Transparency Takes Work Create a Culture of Trust Through Transparency

By Kathleen M. Clayton, CPA, PSA PRINCIPAL | CLARK, N.J.

In its “Trust in Civil Society 2022 Report,” the Independent Sector notes, “Public trust is the currency of the nonprofit sector.” Eighty-three percent of the respondents in the study indicated that “nonprofits must earn my trust before I support them,” and only 56 percent said they trust nonprofits, down from 59 percent in 2020.

Trust is given based on two attributes: delivering on promises and doing the right thing to improve society. For many, trust in nonprofits is a perception or an assumption; it should be more tangible — and transparent.

Being open and honest — that is, transparent — with stakeholders takes work. Some transparency initiatives are more challenging than others.

Financial transparency basics

Some financial transparency is legally required while other information can be provided voluntarily. Some ways for nonprofits to practice and demonstrate financial transparency include:

• Communicate truthfully with donors about how their gifts are used and how that aligns with the organization’s mission.

• Make it a priority to establish donor and data privacy policy.

• Be honest about your tax exempt status.

• Make information such as 990s and annual financial statements easily accessible.

• Make current financial data accessible and easy to comprehend.

• Make it easy for interested parties to request organizing documents such as your exempt application and the IRS determination letter.

• Send current, timely donor acknowledgements.

Rating groups

Most of the well-known rating agencies attempt to measure transparency in their rating systems. Many stakeholders will look to these ratings when they evaluate your organization.

• Charity Navigator assesses four key domains, including accountability and transparency, using their Encompass Rating System, then awards a zero- to five-star rating. Charity Navigator is the largest nonprofit evaluator and rating service.

• Guidestar by Candid issues four “Seals of Transparency.” Their “basic” seal asks for eight data points with eight optional points before assigning the rating. Their highest seal, “platinum,” requires information on mission, donating, grant-maker status, leadership, programs, branding details, financial data, board data, strategic plan, and metrics demonstrating progress on your mission. Candid is known to be the largest source of information on nonprofits.

• CharityWatch rates organizations from A+ to F, and is not strictly focused on financial information.

• The Better Business Bureau (BBB) evaluates five characteristics of charities: accountability, governance, result reporting, finances, and transparent communications. Organizations can receive the BBB Charity Seal.

If an organization has achieved any of these ratings, they should be noted on its website, social media, and written communications. It is time well spent for nonprofits to focus on keeping these ratings current as a means of highlighting their transparency. Also, know that the IRS and most state charity compliance regulators post relevant, publicly accessible information.

Organizational transparency basics

Transparency goes hand-in-hand with good governance. Ways to demonstrate transparency in governance include:

• Publish a list of board members and their affiliations.

• Publish a directory of key staff members.

• Adopt conflict-of-interest policies for board and staff.

• Adopt applicable IRS best-practice policies, including officers’ compensation, whistleblower policy, and document retention practices.

• Publish current ratings by Charity Navigator, Guidestar, CharityWatch, and BBB.

Transparency challenges

Organizations spend a great deal of time creating policies, updating rating directories, and gathering important financial and governance data. It’s only time well spent if stakeholders can access what they are seeking, so communicating with constituents is vital.

CHALLENGE ONE: Communicating financial data

Financial information and ratings by the big rating agencies may not be based on current data. Stakeholders searching for data often find information that is more than a year old. While the data may be easily accessible on websites, such as IRS.gov and Guidestar, readers often want more current information.

Audited financial statements are often seen as strategic tools for proving financial transparency, but often the timing of the audits only provides reasonable historical assurance to readers of those statements. IRS 990 Forms also demonstrate some level of financial legitimacy, but again are primarily historical documents. Studies have found that many donors are more interested in prospective financial data, such as budgets, than in historical financial data like audits and tax returns.

Annual reports or impact reports are also historical in nature, though they give the organization more leeway in highlighting progress and outcomes and often serve as a critical tool in communicating with constituents. While there are some drawbacks to historical data, it is still a common and recommended practice to make financial statements and tax returns (990s) available on the organization’s website.

CHALLENGE TWO: What else do stakeholders want to know?

Some information is relatively easy to gather, such as listings of executive staff and board members. Policy information, including whistleblower and conflict-of-interest policies, is often made available to the general public on the organization’s website. Organizations must spend the time required to develop relevant data to meet the needs of its stakeholders, data often not captured in accounting reports. Many call this “social information.”

People want a platform to connect with causes they are interested in and the nonprofits that support those causes. Organizations must develop a system of impact reporting, that is, measuring performance against goals and mission. The most sought-after information, measuring outcomes and long-term impact, is a challenge for many nonprofits; collecting data on the organization’s activities is key and a good way to get started. Making that information easily accessible is another key element of being transparent.

In recent years, stakeholders have been looking for information beyond the basics, such as:

• How spending decisions are made and by whom?

• What internal controls does the organization have in place?

• Is the organization’s exempt status current?

• How are restricted assets used?

Many stakeholders, including donors, are influenced most by data or policy, but just as many are story driven. They are more likely to support local community-based organizations because they can see the direct impact of the organization’s programs. Honest storytelling can be an effective way to attract and influence prospective stakeholders. Videos and social media postings have become a popular method for communicating snapshots of success stories and other touch points. They don’t have to be professionally prepared, just open, honest, and current.

CHALLENGE THREE: Communicating with myriad constituents

Different stakeholders will access information differently. Some will use online sources and texting, while others visit the organization’s website. And do not be surprised that some still use email, telephone, and voicemail to communicate with your organization. It is a challenge for most nonprofits to manage all communication channels.

Some basic recommendations for communicating include:

• Keep your website current.

• Maintain a current online presence, particularly with third-party rating sites such as Charity Navigator and the BBB.

• Provide contact information for key staff members.

• Update all publicly available data as often as possible.

• Be absolutely clear in all solicitation materials about how donations will be used.

• Consistently deliver new news.

• Be honest with good and bad news.

• Make it easy for constituents to participate, to ask questions and get answers or give feedback.

• Respond to inquiries in a timely and open manner … always.

Yes, transparency takes work. And there are obstacles, including the wide variety of stakeholders, competitiveness within the nonprofit sector, and difficulty in measuring achievements relative to your goals and mission. Building trust through transparency is the responsibility of management and the governing body. It takes work, but the ultimate prize is increased public trust, more financial resources, and organizational sustainability.