressure to put their moral convictions on hold. That is especially likely when organizations place heavy emphasis on loy- such as the formerly 50-member board of the American Red Cross, alty and offer significant rewards to team players. For example, if it is as a contributing factor in nonprofit scandals.17 Other characteristics of organizations can also contribute to common practice for charity employees to inflate expense reports or occasionally liberate office supplies and in-kind charitable donations, unethical conduct. Large organizations facing complex issues may other employees may suspend judgment or follow suit. Once people undermine ethical judgments by fragmenting information across yield to situational pressures when the moral cost seems small, they multiple departments and people. In many scandals, a large number can gradually slide into more serious misconduct. Psychologists label of professionals—lawyers, accountants, financial analysts, board this “the boiled frog” phenomenon. A frog thrown into boiling water members, and even officers—lacked important facts raising moral will jump out of the pot. A frog placed in tepid water that gradually as well as legal concerns. Work may be allocated in ways that prebecomes hotter will calmly boil to death. vent decision makers from seeing the full picture, and channels for Moral blinders are especially likely in contexts where people lack expressing concerns may be inadequate. accountability for collective decision making. That is often true of Another important influence is ethical climate—the moral meanboards of directors—members’ individual reputations rarely suffer, ings that employees give to workplace policies and practices. Organiand insurance typically insulates them from personal liability. A zations signal their priorities in multiple ways, including the content well-known study by Scott Armstrong, a professor at the Wharton and enforcement of ethical standards; the criteria for hiring, promoSchool of the University of Pennsylvania, illustrates the pathologies tion, and compensation; and the fairness and respect with which they that too often play out in real life. The experiment asked 57 groups of treat their employees. People care deeply about “organizational justice” executives and business students to assume the role of an imaginary and perform better when they believe that their workplace is treating pharmaceutical company’s board of directors. Each group received them with dignity and is rewarding ethical conduct. Workers also a fact pattern indicating that one of their company’s most profitable respond to moral cues from peers and leaders. Virtue begets virtue, drugs was causing an estimated 14 to 22 “unnecessary” deaths a year. and observing integrity in others promotes similar behavior. The drug would likely be banned by regulators because a competitor offered a safe medication with the same benefits at the same price. | Ethical Issues in the Nonprofit Sector| More than four-fifths of the boards decided to continue marketing These organizational dynamics play out in distinctive ways in the the product and to take legal and political actions to prevent a ban. nonprofit sector. There are six areas in particular where ethical isBy contrast, when a different group of people with similar business sues arise in the nonprofit sector: compensation; conflicts of interest;

Public confidence in nonprofit performance is at risk. Only one in 10 strongly believed that charities are honest and ethical in their use of donated funds.

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publications and solicitation; financial integrity; investment policies; and accountability and strategic management. Compensation. Salaries that are modest by business standards can cause outrage in the nonprofit sector, particularly when the organization is struggling to address unmet societal needs. In a March 23, 2009, Nation column, Katha Pollitt announced that she “stopped donating to the New York Public Library when it gave its president and CEO Paul LeClerc a several hundred thousand-dollar raise so his salary would be $800,000 a year.” That, she pointed out, was “twenty times the median household income.” Asking him to give back half a million “would buy an awful lot of books—or help pay for raises for the severely underpaid librarians who actually keep the system going.” If any readers thought LeClerc was an isolated case, she suggested checking Charity Navigator for comparable examples. The problem is not just salaries. It is also the perks that officers and unpaid board members may feel entitled to take because their services would be worth so much more in the private sector. A widely publicized example involves William Aramony, the former CEO of United Way of America, who served six years in prison after an investigation uncovered misuse of the charity’s funds to finance a lavish lifestyle, including luxury condominiums, personal trips, and payments to his mistress.18 Examples like Aramony ultimately prompted the IRS to demand greater transparency concerning nonprofit CEO compensation packages exceeding certain thresholds.19 Nonprofits also face issues concerning benefits for staff and volunteers. How should an organization handle low-income volunteers who select a few items for themselves while sorting through noncash contributions? Should employees ever accept gifts or meals from beneficiaries or clients? Even trivial expenditures can pose significant issues of principle or public perception. Travel expenses also raise questions. Can employees keep frequent flyer miles from business travel? How does it look for cash-strapped federal courts to hold a judicial conference at a Ritz-Carlton hotel, even though the hotel offered a significantly discounted rate? The Panel on the Nonprofit Sector recommends in its Principles for Good Governance and Ethical Practice that organizations establish clear written policies about what can be reimbursed and require that travel expenses be cost-effective. But what counts as reasonable or cost-effective can be open to dispute, particularly if the nonprofit has wealthy board members or executives accustomed to creature comforts.

