8/9/2019 On Philanthropy - Good Governance Matters in the Marketplace - Susan Raymond

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Good Governance Matters in the Marketplace

By: Susan Raymond, Ph.D., 10/18/03

An extraordinary analysis by GovernanceMetrics International should provide food

for non-profit thought, not least because it may be providing food for

philanthropists' thoughts.

The study analyzed the stock market performance of corporations over time relative to the

strength of their governance. There is a market price to be paid for sloppy boardrooms.

Companies with below average governance under-performed the market average, and

performed exceedingly less well than those with good governance. And the worse the

governance, the worse the stock performs. For the 1,600 firms studied, those with a

governance rating "well above average" experienced an annualized return of 5.37% for the

three years ended August 12, 2003, compared to a -13.27% return for those companies with

governance measured as "well below average."

People do not tend to invest in organizations they believe they cannot trust.

What is striking about these data relative to nonprofits is that the matter of trust may be an

unrecognized blind spot for non profits. Overlay the commercial governance data on an

October 2002 address to the Ethical Corporation Magazine Conference by Richard Edelman,

President of Edelman Worldwide PR. Edelman presented survey data on trust in institutions in

the U.S. and Europe. In the United States, a smaller portion of those surveyed trusted

nonprofits (38%) than trusted business (41%) or government (43%). People trust nonprofits

less than they trust Wall Street and Washington!

When the question was asked relative to specific organizations, of the 18 most trusted

brands in the United States, only three (World Wildlife Fund, Amnesty International, and

Greenpeace) were nonprofits. More people trust Coca Cola than trust Amnesty International.

Why should this matter? Two reasons.

First, individuals and institutions with significant resources are now paying attention to

corporate governance, and increasingly link governance with performance. It is not

unrealistic to expect that they will train these same metrics on the nonprofits that they

support. A dollar in the stock market and a dollar in the charitable coffer may come to be

seen as representing equivalent expectations about organizational performance. Failure to

meet the expected measure may result in diversion of philanthropic resources to

organizations that do perform on expected measures.

Of course, it is true that we all lead inconsistent lives, and that what we expect of some we

do not expect of others. But, banking on philanthropy's willingness to judge nonprofits

differently from commercial organizations may be a risky bet in these times of attentive

attorneys general.

Second, of course, it seems not to be just Daddy Warbucks who has a bee in his bonnet

about trust and accountability in the marketplace, and whose concern may spill over to

nonprofits. Harry and Maude in Dubuque don't seem too consumed with trust either. When

the few deep coffers of major philanthropic leaders in their boardrooms and the myriad

wallets of America in their living rooms are skeptical, it is difficult not to conclude that storm

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clouds are gathering.

What to do? Accept the validity of the concern and develop a metric. Nonprofit leadership, in

the form of its leadership associations, should develop an explicit set of measures of

governance and accountability. They should then have the courage to apply these measures

to their nonprofit constituency, score the nation's top 200 nonprofits in terms of good

governance, and publish the results. Invite the Wall Street Journal and the Small Town

Chronicle to examine the data openly. Make the assessment every year, and also publish

advances and declines in performance.

Insane, you say? Controversial? Even suicidal? Perhaps. As leaders, why should you take the

risk? Because the alternatives are riskier still. Continued problems of trust, if unanswered,

will erode nonprofit support. Moreover, under conditions of widespread skepticism,

measurement of relative trustworthiness and governance will take place eventually anyway.

Do it before some clever entrepreneur or ambitious attorney general does it for you. You are

less likely to like their assessment than your own.

Sources

K Brown, "Weak Boardrooms and Weak Stocks Go Hand in Hand," Wall Street Journal,September 9, 2003.

R Edelman "Rebuilding Public Trust Through Accountability and Responsibility," Address to

the Ethical Corporation Magazine Conference, October 3, 2002

About The Author:

Dr. Susan Raymond is Managing Director, Research, Evaluation, and Strategic Planning for

Changing Our World Inc., a leading US fundraising and philanthropic services company.

You may contact the author at: sraymond@changingourworld.com

2007 Changing O ur World, Inc. All Rights Re served.onP hilanthropy is a service o fChanging Our World, Inc., an Omnicom company

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