Too Much Regulation is Bad for Nonprofits

(credit: Reuters)

(credit: Reuters)

Given all the momentous news of late, even the most ardent follower of the social sector might have forgetten that this spring saw a torrent of journalism on corruption in nonprofits.

Early in 2015, news began to break that one of New York City’s largest social service agencies – Federation Employment and Guidance Service (FEGS) – was going bankrupt. FEGS had a budget of $250MM per year and served 120,000 low income New Yorkers per year.  The causes were many – with mismanagement and poor governance at the top of the list.

Following quickly on the heels of the FEGS story came something even more explosive – claims that the Red Cross built only 6 homes in Haiti after the 2010 earthquake, despite raising a half billion dollars in relief aid.

David Callahan, the founder and editor of Inside Philanthropy, weighed in on these problems. Callahan made my heart sing as I read his op-ed calling for stronger regulation of nonprofit organizations in the US. I felt like I was reading the words of a kindred spirit as I read his excellent, thoughtful points on bolstering nonprofits through increased transparency, ensuring charitable intent, increased giving and increasing effectiveness.

He lost me quickly, though, with a call for the sector to be “policed” and his suggestion that we create “strong watchdogs” to oversee philanthropy and nonprofits. Mr. Callahan’s suggested solutions are very well intentioned, but fraught with perils that could severely limit the growth and effectiveness of the social sector. Nonprofits organizations are often the only entities willing to take on the risks involved in tackling society’s hardest problems that commercial markets cannot solve and governments cannot solve well.

We certainly need watchdogs and regulation – that much is clear from the stories I shared above. But we need to find a balance that encourages this risk taking in a responsible way. I believe we can govern nonprofits in a way that drives innovation in social impact and public good, while also demanding accountability. We need to be very careful stewards of the tax-free dollars at nonprofits that are imbued with our values and hopes – but not at the expense of the change we expect those values and hopes to produce.

A new “federal bureau to police” nonprofits, which Mr. Callahan argues we need, would almost certainly chill the responsible risk taking at nonprofits that we desperately need to solve intractable problems. Nonprofits have enough hoops to jump through as they navigate a deeply complex and imperfect philanthropic capital marketplace. Society would suffer if we added more of the wrong hoops.

In the coming months, I’ll be thinking more about what the right balance is in fostering accountability and impact from nonprofits. I’d love to hear your thoughts – here in the comments section of this blog, via twitter @impactmba, at facebook.com/impactmba or by email: mangan@haas.berkeley.edu

I look forward to sharing what I hear from you, and what conclusions I reach on a reasonable approach to this balance.

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