SETTING STANDARDS IN THE FIELD OF PHILANTHROPY

Article by Herb Rubenstein
CEO, Herb Rubenstein Consulting

Introduction

In Texas, the Carl and Florence King Foundation has recently been sued for “salaries and benefits that are far beyond reasonable compensation.” The lawyer bringing the case stated: “The salaries being paid to these employees were not only off the charts, we couldn't find any charts for them to fit on." And the foundation is being sued for “expenses [that] are greater than what it pays out in charitable donations.” Quoting CBS News.

This type of suit was predicted at the World Future Society’s Annual Conference by a panel on “The Future of Philanthropy.” The factors that led to one panel member making this prediction were threefold: First, the foundation world is starting to become the home for large amounts of money and is therefore going to become the focus of attention of watchdog groups, people who want to influence how large scale resources are invested and politicians who want to make a name for themselves as ‘guardians of the public trust.” Second, the foundation world is becoming more transparent and information about who a foundation funds, how it decided on what activity to fund, its expenses, its decision making system and its application systems can no longer be hidden from the public. The third factor, and this is the most important factor upon which this prediction is based, is that the foundation and philanthropic industry has never set standards for salaries, for decision making rules about how to decide on grants nor has it ever set standards for the proper relationship between administrative expenses and the amount of money a foundation gives out in grants. The failure of the industry to set these standards leaves the Carl and Florence King Foundation and all foundations vulnerable to suits where an “expert” will be hired to give his or her point of view of what should be the standard in the industry and a judge or jury can accept any standard it wants based on the evidence and opinion of the expert given at that trial. In short, in five years, unless some organization takes a quick leadership role in setting and defending standards for the profession, there will be 100 or 1000 standards and inconsistent verdicts will be rendered harming the philanthropic profession greatly.

The Evolution of Standards

Every major profession has standards. In medicine there is a “standard of care” to use in treating every disease. Airline pilots have professional standards and manufacturing has “standard operating procedures.” It is by these benchmarks that the actions of people in industries and professions are reasonable and consistently judged by outsiders, by peers and by judges and juries. Standards are usually formed either through the creation of committees of leading associations in an industry or profession or by plaintiffs’ lawyers and their hand picked experts who seek to pick off the low hanging fruit in an industry and topple those they believe are
not meeting what they and their experts believe is the appropriate standard for an industry. Either way,
it is now clear that the philanthropic industry, as the panel predicted this summer, is beginning a standards fight.

Proactive or Reactive

Once standards are either imposed on an industry by outsiders, like plaintiffs’ lawyers, politicians, government agencies or watchdog groups, or generated by a careful deliberative process led by the best associations and best minds in the industry, there become little wiggle room for answers like “it depends.” When it comes to how foundations make decisions among competing grant applicants, a standard way of making the decision will be applied by the foundation or it will lose a lawsuit by the losing grant applicant and its lawyer. When it comes to what salaries a foundation pays to its employees, a foundation will be able to defend its salaries by displaying the “industry chart” that the lawyer in the King Foundation case could not find, or it will lose the case the foundation employees who are determined to have received excessive compensation will be removed from the foundation and possibly forced to repay the foundation for their excessive salaries.

Age of Accountability

In just three decades we have moved from the Age of Aquarias to the Age of Accountability. In domestic relations cases the expenditures of one spouse for the past 20 years can come under the scrutiny of a judge who can determine if one spouse had excessive spending during the marriage and upon divorce grant an amount equal to the excessive spending to the other spouse. The doctrine of dissipation of assets now squarely applies to the foundation world and anyone found by a judge or jury can be forced to repay the foundation and the foundation could be placed under a receiver and those who established the foundation could lose all power and decision making authority over the foundation and its assets.

The age of accountability also requires foundations to be able to explain and defend their decisions. If a foundation pays a high salary, it must defend it with an analysis of what the person could have earned in another job given his or her skills and an analysis of the actual value the person contributed to the organization. More than an age of record keeping, the age of accountability forces all involved in the field of philanthropy to defend their judgment, defend their actions, defend their decisions and, if they can’t, they will pay a high price and possible face suits like the King Foundation in Texas currently making the news.

Who Will Set the Standards

In Texas, some standards are being set as the philanthropic industry sits and watches. These are in all likelihood not the standards that the industry wants to measured against. However, unless and until an organization sets real, defensible standards for salaries, decision making approaches in grant making activities and in the ratio of expenses to grants, then everyone will be held to blame at the scene of what Christian Crews of the Waitt Foundation calls, “the upcoming train wreck in the industry.” We are now witnessing one of the first train wrecks. The barn door is open. And until the standards are set, published, accepted and followed by the industry, there will be hundreds, if not thousands, of successful suits against philanthropic organizations for “excessive salaries, excessive spending and unreasonable grant decisions.”

The New Role of Government

The worlds of philanthropy and government have been friendly for many years. Today, there is a changing part of government that will forever alter the relationship between government and philanthropic organizations. That part of government is the State Attorney General. Fueled by their great success in the tobacco cases and their expected success in the antitrust suits against Microsoft, State AG’s will go after foundations for many reasons. First, they will go after foundations who they believe are not acting consistent with the public trust bestowed upon them through the tax benefits allowed in the establishment and operation of the foundation. Second, they will sue foundations they believe are not making investments consistent with the “public good.” Third, they will go after foundations because these will be high profile cases, aided by the private bar who has an interest in earning good fees and themselves gaining substantial publicity by shutting down foundations that can not defend their salaries, their spending or their decision making approaches to giving away money. Third, state attorneys generals will sue foundations because whistleblower groups and individuals now have sufficient time, money, fortitude, persistence and anger to make going after foundations an important cause. As the amount of money multiplies in foundations, the number of watchdog groups and individuals complaining to their state attorneys general will increase. These officer holders, who are elected officials, know a politically effective strategy when they see one. And, without standards, going after foundations and the philanthropic industry, is going after a highly visible and highly vulnerable target.

Conclusion

The Age of Accountability hit the philanthropic industry in the summer of 2002. How the industry responds and who will lead the industry in that response remains to be seen. If you asked knowledgeable people who is the spokesperson for the philanthropic industry. Most people would say they have no idea. Ask them who is the spokesperson for the gun lobby or the National Rifle Association, and most of them would quickly be able to say Charleston Heston. The gun lobby and the NRA have very clear standards for gun safety, gun legislation and gun use educations. While you may disagree with them, they have their house in order when it comes to setting and communicating standards. The gun industry through its leading organization is light years ahead of the philanthropy industry. It is time for the leaders of the field of philanthropy to create standards for all foundations to follow. These leaders, through some association, should take action of enforce these standards by certifying philanthropic organizations that follow the industry guidelines. The industry can not afford many more United Way misstatements of revenues, Red Cross decision making for money given to it for particular campaigns to be used for other purposes.

And if the industry does not do it itself, and soon, then state attorneys generals and private plaintiffs attorneys will fill the void quickly to create standards, dismantle foundations and possibly start criminal proceedings against foundations for violating the public trust if they can not successfully defend their expenses and grant making judgments. The panel on The Future of Philanthropy accurately predicted the future, but even it, comprised of futurists, did not predict that weeks after its presentation, two thousand miles from Philadelphia where the presentation was made, that people who never saw their presentation would be doing exactly what a panel member predicted. The old adage, “The Future is Now”, could not be more true in the field of philanthropy.

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