I recently spoke with Tony Martignetti on Nonprofit Radio about the erosion of public trust in nonprofits. This follows a recent post we published on Nonprofits: The Impact of Law on Trust. Here are some highlights of our discussion (listen to the program to hear much more) as well as some additional thoughts:

The importance of public trust

Trust is a critical component in all strong relationships, and it is especially critical for nonprofits. Of course, nonprofits want donors and funders to trust them, but it’s also important to have trust among all internal and external stakeholders, including employees, board members, allies, media, and regulators.

The erosion of trust

56% of Americans say they trust nonprofits. While that’s better than the trust in government, large corporations, and the news media, the number has been falling over recent years, and it’s a problem. The outlook also looks dim if changes are not made. For example, 57% of Gen Z Americans say giving directly to individuals and causes makes a bigger impact than giving to nonprofits. It’s likely, in my opinion, that much of the public is not aware of the importance of nonprofits, historically and currently, in effecting positive social changes.

Why is public trust in nonprofits eroding?

  • Media coverage of scandals
  • Diminishing IRS oversight and enforcement
  • Under-resourced State oversight and enforcement agencies
  • The state of nonprofit governance 
  • Political activities / dark money
  • Change in individual donors and fundraising
  • Blurring of nonprofit and for-profit sectors 
  • Movements challenging status quo

See Nonprofits: The Impact of Law on Trust for more details.

Is there anything nonprofits and their allies should do about it?

  • Be compliant
  • Be transparent
  • Don’t talk the talk without walking the walk – e.g., don’t just say you believe in diversity, equity, and inclusion or adopt policies that sit on the shelf without making the necessary investments and real changes
  • Be careful of mission drift, especially if any new activities or goals involve what may be perceived as unrelated political or business activities – but don’t be afraid to advocate in furtherance of your mission, which may include lobbying for public charities
  • Remember your mission and beneficiaries don’t exist in a silo; that you’re all part of a broader ecosystem and doing what’s in your nonprofit’s best interests should be with the understanding of not only its own financial health and internal program metrics but of the larger ecosystem – for example, don’t brag about having a low overhead ratio and suggest that it means you do things better than organizations with higher overhead ratios, and don’t chase funds at the cost of compromising your core values – see, e.g., The Four Principles of Purpose-Driven Board Leadership
  • Guard private data – have a privacy policy and safeguards
  • Be careful about implementing new technology – there are often some avoidable pitfalls to what may first appear to be a way to achieve gains in efficiency and accuracy
  • Consider supporting laws that might help trust in the sector – e.g., deductible contributions for all taxpayers not just the 10% or so who can itemize deductions; prevention of dark money from flowing to political candidates through 501(c)(4) and 501(c)(6) organizations that might end up advancing policies that harm your organization’s mission and beneficiaries
  • Call out media and others that misreport on nonprofits (my pet peeve: the erroneous statement that charities cannot lobby)

What happens if trust in nonprofits continues to erode?

The erosion of trust will result in diminished giving by the general public with the possible exception of giving by the very wealthy, who may use their growing influence to control nonprofits to advance their personal policy agendas. We recognize the very wealthy control big businesses and have increasingly understood how they control the government. Will we come to think that they are also controlling the most influential nonprofits as well? Does that perception already exist? How real is that perception?

How do 501(c)(4) organizations fit into this discussion?

It’s important to note at the outset that 501(c)(4) social welfare organizations have tremendous value and many are worthy of substantial public support. They may be pivotal players in movement networks, responsible for many positive social changes.

501(c)(4) organizations are permitted to spend all of their money on lobbying; 501(c)(3) public charities are limited to an insubstantial amount of lobbying (though that can still be a generous limit, particularly for those that made the 501(h) election). Unlike 501(c)(3) organizations, 501(c)(4) organizations are also permitted to engage in political campaign intervention (like supporting political candidates) so long as that isn’t their primary activity. Particularly with a politically divided nation, the 501(c)(4) organization’s ability to engage in unlimited lobbying and spend up to 49% of its budget on supporting candidates for public office (admittedly, based on an aggressive tax position) lowers trust of nonprofits in general because the general public may not appreciate the different types of nonprofits.

There have been two billion dollar transfers to nonprofits that made headlines over the past few weeks. In each case, the transfer was made to a 501(c)(4) social welfare organization. However, for many, these transfers were perceived as charitable contributions intended to influence a political movement. You can read more about these contributions which, to characterize them very generally, fall on opposite sides of the political spectrum:

Billionaire No More: Patagonia Founder Gives Away the Company (NY Times)

An Unusual $1.6 Billion Donation Bolsters Conservatives (NY Times)