In one sense, the best and worst of the American justice system was on full display during the often circus-like trail.  True, Espada, his constituents, stakeholders, fellow elected officials, and the entire nonprofit community finally got to hear the full details of the accusations against him in open court. They comprised an apparently bottomless pit of venality, skullduggery, self-serving, and downright greed and thievery.  Espada, it was shown:

• Billed his publicly funded, nonprofit health clinic about $103,000 for meals between 2005 and 2009, including more than $20,000 for a staggering 214 visits to a single sushi restaurant;
• Rang up another $63,000 in bills for nearly 400 meals at nine other eateries, none of which appeared to be genuine business expenses;
• Charged his Soundview Healthcare Network $1,362.75 for 11 edible arrangements over a 20-month period. Most went for birthday and Mother’s Day bashes for relatives;
• Charged to the nonprofit’s credit card account $344 for pink roses and “balloon trees” plus $76 for a rose arrangement for his wife’s birthday in 2008;
• Used the nonprofit’s credit card to buy thousands of dollars worth of window shades, fencing, garage doors and stones that all were shipped to his Westchester County home (miles, by the way, from the district he actually represents) from 2006 to 2008;
• Along with his wife and several relatives, racked up $15,000 in expenses, billed to his nonprofit, during a visit to a Puerto Rican resort;
• Had the nonprofit cut a $2,229 check for a purported “scholarship” that was actually college tuition for an Espada relative;
• Had his salary at the nonprofit increased to offset a pay cut federal regulators ordered to reflect his (paid) time in Albany as a member of the State Senate leadership;
• Loaded the staff and board of the nonprofit with family –including a daughter-in-law and a no-show uncle driving a company car- and friends, people who wouldn’t ask questions about his personal usage of the nonprofit’s funds;
• Changing or ordered to be changed several of the nonprofit’s official records: he would regularly and personally edit the minutes of the Board’s meeting, excising references or comments he did not like, in some cases changed the official account of what was actually said before the papers were submitted to federal government regulators;
• Had the Board approve a severance package that called for him to be paid one month’s salary for each year “worked” at the nonprofit, eventually resulting in a mind-boggling $7 million sum to be paid to him upon his separation from the organization;
• Forced the nonprofit to award exorbitant contracts to a cleaning company his son controlled.

But on the other hand, the entire affair was marred by a carnival atmosphere, accusations of racism and witch-hunts, the appearance of an actual witch (to counter prosecutors’ alleged use of “voodoo” to influence jurors), a display of bizarre attire (the defense’s entire posse of supporters showed up one day in red to “ward off evil spirits”), a juror who announced on the first day of deliberations that she refused to actually deliberate because she was already convinced of Espada’s innocence, and, in the end, a hung jury: Espada was convicted of only four of the eight counts against him (“theft, embezzlement and misapplication of federal funds,” related to his swindling of more than $480,000 from 2005 to 2008), the jury unable to reach a verdict on either the other four counts or on any of the counts against his son and co-defendant, Pedro Gautier Espada.  Perhaps worse still, it was revealed two days after the verdicts were rendered that while he was on trial for looting the Soundview nonprofit, he was at the same time forcing the financially crippled organization pay over $1 million for his defense costs.

Federal prosecutors have not yet said whether they intend to retry Espada or his son on the unresolved counts, or whether they will look into the use of nonprofit funds to pay Espada’s legal fees.

So what do we make of all this?

There are those who will no doubt say that justice was done, that Espada’s crimes were finally (if only partially) proven, and that he will pay the price for them.  There are those within the nonprofit community who will say that Espada was a singular bad apple, and that his convictions prove once again that the system works and that new laws, regulations, and oversight are unnecessary; these  people will, no doubt continue to insist that all the sector really needs is greater enforcement of regulations that are already on the books.

But we’re not so sure….

While it may be true that the stunning litany of Espada’s crimes and his over-reach were what finally brought him down, his very indictment begs the question of why he was charged while a NY Assembly colleague, Vito Lopez, was not.  Could the sole difference be just that Espada enriched himself, while Lopez merely enriched his girlfriend and campaign manager through combined salaries of over $1.5 million dollars paid by his nonprofit network?

Is it a lack of needed oversight or simply “the way things are” that accounts for testimony given at a recent NYS Senate hearing wherein it was revealed that at the very time that over 250 nursing positions were being eliminated at a well-known New York nonprofit medical center, its CEO was being paid $1.2 million, its COO $738,000, and thirty-six other executives as much as $530,000?  Is something systemically wrong -or not- when the NY Times can report that two brothers who head a publicly funded nonprofit are each pulling down salaries of a million dollars or more?  Is something out of kilter when revelations continue to come out regarding how politicians are on the paid staff of nonprofits to which they direct public funds…or is that simply “the way things are”?

Regular readers of these pages have seen over the past few months a troubling list of such questionable practices.

So, yes, Espada and a few others have been convicted of flagrantly abusing the system and actually stealing money.  But let us say that Espada had not actually looted his nonprofit to pay for vacations, expensive meals, and parties at his house. Let’s say he had contented himself with stacking the board with cronies who would, as other boards have done in other nonprofits, approve a lavish salary and over-the-top retirement package.  Let’s say that Espada had stopped at merely forcing his nonprofit’s Board to award insane no-bid contracts to his son’s cleaning company; or, as Lopez did, strong-arming it into approving astronomical salaries for family and friends.  Would any of this have reached the level prosecutors considered a breech of law and actual criminal activity?  Would we, or the governments, individuals, and institutions that provided the funding for this nonprofit even know about it?

