Sunday, August 28, 2005


One of the things of which Americans can be most proud is our history of creating non-profit organizations to help the less fortunate. Alexis de Tocqueville wrote with admiration about the “associations” that our forefathers formed. As eloquently stated by Larry Kennedy in Quality Management in the Nonprofit World, “An organization that attains tax-exempt status is the beneficiary of a profound opportunity to apply entrepreneurship, compassion, and practicality in fulfilling social motivations while remaining exempt from any responsibility to underwrite the nation’s infrastructure through taxes. We are exempt from these burdens because we operate under the public perception that what we do is important to society and that we are managing a business that provides services for reasons other than personal financial gain.”

In 1939 the House Ways and Means Committee noted, “The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that the government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.” As stated by the US district court in Washington, DC in the 1972 case of McGlotten v. Connally, by granting tax-exempt status “the Government relieves itself of the burden of meeting public needs which in the absence of charitable activity would fall on the shoulders of the government.”

Tax exempt status, therefore, is granted to enable a spirit of entrepreneurship to blossom in areas serving the public good, by saving the government the burden of funding programming that charities are able to provide for the benefit of society, and not for the benefit of any individual.

In the September 2005 issue of Inc., Norm Brodsky wrote about how he likes competition. Well Norm, I have great news for you. In order to help non-profit organizations I am going to start my own non-profit document shredding company. The hospitals, nursing homes, universities, colleges are all coming to me. I’ll provide the same services as you, but for a fraction of the price because I’ll be paying no taxes while your paying whatever it is that you pay. And not to fear, the IRS almost never denies a request by a minimum of three adults to form a non-profit. Hurwitz Non-profit Document Shredding is moving to Brooklyn!

Don’t worry. Just kidding. But it’s not all that ridiculous. Let’s take, for example, a non-profit geriatric facility in the Bronx with total budgets of over $40 million. They provide excellent services, including a community based services organization and a nursing home. For all intents and purposes, either the local, state or federal governments fund all programs. They provide no free services to anyone. They are on a tight budget of government funding. Yet, they are tax exempt. And their CEO earns well in excess of half a million dollars.

While in past centuries the reason for tax exemption was to release the government from financial burdens allowing social entrepreneurs to take the lead in providing services for the public good, today the government in many cases provides both tax-exempt status and 100% funding for these very organizations. That gives these non-profits an unfair advantage over for-profit competitors. In fact, they would be better described as government subcontractors.
If non-profits are to enjoy the benefits of tax-exempt status, they must provide services to the community for which they are not reimbursed by the government to make up for their share of the tax pool. If not, they should lose their tax exempt status and have to play on an even playing field with for-profits. By all means let them continue to be non-profits issuing deductions for donations, but lets not have the government and government subcontractors disguised as tax-exempt non-profits joining forces againg for-profits. That's as sill as my going into the document shredding business.

Thursday, August 04, 2005


The Gloria Wise Boys & Girls Club in the Bronx neighborhood of Co-op City, is involved in what promises to be a growing scandal. According to press reports, New York City’s Department of Investigation has discovered that officials of the agency “approved significant inappropriate transactions and falsified documents that were submitted to various City agencies.” The City has transferred its funding to other local agencies so that programs will continue, and the executive director and assistant executive director have resigned. But what of the board?
Many board members think that if they attend meetings, attend a few events, sit on a couple of committees and make the occasional donation that they have executed their responsibilities. Not so. According to the Revised Model Nonprofit Corporation Act, “a director shall discharge his or her duties… (1) in good faith; (2) with a care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the director reasonably believes to be in the best interests of the corporation.” What does this mean?
It means that board members must ask questions. They must know what is happening. They must review the decisions of the executive. They must approve expenditures and review all financial dealings with the utmost scrutiny. They must make certain that all decisions are in the best interest of the agency. They must assure that the mission of the agency is not being forsaken in favor of any individual or cause other than its own.
What happened at Gloria Wise? It is unclear. For less than six months in 2002 I was their director of Development. My contacts allege that monies received from the City, and possibly other sources, were diverted to the liberal radio station Air America, by the director of Fundraising and the executive director. Depending on the source, the amount ranges from $80,000 to $800,000. The transfer of funds may have been made by the use of a rubber stamp of a board member’s signature on a check.
As we all know, if we are lucky there are only three sides to every story. The truth has yet to come out. But let’s assume that monies were transferred to Air America, without the knowledge of the Board, using a signature stamp.
First, non-profits are, by definition, non-sectarian. For an agency to invest in a political media organ is foolish at best, criminal at worst. It brings into question its non-profit status under IRS regulations. Second, board members have a fiduciary responsibility to assure that their agency’s finances are in order. Providing a rubber stamp signature means transferring that responsibility to others and therefore should not be allowed.
Most importantly, if the Board did not ask questions about the agency’s finances, and did not request independent audited reports, they did not exercise their responsibilities. If considered “gross negligence,” they could be held personally liable for the results of their apathy.
And let’s not forget the auditors. Who were the accountants that missed whatever happened at Gloria Wise, be it $8 or $800,000?
There are well over one million non-profits. That number grows every year as the IRS approves more applications. Most non-profits never amount to anything. They are formed by individuals who care about a cause, want to raise money for it, but don’t have the wherewithal to succeed. They ask some friends to sign the paperwork, agreeing to be board members. They do so out of friendship, never realizing that there are real responsibilities that go with the title.
If anything good is to come out of the Gloria Wise situation it will be a wakeup call to board members that they are responsible for what their agencies do, and can be help criminally liable if they replace due diligence with apathy.

