A key aspect of credibility is the transparency of the information that NPOs disclose to their stakeholders."
Research into the interaction between fraud and nonprofits
The Multidisciplinary Digital Publishing Institute based in Switzerland published some impactful findings in its 2020 issue about sustainability. “Our results highlight the lack of transparency legislation in the third sector, leading [nonprofit organizations] to adopt the voluntary disclosure of information policies to improve the perceived credibility of these entities by their stakeholders” (Ortega-Rodriguez, 2020). Following this, they speak about how this absence of transparency leads to a potential loss of support from donors and volunteers with a direct impact on the future of the organizations. “Despite the importance that the concept of transparency has for generating credibility with society, it is not a phenomenon that is widely studied… there is no single definition that allows us to define transparency in our field of study” (Ortega-Rodriguez, 2020). They write that traditional accounting and financial models used to disclose transparency in a for-profit institution currently do not reflect all aspects and characteristics of the social nature present in a nonprofit organization. They state that nonprofit organizations have traditionally been subject to less strict government regulation than public or private-sector entities.
“[Nonprofit organizations] worldwide face an increasing demand for accountability and improved transparency.”
Why should a nonprofit organization be transparent? They write,
- “Firstly, the growing importance both in terms of size and social action of nonprofit organizations in favor of the community;
- Secondly, the special relationship that nonprofit organizations have with the public sector to cover demands of specific social groups;
- Finally, the funding aspect from public and private donors from which they receive economic resources” (Ortega-Rodriguez, 2020).
They cite that there are two types of information to be disclosed, and there are benefits to disclosing both types. Typically, when we think of an organization as being transparent, we think of financials. Yet, there is another type of transparency. This is the transparency associated with non-financial information. It is just as important, if not more so than being transparent with financial information. This involves more of the human side of the nonprofit organization. If the organization has been a victim of fraud, injustice, discrimination, etc. this information is valuable to its stakeholders.
In a report titled “Understanding Nonprofit Transparency: the Limits of Formal Regulation in the American Nonprofit Sector” by the International Review of Public Administration, they find that “pressure for nonprofits to demonstrate accountability also drives informal transparency efforts through self-regulation” (Hale, 2014). They question whether individuals who fund nonprofit advocacy efforts can be required to disclose their identity. Citing their research, they claim “to foster trust and collaboration and to demonstrate accountability, nonprofit organizations rely extensively on informal forms of transparency not required by law” (Hale, 2014).
Transparency is a symbol of accountability, a very important part of nonprofit organizations.
This transparency comes at a cost. Usually, it is quite a lot of information to dig through when preparing a financial or non-financial statement of transparency. “Therefore, the entities in the nonprofit sector are concerned about the cost of preparing and disclosing non-financial information” (Ortega-Rodriguez, 2020). Traditionally, transparency within a nonprofit organization meant complying with the minimum standards, and nothing more. But research is showing how nonprofit organizations that are not transparent obtain lower scores in terms of public trust, reputation, perceived quality, and donation behavior.
“In particular, there is a positive relationship between transparency, increased reputation, and the credibility of [nonprofit organizations]”
-Ortega-Rodriguez
Introduction to transparency
“Worldwide, the number, size, and prominence of non-profit organizations (NPOs) is growing; this growth is caused by the increase of social problems of an economic, political, and religious nature, etc.” (Ortega-Rodriguez, 2020).
Transparency is a hard term to define within the nonprofit space. It could be defined as implementing an open information policy that ensures timely, relevant, and accurate information is disclosed in an accessible format. It could also be defined as “a continuous flow of information from an organization to the public about the organization’s mission, financial situation, and governance” (Hale, 2014). On a basic level, transparency includes easy public access to information about an organization, with the absence of this access understood as a lack of transparency. “Non-profit transparency and accountability are two connected concepts, with transparency referring to how much information is disclosed by [nonprofit organizations], which contributes to their accountability” (Ortega-Rodriguez, 2020).
Stakeholders are groups of individuals that affect or are affected by the activity the firm carries that out to meet its organizational goals. To be more specific, stakeholders are a nonprofit’s volunteers, collaborators, donors, fundraisers, and essentially everyone that interacts with a nonprofit. To achieve its mission, the nonprofit needs the trust of its stakeholders, making it necessary that the actions carried out by the nonprofit organization are transparent.
How can nonprofits change?
The Multidisciplinary Digital Publishing Institute (2020) suggests that it is “especially relevant to demonstrate that the resources they receive are used to fulfill the purpose for which these organizations were conceived.” They suggest that the value of this transparency is implicit because the transparent disclosure of information by nonprofit organizations should provide their stakeholders with relevant and reliable information. “Henceforth, [nonprofit organizations] must be able to convince society that they have systems in place to assess the prudent management of received resources and funds” (Ortega-Rodriguez, 2020). They also suggest that nonprofit organizations that disclose transparent information show that they act following a set of good practices, have good internal governance, explain the use of their received funds, and are comfortable making information public. “Consequently, credible [nonprofit organizations] have an incentive to differentiate themselves from less credible ones to improve their reputation, because this sector cannot afford the consequences of a public scandal and a collapse of credibility, thereby affecting the capacity for donations and fundraising” (Ortega-Rodriguez, 2020). They cite research supporting the use of the internet and digital means to make this information public.
“In addition, an active engagement in the age of social media is needed to reinforce organizational transparency and accountability.”
The International Review of Public Administration suggests going beyond the simple posting of required information and issue statements addressing current events that affect your organization. Doing this builds trust and an atmosphere of collaboration between the nonprofit organization and its stakeholders. “This trust evolves over time through patterns of engagement between organizations and individuals and takes on many dimensions” (Hale, 2014).
Conclusion
“The ability of stakeholders to access organization-specific information concerning the operations of a [nonprofit organization] is important for donation decisions” (Ortega-Rodriguez, 2020). There is no one way to measure transparency, but any transparency is better than no transparency. “It is also important to note that transparency is not free, and comes at an actual financial cost to organizations. At some point, these costs may deflect funds away from, rather than toward, private charitable objectives and the efficiency and effectiveness that transparency practices are intended to disclose” (Hale, 2014). Yet, this cost may be beneficial in the long run to encourage more donors to contribute because they know directly where their money is going. “Nonprofits lacking transparency risk loss of support from the public or particular constituencies” (Hale, 2014).
Written by: Drew Jackson, WikiCharities Team Member
References
Hale, K. (2014). Understanding Nonprofit Transparency: The Limits of Formal Regulation in the American Nonprofit Sector. International Review of Public Administration Vol 18 No. 3. https://web.archive.org/web/20170811192407id_/http://www.cannabisguild.net/00000-ARTICLES-LAW-REVS/Non-Profit-Transparency.pdf
Ortega-Rodriguez, C., Liceran-Gutierrez, A., & Moreno-Albarracin, A. L. (2020). Transparency as a Key Element in Accountability in Non-Profit Organizations: A Systematic Literature Review. Multidisciplinary Digital Publishing Institute Sustainability 2020 Journal. https://www.mdpi.com/2071-1050/12/14/5834Solution
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