Opinionista Shelagh Gastrow 6 February 2019

Corruption and the non-profit sector

As someone who has worked extensively with non-profit organisations in South Africa on their financial sustainability, it is alarming to read an escalation of reports on corruption in the sector and there is no doubt that some donors are having to deal with big question marks relating to the expenditure of funds.

The South African non-profit sector is not exempt from corruption, but there have been media articles that have been quite alarmist, suggesting that the sector is smeared by a “culture of corruption”. Anyone would acknowledge that some level of corruption exists, as it does in government and the corporate sector, but the sweeping statements that have appeared in the press are quite insulting to a sector that has literally carried the can for this country’s welfare for decades.

Recently there have been a number of scandals affecting the non-profit sector. Some have dealt with issues pertaining to harassment and power relations within organisations, whilst others have revealed some straightforward corrupt activities.

Unfortunately, the bad eggs have a major impact on funding in the sector as the public begins to doubt the general integrity of the thousands of organisations that exist in South Africa. There have been calls for the sector to approach compliance through a corporate lens, when ironically South African has witnessed a number of major corporate governance failures, such as Steinhoff, together with the cosy world of auditing firms abandoning their values and ethics, tied tightly with State Capture.

Corruption is, in the end, the responsibility of individuals, whether in the corporate sector, government or the non-profit sector and, if we are going to suggest that the business sector is doing a better job, I would like to see the evidence.

Governance in the non-profit sector is challenging as most board members are volunteers – they don’t get paid. This makes it difficult for the sector to recruit human resource specialists, accountants and lawyers to their boards.

There are over 200,000 registered NPOs in the country and we definitely do not have the skills base to participate in all those boards. Like the corporate sector, a lot of work has to be done to improve accountability and transparency, but this does not mean that the whole sector is corrupt.

More likely, governance and financial management could be weak as activists and idealists who establish these entities are often not adequately trained, but there is little indication that they actively go out to steal funding. Despite this, in 2012 hundreds of South African NPOs with concerns about governance in the sector came together to develop The Independent Code of Governance for Nonprofits Organisations in South Africa (www.governance.org.za).

This code was developed in response to King III that attempted to impose corporate values on the sector and it specifically chose to avoid “the imposition of inappropriate, unattainable and unaffordable standards” whilst recognising “the best interests of beneficiaries and of society as a whole, in all its diversity”. The code was established to promote good governance and best practice and to ensure that the sector was not regulated by either the state or the corporate sector. The issue of self-regulation still has to be debated.

In terms of the code, it was noted that NPOs are established to “address a need or advance a purpose in the public interest” and that success was measured not merely by “a reference to size, capacity and resources, but by commitment and effectiveness in achieving their goals”. This is very different from the corporate sector and social impact is very different from profit.

The NPO sector includes a wide range of organisations with different social objectives. Besides those that provide welfare services (anything from child welfare, care for the aged, palliative care and care for the disabled); others are involved in the environmental space, housing, education, health, rural development, youth development, gender rights, human rights, social justice and policy development.

The majority of NPOs in the country have small budgets under R500,000 a year. Those that are more substantial must put effective accountability systems in place to satisfy increasingly stringent donor requirements. These include audited financial statements, both narrative and financial reporting and the inclusion of monitoring and evaluation systems. In addition, donor trends show that there is an increased focus on “capacity building” of grantees in the areas of organisational development, governance and financial sustainability. Funds are being set aside by donors to ensure that their own grantees have effective business systems in place to ensure delivery and accountability.

Like any investor, those who fund non-profit organisations should undertake a level of due diligence to ensure trust and confidence exists between the funder and the recipient of those funds. Meetings with the Director and the implementing staff, a review of who serves on the board and a check of the audited financial statements would be basic to any decision to make a grant. It might be well to check with the organisation’s other donors to assess their experience of the organisation, whether it delivers on its promises and provides timeous and accurate reports on their work.

There are currently some attempts by “rating agencies” that claim to undertake the due diligence required for fees, both from the organisation and also from the donor. Any entity that develops such a database of non-profits would require significant resources to maintain the information as the data would be changing regularly. Relying on a third-party agent could also be a disappointing route for a donor – what looks good on paper is not always what happens on the ground. There is simply no short cut to effective grantmaking – it is always based on trust and good relationships.

Overall, scaremongering about corruption in the non-profit sector is totally unnecessary. As mentioned, there is no doubt corruption in the NPO sector, but to paint the whole sector with the corruption brush is a disservice to the myriad of organisations and their volunteers that have played a critical role in sustaining South Africa through some very difficult and complex times. DM

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