Thursday, July 14, 2005


There is nothing more dreaded than change. That is so with organizations as well as individuals. We cherish the familiar. “Better the devil you know” is a personal credo to many. The problem is, that just as individuals must evolve, so must non-profits. Leaders recognize this. What they must also be aware of is that the end result may be totally different from what was expected.
An excellent case of unexpected results was the 1992 reorganization of the Jewish Federation of Greater Clifton-Passaic, New Jersey, which merged with two of its sister agencies, the Jewish Family Service (JFS) and the Passaic-Clifton YM-YWHA (Y), and became Federation divisions. The aim of the merger was to enable the services offered by the JFS (social services, primarily counseling) and Y (recreational and educational programs) to continue to be available to the community, without increasing their burden on the Campaign that was about to suffer an $800,000 loss.
The classic definition of a Jewish Federation is the “central fundraising, planning and budgeting arm of the organized Jewish community.” In reality, as is said more often than not behind closed doors, “We raise money on the back of Israel for local needs.” In other words, putting Israel at the top of the marketing campaign, Federations receive donations which, classically, were distributed with over 50% going to Israel and the remainder being used by the Federation, local and national agencies.
In its heyday, the Clifton-Passaic Federation raised over $2.4 million. In 1991, 17.1% of the annual Campaign went for Federation expenses, its uncollectable pledge reserve, and its Joint Endowment Foundation (with the North Jersey Federation); local and regional agencies received 28.3% of the Campaign; national organizations got 1.1%; and Israel/overseas beneficiaries were allocated the remaining 53.3%. In 1997, the division was 25.7% for the Federation, 70.4% for local and regional agencies (including the JFS and Y), 2.2% for national organizations, and 1.7% for Israel/overseas. (This included deficit funding of $17,768 which was to be taken from the 1998 Campaign.)
As these figures indicate, the annual Campaign following the reorganization was focused on building mounting local needs. That was positive. The negative, from the perspective of the original goals of the reorganization was that while in 1991 the JFS and Y received 30.9% of the funds that were available for general distribution, in 1997 they received at best 63.37% or at worst 71.50%, depending on the math. The JFS and Y had taken over the Campaign.
Those agencies were located in the Jewish Community Center (JCC), which was owned by the Federation. Also present in the building were the Holocaust Resource Center and the Jewish Community News. In the year prior to the merger 40% of the annual Campaign went to agencies in the JCC (including the Federation). By 1997, that percentage had risen to over 90%.
While a multitude of interpretations can be given to any set of statistics, the important points are (a) that the result of the reorganization was to double Campaign support for the “merged” agencies, and (b) to practically eliminate any connection with Israeli/overseas activities – arguably the primary motivation for giving by a majority of donors and definitely the motivating factor behind the contributions of the largest and oldest contributors.
The above statistics are all based on Federation financial reports. Not reported in the 1995 report was that the $200,000 allocation to Israel/overseas was given to the Y to cover its deficit. Moreover, primarily because of the non-payment of pledges over a period of almost 10 years, the Federation’s Board, in accordance with the advice of its accountants, wrote off in excess of $1.3 million in debt to the UJA, through which donations are sent to Israel. (The proposed overseas allocation for 1998 – the year I left Federation, was $50,000.)
According to the Federation’s 2002 IRS Form 990 (the latest available on Guidestar), the Federation raised $1,673,997 (line 1d) and allocated $159,907 (Statement 6) to “Various Jewish Organizations.” Since salaries of the executives of the Federation, JFS and Y are reported, it is clear that the 990 represents the financials for all activities conducted at the JCC. The percentage of donations to local, national and overseas organizations was therefore 9.55%, 90.45% going to the Federation and its divisions. The distribution percentages have thus remained constant since 1996 and 1997.
Clearly, the Clifton-Passaic Federation has become a local agency that sends some money to other community organizations and abroad. It is no longer a “communal” fundraising organization, a “community chest.” While that is to be welcomed, it was not the intent of the merger, which saved local community services at the expense of the Federation’s historic purpose.
The moral is this: Be prepared for unexpected results. You never know where change will lead. And just because the end result was not what you wanted, it may still be for the best.


