The Oxfam scandal shows that, yes, nonprofits can behave badly. So why aren’t they overseen like for-profits?
Last week, news media reported that Oxfam — well respected for its humanitarian work — had employed aid workers in Haiti who hired prostitutes. As the Haiti scandal has unfolded, new allegations have surfaced, including that other workers at U.K. charities had sexually abused teen volunteers, and that overseas staff traded humanitarian aid for sex. Moreover, Oxfam’s top management seems to have ignored warnings about what was going on.
Oxfam now faces an existentialist crisis. It has depleted its moral authority. Donations from individual donors have plummeted. Corporate support from Heathrow, the Co-Op Bank, Visa and M&S might be withdrawn. The U.K. government is threatening to withhold £32 million of annual support and the European Commission has made a similar threat regarding its £29m grants. Celebrity ambassadors like Minnie Driver and Archbishop Desmond Tutu have resigned.
Many other similar organizations have been accused of harboring sexual abusers as well. In 2017 alone, more than 120 workers in leading British charities including Save the Children, Christian Aid and the British Red Cross were accused of sexual abuse.
Why do nonprofits behave in unprincipled ways? Here’s the problem: many scholars and practitioners insist that nonprofits, and civil society groups in general, are principled actors, unlike greedy and instrumental for-profit firms, because their organizational purpose has virtue. In addition, because nonprofits cannot legally distribute profits (although some, like hospitals, might generate them), they do not face shareholder pressure to increase profits.
This presumption of virtue leads regulators and stakeholders to neglect issues of nonprofit governance and accountability. Compared to firms and governments, nonprofits face less scrutiny by outside stakeholders. This leads to poor governance, accountability shortfall and mission drift.
In part, these problems are compounded by how nonprofits raise funds. Nonprofits are supposed to be nongovernmental, a communitarian response to big government and big business. Scholars imagine them as local organizations raising funds from the community, subject to active local scrutiny. But most global nonprofits receive a significant portion of their funds from the government. Not surprisingly, nonprofits are focused on managing their political environment. Internal governance and effective service delivery become peripheral.
The nonprofit sector has expanded — in part funded by governments
A large number of nonprofits are locally rooted, staffed by volunteers and provide local public goods — food banks, homeless shelters and the like. But alongside, there are visible nonprofit “brands” with a global presence and sizable budgets, staffs and bureaucracies. The global nonprofits substantially rely on funding from governments, intergovernmental organizations, private foundations and corporate sponsorship. In 2016, UK’s top 1 percent of charities accounted for about half of the sector’s £10 billion income.
Why do governments fund any nonprofit, local or global? After all, nonprofits are supposed to be nongovernmental. At the domestic level, starting in the 1980s, many Western democracies began relying on nonprofits to deliver public services in the Reagan-Thatcher approach to shrinking government. In the 1990s, both the Clinton-Gore initiative that was called “reinventing government” and Tony Blair’s New Labour ideology encouraged governments to outsource service provision to nonprofits. Some observers wrote about a nonprofit “associational revolution,” comparing this expansion to the 19th-century emergence of the modern nation-state.
At the international level, since the 1990s, global nonprofits have become an important vehicle for delivering foreign aid. When frustrated that foreign aid hasn’t promoted economic development and democracy, donors blame recipient countries’ governmental corruption. Of course, with the dominant notion that nonprofits are virtuous and above temptations, donors saw nonprofits as the appropriate aid contractors. In any case, involving nonprofits in aid delivery was a good political defense against the criticism that foreign aid is a waste of money. Whether nonprofits are more effective and efficient than state-run development agencies remains to be seen.
Where there’s little oversight, problems can flourish
Unfortunately, too much public trust leads authorities and citizens to invest too little in police patrols, regular institutional oversight. Lax regulatory oversight also means that it’s comparatively easy to start a nonprofit. This attracts bad apples. Some entrepreneurs start “briefcase nonprofits” that exist on paper only in order to corner governmental contracts without delivering real services.
The loose oversight over nonprofits allows even real charities to abuse public trust. Charity managers give themselves inflated salaries, use charity money for lavish lifestyles, expensive retreats and so on. One revealing example is the Wounded Warrior Project, a U.S. charity aimed at helping military veterans. Established after 9/11, this charity has raised more than a billion dollars to date. But as CBS News reported, the organization’s leaders have used charity funds for extravagant lifestyles and parties. By some accounts, the charity spends 40 to 50 percent of their resources on overhead — compared to other veterans’ charities that spend only 10 to 15 percent on overhead.
Most countries do not require nonprofits to file annual reports. The U.S. nonprofit sector is an exception; nonprofits are annually required to file Form 990 with details of their finances, activities and governance, which are made public. Yet very few Americans are aware of this requirement, and even fewer use it regularly to guide their charitable giving. To varying degrees, U.S. states have established their own charity regulations. Both the Federal Trade Commission and state attorneys general can investigate charity fraud, but they rarely do.
In contrast, the for-profit sector, working outside the presumption of virtue, is overseen by several layers of regulators, including private bodies such as the stock exchange. For-profit organizations are required to regularly disclose information on finances, governance and policies, information that is scrutinized by financial analysts and shared over television, blogs and newspapers.
Even beyond regulatory filings, however, shareholders can assess how firms are performing by tracking sales. If firms provide shoddy products, they will probably lose customers. Top CEOs get fired if the firm does not meet its quarterly sales targets. By contrast, nonprofits typically serve “customers” who cannot show their displeasure. Often they depend on a particular nonprofit and have no other place to turn to even if they are unhappy about the product. Donors cannot assess how well the nonprofit is doing based on customer feedback.
Is the Oxfam scandal the #MeToo moment for the nonprofit world?
As new nonprofit scandals emerge, it remains to be seen if Oxfam will become the #MeToo moment for this sector. Many nonprofits do useful work. The problem is that the presumption of virtue reduces institutional oversight, and managerial abuses follow. And because the virtue claim raises stakeholders’ expectations, scandals in one nonprofit can deplete the moral capital of the entire sector.
Global bureaucratized nonprofits need structures and rules like those in place for global firms. Nonprofit funding models should be reexamined. A government-funded nongovernmental sector makes little sense. A community-supported nonprofit sector is the closer approximation to the Tocquevillian ideal of the civic sector.
Nives Dolšak is professor and associate director, School of Marine and Environmental Affairs at University of Washington, Seattle.
Sirindah (Christianna) Parr is a doctoral student in political science at the University of Washington, Seattle.
Aseem Prakash is professor of political science and the Walker Family Professor for the College of Arts and Sciences at University of Washington, Seattle.
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