In another Nature Conservancy transaction, the organization received $100,000 from SC Johnson Wax to allow the company to use the Conservancy’s logo in national promotion of products, including toilet cleaner. The company’s chairman sat on the charity’s board, although he reportedly recused himself from participating in or voting on the transaction.21 These examples raise a number of ethical questions. Should board members obtain contracts or donations for their own organizations? Is the board member’s disclosure and abstention from a vote enough? Should a major donor receive special privileges, such as a job or college admission for a child? In a recent survey, a fifth of nonprofits (and two-fifths of those with more than $10 million in annual expenses) reported buying or renting goods, services, or property from a board member or an affiliated company within the prior two years. In three-quarters of nonprofits that did not report

One of the most critical steps nonprofits can take to promote ethical conduct is to ensure that they have adequate ethical codes and effective compliance programs.

any such transactions, board members were not required to disclose financial interests in entities doing business with the organization, so its leaders may not have been aware of such conflicts.22 Despite the ethical minefield that these transactions create, many nonprofits oppose restrictions because they rely on insiders to provide donations or goods and services at below-market rates. Yet such quid pro quo relationships can jeopardize an organization’s reputation for fairness and integrity in its financial dealings. To maintain Conflicts of Interest. Conflicts of interest arise frequently in the public trust and fiduciary obligations, nonprofits need detailed, nonprofit sector. The Nature Conservancy encountered one such unambiguous conflict of interest policies, including requirements problem in a “buyer conservation deal.” The organization bought that employees and board members disclose all financial interest in land for $2.1 million and added restrictions that prohibited devel- companies that may engage in transactions with the organization. opment such as mining, drilling, or dams, but authorized construc- At a minimum, these policies should also demand total transpartion of a single-family house of unrestricted size, including a pool, ency about the existence of potential conflicts and the process by a tennis court, and a writer’s cabin. Seven weeks later, the Nature which they are dealt with. Conservancy sold the land for $500,000 to the former chairman of its regional chapter and his wife, a Nature Conservancy trustee. The Publications and Solicitation. Similar concerns about public trust buyers then donated $1.6 million to the Nature Conservancy and entail total candor and accuracy in nonprofit reports. The Red Cross took a federal tax write-off for the “charitable contribution.” 20 learned that lesson the hard way after disclosures of how it used the Related conflicts of interest arise when an organization offers pref- record donations that came in the wake of the 9/11 terrorist attacks. erential treatment to board members or their affiliated companies. Donors believed that their contributions would go to help victims and
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their families.