The best way to understand a non-profit is to review its mission statement. If the statement is long and convoluted it is safe to assume that the organization lacks focus and direction. It should be short, sweet and to the point, memorable and constantly revisited to assure that it remains relevant to donors, volunteers and staff.
The practical purpose of the mission statement is to remind the agency’s decision makers of their moral foundation. In this regard, there is no difference between non-profits and for-profits. In fact, non-profits can learn a great deal from for-profits.
Leann Cadani may have put it best. In Corporate Mission Statements: A Strategic Management Issue she writes, “The Mission Statement is a crucial element in the strategic planning of a business organization. Creating a mission is one of the first actions an organization should take. This can be a building block for an overall strategy and development of more specific functional strategies. By defining a mission an organization is making a statement of organizational purpose.”
According to Joseph Badaracco in Defining Moments: When Managers Must Choose between Right and Right, “Mission statements and credos can remind managers of the larger purposes their work serves, something easily lost in the hurly-burly of everyday life.” Rudy Giuliani, in Leadership, also speaks about the importance of a clearly defined mission. “Thus, finding the right organizational structure starts with a mission. Then you have to identify your aims, and what you should do to achieve them; find the right people for the job; and constantly follow up to make sure everyone is sticking to the original purpose, that no one’s taken over your team and sidetracked them.”
Remember in 1982 when you couldn’t buy Tylenol? Johnson & Johnson’s mission is to place the priority of the health of its customers above all else. So what to do when containers of Tylenol are poisoned in Chicago and the next day your stock price plunges 20% and you lose $2 billion in company value? Launch a nation-wide advertising campaign pointing out that the cyanide did not come from your plants, that it was an isolated incident of an individual madman, and that the product is safe. Of course that is not what mission-driven Johnson & Johnson did. They pulled Tylenol from the shelves and took a $240 million hit! As their credo states, “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services.” That’s why their CEO was praised, not condemned, for the decision.
Ever hear of river blindness? Scientists at Merck found the cure for the disease that was decimating the lives of Africans. On average it costs $200 million and takes 12 years to develop a drug. In this case just to market Mectizan, as the cure was named, was expected to cost $2 million in its first year for distribution alone. It was estimated that the annual bill for producing and distributing the drug would be $20 million. The $3 price tag per pill was too high for anyone with the disease to pay. No governmental or international organization was willing to pick up the tab. What to do? “The mission of Merck & Co., Inc., is to provide society with superior products and services.” Merck gives the drug away for free. Every year it takes a multi-million dollar hit so that thousands of Africans can see. Again, the decision was praised by shareholders.
Then, of course, there are companies that take a leadership role when government fails. For example, South African mining conglomerate Anglo American could not get the South African government to approve a prescription drug campaign to fight AIDS which is destroying the country, lowering life expectancy to 48 years. With 25 to 30% of its employees being HIV positive, the company had to act. Against government wishes Anglo American decided to provide its employees with drug treatment, in addition to launching an educational campaign. Where government failed to act, a for-profit company took the leadership role and offered its expertise to local communities and health agencies. (Eventually the South African government decided to follow Anglo American’s lead.)
Of course cynics will say that Johnson & Johnson had no choice but to pull Tylenol from the shelves because no one would buy the product. And Merck may be losing millions on Mectizan but it gains untold millions from good press and good will. And as for Anglo American, it needed to protect its work force. But cynics just don’t get it. Having a moral foundation to one’s decisions is good business.
In his recently published book, Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value, Bill George, the former chairman and CEO of Medtronic, places mission at the center of his formula for success. He clearly states that the book’s purpose is “to show all leaders… that there is a better way to lead than we have seen in the past decade – by pursuing your mission, living by your values, and getting superior results for all stakeholders.”
George describes Medtronic as “a mission-driven company.” The mission statement that the company’s founder, Earl Bakken, wrote was “to restore people to fuller lives.” The full mission statement is literally plastered throughout the company, and a regular topic of discussion among employees.
Bakken wrote the mission statement in 1962. Five years earlier the company had created the first pacemaker. On the verge of bankruptcy the company’s board of directors urged Bakken to write the company’s mission statement. “It gave the company a clear purpose and focus. Within three months the company turned profitable and has been so ever since.”
According to George, “the best-kept secret in business is that mission-driven companies create far more shareholder value than do financially driven firms.” (During his tenure at Medtronic, George “created $60 billion in shareholder value!”)
While few non-profits have the impact on society of for-profits, learning for-profit decision making can serve as a guide to non-profits facing moral decisions to which all too often there is no clear decision. Hopefully when non-profits make those tough decisions, their boards and cohorts will show them the same support as their for-profit counterparts.


