Those who work on issues ofethics are among the few professionals not suffering fromthe current economic downturn. The last decade hasbrought an escalating supply of moral meltdowns in boththe for-profit and the nonprofit sectors. Corporate misconducthas received the greatest attention, in part because theabuses are so egregious and the costs so enormous. Chief contenders for most ethically challenged include former MerrillLynch & Co. CEO John Thain, who spent $1.22 million in 2008 toredecorate his office, including the purchase of a $1,400 trash canand a $35,000 antique commode, while the company was hemorrhaginglosses of some $27 billion.1
Still, the corporate sector has no monopoly on greed. ConsiderEduCap Inc., a multibillion-dollar student loan charity. Accordingto Internal Revenue Service records, the organization abused itstax-exempt status by charging excessive interest on loans and byproviding millions in compensation and lavish perks to its CEO andher husband, including use of the organization’s $31 million privatejet for family and friends.2
Unsurprisingly, these and a host of other scandals have erodedpublic confidence in our nation’s leadership. According to a CBSNews poll, only a quarter of Americans think that top executives arehonest. Even executives themselves acknowledge cause for concern.The American Management Association Corporate Values Surveyfound that about one third of executives believed that their company’spublic statements on ethics sometimes conflicted with internalmessages and realities. And more than one third of the executivesreported that although their company would follow the law, it wouldnot always do what would be perceived as ethical.
Employee surveys similarly suggest that many American workplacesfail to foster a culture of integrity. Results vary but generallyindicate that between about one-quarter and three-quarters of employeesobserve misconduct, only about half of which is reported.3In the 2007 National Nonprofit Ethics Survey, slightly more thanhalf of employees had observed at least one act of misconduct inthe previous year, roughly the same percentages as in the for-profitand government sectors. Nearly 40 percent of nonprofit employeeswho observed misconduct failed to report it, largely because theybelieved that reporting would not lead to corrective action or theyfeared retaliation from management or peers.4
Public confidence in nonprofit performance is similarly at risk.A 2008 Brookings Institution survey found that about one thirdof Americans reported having “not too much” or no confidence incharitable organizations, and 70 percent felt that charitable organizationswaste “a great deal” or a “fair amount” of money. Only 10percent thought charitable organizations did a “very good job” spendingmoney wisely; only 17 percent thought that charities did a “verygood job” of being fair in decisions; and only one quarter thoughtcharities did a “very good job” of helping people.5 Similarly, a 2006Harris Poll found that only one in 10 Americans strongly believedthat charities are honest and ethical in their use of donated funds.Nearly one in three believed that nonprofits have “pretty seriouslygotten off in the wrong direction.” These public perceptions areparticularly troubling for nonprofit organizations that depend oncontinuing financial contributions.
Addressing these ethical concerns requires a deeper understandingof the forces that compromise ethical judgment and the mosteffective institutional responses. To that end, this article draws onthe growing body of research on organizational culture in general,and in nonprofit institutions in particular. We begin by reviewingthe principal forces that distort judgment in all types of organizations.Next, we analyze the ethical issues that arise specifically inthe nonprofit sector. We conclude by suggesting ways that nonprofitscan prevent and correct misconduct and can institutionalize ethicalvalues in all aspects of the organization’s culture.
Causes of MisconductEthical challenges arise at all levels in all types of organizations—for-profit, nonprofit, and government—and involve a complex relationshipbetween individual character and cultural influences.Some of these challenges can result in criminal violations or civilliability: fraud, misrepresentation, and misappropriation of assetsfall into this category. More common ethical problems involve grayareas—activities that are on the fringes of fraud, or that involveconflicts of interest, misallocation of resources, or inadequate accountabilityand transparency.
Research identifies four crucial factors that influence ethicalconduct:
- Moral awareness: recognition that a situation raises ethical issues
- Moral decision making: determining what course of action isethically sound
- Moral intent: identifying which values should take priority inthe decision
- Moral action: following through on ethical decisions.6
People vary in their capacity for moral judgment—in their abilityto recognize and analyze moral issues, and in the priority that theyplace on moral values. They also diff er in their capacity for moralbehavior—in their ability to cope with frustration and make goodon their commitments.