The Red Cross, however, set aside more than half of the are unlikely to affect corporate policies. Our view, however, is that $564 million in funds raised for 9/11 for other operations and future symbols matter, and that similar divestment decisions by large instireserves. Although this was a long-standing organizational practice, tutional investors can sometimes influence corporate conduct. Hyit was not well known. Donor outrage forced a public apology and pocrisy, as French writer François de La Rochefoucauld put it, may redirection of funds, and the charity’s image was tarnished.23 be the “homage vice pays to virtue,” but it is not a sound managerial As the Red Cross example demonstrates, nonprofits need to pay strategy. To have one set of principles for financial management and particular attention to transparency. They should disclose in a clear another for programmatic objectives sends a mixed moral message. and non-misleading way the percentage of funds spent on adminis- Jeff Skoll acknowledged as much following his foundation’s support trative costs—information that affects many watchdog rankings of of Fast Food Nation, a dramatic film highlighting the adverse social nonprofit organizations. Transparency is also necessary in solicita- impacts of the fast-food industry. “How do I reconcile owning shares tion materials, grant proposals, and donor agreements. Organizations in [Coca-Cola and Burger King] with making the movie?” he asked.26 cannot afford to raise funds on the basis of misguided assumptions, As a growing number of foundations recognize, to compartmentalize ethics inevitably marginalizes their significance. About a fifth of or to violate public expectations in the use of resources. institutional investing is now in socially screened funds, and it is by Financial Integrity. Nonprofit organizations also face ethical dilem- no means clear that these investors have suffered financial losses as mas in deciding whether to accept donations that have
any unpalat- a consequence.27 able associations or conditions. The Stanford Institute for Research on Women and Gender, for example, declined to consider a potential Accountability and Strategic Management. By definition, nonprofit gift from the Playboy Foundation. By contrast, the ACLU’s Women’s organizations are not subject to the checks of market forces or Rights Project, in its early phase, accepted a Playboy Foundation gift, majoritarian control. This independence has come under increasand for a brief period sent out project mailings with a Playboy bunny ing scrutiny in the wake of institutional growth. In 2006, after a logo.24 When Stanford University launched an ethics center, the $30 billion gift from Warren Buffet, the Gates Foundation endowpresident quipped about what level of contribution would be neces- ment doubled, making it larger than the gross domestic product sary to name the center and whether the amount should depend on of more than 100 countries. In societies where nonprofits serve the donor’s reputation. If “the price was right,” would the university crucial public functions and enjoy substantial public subsidies (in the form of tax deductions and exemptions), this public role want a Ken Lay or a Leona Helmsley center on ethics? Recently, many corporations have been attempting to “green” also entails significant public responsibilities. In effect, those retheir image through affiliations with environmental organizations, sponsibilities include fiduciary obligations to stakeholders—those and some of these groups have been entrepreneurial in capitalizing who fund nonprofits and those who receive their services—to use on such interests. The Nature Conservancy offered corporations resources in a principled way. As a growing body of work on phisuch as the Pacific Gas and Electric Co. and the Dow Chemical Co. lanthropy suggests, such accountability requires a well-informed seats on its International Leadership Council for $25,000 and up. plan for furthering organizational objectives and specific meaMembers of the council had opportunities to “meet individually sures of progress. A surprising number of nonprofits lack such with Nature Conservancy staff to discuss environmental issues of strategic focus. Many operate with a “spray and pray” approach, specific importance to the member company.” 25 which spreads assistance across multiple programs in the hope There are no easy resolutions of these issues, but there are bet- that something good will come of it. Something usually does, but ter and worse ways of addressing them. Appearances matter, and it it is not necessarily the cost-effective use of resources that public sometimes makes sense to avoid affiliations where a donor is seeking accountability demands. to advance or pedigree ethically problematic conduct, or to impose Money held in public trust should be well spent, not just well-intentioned. But in practice, ethical obligations bump up excessive restrictions on the use of funds. against significant obstacles. The most obvious involves evaluInvestment Policies. Advocates of socially responsible investing ar- ation. Many nonprofit initiatives have mixed or nonquantifiable gue that nonprofit organizations should ensure that their financial outcomes. How do we price due process, wilderness preservation, portfolio is consistent with their values. In its strongest form, this or gay marriage? strategy calls for investing in ventures that further an organizaAlthough in many contexts objective measures of progress are tion’s mission. In its weaker form, the strategy entails divestment hard to come by, it is generally possible to identify some indicators from companies whose activities undermine that mission. The issue or proxies. Examples include the number and satisfaction of people gained widespread attention after a Jan. 7, 2007, Los Angeles Times affected, the assessment of experts, and the impact on laws, policies, article criticized the Bill & Melinda Gates Foundation for invest- community empowerment, and social services. The effectiveness of ing in companies that contributed to the environmental and health evaluation is likely to increase if organizations become more willing problems that the foundation is attempting to reduce. to share information about what works and what doesn’t. To be sure, Many nonprofit leaders have resisted pressure to adopt socially those who invest significant time and money in social impact work responsible investing principles on the grounds that maximizing want to feel good about their efforts, and they are understandably the financial return on investment is the best way to further their reluctant to spend additional resources in revealing or publicizing organization’s mission, and that individual divestment decisions poor outcomes. What nonprofit wants to rain on its parade when
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that might jeopardize public support? But sometimes at least a light drizzle is essential to further progress. Only through pooling information and benchmarking performance can nonprofit organizations help each other to do better.

