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The Oxfam scandal shows that, yes, nonprofits can behave badly. So why aren’t they overseen like for-profits?

- February 19, 2018
The British government is reviewing its relationship with Oxfam in the wake of sex allegations against some of the charity’s staff members. (AP)

Last week, news media outlets reported that Oxfam — well respected for its humanitarian work — had employed aid workers in Haiti who hired prostitutes. As the Haiti scandal has unfolded, new allegations have surfaced, including that other workers at U.K. charities had sexually abused teenage volunteers, and that overseas staff members had traded humanitarian aid for sex. Moreover, Oxfam’s top management seems to have ignored warnings about what was going on.

Oxfam now faces an existential crisis. It has depleted its moral authority. Donations from individual donors have plummeted. Corporate support from Heathrow, the Co-Op Bank, Visa and M&S might be withdrawn. The U.K. government is threatening to withhold £32 million ($44.8 million) in annual support and the European Commission has made a similar threat regarding its £29 million ($40.7 million) in grants. Celebrity ambassadors including actress Minnie Driver and Archbishop Desmond Tutu have resigned.

Many other similar organizations have been accused of harboring sexual abusers as well. In 2017 alone, more than 120 workers in leading British charities including Save the Children, Christian Aid and the British Red Cross were accused of sexual abuse.

Why do nonprofit organizations behave in unprincipled ways? Here’s the problem: Many scholars and practitioners insist that nonprofit groups, and civil society groups in general, are principled actors, unlike greedy and instrumental for-profit firms, because their organizational purpose has virtue. In addition, because nonprofit organizations cannot legally distribute profits (although some, such as hospitals, might generate them), they do not face shareholder pressure to increase profits.

This presumption of virtue leads regulators and stakeholders to neglect issues of nonprofit governance and accountability. Compared to firms and governments, nonprofits face less scrutiny by outside stakeholders. This leads to poor governance, accountability shortfall and mission drift.

In part, these problems are compounded by how nonprofit groups raise money. Nonprofits are supposed to be nongovernmental, a communitarian response to big government and big business. Scholars imagine them as local organizations raising money from the community, subject to local scrutiny. But most global nonprofit organizations receive a significant portion of their funding from the government. Not surprisingly, nonprofits are focused on managing their political environment. Internal governance and effective service delivery become peripheral.

The nonprofit sector has expanded — in part funded by governments

A large number of nonprofit organizations are locally rooted, staffed by volunteers and provide local public goods — food banks, homeless shelters and the like. But alongside, there are visible nonprofit “brands” with a global presence and sizable budgets, staffs and bureaucracies. The global nonprofit groups substantially rely on funding from governments, intergovernmental organizations, private foundations and corporate sponsorship. In 2016, the United Kingdom’s top 1 percent of charities accounted for about half of the sector’s £10 billion ($14 billion) income.

Why do governments fund any nonprofit organization, local or global? After all, nonprofits are supposed to be nongovernmental. At the domestic level, starting in the 1980s, many Western democracies began relying on nonprofit groups to deliver public services in the Reagan-Thatcher approach to shrinking government. In the 1990s, both the Clinton-Gore initiative that was called “reinventing government” and Tony Blair’s New Labour ideology encouraged governments to outsource service provision to nonprofit organizations. Some observers wrote about a nonprofit “associational revolution,” comparing this expansion to the 19th-century emergence of the modern nation-state.

At the international level, since the 1990s, global nonprofit groups have become an important vehicle for delivering foreign aid. When frustrated that foreign aid hasn’t promoted economic development and democracy, donors blame recipient countries’ governmental corruption. Of course, with the dominant notion that nonprofit groups are virtuous and above temptations, donors considered them the appropriate aid contractors. In any case, involving such organizations in aid delivery was a good political defense against the criticism that foreign aid is a waste of money. Whether nonprofit groups are more effective and efficient than state-run development agencies remains to be seen.

Where there’s little oversight, problems can flourish

Unfortunately, too much public trust leads authorities and citizens to invest too little in police patrols, regular institutional oversight. Lax regulatory oversight also means that it’s comparatively easy to start a nonprofit group. This attracts bad apples. Some entrepreneurs start “briefcase nonprofits” that exist on paper only to corner government contracts without delivering real services.

The loose oversight over nonprofit organizations allows even real charities to abuse public trust. Charity managers give themselves inflated salaries, use charity money to fund lavish lifestyles, expensive retreats and so on. One revealing example is the Wounded Warrior Project, a U.S. charity aimed at helping military veterans. Established after 9/11, this charity has raised more than $1 billion. But as CBS News reported, the organization’s leaders have used charity money for extravagant lifestyles and parties. By some accounts, the charity spends 40 percent to 50 percent of its resources on overhead — compared to other veterans’ charities that spend only 10 to 15 percent on overhead.

Most countries do not require nonprofit organizations to file annual reports. The U.S. nonprofit sector is an exception; nonprofit groups are annually required to file Form 990 with details of their finances, activities and governance, which are made public. Yet very few Americans are aware of this requirement, and even fewer use it regularly to guide their charitable giving. To varying degrees, U.S. states have established their own charity regulations. Both the Federal Trade Commission and state attorneys general can investigate charity fraud, but they rarely do.

In contrast, the for-profit sector, working outside the presumption of virtue, is overseen by several layers of regulators, including private bodies such as the stock exchange. For-profit organizations are required to regularly disclose information about finances, governance and policies, information that is scrutinized by financial analysts and shared via television, blogs and newspapers.

Even beyond regulatory filings, however, shareholders can assess how firms are performing by tracking sales. If firms provide shoddy products, they will probably lose customers. Top CEOs get fired if firms do not meet their quarterly sales targets. By contrast, nonprofit organizations typically serve “customers” who cannot show their displeasure. Often they depend on a particular nonprofit group and have no other place to turn to even if they are unhappy about the product. Donors cannot assess how well the nonprofit is doing based on customer feedback.

Is the Oxfam scandal the #MeToo moment for the nonprofit world?

As new nonprofit scandals emerge, it remains to be seen whether Oxfam will become the #MeToo moment for this sector. Many nonprofit organizations do useful work. The problem is that the presumption of virtue reduces institutional oversight and managerial abuses follow. And because the virtue claim raises stakeholders’ expectations, scandals in one nonprofit can deplete the moral capital of the entire sector.

Global bureaucratized nonprofit groups need structures and rules like those in place for global firms. Nonprofit funding models should be reexamined. A government-funded nongovernmental sector makes little sense. A community-supported nonprofit sector is the closer approximation to the Tocquevillian ideal of the civic sector.

Nives Dolšak is professor and associate director, School of Marine and Environmental Affairs at University of Washington at Seattle.

Sirindah (Christianna) Parr is a doctoral student in political science at the University of Washington at Seattle.

Aseem Prakash is professor of political science and the Walker family professor for the College of Arts and Sciences at University of Washington at Seattle.