Cognitive biases can compromise these ethical capacities. Thosein leadership positions often have a high degree of confidence intheir own judgment. That can readily lead to arrogance, overoptimism,and an escalation of commitment to choices that turn out tobe wrong either factually or morally.7 As a result, people may ignoreor suppress dissent, overestimate their ability to rectify adverse consequences,and cover up mistakes by denying, withholding, or evendestroying information.8
A related bias involves cognitive dissonance: People tend to suppressor reconstrue information that casts doubt on a prior beliefor action.9 Such dynamics may lead people to discount or devalueevidence of the harms of their conduct or the extent of their ownresponsibility. In-group biases can also result in unconscious discriminationthat leads to ostracism of unwelcome or inconvenientviews. That, in turn, can generate perceptions of unfairness andencourage team loyalty at the expense of candid and socially responsibledecision making.10
A person’s ethical reasoning and conduct is also affected by organizationalstructures and norms. Skewed reward systems can leadto a preoccupation with short-term profits, growth, or donations at the expense of long-term values. Mismanaged bonus systems andcompensation structures are part of the explanation for the morallyirresponsible behavior reflected in Enron Corp. and in the recentfinancial crisis.11 In charitable organizations, employees who feelexcessive pressure to generate revenue or minimize administrativeexpenses may engage in misleading conduct.12 Employees’ perceptionsof unfairness in reward systems, as well as leaders’ apparentlack of commitment to ethical standards, increase the likelihood ofunethical behavior.13
A variety of situational pressures can also undermine moral conduct.Psychologist Stanley Milgram’s classic obedience to authorityexperiment at Yale University offers a chilling example of how readilythe good go bad under situational pressures. When asked to administerelectric shocks to another participant in the experiment, abouttwo-thirds of subjects fully complied, up to levels marked “dangerous,”despite the victim’s screams of pain. Yet when the experiment wasdescribed to subjects, none believed that they would comply, and theestimate of how many others would do so was no more than one in100. In real-world settings, when instructions come from supervisorsand jobs are on the line, many moral compasses go missing.
Variations of Milgram’s study also documented the influence of peerson individual decision making. Ninety percent of subjects paired withsomeone who refused to comply also refused to administer the shocks.By the same token, 90 percent of subjects paired with an uncomplainingand obedient subject were equally obedient. Research on organizationalbehavior similarly finds that people are more likely to engagein unethical conduct when acting with others. Under circ*mstanceswhere bending the rules provides payoff s for the group, members mayfeel substantial pressure to put their moral convictions on hold. Thatis especially likely when organizations place heavy emphasis on loyaltyand off er significant rewards to team players. For example, if it iscommon practice for charity employees to inflate expense reports oroccasionally liberate office supplies and in-kind charitable donations,other employees may suspend judgment or follow suit. Once peopleyield to situational pressures when the moral cost seems small, theycan gradually slide into more serious misconduct. Psychologists labelthis “the boiled frog” phenomenon. A frog thrown into boiling waterwill jump out of the pot. A frog placed in tepid water that graduallybecomes hotter will calmly boil to death.