| Promoting Ethical Decision Making|
Although no set of rules or organizational structures can guarantee ethical conduct, nonprofits can take three steps that will make it more likely. Ensure Effective Codes of Conduct and Compliance Programs. One of the most critical steps that nonprofits can take to promote ethical conduct is to ensure that they have adequate ethical codes and effective compliance programs. Codified rules can clarify expectations, establish consistent standards, and project a responsible

deviations from explicit rules, an approach found to be less effective in promoting ethical behavior than approaches that encourage self-governance and commitment to ethical aspirations.31 To develop more effective codes and compliance structures, nonprofit organizations need systematic information about how they operate in practice. How often do employees perceive and report ethical concerns? How are their concerns addressed? Are they familiar with codified rules and confident that whistle-blowers will be protected from retaliation? Do they feel able to deliver bad news without reprisals? Promote Effective Financial Management. Another step that nonprofits can take to foster ethical behavior and promote public trust is to use resources in a socially responsible way. In response to reports of bloated overhead, excessive compensation, and financial mismanagement, watchdog groups like Charity Navigator have begun rating nonprofits on the percentage of funds that go to administration rather than program expenditures. Although this rating structure responds to real concerns, it reinforces the wrong performance measure, distorts organizational priorities, and encourages disingenuous accounting practices. Groups with low administrative costs may not have the scale necessary for social impact. The crucial question that donors and funders should consider in directing their resources is the relative cost-effectiveness of the organization. Yet according to a 2001 study by Princeton Survey Research Associates, only 6 percent of Americans say that whether a program “makes a difference” is what they most want to know when making charitable decisions. Two-thirds expect the bulk of their donations to fund current programs and almost half expect all of their donations to do so. Such expectations encourage charities to provide short-term direct aid at the expense of building long-term institutional capacity. Moreover, the line these donors draw between “overhead” and “cause” is fundamentally flawed. As Dan Pallotta notes in Uncharitable, “the distinction is a distortion.” All donations are going to the cause, and “the fact that [a dollar] is not going to the needy now obscures the value it will produce down the road” by investing in infrastructure or fundraising capacity. Penalizing charities for such investments warps organizational priorities. It also encourages “aggressive program accounting,” which allocates fundraising, management, and advertising expenses to program rather than administrative categories. Studies of more than 300,000 tax returns of charitable organizations find widespread violation of standard accounting practices and tax regulations, including classification of accounting fees and proposal writing expenses as program expenditures.32 To address these issues, nonprofit organizations need better institutional oversight, greater public education, and more transparent and inclusive performance measures. Ensuring common standards for accounting and developing better rating systems for organizational effectiveness should be a priority. Institutionalize an Ethical Culture. In its National Nonprofit Ethics Survey, the Ethics Resource Center categorizes an organization as having a strong ethical culture when top management leads with integrity, supervisors reinforce ethical conduct, peers display a commitment

Where there is no consensus about ethically appropriate conduct, leaders should strive for a decision-making process that is transparent and responsive.

