DATELINE: December 21, 2007, Chicago
We've been reading a lot about Holden Karnofsky and Elie Hassenfeld and their GiveWell organization the last few weeks. They are everywhere. Yesterday Stephanie Strom of the New York Times jumped in. 2 Young Hedge-Fund Veterans Stir Up the World of Philanthropy, Dec. 20, 2007. Strom in paraphrasing the two wrote,
Mr. Karnofsky and Mr. Hassenfeld argue that widely available existing systems for charity evaluation, which rely largely on the charities' tax forms, known as 990s, are basically worthless because charities are given wide latitude in how they classify information. For example, some charities count fund-raising costs as money spent on programs.
We strongly disagree with their apparent belief about the Form 990. We hope the two will take a close look at the...
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revised Form 990 that was released yesterday. It is a comprehensive overhaul. It might not measure outcomes to the degree that Karnofsky, Hassenfeld, and others would like, but it requires disclosure of just about everything else. It will prove to be a treasure trove for the media and watchdogs, alike. It will also change behavior.
We were struck by the required disclosures of first class travel, companion travel, personal assistants like chefs and butlers, discretionary spending funds, and the like. Every reporter who reviews a Form 990 will start by reviewing those disclosures. We suspect that these practices will soon all but disappear from the landscape. No board is going want to have to justify these sorts of expenses as routine ones unless there is a d_mn good reason (like university housing for a college president).
The core form includes a part devoted to governance. Those questions will undoubtedly change behavior, too. Organizations aren't required to have conflicts-of-interest, whistleblower, or document retention and destruction policies, but they are asked if they do. We suspect nonprofit lawyers will be kept busy over the next year drafting policies for their clients. Once again, the simple "Yes/No" question if answered "No," raises the question, "Why not?" In the end, boards are not going to want to explain to a reporter why the nonprofit hasn't adopted such policies. We are skeptical that just having such policies will improve governance across the board. Some organizations will simply paper over the problem with form policies that they find on the Internet. But there will be boards that engage in serious discussions about these policies once they see the questions. And they are likely to see the questions because there is a question asking whether the board has reviewed the Form 990 prior to filing. Obviously the logical follow up question is "How much time?" Many directors will skim the Form 990 when faced with its size, but there will one or two directors on many boards who spend more time with it, leading to discussions and questions.
The media is always interested in compensation, as well as conflicts of interest. The IRS has handed them that information on a silver platter. And lots of it. As in the past, we learn about compensation paid to officers, directors, key employees, independent contractors, and "highest compensated employees"—love that phrase. However, the information will be better organized and more detailed, particularly when it comes to fringe benefits, deferred, and other forms of compensation. We will also learn something about how the compensation was determined. Were comparables used? Is there a compensation committee?
We will also have a better understanding of how independent the board is, as well as insider relationships that could jeopardize independence. There are also important required disclosures about audits, including audits under the Single Audit Act and OMB Circular A-133.
And for the first time, all charities will be required to disclose whether there has been a fraud, embezzlement, or inappropriate taking of organizational resources, a question that researchers will be able to use to determine how extensive fraud is in the sector. This will undoubtedly be a question that the media will take a look at every time they pull a Form 990.
There has been a lot of interest in levels of endowment, investments in hedge funds and derivatives, and how institutions plan to spend endowment. The IRS gathers all that information.
As for Karnofsky, Hassenfeld, they may want to rethink their view of the Form 990 based on Parts I and III of the Core Form, which are front and center—pages 1 and 2 of the package. Here organizations are given the opportunity to describe their mission and significant activities. Part III is particularly important, requiring a description of the organization's three largest services, with a focus on achievements. Don't fault the Form 990 if organizations don't tell you enough about outcomes. The IRS certainly has asked about them and given organizations the opportunity to tell their stories. For Karnofsky, Hassenfeld, and others, the solution is actually quite simple: Start with the Form 990 and if you don't see what you want, move onto the next organization. If everybody did this, organizations would become more forthcoming in providing the sort of information that so many want. In fact, Karnofsky and Hassenfeld would be doing everybody a favor if after each unsatisfactory review, they sent a form letter explaining why they moved to the next candidate.
This brief discussion only scratches the surface of what information is included on the Form 990 and the accompanying schedules. Those who are interested in schools, hospitals, tax-exempt bonds, advocacy, and fundraising activities will have plenty to consider as they review the assorted schedules, a review that will be made much easier by the discreteness of those schedules.
In sum, by simply asking non-judgmental questions, the IRS will change behavior. Senator Grassley should be applauding what the IRS has accomplished. It's not perfect, but given the volume of comments the IRS received and the concerns raised by those comments, Mrs. IRS and her staff have done an outstanding job of advancing the ball down court. We've gone from college ball to the pros.
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