Moral blinders are especially likely in contexts where people lackaccountability for collective decision making. That is often true ofboards of directors—members’ individual reputations rarely suffer,and insurance typically insulates them from personal liability. Awell-known study by Scott Armstrong, a professor at the WhartonSchool of the University of Pennsylvania, illustrates the pathologiesthat too often play out in real life. The experiment asked 57 groups ofexecutives and business students to assume the role of an imaginarypharmaceutical company’s board of directors. Each group receiveda fact pattern indicating that one of their company’s most profitabledrugs was causing an estimated 14 to 22 “unnecessary” deaths a year.The drug would likely be banned by regulators because a competitoroffered a safe medication with the same benefits at the same price.More than four-fifths of the boards decided to continue marketingthe product and to take legal and political actions to prevent a ban.By contrast, when a different group of people with similar businessbackgrounds were asked for their personal views on the same hypothetical,97 percent believed that continuing to market the drugwas socially irresponsible.14
These dynamics are readily apparent in real-world settings. Enron’sboard twice suspended conflict of interest rules to allow CFOAndrew Fastow to line his pockets at the corporation’s expense.15Some members of the United Way of the National Capital Area’sboard were aware of suspicious withdrawals by CEO Oral Suer overthe course of 15 years, but failed to alert the full board or take correctiveaction.16 Experts view the large size of some governing bodies,such as the formerly 50-member board of the American Red Cross,as a contributing factor in nonprofit scandals.17
Other characteristics of organizations can also contribute tounethical conduct. Large organizations facing complex issues mayundermine ethical judgments by fragmenting information acrossmultiple departments and people. In many scandals, a large numberof professionals—lawyers, accountants, financial analysts, boardmembers, and even officers—lacked important facts raising moralas well as legal concerns. Work may be allocated in ways that preventdecision makers from seeing the full picture, and channels forexpressing concerns may be inadequate.
Another important influence is ethical climate—the moral meaningsthat employees give to workplace policies and practices. Organizationssignal their priorities in multiple ways, including the contentand enforcement of ethical standards; the criteria for hiring, promotion,and compensation; and the fairness and respect with which theytreat their employees. People care deeply about “organizational justice”and perform better when they believe that their workplace is treatingthem with dignity and is rewarding ethical conduct. Workers alsorespond to moral cues from peers and leaders. Virtue begets virtue,and observing integrity in others promotes similar behavior.
Ethical Issues in the Nonprofit Sector
These organizational dynamics play out in distinctive ways in thenonprofit sector. There are six areas in particular where ethical issuesarise in the nonprofit sector: compensation; conflicts of interest; publications and solicitation; financial integrity; investment policies;and accountability and strategic management.
Compensation. Salaries that are modest by business standards cancause outrage in the nonprofit sector, particularly when the organizationis struggling to address unmet societal needs. In a March 23,2009, Nation column, Katha Pollitt announced that she “stoppeddonating to the New York Public Library when it gave its presidentand CEO Paul LeClerc a several hundred thousand-dollar raise so hissalary would be $800,000 a year.” That, she pointed out, was “twentytimes the median household income.” Asking him to give back half amillion “would buy an awful lot of books—or help pay for raises forthe severely underpaid librarians who actually keep the system going.”If any readers thought LeClerc was an isolated case, she suggestedchecking Charity Navigator for comparable examples.
The problem is not just salaries. It is also the perks that officersand unpaid board members may feel entitled to take because theirservices would be worth so much more in the private sector. A widelypublicized example involves William Aramony, the former CEO ofUnited Way of America, who served six years in prison after an investigationuncovered misuse of the charity’s funds to finance a lavishlifestyle, including luxury condominiums, personal trips, and paymentsto his mistress.18 Examples like Aramony ultimately promptedthe IRS to demand greater transparency concerning nonprofit CEOcompensation packages exceeding certain thresholds.19
Nonprofits also face issues concerning benefits for staff and volunteers.How should an organization handle low-income volunteerswho select a few items for themselves while sorting through noncashcontributions? Should employees ever accept gifts or meals frombeneficiaries or clients? Even trivial expenditures can pose significant issues of principle or public perception.
Travel expenses also raise questions. Can employees keep frequentflyer miles from business travel? How does it look for cash-strappedfederal courts to hold a judicial conference at a Ritz-Carlton hotel, eventhough the hotel offered a significantly discounted rate? The Panel onthe Nonprofit Sector recommends in its Principles for Good Governanceand Ethical Practice that organizations establish clear written policiesabout what can be reimbursed and require that travel expenses becost-effective. But what counts as reasonable or cost-effective canbe open to dispute, particularly if the nonprofit has wealthy boardmembers or executives accustomed to creature comforts.
