How philanthropic organisations can improve governance — and why it matters

26 January 2022
Many families are increasing their charitable giving, using private foundations to support their personal philanthropic goals and ensure lasting impact.

Vistra’s recent report on the future of philanthropy found a significant 36 percent year-over-year increase in philanthropic activities. The report also notes changes in the way charitable organisations are making funding decisions. This shift underscores the need for organisations to improve their oversight and governance to prevent money from being diverted to the wrong hands and serious consequences for the charity itself.

Understanding philanthropic trends

The Vistra report found that philanthropists are becoming more flexible and responsive to current events. For example, in 2020, with news about the challenges of Covid-19 and climate change dominating the headlines, healthcare and environmental causes took centre stage. Families are also considering investment opportunities with a philanthropic focus, such as microfinancing, in order to deliver strong financial returns that are matched by a lasting social impact.

Hand-in-hand with these trends is the growing influence of social media. Prior to its advent less than 20 years ago, charities made giving decisions based on personal preferences and the advice of family, friends and fund advisors. While these sources still play important roles, social media and the internet are now critical research tools for philanthropists. In the Vistra report, 48 percent of respondents said they used social media and 37 percent said they used web searches to make decisions.

Social media and the internet are of course powerful tools, but they can also be sources of false information, sometimes planted by unscrupulous or even criminal organisations. At the same time, financial technology has eased the path of global money transfers, which can be a blessing when proper diligence is conducted, but a curse when it is not.

Charities without strong internal governance may inadvertently expose their organisation to criminal abuse, which could have enormous consequences – anything from regulatory sanctions and reputational or financial loss to forced closure of the foundation and even imprisonment.

It’s more important than ever, then, for today’s non-profit organisations to exercise greater scrutiny of any beneficiaries and make sure their governance procedures provide adequate controls over fund transfers.

Avoiding international risks

In some high-risk countries and conflict zones, criminal organisations may try to exploit funds intended to help people. To highlight the growing risks, INTERPOL and other global investigative organisations created a World Atlas of Illicit Flows report. This provides an overview of organised criminal and terrorist groups and how they use money — some of it obtained from unwitting charities — to fuel violence, illegally exploit natural resources and engage in other criminal ventures. The Financial Action Task Force, a global money laundering and terrorist financing watchdog, also has a set of recommendations to combat the abuse of non-profit organisations. By performing better due diligence, strictly following regulations and using available resources, charities will be well positioned to avoid risks.

Preventing scams

Charities must also ensure that their structures are not vulnerable to exploitation by illicit groups or scammers. This risk was illustrated recently by a scam involving the name of MacKenzie Scott, the billionaire former wife of Amazon founder Jeff Bezos.

Scott announced in a December blog post that she had given over $4 billion to more than 300 organisations, including local charities such as food banks. She simply reached out to organisations by email and had no officially established foundation, headquarters or website. But soon after her post was published, scammers created a “MacKenzie Scott Foundation,” convincing victims they were donor recipients and had to pay taxes and other fees in order to receive the funds. A more structured giving format with publicised guidelines could have prevented this type of abuse.

Best practices for effective governance to minimise risk

When implementing a governance structure in a non-profit organisation or foundation, there are a number of best practices to consider.

First off, ensuring compliance with local regulations is of the utmost importance. Many jurisdictions will require registration, so it’s important to do your due diligence to ensure you’re up to date with requirements in the country of operation.

Developing a leadership team with specific skills and expertise is another way to build a foundation with good governance. In particular, look for a foundation council and guardian with experience running a non-profit organisation. When building a leadership team, including DEI as part of the evaluation criteria can help future-proof your team and create stronger outcomes.

As part of a strong governance structure, non-profits should have appropriate controls in place to ensure funds are fully accounted for and spent in a manner consistent with its stated activities. They should follow a “know your beneficiaries” policy, confirming the credentials of fund recipients and partner organisations. For example, when partnering with another charity, carefully check to ensure that charity’s funding sources and any assets – like equipment or vehicles to transport people – are legitimate. Proper due diligence and risk assessment in this area will help anti-money laundering and counter-terrorist financing (AML/CFT). Philanthropic organisations can also create written agreements limiting the use of funds to specific charitable purposes and obtaining the right to inspect partner records.

Foundations should also work with people who have expertise in finance and accounting to support robust reporting processes. Publishing annual financial statements and detailed information about the organisation’s goals, activities, owners and directors can help ensure regulatory compliance and build trust with donors.

Philanthropic organisations have an opportunity to make a real difference in the lives of people, but good governance is a necessity to ensure the intended positive impact. Taking the time to review their own organisational structures and strengthen their policies and practices will help foundations avoid misuse of funds.