All nonprofits can attest to the fact that your organisation’s reputation is the single most important thing. So why risk it all for a gift? Andrea Riddell caught up with FR&C to learn about the importance of due diligence.
In March last year the Guggenheim in New York became one of the latest art institutions to publicly announce they would stop accepting donations from the Sackler family trust. A few months later, the Metropolitan Museum of Art followed suit.
The Guggenheim had received US$9 million in donations from various members of the Sackler family between 1995 and 2015. After years of accepting the Sackler family patronage and recognising them with naming rights, what had changed?
Members of the family behind Purdue Pharma, the maker of OxyContin, were embroiled in a legal battlefield, facing more than 2,000 lawsuits alleging the company and members of the family were responsible for starting and sustaining the opioid crisis.
As opioid addiction continues to claim lives all over the world, artists and activists are pushing back against cultural institutions accepting donations from the trust. In February 2019, artist and recovered opioid addict, Nan Goldin, held a mass ‘die-in’ at the Guggenheim in protest of the Sackler trust support. A flurry of fake prescription slips for OxyContin fell from the ceiling and empty orange medicine bottles were strewn on the floor of the lobby.
Could all of this have been avoided? With a due diligence framework in place, FR&C’s Molly Masiello and Charlotte Grimshaw believe so.
The importance of doing your homework
It’s difficult for a charity or nonprofit to say ‘no’ to a donation of any kind. But sometimes saying ‘no’ is critical in protecting an organisation’s most prized asset – their reputation.
This is where due diligence comes into play.
Due diligence involves undergoing background research on a prospective major donor prior to accepting a gift or entering into a partnership with them. It’s fundamental in revealing legal, ethical or compatibility issues that may result in a donation being contested or revoked in the future.
Due diligence is not to be mistaken for, nor replaced by, prospect research. While prospect research can help identify a prospective donor’s Linkage, Interest and Ability (LIA) to your organisation, due diligence looks at the risks associated with partnering with a donor. This could be a reputational risk, or a misalignment with your mission and values.
When it comes to due diligence, FR&C has noticed that the higher education space is leaps and bounds ahead of charities.
“Universities are very risk adverse; they have big legal teams that manage any reputational risk that could happen, and a lot of naming opportunities as part of their major gifts program, so they’re well across due diligence in fundraising,” says Masiello
However, they are seeing all their clients becoming increasingly interested in due diligence as more and more charities look to major gifts as a donation source.
“It’s becoming more topical as people realise there are risks attached to large donations, which, as a responsible organisation, you really have to examine before you accept any gift,” says Grimshaw.
Researching prospective donors takes time, so Masiello and Grimshaw urge charities to build it into their pipeline as part of their major gifts program.
“It can take a long time [to research a prospect] as some information is not transparent. If someone is a director or on the board of multiple companies, you need to understand what those companies do,” says Masiello.
While an organisation will never be able to mitigate all conflicts of interest or risk, due diligence will help you make an informed decision and provide precedence and consistency in your gift acceptance.
Potential red flags to look out for when researching donors include:
- Legal issues: Have the donations come from illegal activity? Could accepting a donation from this donor expose your organisation to legal or regulatory action? Does the donor have any pending lawsuits, or a criminal history?
- Financial risk: Is there any risk of the donor being unable to fulfill their financial commitment? Could this put your program at risk of survival?
- Reputational risk: Would other stakeholders deem the partnership to be unethical or inappropriate? Could this partnership change the perception of the organisation in the eyes of the public, or internal stakeholders such as employees? Is the donor named on sanctions lists or blacklists?
- Risk to independence: Does the donation give the donor power to influence your organisation?
Look for factors that would affect your organisation or program’s success. Would you have acted differently if you had this newfound information before you had accepted the gift?
Back your actions with a gift acceptance policy
In response to the Sackler family controversy, the Met announced that they would be reviewing its ‘gift acceptance policies’.
A gift acceptance policy is the backbone of due diligence. Having a well-thought-out policy can help guide conversations internally and externally and ensure that gifts ultimately support the mission of the organisation. Every nonprofit will have different criteria so laying this out will ensure that everyone is on the same page.
Your organisation may have a gift acceptance or ethics committee responsible for keeping the policy up to date and reviewing proposed gifts. Or this may fall into the hands of senior leadership. However, all fundraisers who facilitate gifts on behalf of the organisation should be trained in the processes outlined in the gift acceptance policy and understand the organisation’s trigger points.
All fundraisers in charge of accepting gifts can undertake some level of due diligence. Depending on the gift size and commitment, this may be as simple as a Google search. However, best practice recommends delineating between donor management and due diligence roles to build accountability and ensure there’s less risk of error or bias. And, ultimately, the final decision to accept or reject a donation should sit outside of these two functions. These roles should be outlined in your policy.