Conflicts of Interest. Conflicts of interest arise frequently in thenonprofit sector. The Nature Conservancy encountered one suchproblem in a “buyer conservation deal.” The organization boughtland for $2.1 million and added restrictions that prohibited developmentsuch as mining, drilling, or dams, but authorized constructionof a single-family house of unrestricted size, including a pool,a tennis court, and a writer’s cabin. Seven weeks later, the NatureConservancy sold the land for $500,000 to the former chairman ofits regional chapter and his wife, a Nature Conservancy trustee. Thebuyers then donated $1.6 million to the Nature Conservancy andtook a federal tax write-off for the “charitable contribution.” 20
Related conflicts of interest arise when an organization offers preferentialtreatment to board members or their affiliated companies.In another Nature Conservancy transaction, the organization received$100,000 from SC Johnson Wax to allow the company touse the Conservancy’s logo in national promotion of products, includingtoilet cleaner. The company’s chairman sat on the charity’sboard, although he reportedly recused himself from participatingin or voting on the transaction.21
These examples raise a number of ethical questions. Shouldboard members obtain contracts or donations for their own organizations?Is the board member’s disclosure and abstention from avote enough? Should a major donor receive special privileges, suchas a job or college admission for a child? In a recent survey, a fifthof nonprofits (and two-fifths of those with more than $10 millionin annual expenses) reported buying or renting goods, services, orproperty from a board member or an affiliated company within theprior two years. In three-quarters of nonprofits that did not reportany such transactions, board members were not required to disclosefinancial interests in entities doing business with the organization,so its leaders may not have been aware of such conflicts.22
Despite the ethical minefield that these transactions create, manynonprofits oppose restrictions because they rely on insiders to providedonations or goods and services at below-market rates. Yet suchquid pro quo relationships can jeopardize an organization’s reputationfor fairness and integrity in its financial dealings. To maintainpublic trust and fiduciary obligations, nonprofits need detailed,unambiguous conflict of interest policies, including requirementsthat employees and board members disclose all financial interest incompanies that may engage in transactions with the organization.At a minimum, these policies should also demand total transparencyabout the existence of potential conflicts and the process bywhich they are dealt with.
Publications and Solicitation. Similar concerns about public trustentail total candor and accuracy in nonprofit reports. The Red Crosslearned that lesson the hard way after disclosures of how it used therecord donations that came in the wake of the 9/11 terrorist attacks.Donors believed that their contributions would go to help victims and their families. The Red Cross, however, set aside more than half of the$564 million in funds raised for 9/11 for other operations and futurereserves. Although this was a long-standing organizational practice,it was not well known. Donor outrage forced a public apology andredirection of funds, and the charity’s image was tarnished.23
As the Red Cross example demonstrates, nonprofits need to payparticular attention to transparency. They should disclose in a clearand non-misleading way the percentage of funds spent on administrativecosts—information that affects many watchdog rankings ofnonprofit organizations. Transparency is also necessary in solicitationmaterials, grant proposals, and donor agreements. Organizationscannot afford to raise funds on the basis of misguided assumptions,or to violate public expectations in the use of resources.
Financial Integrity. Nonprofit organizations also face ethical dilemmasin deciding whether to accept donations that have any unpalatableassociations or conditions. The Stanford Institute for Researchon Women and Gender, for example, declined to consider a potentialgift from the Playboy Foundation. By contrast, the ACLU’s Women’sRights Project, in its early phase, accepted a Playboy Foundation gift,and for a brief period sent out project mailings with a Playboy bunnylogo.24 When Stanford University launched an ethics center, thepresident quipped about what level of contribution would be necessaryto name the center and whether the amount should depend onthe donor’s reputation. If “the price was right,” would the universitywant a Ken Lay or a Leona Helmsley center on ethics?
Recently, many corporations have been attempting to “green”their image through affiliations with environmental organizations,and some of these groups have been entrepreneurial in capitalizingon such interests. The Nature Conservancy offered corporationssuch as the Pacific Gas and Electric Co. and the Dow Chemical Co.seats on its International Leadership Council for $25,000 and up.Members of the council had opportunities to “meet individuallywith Nature Conservancy staff to discuss environmental issues ofspecific importance to the member company.” 25
There are no easy resolutions of these issues, but there are betterand worse ways of addressing them. Appearances matter, and itsometimes makes sense to avoid affiliations where a donor is seekingto advance or pedigree ethically problematic conduct, or to imposeexcessive restrictions on the use of funds.