The record suggests that the answer is no….certainly not before the fact and, if at all, probably not until it was too late.

As we have previously reported, the governors of New York and New Jersey are attempting to plug at least one hole in the dam by limiting the amount state funded nonprofits can pay executives.  Today’s papers, in fact, carry accounts of Governor Cuomo’s new regulations that would force such organizations to apply for a state waiver and supply justification should they decide to pay more than $199,000 and if the proposed compensation is in the upper 25% of what is paid to executives in similar operations.

While we applaud these initiatives, they leave largely unaddressed a number of issues, among them the increasing number of politicians and elected officials with blatant ties to nonprofits, those on salary to nonprofits to which they directly or indirectly direct public and other funds (or those whose wives, children, relatives, or friends are paid by such nonprofits), the composition and activities of nonprofit boards comprised of those related or beholden to public officials…and the tectonic and contentious basic issue of nonprofit executive compensation.

Given these growing causes of concern regarding the ethics practiced in certain –and yes, limited- quarters of the nonprofit community, we cannot agree with those who claim that current regulations and laws are sufficient to the need, that all that is necessary is greater enforcement.  These practices, even though limited and representing a very small portion of the overall arena, cast a shadow over the sector.

Particularly at a time when funding is scarce, and when so many nonprofits are reeling from the impact of budget cuts at various levels of government, it is imperative that all donors, but especially the taxpayers whose money is routinely funneled to the nonprofit realm, are assured that everything is on the up-and-up, that money is not being stolen or misused, that boards are, in fact, independently overseeing spending and executive decisions, that certain influential and well-placed individuals are not in any way benefiting from a nonprofit’s activities or spending, and that those on whose behalf nonprofits exist are being served.

For these ends to be met, it seems that current regulations may not, in fact, be sufficient…Pedro Espada’s overdue convictions not withstanding.

Each year since 1990, the AFP Research Council awards the Skystone Partners Prize for Research to the author of a book that contributes substantially to the knowledge and understanding of fundraising or philanthropic behavior. The award is made possible by an endowment established by Skystone Partners, an international fundraising consulting firm, through the AFP Foundation for Philanthropy to encourage advanced research that extends the knowledge of fundraising and philanthropy.

The award was presented at a meeting of the AFP Board on March 30^th, just prior to the 49th AFP International Conference on Fundraising in Vancouver, BC.

In its press release, the AFP said, “Beyond serving as a virtual encyclopedia on the topic, this book remains practical and entertaining through its smart organization and lively presentation. What Dr. Penna has done is create a ground-breaking, definitive roadmap for all charities in assessing and expressing their capacity and outcomes. The volume couldn’t come at a more crucial time with the giving public clamoring for ways to identify and support charities that make a real difference. Dr. Penna’s work demystifies the process of setting, managing and reporting realistic outcomes for today’s nonprofit organization.

In keeping with the qualifications and criteria for this AFP research prize, Penna’s book is outstanding, [and] AFP is proud to honor [him] for this exceptional work.”

I am extremely gratified to accept this award, and the kind words of the sponsors.

The AFP press release can be read in its entirety here

The set of suggested changes to current law, regulation, and practice came in the form of a report issued by the Leadership Committee for Nonprofit Revitalization Schneiderman formed last year…interestingly enough, with days of the launch of the Nonprofit Task Force created by Governor Andrew Cuomo, Schneiderman’s predecessor in the AG’s office.  But where the Governor’s Task Force seems to be, at least for the moment, focusing specifically upon the issue of executive compensation paid to nonprofits receiving state funds –in his State of the State speech last month Cuomo announced that he wants to cap such compensation at $199,000 and also require that at least 85 cents of each public dollar a nonprofit collects should go to services and not administration- the committee formed by Schneiderman, including over thirty well respected representatives of the Empire State’s nonprofit sector, went more broadly afield and took into consideration a wide range of issues of concern to the sector itself.

The result, not surprisingly, is largely a sector wish list of suggested actions intended to remove or at least reduce a number of patently onerous burdens in the state’s system of government-by-contract through nonprofit agencies.  For example, there are numerous laudable provisions for addressing delays in contract approval and payment, removing redundant reporting and auditing requirements, and for making cash flow loans to nonprofits awaiting delayed state payments.  Also included are suggestions for engaging the state’s business community in recruiting nonprofit board members, and for launching a “Directors U,” a statewide initiative that would utilize a consortium of organizations and academic institutions to provide training for new and prospective members of nonprofit boards.  The full report can be viewed here.

But buried in the generally feel-good verbiage are also several proposals that not only parallel the efforts of the Governor’s Task Force, but which, potentially, take a much needed step toward addressing a root cause of some continuing scandals plaguing both New York and other states.

