Ethics and Nonprofits

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Ethics and Nonprofits
By Deborah L. Rhode & Amanda K. Packel

Stanford Social Innovation Review Summer 2009
Copyright © 2009 by Leland Stanford Jr. University All Rights Reserved

Stanford Social Innovation Review 518 Memorial Way, Stanford, CA 94305-5015 Ph: 650-725-5399. Fax: 650-723-0516 Email:,



Ethics Nonprofits
By Deborah L. Rhode & Amanda K. Packel



Illustration by Richard Mia

Unethical behavior remains a persistent problem in nonprofits and for-profits alike. To help organizations solve that problem, the authors examine the factors that influence moral conduct, the ethical issues that arise specifically in charitable organizations, and the best ways to promote ethical behavior within organizations. hose who work on issues of

ethics are among the few professionals not suffering from the current economic downturn. The last decade has brought an escalating supply of moral meltdowns in both the for-profit and the nonprofit sectors. Corporate misconduct has received the greatest attention, in part because the abuses are so egregious and the costs so enormous. Chief



contenders for most ethically challenged include former Merrill Addressing these ethical concerns requires a deeper understandLynch & Co. CEO John Thain, who spent $1.22 million in 2008 to ing of the forces that compromise ethical judgment and the most redecorate his office, including the purchase of a $1,400 trash can effective institutional responses. To that end, this article draws on and a $35,000 antique commode, while the company was hemor- the growing body of research on organizational culture in general, rhaging losses of some $27 billion.1 and in nonprofit institutions in particular. We begin by reviewing Still, the corporate sector has no monopoly on greed. Consider the principal forces that distort judgment in all types of organizaEduCap Inc., a multibillion-dollar student loan charity. According tions. Next, we analyze the ethical issues that arise specifically in to Internal Revenue Service records, the organization abused its the nonprofit sector. We conclude by suggesting ways that nonprofits tax-exempt status by charging excessive interest on loans and by can prevent and correct misconduct and can institutionalize ethical providing millions in compensation and lavish perks to its CEO and values in all aspects of the organization’s culture. her husband, including use of the organization’s $31 million private | Causes of Misconduct| jet for family and friends.2 Unsurprisingly, these and a host of other scandals have eroded Ethical challenges arise at all levels in all types of organizations— public confidence in our nation’s leadership. According to a CBS for-profit, nonprofit, and government—and involve a complex reNews poll, only a quarter of Americans think that top executives are lationship between individual character and cultural influences. honest. Even executives themselves acknowledge cause for concern. Some of these challenges can result in criminal violations or civil The American Management Association Corporate Values Survey liability: fraud, misrepresentation, and misappropriation of assets found that about one third of executives believed that their compa- fall into this category. More common ethical problems involve gray ny’s public statements on ethics sometimes conflicted with internal areas—activities that are on the fringes of fraud, or that involve messages and realities. And more than one third of the executives conflicts of interest, misallocation of resources, or inadequate acreported that although their company would follow the law, it would countability and transparency. not always do what would be perceived as ethical. Research identifies four crucial factors that influence ethical Employee surveys similarly suggest that many American work- conduct: places fail...
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