“[A gift acceptance policy] will back up the decisions that you make,” says Masiello.
Without one, you may be conducting research but not actually be aware of what to look out for.
“You need to have criteria by which you make a judgment. There is no point saying, ‘This person wants to give a $5 million gift, we better do a web search on them and see what comes up’. You’ve got to have criteria for what are and are not trigger points for your organisation,” says Grimshaw.
A policy will list types of gifts can be accepted on behalf of the organisation by development staff, as well as gift restrictions. It will also acknowledge when gifts require approval from senior leadership or the board.
For example, a large donation of property may, at first glance, seem like a generous donation, but without the resources to understand and stay on top of the legal and tax requirements, it could end up costing your organisation more than it’s worth.
Your policy should indicate a gift amount level that will prompt higher-level due diligence. For example, any gift over $10,000 will require in-depth research. Your policy should also outline characteristics that could indicate further investigation is needed.
These characteristics could be:
- The donor has a pre-existing commercial relationship with the organisation.
- The donor makes requests or requirements that could compromise the independence and integrity of the nonprofit.
- The donor requests anonymity.
- The donor requests unusual transfer arrangements or currencies.
Together, these triggers will ensure that the time allocated to a gift is proportionate to its level of risk.
Policies should also outline industries that are deemed a conflict of interest. Having clear guidelines around who you will partner with and accept donations from is key to avoiding any public push-back or losing other supporters.
This could be an environmental charity accepting a donation from a mining company; a rehabilitation nonprofit receiving a gift generated from the sale of alcohol or poker machines; or even an art gallery accepting donations connected to the opioid crisis.
Having a policy that’s transparent – to internal stakeholders as well as the public – will also help potential donors understand your organisation’s policy and the thought process behind it. This will also build trust with other donors.
And, like the Met, your gift acceptance policy should be reviewed on a regular basis.
Why comes before how
Where do nonprofits even begin with due diligence? Grimshaw and Masiello recommend bringing it all back to your organisation’s mission.
“Start with the end in mind: what are your goals?,” says Grimshaw.
“If you don’t know why you’re doing it, then you don’t know what you’re looking for,” adds Masiello.
Having a really strong understanding of the mission and values of your organisation will underpin all your processes and policies. Remember the ‘why’ when you build a framework and a gift acceptance policy, and it will narrow down your focus.
“It’s not just about not accepting a donation from someone who is a criminal – that’s obviously bad – but it’s also the risk associated with accepting gifts where the money may have come from a source that’s not compatible with the mission of that particular organisation,” says Masiello.
“[Due diligence] is about being mindful of how complex some of these gifts can be.”
Does due diligence change in a global pandemic?
In times like this – a global pandemic coupled with a recession – saying ‘no’ can be extremely difficult. But it’s just as important to understand where to draw the line during times of financial uncertainty.
Now more than ever, you need to practice due diligence to stand by and protect your organisation.
“The point of due diligence is to make sure that your organisation is not at reputational risk. That doesn’t change in a situation like this,” says Masiello.
Nonprofits cannot afford to stop asking no matter the current climate, so having a gift acceptance policy and a framework for due diligence will ensure that research can be streamlined and not resource-intensive during already resource-draining times.
In fact, due diligence is an ongoing process – through pandemics and all – and does not stop once a gift has been accepted. Research should be revisited, and any new information crosschecked with your policies to ensure no conflicts of interest have arisen over time. Like the Met and the Guggenheim where vocal criticism of the Sackler donations came to the surface as the opioid crisis developed, situations and donors can change, exposing you to risk if you don’t stay on top of due diligence. This process, while it may feel like a burden at the time, can keep you out of the news for all the right reasons.
Some things to remember:
- Ensure your research comes from diverse and reputable sources. It can be difficult to find in-depth information on a donor.
- How you store donors’ sensitive information is critical. Are you abiding by data protection laws?
- Due diligence takes time. Build it into your major gift pipeline and notify your research team as soon as possible.
- Once due diligence has been carried out make sure you brief all relevant people, at all levels, on the findings.
Still not sure where to start? FR&C has a growing list of Australian research resources on their website to begin your prospect research.
And for a deep dive on building a framework for due diligence, don’t miss FR&C’s Molly Masiello co-presenting with Victoria Coyne from Western Sydney University at our virtual Big4 Fundraising Conference on 28-29 October. Early bird registration closes 17 September 2020, so hurry and catch that worm!
An earlier version of this article referred to the family as the ‘Sackler Family’. This has now been amended to ‘members of the Sackler Family’ to distinguish between the members of the family linked to Purdue Pharma and those who are not.