Investment Policies. Advocates of socially responsible investing arguethat nonprofit organizations should ensure that their financialportfolio is consistent with their values. In its strongest form, thisstrategy calls for investing in ventures that further an organization’smission. In its weaker form, the strategy entails divestmentfrom companies whose activities undermine that mission. The issuegained widespread attention after a Jan. 7, 2007, Los Angeles Timesarticle criticized the Bill & Melinda Gates Foundation for investingin companies that contributed to the environmental and healthproblems that the foundation is attempting to reduce.
Many nonprofit leaders have resisted pressure to adopt sociallyresponsible investing principles on the grounds that maximizingthe financial return on investment is the best way to further theirorganization’s mission, and that individual divestment decisionsare unlikely to affect corporate policies. Our view, however, is thatsymbols matter, and that similar divestment decisions by large institutionalinvestors can sometimes influence corporate conduct. Hypocrisy,as French writer François de La Rochefoucauld put it, maybe the “homage vice pays to virtue,” but it is not a sound managerialstrategy. To have one set of principles for financial management andanother for programmatic objectives sends a mixed moral message.Jeff Skoll acknowledged as much following his foundation’s supportof Fast Food Nation, a dramatic film highlighting the adverse socialimpacts of the fast-food industry. “How do I reconcile owning sharesin [Coca-Cola and Burger King] with making the movie?” he asked.26As a growing number of foundations recognize, to compartmentalizeethics inevitably marginalizes their significance. About a fifth ofinstitutional investing is now in socially screened funds, and it is byno means clear that these investors have suffered financial losses asa consequence.27
Accountability and Strategic Management. By definition, nonprofitorganizations are not subject to the checks of market forces ormajoritarian control. This independence has come under increasingscrutiny in the wake of institutional growth. In 2006, after a$30 billion gift from Warren Buffet, the Gates Foundation endowmentdoubled, making it larger than the gross domestic productof more than 100 countries. In societies where nonprofits servecrucial public functions and enjoy substantial public subsidies(in the form of tax deductions and exemptions), this public rolealso entails significant public responsibilities. In effect, those responsibilitiesinclude fiduciary obligations to stakeholders—thosewho fund nonprofits and those who receive their services—to useresources in a principled way. As a growing body of work on philanthropysuggests, such accountability requires a well-informedplan for furthering organizational objectives and specific measuresof progress. A surprising number of nonprofits lack suchstrategic focus. Many operate with a “spray and pray” approach,which spreads assistance across multiple programs in the hopethat something good will come of it. Something usually does, butit is not necessarily the cost-effective use of resources that publicaccountability demands.
Money held in public trust should be well spent, not justwell-intentioned. But in practice, ethical obligations bump upagainst significant obstacles. The most obvious involves evaluation.Many nonprofit initiatives have mixed or nonquantifiableoutcomes. How do we price due process, wilderness preservation,or gay marriage?
Although in many contexts objective measures of progress arehard to come by, it is generally possible to identify some indicatorsor proxies. Examples include the number and satisfaction of peopleaffected, the assessment of experts, and the impact on laws, policies,community empowerment, and social services. The effectiveness ofevaluation is likely to increase if organizations become more willingto share information about what works and what doesn’t. To be sure,those who invest significant time and money in social impact workwant to feel good about their efforts, and they are understandablyreluctant to spend additional resources in revealing or publicizingpoor outcomes. What nonprofit wants to rain on its parade when that might jeopardize public support? But sometimes at least a lightdrizzle is essential to further progress. Only through pooling informationand benchmarking performance can nonprofit organizationshelp each other to do better.
Promoting Ethical Decision MakingAlthough no set of rules or organizational structures can guaranteeethical conduct, nonprofits can take three steps that will makeit more likely.
Ensure Effective Codes of Conduct and Compliance Programs.One of the most critical steps that nonprofits can take to promoteethical conduct is to ensure that they have adequate ethical codesand effective compliance programs. Codified rules can clarify expectations,establish consistent standards, and project a responsiblepublic image. If widely accepted and enforced, codes can also reinforcecore values, deter misconduct, promote trust, and reduce theorganization’s risks of conflicting interests and legal liability.
