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Steven Pearlstein
Steven Pearlstein
The Post
Business Section
Talk: Business News message boards
Archive: Past columns by Pearlstein
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Nonprofit Accountability
With Steven Pearlstein
Washington Post Financial Staff Writer

The Washington Post ran a three-part series on the Nature Conservancy this week, reporting on the nonprofit organization's relationship with major donors and board members. The series reported that land purchased by the conservation group has been resold in some cases, with the buyers gaining some rights to develop the land.

In his column today, Steven Pearlstein writes: "To me ... the most disturbing revelation of The Post's series was that even a large and well-respected nonprofit -- a pioneer in adopting corporate best practices -- turns out to be no more open or transparent than most money-grubbing corporations." Read the full column.

Submit Your Questions and Comments: Pearlstein was online on Wednesday, May 7 at Noon ET to discuss nonprofit accountability.

About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

A transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Hampton, Va.: How is it that The Nature Conservancy can withhold financial information from The Post reporters? Don't charities have to disclose their finances by law?

Steven Pearlstein: The Nature Conservancy DIDN'T withhold information, as far as I know. When we asked for stuff, they gave it, by and large. My point is that in order to ask questions about the bad stuff, we first had to find out about the bad stuff from other people, since they don't make it available in any of their public statements, reports, etc. So, for example, a big lawsuit down in the Gulf Coast about drilling for gas, which they did on their conservation land: no notice of that anywhere. My point is that a non-profit organization should have an affirmative duty to disclose material events, lawsuits, insider transactions to its stakeholders.

Louisville, Ky.: Can the Conservancy's problems be largely attributed to a rapid, ambitious expansion during recent years, while some of the "nuts and bolts" of the organization have been left behind, especially in the scientific area? Clear accounting for different kinds of "preservation", "protection", "conservation" or "compatible development", etc., seems to be lacking. Just how can this large growing organization measure its successes (or failures) given such complex goals and varied methods of operation?

Steven Pearlstein: There is actually a recent Harvard Business School case study on the Conservancy which confirms your suspicion: the organization grew in a very decentralized way and the new head came in after John Sawhill died and put through a sweeping reorganization, with a new strategy, that centralized things a bit more. As I understand it, many of the "bad things" that we reported about were the result of decisions made at the state and local chapter level, which prompted this new strategy and organizational framework. And there has been some controversy surrounding these changes, with a number of people leaving either voluntarily or not.

Washington, D.C.: I think this series of articles will actually help the Nature Conservancy in the end, by making them more accountable for their -sometimes sloppy and inappropriate] actions. What do you feel are the necessary first steps toward cleaning up their act and their image? An entirely new Board? A mission that stays closer to what it was originally?

Steven Pearlstein: I probably have a different view on this than the authors of the series, and perhaps you as well. I'm not sure that they did stuff that was so terrible, really, in the larger scheme of things. Some of the things were experiments, really, that turned out badly and I'm not sure you want to be overly critical of that. Other things, like the land deals with insiders, look very bad but probably are still consistent with the mission of the conservancy. And then some things are just inexcusable, like using a straw to try to snooker another non-profit that owned an adjacent piece of land. Bad stuff happens in any organization. A bit better oversight and controls is usually part of the answer. A thorough reconsideration of goals and methods is another. But by and large, this is a well-run, professional organization that looks from the outside as one that is fully capable of learning from its mistakes. And you have to realize that at the Conservancy, they don't think it is a mistake to buy up land and have one rich person put a big house on it: they think that is an acceptable and cost-effective way of preserving delicate land from overdevelopment. That may not sit well with some people (people who don't like the idea of rich people getting to build nice property that poor people can't, or environmentalists who want absolutely nobody to use the land). But as far as I understand it, it is fully consistent with their stated mission.

Arlington, Va.: I've worked in non-profits as a staff member and board member for about 12 years. While most did very good work, I have witnessed a lot of fraud and abuse. I think because so many nonprofits have strong ideological leanings that they put up their defenses when they are criticized, even when it is justified. I have been disgusted that a lot of supporters tend to look the other way in order to support "the cause." Even with scandals from the United Way and Nature Conservancy, do you see any sign of a reform movement?

Steven Pearlstein: Yes, as I said in the column, there are lots of signs of reform. The big move now in the non-profit world is for accountability and effectiveness measures. It is driven in part by the reduction in the overall level of funding, which means donors are being more picky about which programs they fund. And it is driven in part by some scandals like the United Way, and unflattering series like the Post articles on the Nature Conservancy. So don't despair.

