Project Management Institute

The ethics audit for nonprofit organizations

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Ethical issues face us at every turn, and nonprofit institutions have a special need to keep to the high road. Here's a tool to help organizations incorporate ethical behavior as a key component of business strategy.

by Arthur Gross Schaefer and Anthony J. Zaller

BY THE END OF THE 1980S, many in our society had reached sobering conclusions regarding our ethical choices. Dismay caused by high-profile scandals in the banking and securities industries led to a demand for more ethical scrutiny of business practices, primarily in profit-oriented business. As a result ethics programs proliferated. In what has been termed an ethics education revolution, universities and corporations jumped on the bandwagon, eagerly sponsoring a vast array of speakers, conferences, courses and approaches. The goal was to equip business people with the proper tools (codes of ethics) and decision-making procedures (stockholder analysis) to deal with ethical dilemmas.

However, with the passage of time, one fact has become extremely apparent: it isn't easy to raise the ethical consciousness of an organization—whether for-profit or not-for-profit. Ethics-enhancing tools, though helpful, did not act as the cure-all for ethical problems, which they were expected to do. While tools like corporate codes of ethics can function as a good first step towards raising some ethical issues, when used alone they have proven totally insufficient in ensuring that the ethical standards of an organization are followed. Tools that were intended to help resolve and encourage ethical behavior instead provided frustration and confusion for managers of organizations.

Nonprofit institutions either followed this trend by adopting codes of ethics or ignored the problem altogether, believing that issues of business ethics had no relevance for charitable entities. However, a glance at any newspaper will tell you that this simply isn't true. Even companies with the best codes of conduct and histories of ethical behavior can sometimes behave in an unethical manner. For example, the United Way and the National Association for the Advancement of Colored People have both experienced ethical conflicts recently. The trend toward nonprofit organizations endorsing products raises additional concerns over the potential for ethical conflicts. And there is increasing public concern over the salaries of the chairmen of large nonprofit organizations. Far from being immune to public concerns about business ethics, nonprofits must be even more vigilant than for-profit entities.

Doing Good and Doing it Right. When a nonprofit organization violates the public trust or does not adhere to its own principles, the public responds with disillusionment and anger. Nonprofit institutions carry a greater obligation to be ethical than do privately owned corporations because they are created, given tax-exempt status, and funded with the express purpose of supporting perceived community values such as religion, art, public welfare, education, and professionalism. A quintessential idea behind the establishment of a nonprofit organization is the idea of “obligation to community.” Contributors, board members, officers, employees and volunteers willingly participate in the nonprofit institution's activities because they support the same values advocated by the organization. These stakeholders—the organization's community—expect that nonprofit institutions will honor the faith placed in them by managing their endeavors with a high level of integrity.

Ethics is not a matter of right or wrong; it is a process by which an organization evaluates decisions. If the organization's core values agree with the values being promoted in its choices, then there is ethical consistency. If not, it begins to sink into chaos and loses its credibility.

Ethics is not a matter of right or wrong; rather it is a process by which an organization evaluates decisions. If the organization's core values agree with the values being promoted in its choices, then there is ethical consistency. But if its actions and motives seem to send a different message than its core values would suggest, it begins to sink into ethical chaos and loses its credibility. Any distance between the organization's public face and its private activities produces disenchantment for its supporters. Contributors and members become disappointed when their money is used inappropriately or when an institution betrays the trust of the community it serves. When an organization is viewed as lacking virtue, volunteers and employees can exhibit frustration, and even hostility, as they believe their goodwill, time, effort and reputation have been abused. If the leadership of the organization produces a corporate credo but does not actively and visibly follow it, the remainder of the company will become equally indifferent; worse, if the leadership violates such a credo, those below them will feel they also have no need to obey the rules. Ultimately, the effectiveness of the enterprise and its ability to attain its purpose can be undermined by this discord.

Accordingly, the inner workings of an institution must be monitored to ensure that they mirror its publicly articulated values. However, most organizations do not take time to discuss the need for consistency in words and deeds. There is virtually no mechanism designed for this type of review.

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But the fact that the current tools have not been as effective as was hoped does not undermine the basic truth that ethical considerations are critical for both profit and nonprofit institutions. The benefits of acting ethically are becoming more obvious to corporations, in both the private sector and in nonprofit organizations. Diane J. Duca, in Nonprofit Boards: Roles, Responsibilities, and Performance (Wiley & Sons, 1996) supports this view: “Business and nonprofit organizations are increasingly aware that actively promoting ethical behavior and practices not only makes sense from a customer-relations standpoint but also represents a better way to run a business.” Not only are clients pleased when they view an organization as acting in an ethical manner, the employees are more satisfied. One can easily see the benefits that would result in higher employee productivity when the employees observe the company behaving ethically toward them and the customers. Because of the free market forces that drive companies to perform at optimum levels of efficiency and customer satisfaction, ethics play a large role in how successful an organization will be.

