It’s any non-profit’s worst nightmare: a February 18, 2010 CBS News 6 p.m. national story by Katie Couric that highlights a complaint of misused funds by a charity. Where are the policies that guide the governance, ethics, and accountability of the non-profit?

This article will serve as a case study to highlight the importance of several very obvious issues that could have been easily prevented. It is not intended as a review of “Feed the Children” or an evaluation of the need or the effectiveness of its program. Rather, it is a reaction to the elements presented in the news story and an illustration of how proper policies can prevent and/or guide an organization during a time of accusation or investigation, neither of which should necessarily be bad for any non-profit. CEGA believes that all non-profits need ‘a seal of approval’ and the problems highlighted by the “Feed the Children” news story provide an excellent learning opportunity.

By way of brief background, “Feed the Children” was reportedly the fifth largest charity, with annual contributions of over $1 billion. CBS reported on a very public dispute between its founder and his daughter, who is now employed by the charity. Allegations of misuse of funds have been made public in various lawsuits and countersuits. A watchdog organization reports that the charity has been questioned for over a decade about its operation. Among the very serious allegations are that only 15% of the funds raised directly support the need for which the charity was established. Recent allegations include disaster relief efforts in Haiti, whereby camps have been established to feed hungry children. The investigation by CBS into the operation of a Haiti relief camp indicates considerable confusion and misinformation surrounding performance of the charity and the role it was to play. The United Nations alleges falsehoods by the charity. It has been reported that no meals were served by the charity to any children after two weeks of camp operation. Amid the investigative reporting for the CBS story, the Haiti-based coordinator for “Feed the Children” resigned last week.

Let’s start with what we believe is the single most important policy for any non-profit: its conflict of interest policy. Such a policy could be very brief – or very inclusive – or it could include specific subpolicies, but the conflict of interest policy should guide an organization whenever there is an issue, for example, between its founder and family member who is an employee of the charity. Such a policy may rightly prohibit the employment of a family member, and may describe the types of financial transactions that are and are not acceptable by the charity. For example, spending charitable funds on the lifestyle of any employee is not good policy for any non-profit. If such a policy is in place, the governing body, presumably its board of directors, has a working tool in place to measure compliance. And, if the policy has been adopted and is on record, it states, for all donors to see, the intentions of the organization.The absence of such a policy does not mean the intentions were not appropriate, but it sure makes it difficult to prove, to measure, and to govern. Having any policy in place before a problem occurs can only be considered wise and proactive. CEGA believes that such proactivity will become increasingly important as donor contributions become more and more discerning.

While the conflict of interest policy should provide the cornerstone for any set of non-profit policies, many other policies can be customized to meet the specific needs of an organization. Examples include: investment policies, policies that guide administrative costs versus direct services (which are required reporting for non-profits in many states), employment policies that restrict the hiring of family members and, more specifically, establish an arms-length distance between the board of directors and the staff, so that family members cannot serve on the board that appoints other family members as staff.

Other examples include strict guidelines on appropriate expenditures, particularly all that fall under the category of “entertainment and expense reimbursement” and policies that outline the compensation methodology adopted by the board. Absence of such policies leaves open the opportunity for allegations and does not provide the board with the tools for making clear determinations when circumstances arise. Let us hasten to add that the mere adoption of policy does not ensure the proper operation of the non-profit; the intent of the policy must become part of the fabric and culture of the organization, which accrues to its benefit over time.

When a non-profit faces an accusation that would destroy the public trust placed in that organization, it is nothing short of tragic to learn that the operation was not guided by sound policy and guidelines. In the wake of Enron and Madoff, a wise non-profit would do well to anticipate increased regulation of the likes of Sarbanes-Oxley and to move boldly toward self-regulation as a competitive advantage over its peer organizations. Why? Because enlightened self-governance is always the right thing to do. And, compliance with the IRS regulations that enabled the establishment of the charitable organization is the law.