April 2006

Dear Friend:

I received a lot of mail on my column last month about how the power of "sunshine"—voluntary disclosure and on-line transparency—may be the best solution to address the questions about the nonprofit sector that occasionally surface. Here at GuideStar, we have seen how the power of sunshine has effected a dramatic change in organizations' willingness to share information about their activities, the impact of their work, and the efficiency of their operations. We have also seen how making nonprofit data available to the public, the media, the government, and others via the Internet has raised the bar for exempt organizations. The public now expects nonprofits to disclose information readily.

But we believe we're still in the early stages of developing better reporting on the nonprofit sector. GuideStar has a number of plans underway to deliver new services that will improve the quality and types of data we collect, better ways of displaying information, and more effective tools and services to help use GuideStar data for important decision making. At GuideStar, we say that good decisions require good data.

But as powerful as on-line transparency is, is it enough? As sector leaders, we should hold accountable a poorly run organization with programs that have little impact on community problems by promoting best practices for nonprofit management. In order to have programs that have real impact on community needs, a nonprofit organization must be well managed. That's one reason that we created our edu@GuideStar program to work with nonprofit academic centers to help train the next generation of nonprofit leaders and why many organizations are doing good work to improve program effectiveness.

So what is the role of government in promoting nonprofit accountability? We see two primary functions: (1) establishing the basic standards for entry and operations and (2) punishing those that abuse the system—creating consequences for those who are involved in inappropriate and illegal behavior.

IRS commissioner Mark Everson has made strengthening oversight of exempt organizations one of the IRS's top four priorities. The IRS hired 105 new revenue agents for this purpose in FY 2005, recently issued a report and new guidelines on political activity by charities, and is in the midst of examining compensation practices at 2,000 501(c)(3) organizations. The compensation initiative is looking not only at compensation levels but also at how nonprofits report compensation on their 990s.

Although I have no doubt that there may be some legitimate nonprofit organizations engaged in inappropriate activity, I think a more troubling issue is those who take advantage of the tax-exempt status for personal and corporate gain. Legitimate nonprofits need help from the IRS in protecting us from wrongdoers who give the entire sector a bad name.

As these interesting developments for the sector continue, we at GuideStar will continue to promote nonprofit transparency, not only to expose the actions of wrongdoers but also to highlight the activities of the thousands of organizations that work ethically and effectively.

Sincerely,

Bob Ottenhoff
President and CEO
president@guidestar.org