In answer to the Gordian Knot issue of executive compensation, the Committee makes the common-sense suggestion that executives simply should not be involved in determining their own compensation, and that state law should be amended to require that independent directors make an annual affirmative determination that compensation paid to the chief executive -as well as the chief financial officer and other key employees- is reasonable, justified, and commensurate with services provided.  Under the AG’s recommendation, Boards would also be required to 1) consider total compensation, including all perquisites and benefits; take into account relevant comparability data appropriate to the size and type of nonprofit; employees’ qualifications and performance; payments or other benefits from related entities; and consider budgetary challenges and other issues affecting the corporation’s overall financial position; 2) provide contemporaneous documentation of the justifications for and reasonableness of compensation; and 3) adopt polices and procedures governing outside compensation consultants’ selection and retention, and oversight of their work. Boards would also be required to affirm compensation consultants’ qualifications and independence, which, under the recommendation, should be also defined by statute.

Going further, the Committee included proposals for the adoption of Conflict-of-Interest and Whistleblower policies, for full disclosure to the board of material terms that would constitute an “interest” of a board member in a matter that body may be deciding, for recusal of such interested board members, and in such cases where a member’s interest is established, that the board make an affirmative determination that a transaction with that person is fair and reasonable before it can be approved.

But the sharpest teeth the recommendations contain are provisions for giving the Attorney General the express authority to investigate improper interested party transactions.

It remains an open question whether these changes, should they be adopted by the Legislature and the Executive Branch, will change things measurably.  There is nothing in these proposals, for example, that would prevent collusion on the part of board members where another member’s interest is being served.  Similarly, it is hard to say that any of these suggestions would have an impact on cases such as the recently revealed fact that one lawmaker had the director of a nonprofit he created and greatly influenced (a woman who also happened to be his girlfriend) paid $782,000 in 2009…or the case of the former NY state senator who stole more than $700,000 from nonprofit groups for which he’d obtained taxpayer money…or the DC councilman who used a nonprofit to divert to himself more than $300,000 meant for youth baseball…or the Georgia state senator who devised a scheme to use her office to arrange for state funds to be disbursed to a pair of non-profit organizations that, in turn, funneled more than $80,000 of the money back to her through businesses she owned and operated…or the several members of Congress whose favored nonprofits are miraculously receiving sizable contributions from interests seeking favorable attitudes from those legislators…or the North Carolina legislator who was on the payroll to two publicly funded nonprofits to the tune of $195,000 –at least one of which also made a 6-figure loan to the legislator’s wife…a board member (the other board member is his brother)…or in a host of other examples involving practices which are “questionable” at the least.

But they are a step in the right direction.  Unfortunately, few initiatives such as the ones announced by the Schneiderman committee will do much good as long as human nature remains what it is (which it will), and powerful legislators remain in a position to not only direct public funding to, but to strongly influence the hiring, contracting, and spending decisions of nonprofits.  Unless and until a strong, firm firewall is erected between politicians having access to the public purse, and nonprofits which might find themselves in an uncomfortable position (how do you say NO to the person who essentially funded you?) situations like those listed above will continue.

Attorney General Schneiderman’s committee is to be applauded for the work it has done and for the many needed reforms it has suggested (not a few of which could probably find significant resonance in other states).  Sadly, one of the most needed reforms is not on the list. Given that, it is probable that stories like those cited above will continue to come to light.

The first is that I have been (thankfully) busy, mostly in Texas where Barry Silverberg, the president of the Texas Association of Nonprofit Organizations, has had me traveling to the Lone Star State to deliver a number of workshops to TANO members in Austin.  Those sessions have been well received and have gone well; and I’ll be traveling back down there in a few weeks as we take the show on the road and present in San Antonio.

The second factor -more importantly- is that, while the body has been busy getting organized, collecting information from nonprofits, and gathering opinions from major players in the sector, there has been literally no substantial news coming out of New York State Governor Cuomo’s Nonprofit Task Force.

The sole insight into what is going on behind the scenes is that in his State of the State Address the Governor did announce that he would like to emulate the actions of New Jersey Governor Chris Christi and cap executive compensation at state-funded nonprofits.  Cuomo set the bar at $199,000 annually.  Going a bit farther, he added that he intends to require that at least 85 cents of each public dollar a nonprofit collects should go to services and not administration.

These proposals raise several questions.

The first is one of enforcement.

When one considers that a significant number (a majority???) of nonprofits in New York receive state dollars -either directly or indirectly- is the Governor’s initiative to be interpreted as meaning that no nonprofit whose head earns more than $199,000, or that spends more than 15¢ of each public dollar on administration, will be henceforth eligible for any state monies whatsoever?

The fallout from this could be considerable…as could the anticipated pushback.

Beyond this, however, the governor’s message is disappointing in that it seems that he is being strictly true to his word, and the Task Force, launched in direct response to revelations of large pay packages earned by executives of nonprofit entities (and some for-profit entities) that provide state services, is –at least for the moment- focusing solely on such pay packages.

Unaddressed, in anything publicly seen or heard, are larger and more troubling issues having to do with the connections between politicians and nonprofits, and the way certain publicly funded nonprofits seem to avoid any public scrutiny at all while they literally pilfer the public coffers.

By way of example, virtually at the same time as Cuomo delivered his address, it was revealed that the departing director of the politically connected social-services empire founded by Brooklyn Democratic leader Vito Lopez will be collecting up to $135,000 in unused sick time and vacation pay.

New York City –the pass-through agency by which this particular organization received its public funding-  ordered the woman booted after the City’s Department of Investigation belatedly found she had collected questionable “retroactive” pay that boosted her compensation to $782,000 in Fiscal Year 2009 from the already outrageous level of $336,000 she collected in 2008.

