Nonprofits: The Impact of Law on Trust

I had the pleasure of guest lecturing for Professor Louise Carroll’s class in the nonprofit administration program at USF earlier this week. While the focus of my talk was on nonprofit law, I first examined the subject of trust in nonprofit organizations.

In May 2022, Independent Sector published an article, Trust in Civil Society, in connection with its annual report on  trust in American nonprofit, philanthropic organizations, and other institutions. The article noted the following key insights:

  • Trust in philanthropy held steady. Trust in nonprofits saw a small downward trend during the pandemic.
  • Low trust across institutions, but nonprofits among most trusted.
  • Integrity and purpose are critical to trust.
  • Trust among women declined during the pandemic.
  • Gen Z is skeptical of the sector, though views have not solidified.
  • Trust is tied to financial well-being and education.

Regarding integrity and purpose:

Distrusters of nonprofits and philanthropy point to perceived fund mismanagement and cases of corruption and scandals. Neutral trusters say financial transparency and proof of impact are necessary. Public figure endorsements, communicating clear organizational mission, and demonstrating results remain top trust drivers.

To the class, I included 8 factors for the erosion of trust in nonprofit organizations:

  1. Media coverage of scandals – the news media is incentivized to increase readership, and scandals in the nonprofit sector are generally more appealing for such purposes than success stories, which ultimately results in a distorted view of the sector
  2. IRS oversight and enforcement – the IRS oversight and enforcement of charitable and other tax-exempt organizations has been waning for years, particularly since the fictitious right-wing targeting scandal of 2013 and defunding of the agency, resulting in poor solutions like the Form 1023-EZ (see Additional Skepticism of Form 1023-EZ)
  3. State oversight and enforcement – about one-third of state charity regulator offices have less than one full-time equivalent employee; a majority have less than three (see State Regulation and Enforcement in the Charitable Sector, Urban Institute)
  4. The state of nonprofit governance – according to an industry survey by BoardSource, almost half of all chief executives said that they did not have the right board members to establish trust with the communities they serve (see Leading With Intent: BoardSource Index of Nonprofit Board Practices
  5. Political activities / dark money – particularly since the infamous Citizens United decision by the U.S. Supreme Court, groups have been able to spend great sums of money, without limitation, to influence elections, and nonprofits (particularly 501(c)(4) social welfare organizations and 501(c)(6) business leagues) have been vehicles through which donors can hide their identities (see Dark Money, Brennan Center)
  6. Change in individual donors and fundraising – the number of donors to nonprofits is shrinking, and the importance of mega-donors to nonprofits (e.g., Mackenzie Scott) is rapidly growing, which contributes to the increasing influence of wealth and power on the nonprofit sector and the decreasing trust of nonprofits (see Where Have All the Donors Gone? The Continued Decline of the Small Donor and the Growth of Megadonors, Nonprofit Quarterly; Gilded Giving 2022, Institute for Policy Studies)
  7. Blurring of nonprofit and for-profit sectors – as nonprofits engage in more commercial activities for funding and for-profits engage in more social good activities for attracting consumers, the distinction between nonprofit and for-profit has become less important, particularly to younger generations (57% of Gen Z Americans (4 points higher than average) say giving directly to individuals and causes makes a bigger impact than giving to nonprofits according to the Independent Sector survey)
  8. Movements challenging status quo – the past few years has seen much greater activity and influence of decentralized movements on social issues and a public questioning of the status quo and incremental changes where there are injustices and a lack of equity (particularly, racial equity), including within the nonprofit sector and the charitable industrial complex (see Nonprofit Industrial Complex 101: A Primer on How It Upholds Inequity and Flattens Resistance, Community-Centric Fundraising)

Independent Sector’s publication was not all bad news. It also offered insights for consideration and action:

  • Leverage Existing Trust to Strengthen Democracy
  • Restore Cycle of Trust and Engagement
  • Uphold Public Expectations of Government Accountability
  • Better Understand Disaggregated Macro-Trends
  • Frequent Constituent Engagement May Breed Trust

Engagement is key in all of these action items. And as I discussed in an earlier post, engaging Millennials and Gen Z as leaders and supporters is absolutely critical, but the nonprofit sector is falling short on its efforts, and every organization needs to give their inclusion higher priority.

The USF students also called out some other signals of trust that coincided with the Independent Sector survey:

  • Financial transparency
  • Demonstrable results using donations
  • Transparency about political affiliations/ideology
  • More information about the organization generally

While there are many strong and valuable reasons for supporting donor advised funds and social welfare organizations, under current laws, the lack of transparency associated with each needs to be better addressed with a substantial amount of trust in nonprofits hanging in the balance.

The reporting required of tax-exempt organizations, including churches (using the broad tax law definition), which have no federal tax law reporting requirements despite the benefit of being exempt from income taxes, could also be strengthened to provide the public with greater information about the organizations they are considering supporting and the value of their work.

Trust but verify will engender greater trust and support.