2016 Election Series – Nonprofit Issues in the Spotlight (Part Two)

This is Schauble Law Group’s second in a series of posts addressing nonprofit issues that have been in the headlines due to the 2016 Presidential Election. As with our previous post, and all posts in this series, our goal is to use the recent headlines as a teaching tool to inform our clients and the larger nonprofit sector on these important topics. This post will focus on the potentially devastating impact that a scandal—or even just the appearance of impropriety—can have on a charity, which has been in the headlines recently with respect to the Clinton Foundation. Charitable missteps, such as undisclosed conflicts of interest, can irreparably harm a charity and casts a shadow on the nonprofit sector as a whole.

Pulled From the Headlines Part II – Appearances Matter

Protecting a public charity’s reputation is of paramount importance for reasons that are too numerous to recite in this post. For example, when a charity’s reputation and ethics are called into question, it directly impacts its fundraising ability. Consider the Susan G. Komen for the Cure scandal, where it was revealed that a high-ranking official at the charity had attempted to pull funding from Planned Parenthood due to her own personal political agenda: the impact on fundraising was immediate and devastating. The Seattle chapter’s Race for the Cure, its signature annual fundraising event, saw a nearly 50 percent drop (over $500,000) in amounts raised over the prior year and saw its number of participants in the event fall from 13,000 to 8,500.

Damage to reputation can also lead other organizations to shy away from strategic partnerships that may be necessary to implement a charity’s mission. For example, when the Wounded Warrior Project found itself in the media’s critical eye for lavish spending on travel and parties for its executives, the charity’s strategic partnership with hospitals treating veterans through its Warrior Care Network Hospitals Project was threatened. Further, it found that many of its high-profile corporate partnerships (e.g., with the NFL and Bank of America) were at risk, presumably because the companies were wary of associating their brands with the organization.

State and federal inquiries into a charity’s activities can be triggered by allegations of misconduct as well. Defending these investigations are time-consuming and costly. To make matters worse, long after the headlines have faded, donors remember that the organization has been the subject of a government investigation.

All of these things have something in common: they deplete the charity’s resources (financial and otherwise) and divert the charity’s attention from its essential work. When that happens, it’s the charitable beneficiaries and other stakeholders that suffer most.

Beyond the damage to the individual charity and its stakeholders, ramifications reverberate through the nonprofit sector as a whole when high-profile charities are involved in actual or alleged misconduct. Scandals erode public trust in the sector, and this lack of public confidence can translate into less support for completely unrelated organizations. Further, public trust in the federal and state government agencies that are supposed to oversee the sector and ensure that bad actors are held accountable is diminished as well.

Questions of propriety have dogged the Clinton Foundation since its creation in 1997, when it was originally organized as the William J. Clinton Foundation with the purpose of building the Presidential Library in Arkansas. The scrutiny increased as Hillary Clinton ascended to positions of power within the federal government, first as a Senator, and then as Secretary of State. The media scrutiny ultimately resulted in the Foundation disclosing its donor list and Hillary Clinton signing a transparency agreement with the Obama administration, which included committing the Foundation to not accepting any donations from foreign governments. According to news reports, the Foundation began accepting those donations again after Secretary Clinton left her position as Secretary of State. However, many of Secretary Clinton’s critics, who felt she clearly intended to run for President when the donations were accepted, have denounced both the Foundation and Secretary Clinton on the basis that there are inherent, if not irresolvable, conflicts of interest with a candidate for the highest office in the United States having close ties to a charity that accepts money from foreign governments.

The Clinton Foundation receives high marks for taking on some of the most challenging and persistent issues facing the world, such as the fight against AIDS. However, the presence—or even appearance—of conflicts of interest are numerous and disconcerting. As an example, Boeing apparently donated approximately $10 million to the Foundation in the years before Hillary Clinton became Secretary of State. In 2011, while Hillary Clinton was the Secretary of State, Boeing donated another $900,000, coinciding with the State Department’s approval of a $29 billion sale of fighter jets by Boeing to the Kingdom of Saudi Arabia. The sale was approved by State Department officials several levels below the Secretary, as well as the Department of Defense and Congress, but the facts still call into question whether Boeing was hoping to curry favor with the Secretary prior to approval of the sale by making the donation. According to the news reports, no actual evidence of impropriety was found, but the reputational damage was already done before that determination was made—much of the public now doubts the philanthropic motives of the donors and the actual work of the Foundation.

As legal advisors to nonprofits, we know too well that real and apparent conflicts of interest can be difficult to identify and manage, and sometimes will require difficult decisions to be made. Some conflicts can be as obvious as those presented to the Clinton Foundation, while others can be far more subtle, yet equally profound. We encourage nonprofits to take this opportunity to review their policies and procedures for assessing conflicts of interest, and update them as appropriate.

Do you have a conflict of interest policy in place? When was it last reviewed and updated and does it conform to best practices? Does it describe what a real or apparent conflict of interest is, increasing the chances a conflict will be properly identified when it arises? Does the policy lay out a clear process for disclosing, vetting, documenting and deciding on the conflict of interest, understanding that a good process often leads to a more thoughtful and defensible outcome? Do you ask persons of influence within the organization (e.g., directors, officers and key employees) on an annual basis to review the conflict of interest policy and evaluate their positions outside the organization, so that you and they can identify situations in advance that could give rise to a conflict? Do you have a gift acceptance policy that addresses how you will address implicit conflicts of interest relative to the donor?

Having these types of objective policies and procedures in place before a difficult situation arises, should add clarity to a decision-making process that can otherwise be emotionally charged.  However, there is no substitute for good judgment. Serious reputational harm can result from a decision involving a conflict of interest, even when policies and procedures are followed to the letter. So ask yourself, is our organization willing to accept how this decision might be reported in the Wall Street Journal, the New York Times or even our local newspaper? The answer might help you in determining not only if your organization can proceed in the face of a conflict of interest, but whether it should proceed.


Click here for a timeline of donations to the Clinton Foundation along with the donor’s issues before the State Department.

Follow this link for an article discussing the merits of charges against both the Clinton Foundation and the Donald J. Trump Foundation.

For a fabulous panel discussion last week from the Wilson Center for Social Entrepreneurship of the nonprofit issues with the Clinton Foundation and Donald J. Trump Foundation, click here (the discussion of the Clinton Foundation begins at 19:30).

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