By Oxford Analytica*Forbes
April 5, 2005
Non-governmental organizations raise billions of dollars each year from individuals, private and public sector donors and charitable foundations, including $8 billion so far for the recent tsunami relief. However, there is no accepted benchmark for evaluating the effectiveness of NGOs in their stated missions. Nor are NGOs subject to the same standards of budgetary and governance oversight as listed companies or government officials in democratic states.
NGOs constitute the not-for-profit (NFP) sector of international civil society and include advocacy and lobbying groups, for causes such as women's rights and the environment; service organizations for disaster relief, humanitarian aid and economic development; and policy institutes, think tanks and specialized educational organizations focused on international affairs.
Since its founding in 1945, the U.N. has been a staunch supporter of NGOs. Today 2,613 NGOs are registered with the U.N. Economic and Social Council (ECOSOC), while 1,407 NGOs are accredited to the U.N. Secretariat's Department of Public Information. The Union of International Associations in Brussels monitors over 58,000 international non-profit bodies pursuing 42,000 strategies based on 4,800 categories of issues.
The distinguishing feature of NGOs--as of all charitable institutions--is that donors do not benefit directly from their contributions. Instead, the benefit accrues to third parties targeted by the organizations or to society as a whole. As a consequence, NGOs have traditionally been accorded the presumptions of moral authority, altruism and absence of conflicts of interest. However, the NGO sector, despite its beneficent intentions, is viewed as a candidate for the same type of governance standards as the private, for-profit, sector.
Pressure to improve NGO accountability emanates from various forces:
Philanthropists: Charitable foundations, which used to donate without strings attached to NGOs, are now increasingly setting requirements on how funds may be used. This restricts the initiative of the NGO while transferring the mission decision from NGO to donor. NGOs are under pressure to professionalize transparency and governance standards in order to demonstrate that they are worthy custodians of donations and to regain control of their own agendas.
Academia: Calls for improvement in NGO accountability and governance and for the democratization of civil society have emanated, among others, from the Yale School of Management; the Hauser Center for Non-Profit Organizations at Harvard; the Center for the Study of Global Governance at the London School of Economics; the Center for the Study of Globalization and Regionalization at the University of Warwick; and the One World Trust.
United Nations: Given the role of the U.N. in promoting NGOs, U.N. accreditation might appear to be an appropriate mechanism for standardizing NGO effectiveness and governance. ECOSOC's accreditation rules theoretically require a "democratically adopted constitution," "representative structure" and an "appropriate mechanism of accountability" but are largely devoid of timely enforcement powers.
A panel chaired by former Brazilian President Fernando Henrique Cardoso submitted a report in June 2004 on U.N.-Civil Society relations, but its proposals focused on U.N.-specific problems such as de-politicizing the process of accreditation and placed little emphasis or urgency on increased transparency and governance.
Effectiveness: The post-tsunami relief was testimony to the skills and power of NGOs. However, it also revealed deficits in NGOs' ability to operate. In Sri Lanka and Indonesia, regulatory, legal and enforcement inadequacies allowed abuses to occur. Australian charities, for legal reasons, could not easily channel funds outside Australia. And only Germany, the United Kingdom and the United States readily permit the spending of domestic charitable donations abroad.
Measurement and enhancement of NGO effectiveness will probably reflect the standards in the private sector, such as agreement between boards and managers on the overall mission of the organization, definition of the tools needed to carry out that mission and efficient and timely financial and non-financial reporting.
Decision-making processes that can be demonstrated to be both disciplined and professional, and which are documented and reasonably transparent to third parties will be important as well. In addition, board members and managers will need to be held accountable for their actions against objective criteria communicated to the stakeholders of the organization.
Not-for-profit organizations in the United States (known as registered charities in the United Kingdom) have equally come under scrutiny. In fact, U.S. legislative action primarily directed at domestic NFPs may prove the most influential in the reform of NGOs internationally. Within the U.S. NFP sector, there are one million tax-exempt charitable organizations, and debate is intensifying on the issues of mission, means, management, transparency, accountability, performance measurement and governance.
The main effect of being a U.S. NFP is tax-exempt status under U.S. Internal Revenue Code section 501(c)(3), which enunciates the "exempt purposes" of a charitable organization.
The chairman of the U.S. Senate Finance Committee, Sen. Charles Grassley, has announced his intention to introduce legislation that will provide a regulatory framework for NFPs. The commissioner of the Internal Revenue Service, Mark Everson, outlined to the Committee in June 2004 new requirements that the IRS is implementing to force disclosure of compensation, governance and other policies.
On March 1, the Committee received a report, which it had commissioned from a coalition of 175 NFP leaders, recommending tightening of NFP financial operations and a database of information on charities. Many international NGOs are US 501(c)(3) organizations and will be required to comply.
Stricter compliance requirements with regard to clarity of purpose, performance, governance, transparency and reporting may cause the ranking, combination or even disappearance of some NGOs. Just as with U.S. NFPs, international NGOs will find it in their interests to stay ahead of the trend, lest government-imposed requirements prove stricter than voluntary ones.
U.S. and U.K. government rules are likely to dominate disclosure and governance requirements for the larger NGOs until broader-based regulations can be agreed on. NGOs must prepare for the kind of disclosure and self-assessment that corporate governance standards set for listed companies themselves.
They will come under increasing pressure to focus on stated missions and defined target audiences and be judged against self-set standards vis-í -vis their boards of trustees, donors, governments and the public at large.
NGOs are faced with the challenge of ensuring demonstrable effectiveness, professionalization of management and transparency of governance. If successful, funding from public and private sources will increase and the ultimate pursuit of their missions will benefit.
About Oxford Analytica: Oxford Analytica is an independent strategic consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world.
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