Conference considers whether charities need more regulation

Naomi Levine snapped the black-suited attendees to attention at the inaugural conference on charity governance hosted by NYU’s George H. Heyman Jr. Center for Philanthropy and Fundraising when she announced, “The boards of foundations [that were defrauded] were accessories to the [Bernard] Madoff disaster.” Levine, the founding executive director of the Heyman Center, was one of the organizers of the conference, as well as a speaker. The conference was presented against a background of swelling criticism of nonprofit governance from Congress, from judges, and from the nonprofit sector itself. A lawyer and former national executive director of the American Jewish Congress, Levine told the audience of fund-raisers, donors, and tax specialists that in her experience, members of nonprofit boards lack elemental knowledge of their fiduciary responsibilities as well as of the workings of the organizations they are supposed to oversee.

Major donors are clueless, she said, and professional fund-raisers are too preoccupied with meeting their goals to worry about governance. “Most people view the [nonprofit] sector as made up of good guys,” she said, “and good guys don’t do bad things.”

Except when they do. Madoff’s fraud affected many charities and organizations in the Jewish communal world, including Hadassah and Yeshiva University, as well as individuals. State Sen. Loretta Weinberg lost her life savings, and the charitable foundation of U.S. Sen. Frank Lautenberg lost millions. Former mayor of Fort Lee Burt Ross also invested with Madoff and initially reported that he lost $5 million.

There are one million nonprofit organizations in the U.S., with new ones being formed daily, said Stephanie Strom, a New York Times reporter who writes about the world of philanthropy. “I sincerely doubt that they are dying at the rate they are being created,” she said, and even when the organization expires, the tax exemption lives on. It is impossible for the media to cover so many organizations, Strom said, noting that she’s one of the few journalists on this beat. Strom made the point that even when a charity is exposed by the press as being irresponsible in its record-keeping and oversight, the public often continues to contribute, as happened with Yele, a group founded by rapper Wyclef Jean. She expressed the concern journalists feel when they recommend organizations where readers can send contributions after natural disasters. What do we really know about these groups? she asked.

In answer to a question as to whether the press can play a part in the regulation of nonprofits, Strom demurred. “It is impossible for media to play that role. The media should not be promoting charities they don’t know much about.” The public cannot depend on the press to monitor the nonprofit world, she said, and predicted that Congress and state and local governments would become more interested in the legitimacy of the tax-exempt nonprofit status of charities as economic recession eroded the traditional tax base.

Former New York Gov. Eliot Spitzer agreed that government has a legitimate and necessary role to play in regards to charities. Spitzer set out his theory of government’s function: First, only government can enforce rules of transparency (“self-regulation is an oxymoron,” he scoffed); second, only government can deal with externalities — factors such as pollution that aren’t figured into the market price; third, only government can enforce a society’s core values, such as the need for a minimum wage or battling discrimination.

“Every breakdown we have seen in the corporate sector has been because of a breakdown in agency relationships,” Spitzer said, adding, “Many people in the nonprofit sector are not as involved as they should be.” Who is watching the nonprofit store, he asked. There are no shareholders (those folks supposedly watching the for-profit store), the board is unengaged, and the recipients have no standing. “Fiduciary duty is what this all comes down to,” Spitzer said.

Conference organizer Doug White, author of “Charity on Trial,” pointed out that many organizations would have avoided losses if they had asked simple questions about Madoff’s returns, like how is it possible to make a steady 12 percent return when the stock market is going down. Why was there no outcry from the donors to the foundations that Madoff bilked, White asked, then warned, “If charities don’t shape up, there will be more regulation.”

Dana Aviv, the president and CEO of Independent Sector, was left to defend nonprofits from more government regulation. Acknowledging the inadequacy of self-regulation, she pointed out the sector was far too diverse in size and mission to be effectively regulated by government, describing legislation as a blunt instrument. “We do not have shareholders, but we do have stakeholders,” she said. “We have a responsibility to be each other’s experts.”