Donors Behaving Badly?

I’ve written before about the importance of avoiding mission creep and other alignment issues when seeking funding for your nonprofit. I know, it is certainly easy to fall into the “any funding is good funding” trap, especially in small and often under-resourced nonprofit organizations. But, as I’ve noted, the pursuit of grant funding can definitely prove problematic if it is misaligned with the overall mission and direction of your organization. Mission alignment is key to ensuring that the funding your organization receives helps you accomplish what is in your strategic plan instead of taking you away from your actual goals.

But there’s another type of funding related issue that can be even more detrimental than a misaligned grant award. So detrimental, in fact, that it can cause serious damage to an organization’s reputation or even land it in the headlines. And in the world of nonprofits, the marketing idiom there’s no such thing as bad publicity absolutely does not apply.

So, what type of funding can be this problematic? The type that comes from donors who behave badly. I think you know what I mean…we have all seen the headlines:

“XYZ Charity Under Immense Pressure to Return Tainted Millions”

“ABC Nonprofit Accepted Donations from Criminals”

“Corporation Attempts to Clear Bad Reputation through Charity”

This issue can manifest itself in many different ways. It might be an individual who has been philanthropic for years but is later found to have engaged in criminal activity. It could also be a major corporate donor who finds itself the subject of a class action discrimination lawsuit. The potential problems are endless. But, it is up to you, the nonprofit leader, to ensure that your funding needs don’t overshadow the due diligence process that should always happen before accepting a major donation. Failing to do so can be costly, both in terms of financial and reputational damage.

So, how do nonprofits find themselves in these predicaments? Through a combination of factors, really. It usually starts with leadership that gets a little too excited about a prospective major gift. It is hard not to get excited about an individual or corporate donor offering thousands or even millions to help your organization. And, when leadership is excited everyone gets excited, and it’s easy to miss issues if everyone is blinded by dollar signs. Along the way, there might be a red flag or two that get ignored or minimized. Someone fails to pause, reflect, and ask more questions about the donor. Perhaps no one thinks to take a closer look at the finances and/or history of the corporation, or maybe this donor has been throwing money around all over the place and folks are just pleased to finally be on their giving radar.

So, the gift is negotiated, received, and celebrated. And everyone is happy, until a triggering event occurs — like a prominent philanthropist being charged and later convicted of criminal activity — and every organization that ever received charitable donations from this individual, including yours, is immediately under scrutiny. Ugh.

It is always a smart practice for nonprofit leaders to conduct their own due diligence in advance of accepting major contributions. This is relevant for any major donor, not just the ones whose questionable reputations precede them. As a nonprofit leader, you want to have as full a picture as possible about the donor, the source of the funds being donated, and any legal or ethical issues that the donor may have dealt with in the past.

One of the trickiest parts of the due diligence process is that there is a lot of gray area. What one nonprofit leader views as unethical another may view as capitalism at its finest. And, absent a criminal conviction, so much in these decisions is subjective, and every nonprofit leader has their own comfort level with risk. But the point of due diligence is to have as much information as possible to inform your decision about whether and how your organization should be engaged with the donor in question.

I promise I’m not trying to freak you out, nonprofit leaders. My point is simply to remind you to slow down and do your homework before entering into agreements with major individual or corporate donors. Just as you should expect major donors to scrutinize your nonprofit before handing you a giant check, it is your duty to investigate the people and companies who show up with giant checks to give.

If your nonprofit doesn’t already have a gift acceptance policy, I strongly encourage you to make it a priority to create one. This policy specifies the types of contributions your organization will accept, the grounds under which it will decline a gift, and can even spell out a process for handling ethical issues after a gift has already been accepted. I also recommend investing in one of the many prospect research software tools that can help with the due diligence process, in addition to identifying new prospective donors. Some organizations even go as far as creating standing ethics committees on their boards of directors that meet regularly to discuss and vet major donors who have been or may be approached for funding. Whatever path you take for your organization, just make sure you’ve got a plan and process in place to deal with donor ethics issues if they ever arise.

A little bit of homework now can help your nonprofit avoid major ethical, reputational, and financial issues later.