public image. If widely accepted and enforced, codes can also reinforce core values, deter misconduct, promote trust, and reduce the organization’s risks of conflicting interests and legal liability. Although the value of ethical codes and compliance structures should not be overlooked, neither should it be overstated. As empirical research makes clear, the existence of an ethical code does not of itself increase the likelihood of ethical conduct. Much depends on how standards are developed, perceived, and integrated into workplace functions. “Good optics” was how one manager described Enron’s ethical code, and shortly after the collapse, copies of the document were selling on eBay, advertised as “never been read.” 28 A recent survey of nonprofit organizations found that only about one third of employees believed that their workplace had a wellimplemented ethics and compliance program. This figure is higher than the corresponding figure for the business (25 percent) and government (17 percent) sectors, but still suggests ample room for improvement.29 Part of the problem lies with codes that are too vague, inflexible, or narrow. Only about half of nonprofit organizations have conflict of interest policies, and fewer than one third require disclosure of potentially conflicting financial interests.30 A related difficulty is compliance programs that focus simply on punishing
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to ethics, and the organization integrates its values in day-to-day decision making. In organizations with strong ethical cultures, employees report far less misconduct, feel less pressure to compromise ethical commitments, and are less likely to experience retaliation for whistle-blowing.33 This survey is consistent with other research, which underscores the importance of factoring ethical concerns into all organizational activities, including resource allocation, strategic planning, personnel and compensation decisions, performance evaluations, auditing, communications, and public relations. Often the most critical determinant of workplace culture is ethical leadership. Employees take cues about appropriate behavior from those at the top. Day-to-day decisions that mesh poorly with professed values send a powerful signal. No organizational mission statement or ceremonial platitudes can counter the impact of seeing leaders withhold crucial information, play favorites with promotion, stifle dissent, or pursue their own self-interest at the organization’s expense. Leaders face a host of issues where the moral course of action is by no means self-evident. Values may be in conflict, facts may be contested or incomplete, and realistic options may be limited. Yet although there may be no unarguably right answers, some will be more right than others—that is, more informed by available evidence, more consistent with widely accepted principles, and more responsive to all the interests at issue. Where there is no consensus about ethically appropriate conduct, leaders should strive for a decisionmaking process that is transparent and responsive to competing stakeholder interests. Nonprofit executives and board members also should be willing to ask uncomfortable questions: Not just “Is it legal?” but also “Is it fair?” “Is it honest?” “Does it advance societal interests or pose unreasonable risks?” and “How would it feel to defend the decision on the evening news?” Not only do leaders need to ask those questions of themselves, they also need to invite unwelcome answers from others. To counter self-serving biases and organizational pressures, people in positions of power should actively solicit diverse perspectives and dissenting views. Every leader’s internal moral compass needs to be checked against external reference points. Some three decades ago, in commenting on the performance of Nixon administration officials during the Watergate investigation, then-Supreme Court Chief Justice Warren Burger concluded that “apart from the morality, I don’t see what they did wrong.” 34 That comment has eerie echoes in the current financial crisis, as leaders of failed institutions repeatedly claim that none of their missteps were actually illegal. Our global economy is paying an enormous price for that moral myopia, and we cannot afford its replication in the nonprofit sphere. Q
Note s
1 Jay Fitzgerald, “Treasury Gets Tough: Eyes Financial Bailout Abuse,” Boston Herald, January 28, 2009: 25; Sheryl Gay Stolberg and Stephen Labaton, “Banker Bonuses Are ‘Shameful,’ Obama Declares,” The New York Times, January 30, 2009: A1. 2 Sharyl Attkisson, “Student Loan Charity Under Fire: Is One Educational Charity Abusing Their Status with Lavish Travel and Huge Salaries?” CBS News, March 2, 2009; Sharyl Attkisson, “Loan Charity’s High-Flying Guests Exposed: Educational Nonprofit Under Fire for Transporting Politicians with Money That Could Have Gone to Students,” CBS News, March 3, 2009.

