Another Blow for the Public Image of Charities
By Henry Goldstein
Reprinted with permission from The Chronicle of Philanthropy, May 2003

The Supreme Court's decision last week in a telemarketing-fraud case was a major victory for the public but a significant loss for charities seeking to win back public confidence in nonprofit organizations.

The court last week looked past the narrow, self-interested position pushed by many of the nation's major nonprofit coalitions, and unanimously ruled that the right to free speech doesn't cover fraudulent charity solicitations. The justices' snub of the friend-of-the-court briefs filed by associations that represent charities and fund raisers was more than a loss in the legal arena. It was a far greater setback in the court of public opinion. At a time when trust in charities is sagging, nonprofit groups should not be standing silent about anyone who misleads donors. But in this instance, and too many others, charities seem to forget that their first obligation is to the donors who support their causes. The result has been that it is growing harder for Americans to determine what causes to trust -- and what to shun.

At issue is the case known as Madigan v. Telemarketing Associates, in which the State of Illinois sought to prosecute a telephone-solicitation company hired to raise money for a veterans charity called VietNow. The telemarketing company passed on to the charity less than 15 cents of every dollar raised. Prosecutors say that the company intentionally and knowingly misled prospective donors by telling them that most of the money would go to charity. The company says that it didn't deceive donors, and that it spent a considerable sum educating the public about the needs of veterans.

Charities, telemarketing companies, and other organizations sided with Telemarketing Associates because they said they feared that states would use the case as an opportunity to regulate how much a charity is legally permitted to spend on fund raising. Rulings by the Supreme Court in the 1980s made clear that states couldn't specify how much a charity was allowed to spend on fund raising because doing so would trample on an organization's free-speech rights, and many nonprofit groups were legitimately fearful that the justices might overturn all or a portion of those rulings.

But the court -- wisely -- did not take on the issue of whether 85 cents on the dollar is a “reasonable” fund-raising cost. Instead it fastened on whether donors had been misled, and sent the case back to the lower court to determine whether fraud had been committed, leaving the charity industry with egg on its face -- along with an opportunity to clean up its act.

In getting into this case, the Association of Fundraising Professionals, Independent Sector, and other nonprofit coalitions pitted themselves against 40 states, AARP (whose brief noted that the elderly, charities' best donors, are victimized more often by scams than other people), and the Wise Giving Alliance of the Better Business Bureau, all of which sided with the Illinois prosecutors.

What was wrong with the picture painted by the nonprofit coalitions was that they cropped the donors out of it. Despite the recent scandals involving United Ways, the Red Cross, Boy Scouts, September 11 scams, Internet con artists, and many others, most of us continue to give because we like a particular charity, and we more or less assume it does good works with our money. Even if someone could devise a simple way to explain why some charities have high fund-raising costs and others do not, that would probably not cause donors to drop all the charities with high fund-raising costs in favor of those with low costs. People will still give based on their emotional connection to a cause and an organization.

However, if the public realizes that the Illinois case was only superficially about the First Amendment, which charities said they were zealously trying to protect, and really about fund raisers trying to conduct their business as usual and with little government oversight, then donors might start growing suspicious of all the causes to which they contribute more than $200-billion a year. What does it say to the public that charities were willing to overlook the accusations of fraud just so they could go on raising money the way they always have? Will Americans be willing to take the time to figure out which charities are legitimate and which are not, or will they close up their wallets and give up on all nonprofit groups?

One way for charities to win back the trust of the public is to take on the issue of fund-raising costs and determine what is reasonable for any group to spend on soliciting, and what won't be tolerated. Charity trade groups should be working a lot harder on the question of how to define fund-raising costs, instead of ceding the responsibility to state attorneys general, who will define it by default.

State attorneys general know they have found themselves a potent political issue. When state regulators get attention for their crusade on the evening news, proclaiming, that a “charity telemarketer scams 85 percent of donations,” nonprofit groups of all kinds get a black eye. Charities need to have a comeback that is equally simple to understand and that reassures donors that they are being told the truth about how much of their donation goes to a good cause and how much goes into the hands of a paid solicitor.

Today, all charities can point to is the “donor bill of rights” endorsed by the major nonprofit coalitions, but that document doesn't say anything about what is reasonable for a charity to spend on fund raising.

The Supreme Court last week said government wasn't going to sit back and allow fund raisers to make false or misleading statements about where donations go. Now it's up to charities to take the same strong stand and prove to donors why they deserve to be trusted and supported.

Henry Goldstein, president of the Oram Group, a fund-raising consulting company in New York, is a regular contributor to these pages. Click here to send an email.