When doing executive recruiting for non-profits, it is amazing to me the number of clients and candidates that have not heard of Guidestar – the first place anyone should go when seeking information about a non-profit.
Guidestar ( is a national database providing basic information on approximately one million non-profits throughout the United States, including over 80,000 in New York. The most important aspect of the database is that it includes the 990s for the vast majority of these organizations. (The 990 is the tax form submitted annually by non-profits to the IRS. It includes information on revenue, expenses, senior management salaries, and board membership.)
Before a job interview it is important to download the prospective employer’s 990 as part of any research that you do. While it is important to note revenue and expenses, in reality what any candidate wants to check are the salaries paid to senior management. Anyone earning more than $50,000 should be listed. This is not just important for salary negotiations, it can also be very informative.
I once went for an interview where the proposed salary was $80,000. I downloaded the agency’s 990 and discovered that no one was listed as earning $50,000 or more. Since I was interviewing for director of Development, it was logical to assume that at least the CEO and COO would be making more. I asked the COO for an explanation. He told me that the agency was in fact made up of a network of non-profits. Salaries were distributed among the different constituent agencies. As no single agency paid $50,000 or more to any employee, none was listed. As I found out later, their accounting practices were questionable at best. That said, their books were audited, and distributing the salaries was legal – but it certainly wasn’t kosher!
Then there is a Connecticut educational non-profit. It has annual revenue of $5,766,523. Of this, $1,194,884 comes from contributions, $4,571,639 from program revenue.
The president earns $254,700. The co-president makes $127,169. One program director grosses $57,308 and another employee makes $60,303. Together the four earn $499,480.
Additionally, the agency pays a lease of $461,358. Specifically, $266,601 is lease rent; $103,697 is for lawn maintenance and rubbish removal; $50,477 is utilities payments; and $40,583 is taxes.
The four employees earn 41.80% of donations. Or, they earn 10.92% of program revenue. Or, 8.66% of all revenue. The lease represents 38.61% of contributions; 10.09% of program revenue; or 8% of all revenue.
All of this is perfectly legal. It is also apparently totally reasonable. Just one problem: The president and co-president are husband and wife. The two employees are their children. And they own the land that the non-profit leases. So, in total, the family receives $960,838 from the non-profit. Put differently, they get 80.41% of contributed funds, or 21.01% of program revenue, or 16.66% of all revenue. Again, it may be legal, but it’s not kosher.
The appearance of impropriety is something non-profits have to avoid at all costs. While the two examples cited are clearly exceptions to the rule, they reflect poorly on the industry as a whole. And it is all a matter of public record.
The number one rule of management is this, If you don’t want it on the front page of the local paper, don’t do it.