As part of the deal, she was allowed to cash in unused sick time and vacation time, accumulated over a 38-year career, up to a maximum of $135,000.

Another organization executive, it was also learned, had his 2009 compensation quietly boosted by $68,000 to $190,000. In his defense, this individual told the Department of Investigation that he “believed” the organization’s Board had approved the hike…although he “had no proof” to substantiate that assumption.  For their part, Board members told investigators that they had no idea how much Fisher was being paid.

On the one hand, all this could be seen as no more than a sadly typical Empire State scandal….Lord knows we have enough of them.

But on the other hand, the larger issue –and the one with nationwide implications- is what to do about this entire situation.

Politicians, we all have to admit, like to be seen as doing something about a problem that has gained public attention and infamy.  If the politician is an executive –a mayor, a governor…or even a president- the usual response to this impulse is to announce an initiative, a reform, or a new administrative ruling.  Legislators –at all levels…city, county, state, and congressional- like to announce new legislation or a new appropriation of funding to address the problem at hand.  Cuomo, in this case an executive, is proposing essentially new rules.  But a significant body of opinion within the sector is arguing that we don’t need more rules and regulations…or even stricter ones.  Rather, they argue, we need more resources devoted to enforcing the rules we already have on the books.

One VERY WIRED sector insider (who probably would not want me to use his name…so I won’t) recently told me that new rules will only make it harder on the majority of nonprofits that are conducting themselves properly…those who are not connected to any politicians, those who don’t have any politicians’ girlfriends on the payroll, those that don’t have a Board of unaccountable puppets rubber-stamping questionable decisions. The last thing these completely above board groups need, he told me, are more regulations enforced by mindless bureaucrats, more hoops to jump through, more papers to fill out, just to get the funding they need and deserve.  Instead, he said, government at all levels needs to police itself and enforce the already ample laws, rules, and regulations on the books.

“But,” he added, “that takes money…and is distinctly unglamorous…especially if the effort only nets relatively small fish.”

From the little that is discernible from the vantage point of those on the outside, the insiders are battling over whether more regulations or more enforcement muscle is needed.

Disappointing, however, is the fact that no one –neither those in the public nor those in the nonprofit sector- seems to be talking about finally building an unbreechable firewall between nonprofits –which exist to fulfill a public good- and politicians…who operate primarily for their own good.  Until this is done, sad to say, stories like those coming out of New York will only continue…to the detriment of our entire sector.

Ruth McCambridge’s December 5^th article on the Nonprofit Quarterly’s Nonprofit Newswire page, “Donors Give LESS When More Analytic Say Researchers,” is certainly provocative; but it misses a serious point and could give donors, both large and small, the wrong impression.

Reviewing a recent Boston Globe article, McCambridge reports that certain research supports the notion that “the more individual contributors think about their donation the less they are likely to give.”  This, McCambridge concedes, “of course, flies in the face of logic for those who encourage individuals to give more ‘wisely,’ recommending research about an organization’s financial ratios and outcomes.”   The article ends with the conclusion that “encouraging donors to give to the most efficient, best organizations might mean that less money actually gets donated.”

That such should be the case does not sound all that unusual: it has long been a staple of home economics that cutting down on impulse buying is one sure way to stay within a budget.  For example, in the case of going to the grocery store, it is estimated that an average family could save about $2500 a year simply by sticking to a thoughtfully created shopping list that for the most part focuses on the essentials.

That impulse giving should not be dramatically different from impulse buying is no real surprise, as both have their roots in emotion and psychological gratification.  But just as impulse buying often squanders resources, so does impulse giving.  Tossing $10, or even $1 into the convenient receptacle looking for “charitable donations” on the counter of a local store, giving simply because someone we know asked us to, or impulsively responding with a check to a heart-tugging photograph of a needy child as part of a mailing we receive are all common examples of how many of us give on impulse.  So, we agree that if people thought more about such contributions –and where the money was actually going- they might be less likely (particularly at this time of year) to simply hand over their money.

That said, we must take strong exception to the underlying implication of the McCambridge article overall: that thinking is inimical to generosity.  To the contrary, research indicates that as much as 15% of current giving, could be based upon research (see Hope Consulting’s Money for Good research); and we believe that that proportion can and should rise.  Why hasn’t it done so already? Perhaps the most seminal reason is that for a vast number of charities out there seeking support, data on performance is simply not available. Therefore, it is tough to argue that people should be research-based and informed in their giving, to use their heads at least as much as they do their hearts, when the essential information that would allow them to do so is usually missing.   By moving to CN 2.0 and, within a few years, to CN 3.0, we are trying to do our part to help fill this void; and we believe that as more charities come to see the value of transparency and accountability, they will increasingly make necessary information available to the public themselves.

In the meanwhile, we have long advocated that donors do at least some research into organizations asking for their support. Far too much of this money is simply wasted on organizations that are inefficient, ineffective, or downright fraudulent. The evidence regarding just how much money is wasted this way is saddening, alarming, and disheartening (for example, see the recent book by Gary Snyder – Silence: The Impending Threat to the Charitable Sector) .  Perhaps most regrettable is that these resources could be far better used by organizations that are managed in an accountable fashion (financially and organizationally) and that can demonstrate meaningful, sustainable, and verifiable outcomes.

