A recent study by the London-based One World Trust of the accountability of international organisations, multinational corporations and non-government organisations found that Rio Tinto and Glaxo SmithKline were more accountable than NGOs such as World Wildlife Fund, Oxfam and Care. Ironically, finishing at the top of the table was the International Committee of the Red Cross.
In Australia the Red Cross in its Bali appeal did what every other charity does. It saw a good cause and launched an appeal around it.
Usually people just give money and trust the charity to do the right thing, an easy assumption to make with the Red Cross, as it is one of the best-run charities. Only this time people asked where the money went and were unhappy about the answers they received.
It highlighted a central problem in the charitable sector a disconnect between how charities spend their money and why people give them money. In Australia, the relationship between donors and charities can best be described as don't ask, don't tell.
But how has it come to this? First and foremost, non-profit organisations lack shareholders and aggressive external stakeholders demanding transparency and efficiency. They do not have stockbrokers and analysts expertly combing through their books.
They are governed by non-profit disclosure and fund-raising laws at a state level, but these are vague and not enforced. The task of setting standards of behaviour and disclosure is left up to organisational insiders the board, staff and active members. In short, no one is looking critically from the outside. This has bred laxity, poor standards and abuse.
If a business raises funds from the public, it must provide a prospectus detailing purpose, performance targets and proposed allocation of funds. Failure to comply with this prospectus usually means prosecution by the Australian Securities and Investments Commission.
Many charities do not even provide the basic data required by law. For example, a recent survey of 89 NSW charities, carried out by a research organisation, Givewell, found that 37 per cent did not disclose the cost of fund-raising, including administration and marketing costs.
Another recent review of 22 not-for-profit organisations undertaken by the Institute of Chartered Accountants found: limited reporting of objectives; the majority failed to explain their organisational structure and decision-making processes; inadequate disclosure of relationship with other groups; limited use of statistical performance information; failure to disclose investment policies; inadequate disclosure of grant-making activities; and inadequate disclosure of risk management approaches.
Organisations included in this survey were at the top end of the industry and included Care, WWF, World Vision and the MS Society, with a combined annual income of more than $550 million.
Treasurer Peter Costello recently addressed the theme of trust in the charitable sector. Costello noted that charities would have to do better if they wanted to keep the public trust. Inefficiency is corrosive of trust. And trust is the currency of the charitable sector.
Costello perceptively homed in on the area holding back the promotion of social capital the declining levels of trust in the institutions which foster it, such as the churches and charities.
The problem for some charities in rebuilding the public's trust is that this trust has been built on myths, specifically that the sector is run by small, indigenous organisations managed by volunteers.
While many groups conform to this stereotype, the reality is that a large share of the charitable dollar is taken by Australian branch offices, or franchises, of large multinational charities like Care, World Vision, Greenpeace, WWF and Oxfam.
Charity is big business. A Johns Hopkins University study of the charitable sector in 22 countries estimates their combined annual expenditure was $US1 trillion ($1.54 trillion). Whether the sector likes it or not, it will have to reform if it is to survive and regain the public's trust. Otherwise, many other charities will find out for themselves what the Red Cross discovered: when you wear a halo and sprout wings, you hit the ground harder when you fall, because you have further to fall.
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