Ethics in the Nonprofit Sector

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Ethics in the Nonprofit Sector
Nataly Schwartz
Nonprofit and Association Organizations and Issues
University of Maryland University College
Jennifer J. Wood
March 30, 2011

“When governmental and nonprofit organizations are good, they are very good. And good they must be, because we entrust them with society’s most important functions- educating our minds, uplifting our souls, and protecting our health and safety…But when governmental and nonprofit organizations are bad, they are horrid” This is the argument put forth by Regina E. Herzlinger in her 1996 article from the Harvard Business Review. Herzlinger, and many others, are troubled by the ethical issues faced by the nonprofit sector and the decrease in public trust. The recent economic collapse, brought about in part by dishonest corporate behavior, has raised the issue of business ethics in general to the forefront. Nonprofit organizations tend to be held to a higher standard. “Public persona often attaches an untarnished, ethically centered structure to the nonprofit sector” (Smith, McTier & Pope, 2009). This perception is based on the role that nonprofits play in our society, often filling gaps left by government agencies to care for our most needy. But the unique role of these organizations in our society creates some unique ethical challenges, which can be complicated by the high standard to which they are held. These organizations face ethical dilemmas which are unique to the nonprofit sector and therefore must utilize unique methods to resolve these issues.

There are a number of key ways in which nonprofits differ from profit driven companies, which impact an organization’s ethical framework. One such factor is the “absence of the manager-stockholder or agent-principal paradigm, typical of for-profit businesses and due to their humanistic image” (Bhandari, 2010). When analyzed using agency theory, nonprofits lack a clearly defined principal/owner, decreasing overall accountability within the organization. Many groups have a shared interest in the organization, such as donors, members or clients and volunteers. Employees “do not have the self-interest that comes with ownership and helps to ensure…that the business accomplishes its goals efficiently” (Herzlinger, 1996). A lack of accountability within an organization, can easily lead to lapses in ethical behavior.

Lack of accountability has been blamed for most of the ethical lapses in both the nonprofit and for-profit sectors. The call for greater accountability is a direct result of fiscal mismanagement and scandal within the sector. “One of the more prominent cases of fiscal mismanagement emerged amid disclosure of the William Aramony scandal within the United Way” (Smith & Richmond, 2007). Other well known examples include the NAACP executive director giving $332,000 of association funds to a former employee (Herzlinger, 1996), and more recently funds donated for Haiti earthquake survivors being inappropriately allocated. These are just a few of many examples, which can all be traced back to the issues of accountability and transparency.

Many nonprofits rely heavily on volunteers to fulfill various roles within the organization. This presents its own unique challenge from an ethical standpoint. “Since volunteers are unpaid, they often see themselves as untouched by organizational rules, or at least feel as if they have the right to some interpretive license based on their unpaid status” (Bell, Bell & Elkins, 2005). Additionally, volunteers often have their own motives for getting involved with an organization, which may or may not match with an organizations mission statement. The motives and behavior of a volunteer is especially important if he or she serves on a volunteer board of directors. These volunteers who serve on a board are the public face of an organization and have a significant influence on public opinion and the direction of an organization in general....
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