Nonprofit organizations have an opportunity to ensure the proper ethical training of their employees and managers. Moreover, business schools should prepare future nonprofit leaders for business challenges as well as the ethical challenges they will face as nonprofit leaders. Nonprofits have a responsibility to the causes they serve to act within the best interests of the organization. However, research has shown an inverse relationship between nonprofit ethical standards and the level of fraud within these organizations.
Current Ethical Standards in Nonprofits
Nonprofit World (2007) reported that ethical misconduct is at its highest level with over half of surveyed employees admitting to witnessing an ethical violation or lapse within a year. Standards set by Sarbanes-Oxley legislation do not fully apply to nonprofit organizations. There are only two stipulations within Sarbanes-Oxley that apply to nonprofits: protection for whistleblowers and document retention (Jackson, 2005). Although governance for nonprofits do not fall completely under the Sarbanes-Oxley guidelines, there are still federal, state, and local laws that must be followed.
Current standards of ethics in nonprofit organizations are:
- To establish a formal code of ethics,
- To plan for the protection of assets,
- To create procedures for the protection of whistleblowers,
- To create procedures for document preservation,
- And to create procedures for the disclosure of financial and fundraising information.
At a minimum, these standards should be in place for all nonprofit organizations.
Ethical "Best Practices" for Nonprofits
The problem is that ethical standards within nonprofits are not always as clear as they are in the for-profit sector. The different missions, sizes, commitments, and liabilities of nonprofits make it difficult to develop ethical standards to fit the entire nonprofit sector (Whitehouse, 2004). For example, the core mission of a small catholic church in Chicago and the Archdiocese of Chicago may be the same, but the policies and procedures of both organizations are extremely different.
The complexity of nonprofits has led many organizations to create organizational standards that parallel the Sarbanes-Oxley legislation. These standards are referred to as “best practices” and have materialized from different sections within Sarbanes-Oxley (Jackson, 2005). The best practices for nonprofits include:
- Recruit a competent board of directors that understands and complies with their fiduciary responsibilities to stakeholders.
- Elevate the level of leadership and employee accountability.
- Implement effective controls that guarantee compliance with current and future nonprofit industry standards.
If nonprofits follow ethical standards and choose to follow these best practices, it will give them a competitive advantage over organizations that only just follow the rules. Donors will be more likely to give money, other stakeholders will improve their trust of the organization, and the public perception of nonprofits will improve.
Sources
- Jackson, P. M. (2005). Sarbanes-oxley for nonprofits: A guide to building competitive advantage. Hoboken, NJ: John Wiley & Sons, Inc.
- Nonprofit sector panel issues good governance principles.(2007). Bruce R.Hopkins' Nonprofit Counsel, Nonprofit World, 24(12), 5-7.
- Whitehouse, S. (2004). The Sarbanes-Oxley Act And Nonprofits: "but I thought that didn't apply to us". Nonprofit World, 22(5), 10-13.
Michele Whitney - Over 10 years of diverse professional experience, PhD candidate in Public Service with an undergraduate degree in Marketing and an MBA.
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