I recently received two Google Alert e-mails:

The first was an article about the Red Cross scandal in China (explaining the impact on the organization’s reputation from a young woman making false claims of management responsibility within a division of the Red Cross (that the Red Cross claimed did not exist) photographed perched bejewelled on a luxury car). The second explained a new donor transparency regulation in China (requiring disclosure on a range of matters relating to the donation, fund-raising practices, and use of funds).

Scandals happen – irrespective of the law, the quality of the board and management team, or the quality of the organization. It is human nature, and no legal or voluntary accountability mechanisms can protect against human nature. The Chinese Red Cross is to be congratulated on a pro-active response to an issue that could happen to any NGO. The Chinese government is to be congratulated on swift legislative response. Both, however, serve as reminders that in the non-profit sector the law is the lowest common denominator and not the goalpost for governance, accountability, transparency and ethics (which I refer to as “GATE”).

Myriad accountability organizations exist proposing best practice from the Better Business Bureau, Independent Sector, and Guidestar in the US to New Philanthropy Capital and the NCVO in the UK to the Comite de la Charte in France to various academic institutions internationally.[1] The non-profit sector even in highly developed legal systems continually asks itself how to improve GATE. The highly developed non-profit legal systems demonstrate that the law is insufficient and that voluntary GATE is essential – to protect against scandal, to satisfy demanding donors, and even to operate a highly ethical organization internally. In less developed non-profit legal systems and/or less stable political environments, civil society engagement has taken on new meaning since the manifestation of individuals during the Arab Awakening, burgeoning philanthropy in China, street protests in Russia, and rising needs in areas like the Horn of Africa and the Sudan. These countries not only lack well-developed non-profit legal regimes, they lack stable legal systems more generally for enforcement of legal obligations, defence of basic rights, stability of intellectual property or land rights, litigation of disputes, and other such matters. The less developed non-profit legal systems demonstrate that insufficient law is never an excuse and that voluntary GATE can compensate for the law.

Legal systems vary considerably. China’s non-profit and philanthropic regulatory regime is understandably and impressively developing. The US requirements are sophisticated but not exhaustive. Notable elements include the Sarbanes-Oxley Act requirements of whistleblower and document retention policies, as well as the Internal Revenue Service’s (the US tax authority) efficient, effective, and transparent Form 990 annual disclosure form. Any missing regulatory elements reflect in part the non-profit sector’s on-going proactive efforts to pre-empt excessive regulation with self-regulatory efforts on the correct conclusion that self-regulation often proves more effective and appropriate than over-regulation. In France, extensive focus is placed on the use of funds, particularly following the Cour des Comptes’ (French accounting authority) encyclopaedic audit of use of 2004 tsunami funds. Use of donor funds is indeed important. However, more focus on key areas such as independent board oversight, conflicts of interest, and publicly available disclosure like the US Form 990 is lacking. Organisations such as l’ARC (Association for Cancer Research) voluntarily perform double external audits and scrupulously manage conflicts of interest, in part as the result of a proactive, transparent and self-critical response to a scandal in the 1990s. French law still hasn’t caught up with l’ARC, even having witnessed the sector-wide impact of the L’ARC issue.

Part of the problem is that the diversity of sizes and sectors of non-profit organizations requires diverse approaches to GATE in accordance with necessity, feasibility, and appropriateness. The law should not over-regulate and therefore deter the formation of non-profit organizations or create excessive administrative burden. Nor should absence of, or weakness in, the law be an acceptable excuse for not undertaking voluntary GATE efforts to ensure best practice.

This blog, therefore, is both a positive message of encouragement and a respectful reminder:

  • Non-profit organizations must respect local, national, and international law and treaties
  • Non-profit organizations can achieve first in class GATE voluntarily without depending on the law (or indeed despite the law). If the law is still developing, or the legal system in your country of operations is in turmoil, you can act independently – and relatively easily and inexpensively –   to raise your GATE practices to first in class international standards (including as necessary to attract international funding).
  • Conversely, non-profit organizations cannot depend on the law for first in class GATE irrespective of the state of the law. Voluntary GATE mechanisms will always be necessary, irrespective of the size or sector of the organization.

As always, comments and questions are welcome.

Copyright 2011 Susan Liautaud. All rights reserved

[1] I have the privilege of serving as an outside independent director of the Comite de la Charte. The views expressed in this blog are entirely separate from those of the Comite de la Charte, its management and board or directors, and my service to the Comite de la Charte.