Although the value of ethical codes and compliance structuresshould not be overlooked, neither should it be overstated. As empiricalresearch makes clear, the existence of an ethical code does not ofitself increase the likelihood of ethical conduct. Much depends on howstandards are developed, perceived, and integrated into workplacefunctions. “Good optics” was how one manager described Enron’sethical code, and shortly after the collapse, copies of the documentwere selling on eBay, advertised as “never been read.” 28
A recent survey of nonprofit organizations found that only aboutone third of employees believed that their workplace had a well implementedethics and compliance program. This figure is higherthan the corresponding figure for the business (25 percent) and government(17 percent) sectors, but still suggests ample room for improvement.29 Part of the problem lies with codes that are too vague,inflexible, or narrow. Only about half of nonprofit organizationshave conflict of interest policies, and fewer than one third requiredisclosure of potentially conflicting financial interests.30 A relateddifficulty is compliance programs that focus simply on punishingdeviations from explicit rules, an approach found to be less effectivein promoting ethical behavior than approaches that encourageself-governance and commitment to ethical aspirations.31To develop more effective codes and compliance structures, nonprofit organizations need systematic information about how theyoperate in practice. How often do employees perceive and reportethical concerns? How are their concerns addressed? Are they familiarwith codified rules and confident that whistle-blowers willbe protected from retaliation? Do they feel able to deliver bad newswithout reprisals?
Promote Effective Financial Management. Another step that nonprofits can take to foster ethical behavior and promote public trust isto use resources in a socially responsible way. In response to reportsof bloated overhead, excessive compensation, and financial mismanagement,watchdog groups like Charity Navigator have begun ratingnonprofits on the percentage of funds that go to administrationrather than program expenditures. Although this rating structureresponds to real concerns, it reinforces the wrong performance measure,distorts organizational priorities, and encourages disingenuousaccounting practices. Groups with low administrative costs may nothave the scale necessary for social impact. The crucial question thatdonors and funders should consider in directing their resources isthe relative cost-effectiveness of the organization. Yet according toa 2001 study by Princeton Survey Research Associates, only 6 percentof Americans say that whether a program “makes a difference”is what they most want to know when making charitable decisions.Two-thirds expect the bulk of their donations to fund current programsand almost half expect all of their donations to do so. Suchexpectations encourage charities to provide short-term direct aid atthe expense of building long-term institutional capacity.
Moreover, the line these donors draw between “overhead” and“cause” is fundamentally fl awed. As Dan Pallotta notes in Uncharitable,“the distinction is a distortion.” All donations are going tothe cause, and “the fact that [a dollar] is not going to the needynow obscures the value it will produce down the road” by investingin infrastructure or fundraising capacity. Penalizing charitiesfor such investments warps organizational priorities. It also encourages“aggressive program accounting,” which allocates fundraising,management, and advertising expenses to program ratherthan administrative categories. Studies of more than 300,000tax returns of charitable organizations find widespread violationof standard accounting practices and tax regulations, includingclassification of accounting fees and proposal writing expenses asprogram expenditures.32
To address these issues, nonprofit organizations need better institutionaloversight, greater public education, and more transparentand inclusive performance measures. Ensuring common standardsfor accounting and developing better rating systems for organizationaleffectiveness should be a priority.
Institutionalize an Ethical Culture. In its National Nonprofit EthicsSurvey, the Ethics Resource Center categorizes an organization as havinga strong ethical culture when top management leads with integrity,supervisors reinforce ethical conduct, peers display a commitment to ethics, and the organization integrates its values in day-to-daydecision making. In organizations with strong ethical cultures, employeesreport far less misconduct, feel less pressure to compromiseethical commitments, and are less likely to experience retaliationfor whistle-blowing.33 This survey is consistent with other research,which underscores the importance of factoring ethical concerns intoall organizational activities, including resource allocation, strategicplanning, personnel and compensation decisions, performance evaluations,auditing, communications, and public relations.