Moreover, it is clear that unethical conduct creates many negative effects. Unethical behavior not only affects donors and employees but also upper management and the overall organization's sense of value as a business. In psychology and marketing, the term cognitive dissonance is used to express the uneasiness that one feels when he or she does not act in accordance with his or her values and beliefs. This is a dangerous situation for a nonprofit organization because the goal of the organization is lost if it is not following the values for which it was established. Such dissonance can be resolved in one of two ways. A positive effect of the cognitive dissonance would be the elimination of the unethical behavior. Guilt could change the way the individual or organization acts in the future. The not-so-positive effect could be a change in the organization's values, making the unethical behavior consistent with those values and ultimately undermining the sole purpose of a nonprofit organization. Once donors, volunteers, members, or employees observe unethical behavior by the organization or its leaders, they will no longer offer their support and loyalty. And that spells trouble for a nonprofit entity.

A Proactive Tool: The Ethics Audit. Corporate conduct codes, ethics training, imposed legal inspections and consistent reaction to ethical violations all have their place in ensuring ethical practices and policy development, but they still have serious shortcomings. First, these typical measures are reactive, not proactive measures. Second, as managerial control systems, they emphasize the short term and the obvious. Third, their very nature is either descriptive or prescriptive, lacking in the area of self-reflection. Rarely do organizations have a bona fide, agreed upon and accepted system that allows the organization to consistently focus and re-focus on whether or not it embodies the values it professes.

Individuals and organizations alike have grave difficulty in doing this kind of holistic self-examination. Clarence Walton, a pioneer in the areas of organizational ethics, understands this shortcoming and supports the need for ethics audits in his book The Moral Manager (Ballinger Publishing, 1988):

Sample Nonprofit Ethics Audit Questions

This sample Ethics Audit is an attempt to help raise various ethical issues to the multifaceted aspects of nonprofit organizations. The theoretical basis for this audit is a simple stimulus-response model. The model itself raises questions and acts as the stimulus prompting the responses. In the process of responding to the questions, those performing the audit become aware of the issues and are in a position to formulate suggestions for improvements.

This audit recognizes that there are literally hundreds of ethical issues that may be relevant to a given nonprofit organization. However, it is feasible to focus on a limited number of issues with this instrument.

Please note that this ethical audit has been made for general application and that some of the specific questions may not be applicable to your particular situation. Moreover, you may need to increase areas of investigation to help ensure that significant ethical issues at your nonprofit organization are properly addressed.

Since it is our hope to continually improve this ethics audit, please take a few moments to write us with your comments and any additional questions or areas of investigation that you found to be helpful.

  1. Community Advocacy—ardently advocating ethical values within the nonprofit organization and the community

    a. To what extent does the nonprofit organization take public stands on public issues?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent is the nonprofit organization known in the community as an acknowledged leader in issues of social concern?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

  2. Open Communication—keep membership informed honestly as to all relevant matters

    a. To what extent are board decisions made in an open manner from all relevant sources?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent does the Board of Trustees (or Executive Committee) view its responsibility of representing the entire membership of the organization?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    c. To what extent does the nonprofit organization honestly represent its programs and activities in its publications?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

  3. Fair Treatment For All Members—safeguard the ability to exercise independent judgment on all matters by avoiding undue influences and conflicts of interest

    a. To what extent are leadership positions open to all staff members regardless of other considerations (i.e., age, religious affiliation, sex, sexual orientation)?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent do staff members provide services equally to all members regardless of financial status?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    c. If the organization honors those who provide financial gifts, to what extent is it done in an egalitarian manner, including concerns to honor donors irrespective of amount?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    d. To what extent are safeguards used to prevent board members from unjustly profiting from their position in the organization?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

  4. Confidentiality and Respect for All Members—avoidance of gossip, cliques and the protecting of information gained in confidence

    a. To what extent is private information (emotional stability, marriage and financial status, etc.) about nonprofit organization staff members kept in a confidential manner?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent does the staff of the organization attempt to actively avoid gossip?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

  5. Leadership by Example—engaging in exemplary ethical conduct which will be a model for the nonprofit organization's staff and the community

    a. To what extent does the organization have an established ethics committee or other channels which allow for the raising and discussing of ethical issues?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent does the nonprofit organization make available tax deductions which are illegal and not in the spirit of the law?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    c. To what extent does the organization adhere to the copyright laws when it copies photos, works of art, music, written material and other copyrighted items?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    d. To what extent does the nonprofit organization pay its obligations in a timely manner?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

  6. Human Investment—the provision for the physical, psychological and economic welfare of present, potential, and former (retired) employees

    a. How does the nonprofit organization provide for fair benefits (pension, social security, medical) for the support staff?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent does the nonprofit organization have an employee handbook that sets out clearly its policies for vacation, sick days, etc.?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    c. To what extent does the nonprofit organization address employee contract negotiations in an honest and open manner?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    d. To what extent does the nonprofit organization treat its support and part-time staff in as fair a manner as its professional staff?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

  7. Ecology—the efforts to minimize the negative impact of its operations on the natural environment

    a. To what extent has the nonprofit organization taken sufficient steps to conserve the natural resources that it uses (i.e., energy and water)?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

    b. To what extent does the nonprofit organization attempt to support recycling activities?