We are not suggesting that Ms. McCambridge’s article was deliberately written in such a way as to suggest that thought and consideration should not go into individuals’ giving decision. However, we are afraid that it could be taken that way.

There are any number of reasons to explain the overall findings cited by McCambridge.  But we are hard pressed to imagine any justification for the implication that thought and consideration should not be part of everyone’s donating process. People will always give based, at least in part, upon emotion and impulse.  We understand that.  But we would argue that far from being a depressing influence on charity, thought, consideration, and at least some research will ultimately result in far more effective giving overall, and far fewer precious resources wasted.

Why Outcomes?

Why should the nonprofit sector change what it has been doing for well over 100 years?

That she was feeling pressured and under a tremendous strain was readily apparent: you could read it in the lines on her face and in her tired, tired eyes.  Not thirty days earlier the county executive had announced the unilateral cancellation of all contracts not deemed “essential;” and a good number of them had been with her agency, one of the largest nonprofit human service organizations in the metropolitan area.  It also seemed clear that the county legislature would be making further cuts as it cobbled together a deficit threatened budget for the coming fiscal year.  From the state capital there were rumblings of massive imminent cuts in programmatic spending; and a local funder, a bank, had just informed her that it was, in fact, not going forward with a $100,000 grant she had been counting upon.

“At a time like this,” she said to me wearily, “the last thing we can be concerned about is performance and quality.”  The irony of her statement obviously escaped her, focused as she was upon explaining to me that the results and outcomes training for which I had been contracted by her agency was not going to occur.  In the privacy of my own thoughts I wondered Well, if not quality and performance, what are you concerned with?

The answer, of course, was survival….the survival of her programs, the survival of her staff and payroll…the survival, perhaps, of her entire agency.

While this particular drama was being played out in but one city in but one state, it has had echoes across the country as the current economic downturn (never mind that the economists tell us that the recession is over!) is pressuring nonprofits of all shapes and stripes and of every conceivable mission.  As my former client might have put it, At a time like this, when we are fighting so hard just to survive, is it right, fair, or even necessary for us to be burdened by having to demonstrate the “outcomes” of the very good and valuable work we have been doing for decades or more?  In the opinion of many, that is a valid question; and from a historical perspective, it is a fair one as well.

While organized social and relief efforts of charities and religious institutions easily date back to the mid-19^th Century, for a variety of reasons the question of effectiveness was slow to be asked. As the mindset of the Progressive Era (≈1900-1915) came to replace the Social Darwinism of the Gilded Age, the nation’s attention became focused upon the tragedies of slum tenements, the corrosive influence of political corruption, the depredations of the trusts, the abuse of laborers, the despoiling of the environment and threats to public health.  Thinkers and reformers came to see society’s ills as reflecting societal -and not as individual- failures; and as a response they designed and put into place a host of programmatic responses across a wide array of fronts.  The government stepped in to protect natural resources and the quality of the food supply.  Social welfare organizations like the Salvation Army spread to and across America.  Fraternal organizations like the Odd Fellows, the Freemasons and the Knights of Columbus extended their influence.  Religious inspiration, self-improvement and civic engagement were closely intertwined throughout this period.^[1]

However, at the same time, three characteristics worked against the development of a strong tradition of assessing the impact of these efforts.  The first (and especially if we cast our sights farther, into the New Deal) was that these initiatives often relied heavily upon legislative fiat or executive order.  From temperance to health, these efforts sought establish rules for general behavior, rather than seeking to change individual behavior. A second factor was their one-size-fits all nature.  Programs were designed to address problems, not necessarily their causes.  To the extent that they targeted people, they did so as a class or group: immigrant mothers and workers, laborers, residents of a certain region or area.  Finally, there existed a faith in the effectiveness of these programs that required little or no “proof.”^[2]  Programs typical of this period addressed massive issues on a massive scale.  Their “effectiveness” was measured in terms of the number of applicants they had, or the number of dollars they disbursed.   Both their outcomes and their impacts were thought to be readily apparent; and a specific demonstrations of “outcomes” was not thought to be necessary.^[3]   Illustrative of this fact is that in his landmark survey of over 60 years of social science writing, S. E. Zimbalist did not find evidence that there traditionally existed any question at all about the effectiveness of social interventions. To the contrary, there was an implicit assumption that armed with an understanding of social problems, social work professionals would have no trouble changing these conditions through the proper policies, actions, programs, and direct intervention.^[4]

There are many in the sector who continue to believe that questions of demonstrated effectiveness are a burdensome distraction from “the work”; and a number of these observers feel that the “armchair activists, pointing fingers and pontificating from the sidelines”[5] should get out of the way and stop creating new hoops –often in the form of performance standards and demands for evidence of outcomes- through which committed practitioners need to jump to qualify for funding and to have their efforts deemed legitimate and worthwhile.