Often the most critical determinant of workplace culture isethical leadership. Employees take cues about appropriate behaviorfrom those at the top. Day-to-day decisions that mesh poorlywith professed values send a powerful signal. No organizationalmission statement or ceremonial platitudes can counter the impactof seeing leaders withhold crucial information, play favorites withpromotion, stifle dissent, or pursue their own self-interest at theorganization’s expense.
Leaders face a host of issues where the moral course of actionis by no means self-evident. Values may be in conflict, facts may becontested or incomplete, and realistic options may be limited. Yetalthough there may be no unarguably right answers, some will bemore right than others—that is, more informed by available evidence,more consistent with widely accepted principles, and more responsiveto all the interests at issue. Where there is no consensus aboutethically appropriate conduct, leaders should strive for a decision makingprocess that is transparent and responsive to competingstakeholder interests.
Nonprofit executives and board members also should be willingto ask uncomfortable questions: Not just “Is it legal?” but also “Is itfair?” “Is it honest?” “Does it advance societal interests or pose unreasonablerisks?” and “How would it feel to defend the decision onthe evening news?” Not only do leaders need to ask those questionsof themselves, they also need to invite unwelcome answers fromothers. To counter self-serving biases and organizational pressures,people in positions of power should actively solicit diverse perspectivesand dissenting views. Every leader’s internal moral compassneeds to be checked against external reference points.
Some three decades ago, in commenting on the performance ofNixon administration officials during the Watergate investigation,then-Supreme Court Chief Justice Warren Burger concluded that“apart from the morality, I don’t see what they did wrong.”34 Thatcomment has eerie echoes in the current financial crisis, as leadersof failed institutions repeatedly claim that none of their misstepswere actually illegal. Our global economy is paying an enormousprice for that moral myopia, and we cannot afford its replication inthe nonprofit sphere.
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Notes
1 Jay Fitzgerald, "Treasury Gets Tough: Eyes Financial Bailout Abuse," Boston Herald, January 28, 2009: 25; Sheryl Gay Stolberg and Stephen Labaton, "Banker Bonuses Are 'Shameful,'Obama Declares," The New York Times,January 30, 2009: A1.
2 Sharyl Attkisson, "Student Loan Charity Under Fire: Is One Educational Charity Abusing Their Status with Lavish Travel and Huge Salaries?"CBS News, March 2, 2009; Sharyl Attkisson, "Loan Charity's High-Flying Guests Exposed: Educational Nonprofi t Under Fire for Transporting Politicians with Money That Could Have Gone to Students,"CBS News, March 3, 2009.
3 Deborah L. Rhode, "Where Is the Leadership in Moral Leadership?" D. 3 L. Rhode, ed., Moral Leadership: The Theory and Practice of Power, Judgment, and Policy, San Francisco: Jossey-Bass, 2006: 13.
4 Ethics Resource Center, National Nonprofit Ethics Survey 2007, March 27, 2008: ix, 2-4, 19.
5 Paul C. Light, How Americans View Charities: A Report on Charitable Confidence, Washington, D.C.: Brookings Institution, April 2008.
6 James R. Rest, ed., Moral Development: Advances in Research and Theory, New York: Praeger Publishers, 1994: 26-39.
7 Rhode, "Where Is the Leadership in Moral Leadership?": 25.
8 Kimberly D. Krawiec, "Accounting for Greed: Unraveling the Rogue Trader Mystery," Oregon Law Review, 79(2), 2000: 309-10.
9 See Leon Festinger, Theory of Cognitive Dissonance, Stanford, Calif.: Stanford University Press, 1957: 128-34; Eddie Harmon-Jones and Judson Mills, eds., Cognitive Dissonance: Progress on a Pivotal Theory in Social Psychology, Washington, D.C.: American Psychological Association, 1999.
10 David M. Messick and Max H. Bazerman, "Ethical Leadership and the Psychology of Decision Making," MIT Sloan Management Review, 37(2), 1996: 76.
11 Ronald R. Sims and Johannes Brinkmann, "Enron Ethics (Or Culture Matters More Than Codes)," Journal of Business Ethics, 45(3), 2003: 243, 252.