    Insufficiently       1       2       3       4       5       Sufficiently

    Comments: _______________________________________

… few organizations step back often enough to assess the character of the workplace. The assessments, properly and objectively made, could be revealing. The pulse-taking and analysis is probably the most serious exercise an organization will ever make.

Many of the currently available tools focus on helping the individual make a decision, separate from the context of the nonprofit institution's core values in which they function. Much of what we know and use in ethical training and consulting is based almost wholly upon research and theory about individual ethical decision-making. Areas such as moral reasoning, personal values, decision styles, or moral philosophies, which reflect an intense individual grounding, are used consistently to describe and prescribe ethical practices and policies. While there is significant merit to this approach, it is severely limited in the sense that it defies the reality of how and why ethical behavior occurs in organizations. People act according to how they perceive the culture of the organization as a whole. While a company may possess a detailed code of ethics it will be the behavior that the company rewards—ethical or unethical—that individuals will continue to perform. By adopting the ethics of the individual as the basis for our understanding and rectifying the ethical ills in the organization we severely limit consideration of a broader range of ethical behaviors and issues.

Tools that are intended to help the individual and institution review their ethical climate must be “user friendly” and aimed at changing the corporate culture. In an article in the May/June 1993 edition of the Harvard Business Review, Andrew Stark expressed the reality that businesspeople face in relation to ethics in organizations:

… I suspect that the field of business ethics is largely irrelevant for most managers. It's not that they are hostile to the idea of business ethics. Recent surveys suggest that over three-quarters of America's major corporations are actively trying to build ethics into their organizations … The problem is that the discipline of business ethics has yet to provide much concrete help to managers … and even business ethicists sense it.

A Self-Prescribed Ethical Criterion. While there are a myriad of ethics audit approaches to understanding and rectifying ethical issues, many fall short of providing what Stark refers to as “concrete help for managers.” Although such a step as an ethics audit is commendable, many of these audits are very limited in their scope, and thus their effectiveness. Organizations must implement audits that combine the context of individually based ethics and the effects of the social systems in which individuals operate. We need to remember that people do not exist and make decisions in isolation. It is apparent that any audit that purports to examine ethics inside an organization (open communication, leadership) must look outside the organization (social responsibility, ecology) as well. Situational and environmental factors have a significant impact upon the ethical behaviors of individuals and on the subsequent policies of an organization. Clearly, an ethics audit is needed that goes beyond individually based ethical theory to include the dimensions of the organization, the social system and milieu in which the company operates.

An ethics audit (see sidebar for selected questions) that has been specifically drafted for the not-for-profit institution, focusing on common core values such as social responsibility, open communication, treatment of employees, confidentiality and leadership can begin to begin to fill this gap. The proposed audit does not set forth an objective standard but rather uses the institution's own values to create a criterion against which actual practices can be compared. An ethics audit like this could be regarded as what L. Reynolds described as “a corporate wellness tool” in a 1991 article in Business Ethics (“The Ethics Audit,” Vol. 5, No. 4, p. 20).

We would take it one step further and call the creation of such an audit as a corporate system of awareness—a self-assessment and self-regulation tool. This tool would raise the consciousness of unethical behavior for boards, officers and workers and thereby help to heighten ethical actions and prevent corruption within the institution. The audit can become a very powerful force for change in the company if it is used at board meetings, volunteer and employee training programs. An ethics audit is an activity that needs to be done with consistency; it cannot simply be a one-time event. Much like a financial audit, in order to be truly effective, an ethics audit must be used with some degree of regularity so that an organization can close the gap between its values (what I say I believe) and its ethics, (how I actually behave).

WE BELIEVE THIS AUDIT, if it is to truly serve the purpose of a more complete system of self-examination, must include and combine key factors from the areas of social responsibility, open communication, support to the community, leadership by example, human investment, ecology and maintaining the dignity of employees. In so doing, organizations may actually become better at planning for occurrences of unethical behavior, and create a climate where ethical dilemmas can be considered in advance so that unethical behavior can be avoided. Since ethical dilemmas are as much a part of doing business as changing interest rates, it is our contention that this would also make a dramatic contribution to the successful development of an organization's overall strategic planning process. An organization should plan for the resolution of ethical issues just as they would for strategic goals. ■

Arthur Gross Schaefer, J.D., C.P.A., M.H.L., Rabbi, is a professor of business law and ethics at Loyola Marymount University, Los Angeles, Calif. Dr. Raymond Gleanson, George Fox University, originally helped in the creation of this material.

Anthony J. Zaller is an undergraduate research assistant at Loyola Marymount University. (Shamus Auth, MBA research assistant, also assisted in the editing and research for this paper.)

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This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM Network • April 1998

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