But on the other hand, there are those who believe that the traditional lack of a focus on effectiveness has led to a situation where the stated objectives of many social and human service programs are “are grandiose, but usually vague statements of intent and procedure…based upon largely untested or even unsound assumptions whose validity rests primarily upon tradition or ‘common sense’ and not upon proven effectiveness.” ^[6]  There are even some who would argue that because of a traditional accent upon caring, commitment, and activity instead of a focus on demonstrated impact, there is not actually any real evidence that any social programs have ever in fact done any real good at all.[7]

Somewhere between these two perspectives lie the truth…and the reality that nonprofits across the nation face.  It has been called the “battle for the soul of the nonprofit sector,[8]  and it represents a reality that concedes that, yes, the implementation and utilization of outcomes does represent a challenge for those who are unfamiliar with its concepts, language, and methodologies, but also one that admits that the world has changed and is unlikely to return to a day where statements of commitment, descriptions of problems, and accounts of activity will suffice for conscientious social investors.  That genie is not going back into the bottle; so the question nonprofits ought to be asking is Do we understand the benefits of adopting an outcomes perspective to our work?

For most nonprofits, the fact is that a growing number of governmental, institutional, and even individual social investors are asking for evidence of outcomes.  Grant applications ask for such information, and project summation reports are expected to contain it.  When one considers that Charity Navigator, the nation’s foremost charity rating agency, serving over 3.3 million unique visitors and impacting approximately $10 billion in charitable donations each year,[9] will soon be adding a third component for results to its already formidable assessment system, it becomes obvious that the day is not too far off when most requests for nonprofit funding will be relying in some proportion upon a demonstration of outcomes, impacts, and effectiveness.

So perhaps the most basic advantage an outcomes perspective can give to a nonprofit is that it will allow an organization to competently compete for funding dollars in a world that increasingly demands such evidence.

A second advantage to be gained from the implementation and utilization of an outcomes perspective is the opportunity for learning.  Whatever else an outcomes approach may do for an organization, it is at heart a learning system, delineating precise steps to be accomplished in pursuit of a goal.  By matching actual progress against such an explicit roadmap given an organization the opportunity for real-time assessment, the chance to make real-time course corrections, and a way to change program designs in order to do better next time.  The potential such a capacity represents can be readily seen in a basic mantra of the powerful and world famous Six Sigma methodology, which constantly reminds practitioners to Define, Measure, Analyze, Improve and Control.  If organizations from GE and IBM to Lockheed Martin and Toshiba have accepted the benefits of using an outcomes approach for learning, the chances are that the nonprofit sector could benefit from using it as well.

Finally, a well implemented outcomes approach simply helps organizations design better programs because of the questions it asks, and the before-hand thinking and answers it demands.  By mandating a clear well defined goal –the Outcome Statement- by establishing an explicit set of sequential steps and accomplishments to be achieved –milestones and Performance Targets- and by repeatedly asking the capacity question and challenging assumptions, an outcomes approach to our work gives the sector a powerful means of being better at what we do.  It is an advantage that we simply cannot not pass up.

******************

In the end, the woman who told me that “at a time like this” she simply could not afford to focus on “performance and quality” had it, of course, entirely wrong.  It is precisely now, at a time of scarce funding and increased competition, that organizations like hers need to adopt a focus on outcomes.  It is precisely now that nonprofits -whether they are engaged in human services, environmental protection, social justice, or advocacy- need to rethink the terms in which they define themselves and their missions; now is the time to step away from the familiar and comforting reliance on commitment, activity accounts, service units, and compliance and toward the brave new world of performance.

Unfortunately, at the time that was not a message she was prepared to hear.

But it is nonetheless one the rest of us should begin listening to immediately.

Some weeks later the Task Force began sending out a 43-question survey that honed in on executive compensation packages at the $100,000 and $200,000 levels, but also asked “What justifies your organization being a nonprofit?”

Since then, however, nothing: there has been literally no news of, or coming from, the Task Force.

This may be accounted for by several dynamics.  The first is that on October 3^rd, Benjamin Lawsky, the head of the Task Force, became the state’s first commissioner of the newly formed Department of Financial Services, the result of Cuomo’s merger of the former Banking and Insurance Departments.  It is easy to presume that with such a large undertaking now his responsibility, Mr. Lawsky has a very full plate, and that the Task Force has simply taken a back seat to the understandably pressing matters no doubt part of the huge departmental merger he is now tasked with managing.

A second possible explanation for the dearth of news coming from the Task force is that there is simply no news to report.  The most likely reason for this is that the Task Force is still sending out the questionnaires: they were supposed to be issued on a “rolling basis,” and that process might not yet be complete.  It could also be that the responses have been slow in being returned, and that the information-gathering phase of the Task Force’s work is still underway. A more ominous possibility, however –and we must add that this is based strictly on quiet rumors heard within the sector- is that a number of the state’s nonprofits are resisting the Task Force’s inquiry.  We had predicted such resistance in our blog of August 26^th, and it seems that at least some nonprofits are questioning or challenging the Task Force’s legal right to ask for the information it is seeking or to demand that nonprofits cooperate by providing any information at all.

All this comes against the backdrop of a recent article in the Nonprofit Quarterly[1], in which the authors set out to statistically determine the driving forces behind executive compensation within several subsets of nonprofit endeavor.

Citing the increased “professionalization of the sector, the increasing desire to measure and reward success, and the need to retain and promote the most talented managers,” the authors tried to determine whether it is organizational and programmatic size, pay-for-financial-performance, or the role of liquidity, or “free cash flow,” that accounts for the levels of nonprofit executive compensation seen across the country.

Two other factors mentioned in the article are the IRS regulations allowing sanctions and fines to be levied on nonprofit organizations that pay their executives excessive compensation relative to similar nonprofit and for-profit firms, and a “me-too-ism” reminiscent of free agent pro athletes, whereby one guy’s success in negotiating a salary becomes the benchmark by which the next person sets his or her compensation demands.