3 Deborah L. Rhode, “Where Is the Leadership in Moral Leadership?” D.L. Rhode, ed., Moral Leadership: The Theory and Practice of Power, Judgment, and Policy, San Francisco: Jossey-Bass, 2006: 13. 4 Ethics Resource Center, National Nonprofit Ethics Survey 2007, March 27, 2008: ix, 2-4, 19. 5 Paul C. Light, How Americans View Charities: A Report on Charitable Confidence, Washington, D.C.: Brookings Institution, April 2008. 6 James R. Rest, ed., Moral Development: Advances in Research and Theory, New York: Praeger Publishers, 1994: 26-39. 7 Rhode, “Where Is the Leadership in Moral Leadership?”: 25. 8 Kimberly D. Krawiec, “Accounting for Greed: Unraveling the Rogue Trader Mystery,” Oregon Law Review, 79(2), 2000: 309-10. 9 See Leon Festinger, Theory of Cognitive Dissonance, Stanford, Calif.: Stanford University Press, 1957: 128-34; Eddie Harmon-Jones and Judson Mills, eds., Cognitive Dissonance: Progress on a Pivotal Theory in Social Psychology, Washington, D.C.: American Psychological Association, 1999. 10 David M. Messick and Max H. Bazerman, “Ethical Leadership and the Psychology of Decision Making,” MIT Sloan Management Review, 37(2), 1996: 76. 11 Ronald R. Sims and Johannes Brinkmann, “Enron Ethics (Or Culture Matters More Than Codes),” Journal of Business Ethics, 45(3), 2003: 243, 252. 12 See Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations, October 2007: 27, which advises against compensating internal or external fundraisers on the basis of a percentage of the funds raised. 13 Rhode, “Where Is the Leadership in Moral Leadership?”: 17-18. 14 J. Scott Armstrong, “Social Irresponsibility in Management,” Journal of Business Research, 5, September 1977: 185-213. 15 Barbara Kellerman, Bad Leadership: What It Is, How It Happens, Why It Matters, Boston: Harvard Business School Press, 2004: 146, 155. 16 Peter Whoriskey and Jacqueline L. Salmon, “Charity Concealed Pilfering: Auditors Had Flagged United Way Executive,” Fort Wayne Journal Gazette, August 17, 2003: 7; Bill Birchard, “Nonprofits by the Numbers: In the Wake of Embarrassing Revelations, High-Profile Scandals, and Sarbanes-Oxley, Nonprofit CFOs Are Striving for Greater Transparency and Accountability,” CFO Magazine, July 1, 2005. 17 Stephanie Strom, “Red Cross to Streamline Board’s Management Role,” The New York Times, October 31, 2006: A16. 18 Karen W. Arenson, “Ex-United Way Leader Gets 7 Years for Embezzlement,” The New York Times, June 23, 1995: 14. 19 Internal Revenue Service, Form 990 Redesign for Tax Year 2008 Background Paper, December 20, 2007. 20 Joe Stephens and David B. Ottaway, “Conservancy Property Deals Benefit Friends,” The Seattle Times, May 7, 2003: A12. 21 David B. Ottaway and Joe Stephens, “Conserving a Green Group’s Public Image,” Orlando Sentinel, May 18, 2003: G1; United States Senate Committee on Finance, Committee Report on The Nature Conservancy, Part III: 4. 22 Francie Ostrower, Nonprofit Governance in the United States, Washington, D.C.: The Urban Institute, 2007. 23 Birchard, “Nonprofits by the Numbers.” 24 Fred Strebeigh, Equal: Women Reshape American Law, New York: W.W. Norton & Co., 2009: 46. 25 Ottaway and Stephens, “Conserving a Green Group’s Public Image”: G1. 26 Matthew Bishop and Michael Green, Philanthrocapitalism: How the Rich Can Save the World, New York: Bloomsbury Press, 2008: 167. 27 Paul Brest and Hal Harvey, Money Well Spent: A Strategic Plan for Smart Philanthropy, New York: Bloomberg Press, 2008: 127-30. 28 Peter S. Cohan, Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy, San Francisco: Jossey-Bass, 2004: 2; Lynn Sharp Paine, Value Shift: Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance, New York: McGraw-Hill, 2003: 36. 29 Ethics Resource Center, National Nonprofit Ethics Survey 2007: 2. 30 Ostrower, Nonprofit Governance in the United States: 9. 31 Melissa S. Baucus and Caryn L. Beck-Dudley, “Designing Ethical Organizations: Avoiding the Long-Term Negative Effects of Rewards and Punishments,” Journal of Business Ethics, 56(4), 2005: 355. 32 Dan Pallotta, Uncharitable: How Restraints on Nonprofits Undermine Their Potential, Medford, Mass.: Tufts University Press, 2008: 41, 149-50, 162. 33 Ethics Resource Center, National Nonprofit Ethics Survey 2007: 1, 4-5, 10, 16. 34 Peter Goldman with Constance Wiley, “Inside the Burger Court,” Newsweek, December 10, 1979: 76.
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