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The Honolulu Advertiser
Posted on: Tuesday, December 2, 2003

ISLAND VOICES
Capacity hurts nonprofits most

John Flanagan is president and CEO of Hawai'i Community Services Council, a nonprofit that engages in community planning and provides training and technical assistance for nonprofits.
By John Flanagan

According to Hawai'i Supervising Deputy Attorney General Hugh Jones, "There is growing pressure for nonprofits to voluntarily adopt, or adopt by legislative fiat, many of the reforms that Congress implemented in the Sarbanes-Oxley Act of 2002 for for-profit, publicly traded corporations."

In the Nov. 23 Advertiser, Jones offered a detailed list of governance practices that nonprofits should voluntarily adopt, such as annual budgets, financial audits, executive evaluations and written policies on board-meeting attendance, conflicts of interest, investments, internal controls, purchasing and unrestricted net assets.

Why this rush to consider, if not enact, regulation? "Confidence in nonprofit organizations is at the lowest level in two decades," Jones wrote. "One-third of Americans 57 or older have less confidence in nonprofits over the last two years."

Despite this, Jones said, a recent national study found that "... 81 percent of nonprofit organizations have seen no change in their level of financial accountability following (recent) accounting scandals."

Not everyone shares Jones' perspective. "I think that in the universe of nonprofit issues, poor corporate governance isn't the principal threat to society," says Andrew Aoki of 3Point Consulting, a local firm that works with Hawai'i nonprofits. "What's really scary is a lack of financial, organizational, political, technological and human capacity in the sector."

Aoki doubts most nonprofits can address governance issues without first addressing this capacity shortfall. "Moreover, issues of corporate governance may just be a symptom of those other problems. Addressing the capacity issues might improve governance, but I don't think addressing governance issues will lead to meaningful improvements in capacity."

Geri Marullo, CEO of Child and Family Service, agrees. "The oversight of nonprofits is incredible especially when they receive state and federal dollars," she said. Meeting monitoring and reporting requirements is a daily drain on time and resources.

"Besides accreditation standards and new reporting requirements, there is also additional scrutiny by volunteers and community members," Marullo says. "The best practice in oversight of nonprofits is focused, diverse, dedicated board members from all walks of life, not more government involvement."

Jerry Rauckhorst, Diocesan Director of Catholic Charities Hawai'i, said, "There are many health, behavioral health and human service organizations who have public and donor trust and confidence, are governed well by volunteer leaders and professionally led by dedicated and competent nonprofit leaders."

Such organizations welcome accountability and quality improvement; it is ingrained in their culture.

"These organizations are usually accredited by national standard-setting bodies — which involves meeting best-practice standards in governance, administration and fund-raising as well as program effectiveness and outcome standards," Rauckhorst said.

Jones wrote that the number of complaints to the Attorney General's office regarding public charities "... has mushroomed, largely resulting from the Kamehameha Schools' controversy and resulting reforms." Yet Kamehameha Schools is hardly the model of a typical Hawai'i nonprofit.

"Perhaps somewhere out there are a few Enron-esque nonprofit executive directors and volunteer boards wreaking havoc on individuals and society with their unscrupulous use of QuickBooks," Aoki said. "I just don't see the justification for X-raying the shoes of all nonprofits for such a limited social benefit."

In the real world, the challenge for most nonprofits isn't corporate corruption or irresponsible boards letting highly compensated executives rip off donors, taxpayers and clients. Rather, it's getting paid on time, meeting regulations and state contract reporting requirements, keeping up with technology, dealing with a decline in volunteerism or fund-raising in a down economy.

Such challenges are far more daunting than implementing or complying with the Sarbanes-Oxley Act. In fact, "Sarbanes-Oxley would be a slam dunk for well-run nonprofits," Rauckhorst said. "It's only a value-add dimension of what drives their organizational culture."

Certainly, all nonprofits should strive to implement best practices. "To (Jones) it's the public's lack of confidence that's the driving force," Rauckhorst said. "Another perspective would be that agencies that have the public's confidence — and there are many — should do even more to keep it."

"Now that we've addressed that issue," he said, "let's get on with the real issues that challenge our ability to carry out our missions."