Louisville, Ky.: Having worked in the field of human services (child welfare) for several years now, I have worked for non-profit and for-profit providers alike. Many of the non-profits in the field emphasize cutting costs to the point of providing little in the way of services to their clients despite the tax break they get for organizing as a non-profit. The most charitable organization in terms of services to its clients I have ever worked for is in fact a for-profit, organized by the owner/Executive Director as a for-profit for purposes of flexibility in providing services as opposed to pocketing proceeds. All of this has led me to wonder whether the lack of oversight of non-profits has allowed the directors of non-profits to take the monies they save in not paying taxes and distribute them amongst themselves in the form of high salaries and bonuses. I have come to think of the directors of some of the non-profit providers in this field as "the new shareholders" of "charitable" corporations. We need more oversight.

Steven Pearlstein: Well said. I'll let that stand on its own.

Harrison, N.Y.: You state that The Nature Conservancy was "a pioneer in adopting corporate best practices." What are those best practices, as I saw no mention of them in the series of articles.

Steven Pearlstein: John Sawhill, who headed the Conservancy, was a former government official and Wall Street type who used corporate management techniques. And this has been picked up by his successor. They made heavy use of McKinsey consultants and alot of the latest management fads in terms of organization and change management. That's all I meant to say. It is all laid out in the Harvard Business School case study I mentioned.

Cottage City, Md.: I have a feeling that the Nature Conservancy is feeling really sore and naked right about now. That was a blistering report you put together - I just wish you would do it for a large number of these wealthy charities that seem to feel that charity begins at home. I would be greatly surprised if TNC didn't find a sharp drop-off especially among the smaller donors who can't hope to benefit from these sweet land deals.

Steven Pearlstein: I'm sure they are feeling sore right now--sore at us as well as sore at themselves. I suspect it is a strong enough organization that it won't suffer too much long term damage if it addresses legitimate problems raised by the articles. They also do lots of good things as well.

Celina, Ohio: As you know, accountability costs money. New and small non-profits really struggle with this issue. Even small community foundations deal with this problem, especially in a down economy. Do you think there's a middle ground for organizations that have little budget and few staff?

Steven Pearlstein: It doesn't take a lot of budget and staff for the director to sit down once a year and write, in clear English, a ten page annual report saying candidly what went well last year, what didn't, why it didn't, and what are the challenges and risks to the organization going forward.

Alexandria, Va.: I imagine that nonprofits must file some sort of application with the IRS and state taxing authorities to get official nonprofit status. Don't these same nonprofits therefore have to submit lots of information annually to the government? And isn't the government responsible for auditing their books?

My question, I guess, is what's already being done to police nonprofits and why isn't that working?

Steven Pearlstein: A form 990 is required to be filed with the IRS, but that is financial information about income, expenses, some salary stuff, that may or may not give a very good picture of the organization and its activities, challenges, achievements and screwups. Many big organizations have audited financial statements that go beyond this. I'm not a big believer in having the government regulate the sector further than it does already. What's necessary is for stakeholders, particularly funders, requiring that they get more candid assessments and self-evaluations.

Richmond, Va.: The Post series on the Nature Conservancy was most informative. The Conservancy purchased the barrier islands on the ocean side of the eastern shore of Virginia. A lot of history and ecological importance is associated with these islands.

On one island, Cedar Island, the Conservancy constructed several large homes. Rumors are surfacing that the homes are being sold (at cost or at a loss) to people connected to the Conservancy. I'm aware that the Board of Governors' include several former CEOs of companies like Columbia Gulf Transmission, NASDAQ, Norfolk Southern, Gulf States... Pretty high-level stuff. Also, a couple of retired generals are thrown into the mix as well.

Bottom line. The execs appear to be using the nonprofit as a tool to obtain property (for personal use) on pristine land.

Steven Pearlstein: I obviously can't verify what you say but if it is true, it does raise serious conflict of interest problems.

Washington, D.C.:

First, a clarification: Posting on GuideStar is not necessarily voluntary. GuideStar gets Form 990s -- the annual information returns for tax-exempt organizations -- directly from the IRS and need not get permission from the organizations themselves.

Second, an observation: Nonprofits and for-profits alike are well-advised to put their best foot forward when presenting their annual activities. However, nonprofits must report not only to the federal and state government, but also to their funders (e.g., foundations), and individual donors. This makes them subject to the same market forces that operate in the business sector.