Giving a nod to the fact that nonprofit executives increasingly seek pay “comparable” with managers in the for-profit sector –a practice with which some observers have serious philosophical objections- the authors determined that, by and large, organizational size is the greatest determining factor in the salary levels paid across the sector.

While the article and the research behind it are useful, and could provide the Cuomo Task Force with at least modest guidance as to some of the factors that go into nonprofit executive compensation, its value is limited by at least four considerations. The first is unfortunately the very nature of the process by which many executives are hired…that is to say most are hired –and their salaries determined- based upon past performance: Smith or Jones did well at Nonprofit X, and the hope is that they will do at least equally well when hired by Nonprofit Y, and so he or she is paid based upon that fond hope. This too reminds us of the paradigm in professional sports, whereby a free agent is paid on the basis of past performance; while in fact, his best year(s) may in fact be behind him.

But an important second consideration limiting the value of the authors’ findings is the fact that it looks at financial performance and administrative efficiency as variables, and not at the effectiveness the executive brings to an organization’s performance in discharging its mission.  The troubling suggestion here is that programmatic results, the ability of an organization to do what it says it will do, are effectively immaterial in determining whether an executive is worth what he or she is being paid. Even the authors of the article note that “nonprofits [are relying] on organizational size to make compensation decisions, drawing on free cash flows when available, rather than addressing the challenge of defining, quantifying, and measuring the social benefits that [executive leadership may] produce.”

Also dampening the value of the findings is the fact that, on the one hand, the authors state that “in situations where the Board is not independent or is weak, [executives] may be highly compensated due to poor oversight or collusion. In either case, the control systems designed to protect the interests of [stakeholders] fail.”  However, a few paragraphs later they admit that “We did not examine the question of board oversight in our study.”

Unfortunately, asleep-at-the-switch Boards are a significant contributing factor (in both the nonprofit and the for-profit sectors) in cases where questionable compensation packages are approved or outrageous spending decisions countenanced.  Unless it is to be believed that individuals like the Levy brothers and others previously mentioned in these pages have unilaterally set their own salaries and approved their own spending, the issue of Board accountability must be included in any examination of compensation and spending.

Finally, while the article may, in fact, do a decent job of examining factors that explain current nonprofit executive compensation levels, it does not address what those levels ought to be.  In fact, if the wording of the article is to be taken at face value -With regard to free cash flows, we found that the sensitivity of CEO remuneration to increases in the commercial revenue share is highest in the health subsector, which essentially means that the more money flowing through an organization, the higher the compensation levels- the Levy brothers’ storied $1million salaries were perfectly normal given the millions in state contract dollars flowing through the organization!

The sector owes the authors of the NPQ article, Drs. Frumkin & Keating, a debt of gratitude for their thoughtful analysis and the light they shed on some of the practices currently at play in the determination of nonprofit executive compensation.  However, that still leaves the sector, and the Cuomo Task Force, the quandary of trying to decide what levels of compensation, for all nonprofit management positions, is just, proper, and moral while still being sufficient to attract qualified candidates. Unfortunately, even Frumkin and Keating conclude that the existing IRS regulations “may not be particularly effective in identifying either…levels of compensation that are too high or organizations that are violating the spirit” of their nonprofit status.  In short, the sector is still groping in the dark for answers.

Beyond this, the broad range of issues in addition executive compensation that have arisen regarding nonprofits –the spending some of them approve; the ties some have to politicians, the way “contributions” to politicians’ favored charities are morphing into the newest form of pay-to-play; and the way public funds are awarded to nonprofits- are also still left unaddressed.  It remains to be seen whether the Cuomo Task Force, when it begins once again to take public action, will tackle these questions.  It is also an open question whether other states will follow the example the Task Force eventually sets.  We have already seen one governor, Chris Christie of New Jersey, limit the amount of state funding which could be used to reimburse CEO salaries at nonprofits that contract with the two state agencies.  If the current state debt crisis across the country continues, we may see more such actions, and there is no saying that New York will not follow its neighbor’s lead.

Either way, this is an issue, or rather a set of issues, that is not going to go away any time soon.  While many nonprofits across the country are understandably concerned that budget cutting at all levels of government will negatively impact them and their budgets, perhaps they should be paying more attention to the possibility that the rules under which they have been operating, making decisions, and deciding upon the compensation packages they will agree to pay, may fundamentally change in the very near future.

As reported by the New York Times, MSNBC, and other outlets a year ago, at least two dozen charitable organizations set up or run by lawmakers or their families were shown to be accepting donations from companies trying to influence policy. As was reported at that time, corporate executives said they merely wanted to give to a good cause; but what they actually donated to suggested that “charity” was not the main reason for many of the donations.  Rather, the unmistakable impression was that they were attempting to buy influence by becoming known as supporters of a favored politician’s family-connected charity.

Fast forward to this year, and we find that virtually the same issue is embroiling Anita Perry and her husband, Texas Governor Rick Perry.  It seems that the nonprofit from which Ms. Perry draws a $60,000 salary, an organization that did not receive a single donation larger than $5,000 before she joined its staff, has had an explosive growth in the number of major gifts since she was hired.  Interestingly, 34 out of 37 of its donors have political ties to the Governor.