12 See Panel on the Nonprofit Sector, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations,October 2007: 27, which advises against compensating internal or external fundraisers on the basis of a percentage of the funds raised.
13 Rhode, "Where Is the Leadership in Moral Leadership?": 17-18.
14 J. Scott Armstrong, "Social Irresponsibility in Management," Journal of Business Research, 5, September 1977: 185-213.
15 Barbara Kellerman, Bad Leadership: What It Is, How It Happens, Why It Matters, Boston: Harvard Business School Press, 2004: 146, 155.
16 Peter Whoriskey and Jacqueline L. Salmon, "Charity Concealed Pilfering: Auditors Had Flagged United Way Executive," Fort Wayne Journal Gazette, August 17, 2003: 7; Bill Birchard, "Nonprofits by the Numbers: In the Wake of Embarrassing Revelations, High-Profile Scandals, and Sarbanes-Oxley, Nonprofit CFOs Are Striving for Greater Transparency and Accountability," CFO Magazine, July 1, 2005.
17 Stephanie Strom, "Red Cross to Streamline Board's Management Role," The New York Times, October 31, 2006: A16.
18 Karen W. Arenson, "Ex-United Way Leader Gets 7 Years for Embezzlement," The New York Times, June 23, 1995: 14.
19 Internal Revenue Service, Form 990 Redesign for Tax Year 2008 Background Paper, December 20, 2007.
20 Joe Stephens and David B. Ottaway, "Conservancy Property Deals Benefit Friends," The Seattle Times, May 7, 2003: A12.
21 David B. Ottaway and Joe Stephens, "Conserving a Green Group’s Public Image," Orlando Sentinel, May 18, 2003: G1; United States Senate Committee on Finance, Committee Report on The Nature Conservancy, Part III: 4.
22 Francie Ostrower, Nonprofit Governance in the United States, Washington, D.C.: The Urban Institute, 2007.
23 Birchard, "Nonprofits by the Numbers."
24 Fred Strebeigh, Equal: Women Reshape American Law, New York: W.W. Norton & Co., 2009: 46.
25 Ottaway and Stephens, "Conserving a Green Group's Public Image": G1.
26 Matthew Bishop and Michael Green, Philanthrocapitalism: How the Rich Can Save the World, New York: Bloomsbury Press, 2008: 167.
27 Paul Brest and Hal Harvey, Money Well Spent: A Strategic Plan for Smart Philanthropy, New York: Bloomberg Press, 2008: 127-30.
28 Peter S. Cohan, Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy, San Francisco: Jossey-Bass, 2004: 2; Lynn Sharp Paine, Value Shift: Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance, New York: McGraw-Hill, 2003: 36.
29 Ethics Resource Center, National Nonprofit Ethics Survey 2007: 2.
30 Ostrower, Nonprofit Governance in the United States: 9.
31 Melissa S. Baucus and Caryn L. Beck-Dudley, "Designing Ethical Organizations: Avoiding the Long-Term Negative Effects of Rewards and Punishments," Journal of Business Ethics, 56(4), 2005: 355.
32 Dan Pallotta, Uncharitable: How Restraints on Nonprofits Undermine Their Potential, Medford, Mass.: Tufts University Press, 2008: 41, 149-50, 162.
33 Ethics Resource Center, National Nonprofit Ethics Survey 2007: 1, 4-5, 10, 16.
34 Peter Goldman with Constance Wiley, "Inside the Burger Court," Newsweek, December 10, 1979: 76.
Deborah L. Rhode is the Ernest W. McFarland Professor of Law at StanfordLaw School and director of the Stanford Center on the Legal Profession. She is theauthor of 20 books, including Moral Leadership: The Theory and Practice of Power,Judgment, and Policy (Jossey-Bass, 2006), and Legal Ethics (Foundation Press, 5thEdition, 2009).
Amanda K. Packel is the associate director of the Stanford Center on the LegalProfession. Before joining Stanford University she was an associate at the law firmCovington & Burling, where she practiced white-collar criminal defense.
DOI: 10.48558/ywk9-cg82