Finally, in our work with nonprofit boards, we have witnessed the push for transparency and innovative business activities, particularly in a tough economy. If you want to grow as an organization, then you must take risks, which can lead to either success or failure. If the results of the combination of risk-taking and transparency are "public vilification and an immediate cut-off of funding," nonprofits face a no-win situation.

Marla J. Bobowick
Vice President

Steven Pearlstein: My reference to GuideStar was not to the Form 990s that they put up on their website for every non-profit, but the 75,000 organizations that have agreed voluntarily to submit additional documentation, including annual reports, lists of officers and directors, etc.
On your second point, that non-profits should put their best foot forward, I suppose that begs the question of what best foot is. If you send out annual reports that leave the impression that everything you do is 100 percent effective and you never make a mistake, then you are suggesting a level of success that is a lie and people would do well not to trust you or fund you. That wouldn't be the best foot forward, in my opinion. The best pitch is a candid pitch--and yes, in that context, market forces can work well. If the market for charitable capital, however, is denied good information, it cannot work well. That's just basic economics.
On your last point, I'm all for what creating a climate of tolerance for reasonable risk taking and well-intentioned failure, as I said at the end of the column. That should be part of the reform movement as well.

Waldorf, Md.: Looking at the NC's list of major corporate sponsors sure gives the appearance that they've been co-opted by the people they are supposed to be fighting. Your thoughts?

Steven Pearlstein: They're not supposed to be fighting anyone, if you look at their mission and charter. They are a non-confrontational, largely non-political organization that got big by buying up land or slapping easements on land to preserve it from development or overdevelopment. Other environmental groups fight timber companies and oil companies. NC tries to work with them. The world needs both kinds, it seems to me.

Washington, D.C.: I often hear the statement, "Nonprofits should run more like a business." I believe they should run more like a well-managed nonprofit! Any comment?

Steven Pearlstein: Amen.

Washington, D.C.: Do you think donor support will decrease because of the gross mismanagement of TNC's massive funds?

Steven Pearlstein: I'm sure there will be an impact but I think you've overstated the situation in characterizing it as gross mismanagement. Also, their massive funds is a bit overstated: much of their "revenue" comes in the form of land or the book value of easements, not cash.

Williamsburg, Va.: This is an observation more than a question: Not all charities must disclose their finances. Only charities with annual incomes of more than $25,000 are required to file Form 990 with the IRS--only about 1/4 to 1/3 of the public charities registered with the IRS fall into this category. And, because of separation of church and state, faith-based organizations of _all_ sizes are exempt from filing with the IRS.

Steven Pearlstein: Thanks for that clarification.

Olney, Md.: Alexandria should look to the Better Business Bureau rather than the IRS. The BBB has a Wise Giving Alliance that does analyze the percentage of money going towards fundraising and administrative costs as opposed to programs. Not really as comprehensive as it could be, but easier to understand than a form 990. (Which you can usually read at www.guidestar.org, if you're so inclined.)

Steven Pearlstein: I mentioned that in the column, I think.

Boston: Re: "...requiring that they get more candid assessments and self-evaluations." What charity do you know will say they did a poor job on their program service activities? Most charities' annual reports, if they even bother to write one, stick to the theme of "we are the greatest charity in the world."

Steven Pearlstein: Right, and that's a problem. Funders can help by saying they won't give money to organizations that present an overly rosy picture of themselves because by doing so they demonstrate that they are not truthful and trustworthy.

Easton, Penn.: As a long time TNC supporter I was dismayed to read of many of the things that TNC has done...The State TNC Chapters are still doing good work, I hope that this doesn't hurt them too much... I do spend the time to read the 990's on guidestar.org but they can lag by almost a year and don't break things out in much detail. Since most charitable contributions result in tax breaks, maybe there could be more insight, further breakdown of how these donations are spent required by Congress?

Steven Pearlstein: While I'm not sure what the solutions to this problem are, I am sure that more oversight by the Congress isn't one of them.

Fredericksburg, Va.: As a real estate broker, I have been confronted by the relationship between USFWS (fish and wildlife) and/or USNPS (national park service) and "non-profits" such as TNC and TPL. Basically, the Feds use those organizations to acquire real estate and either pay them a fee and/or know that they shake the property owner down for a fee. Is it legal for the Feds to use these groups as contractors without bidding the services out competitively?

Steven Pearlstein: I'd be surprised if the lawyers haven't vetted it six ways to Sunday. Not sure what you think competitive bidding would accomplish.

Steven Pearlstein: Thanks folks. Keep reading. See you next week.

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