Meanwhile, it has now been reported that donors to a nonprofit group that Newark, N.J. Mayor Cory Booker founded before he took office have since then received millions of dollars in city contracts. From 2005 -the year before he took office- to 2008, donations to the organization have increased more than ten-fold, from $310,356 to $3.2-million; and nine contractors who donated a combined $19,500 last year for a golf event have since received $21.5-million in city business.

All of this raises questions, not the least of which, to paraphrase the Cuomo Task Force’s inquiry, is Should these politically connected organizations be nonprofits in the first place? 

On the one hand, one member of Congress insisted that “Almost all of these [politically connected] foundations were set up for a good purpose.”  And that may well be.  But at the same time, some corporate representatives have admitted that their companies are trying to gain access to lawmakers to push their agendas.  “We are not apologetic about it at all: it is part of our overall effort to work with policy makers,” said the spokesman for a large energy company that had made donations to politically-tied nonprofits.  Moreover, as the Times reported, charities set up by politicians often have the convenient side effect of enabling elected officials to run “something akin to a permanent political campaign,” with T-shirts and caps sporting the politician’s name often given out at the charity’s events, banners displaying his or her name prominently hung wherever and whenever the organization is involved, and various media reporting appearances by the politician and his/her family at functions the charity supports. In its more blatant form, the staff of some of these organizations do little else but what is, essentially, campaign work.

Whether the Cuomo Task Force will eventually look into these matters is, at the moment, an open question.  But by asking for the justification under which nonprofits in the state organize and operate, the Task Force is setting a precedent with nationwide implications.   New York and other states have seen, by virtue of numerous scandals involving politicians and nonprofits, that the mixing of these two sectors is rarely –if ever- a good thing.  Funds are too easily mismanaged when saying No would mean crossing a powerful elected official, personal favors are too easily paid off through nonprofit budgets, and influence is too susceptible to the appearance of purchase.

Several observers have rightly noted that instances of abuse –even if they are few and far between in the larger scheme of things- are leading to a creeping indictment of the whole sector.  As Doug Sauer, the head of the New York Council of Nonprofits recently said, “The vast majority of community-based nonprofit employees are doing hard and challenging work.”  This is undoubtedly and unquestionably true.  But it is also true that when nonprofits and politics mix, appearances and –unfortunately- the results more often than not only add to the questions and negative conclusions.

We do not know yet whether the Cuomo Task Force will ultimately look into the question of politically connected nonprofits.  We do not know whether it will examine the issue of nonprofits organized by, run by, or funded by politicians or their contributors.  By virtue of the questions it is asking, the Task Force has opened that door, even if only a crack as of yet. But these are questions that need to be asked, and from New York to Texas, and through every state in between, it is an issue that is not going to go away.  The Task Force has a tremendous opportunity before it for setting a national example; it will be interesting to see what it does.

The Outcomes Movement, however, got a powerful boost this month with the message coming from two highly respected individuals who also have the power to back up their words with action.

In Boston, Massachusetts Governor Duval Patrick announced that for the first time in decades, some state aid to public colleges and universities will begin to be based upon performance and results, instead of enrollment.  This is a sea change, not only for public education, but potentially for all nonprofits that receive state financial support.  If the funding requests of schools can begin to be made contingent upon results, why should human and social service agencies be any different?

Meanwhile, Howard Warren Buffett, grandson of legendary investor Warren Buffett, and Executive Director of the Howard G. Buffett Foundation, called upon nonprofits to start selling impact, and stop trying to get by on appeals to emotion.  Outlining his plans for the Foundation, Buffet said that he intends to direct its resources to proven strategies, “rather than doling out cash to [those] with the most heartstring-tugging story.”

Other institutional social investors, notably the William & Flora Hewlett Foundation and Venture Philanthropy Partners, have already made outcomes a central focus of their activities and grant-making.  Many governmental agencies are also calling for at least an outcomes statement of some sort in their grant applications.  Although few have gone as far as Governor Patrick and made an explicit connection between performance and funding, –and fewer still truly enforce that connection as of yet- as public sector dollars continue to be stretched to the limit, it is quite likely that sharp politicians will begin to see a personal advantage in arguing that scarce resources should go only to those efforts reliable evidence of success.

The question is how the sector will respond to the potential impact of either the Duval or Buffet statements.

It is predictable that in the Bay State, some nonprofits will content themselves with the notion that the Governor focused on colleges and universities, and not upon them.  Similarly, many nonprofits around the country will reason that because they neither seek nor receive support from the Howard G. Buffett Foundation, they do not have to worry about the new direction announced for that organization, and can continue to peddle problems and activity, heart-tugging emotion…and the sizzle instead of the steak.

But like the silly unicorns in the Irish Rovers’ song, who ignored Noah’s invitation and decided that the falling rains were nothing but a passing shower, those nonprofits that continue to try to maintain that the emerging accent on results and performance has nothing to do with them, that they are too busy “doing” to learn what they need to know to implement an outcomes approach to their work, or that their particular programmatic focus or their client base is somehow “special” and thereby exempt from the rising tide of the Outcomes Movement, will ultimately find themselves to be a vanished breed.

The statements of Governor Patrick and Mr. Buffet this month were nothing less than storm warnings; and all nonprofits would do well to pay heed.