Toronto Star article “Charity boss hires own firm to fundraise” raises fundraising ethical issues

October 16, 2010 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, Ethics and Canadian Charities

Here is an interesting article by Kevin Donovan of the Toronto Star entitled “Charity boss hires own firm to fundraise” in which he describes some of the dealings at the Oshawa Hospital Foundation.  There is also a response by the Oshawa Hospital Foundation. [Update - There are further articles, including in the Toronto Star that discuss this issue and they are noted below]

http://www.thestar.com/news/article/873467—charity-boss-hires-own-firm-to-fundraise

Here are the Charity Directorate of CRA “Indicators of Concern” in their Fundraising Guidance http://www.globalphilanthropy.ca/index.php/blog/canada_revenue_agency_guidance_on_fundraising_by_canadian_charities/

11. Areas of concern that could lead to further review
The following is a list of indicators that could cause the CRA to further review a registered charity’s fundraising activities.

a.Sole-source fundraising contracts without proof of fair market value.
b.Non-arm’s length fundraising contracts without proof of fair market value.
c.Fundraising initiatives or arrangements that are not well-documented.
d.Fundraising merchandise purchases that are not at arm’s length, not at fair market value, or not purchased to increase fundraising revenue.
e.Activities where most of the gross revenues go to contracted non-charitable parties.
f.Commission-based fundraiser remuneration or payment of fundraisers based on amount or number of donations.
g.Total resources devoted to fundraising exceeding total resources devoted to program activities.
h.Misrepresentations in fundraising solicitations or in disclosures about fundraising or financial performance.

If the Toronto Star story is correct then it seems that a number of the “Indicators of Concern” apply to this particular case including sole-source fundraising contracts and non-arms length fundraising contracts.  While such conduct, if it is as described in the article, is not prohibited it is an “indicator of concern” under the CRA’s fundraising guidance and registered charities should be aware that indicators of concern will potentially cause CRA to more closely examine the fundraising operations of the charity.

Also I looked at the T3010 filings which are located at http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html for the THE OSHAWA HOSPITAL FOUNDATION and they seemed to raise more questions than they answered.

Here is a response from The Oshawa Hospital Foundation.  http://theohf.com/images/october_11_2010.pdf

it is interesting to see the website for the Oshawa Hospital Foundation they note:

“100% of every dollar raised goes directly to funding programs and initiatives for LHO.”  This does not seem to be consistent with the T3010 filings of the charity.


[Update _ here is another story on the matter entitled “Oshawa Hospital Foundation defends CEO who used own firm to raise funds” - http://newsdurhamregion.com/news/article/163645]

There was also a further Toronto Star article entitled “The Star gets action: Oshawa charity launches fundraising review”
http://www.thestar.com/news/article/876608—the-star-gets-action-oshawa-charity-launches-fundraising-review

The article discusses how the Oshawa Hospital Foundation is going to be doing an independent review.

“Late Friday, after the Star sent more questions to Ball, she responded by releasing a statement saying the foundation board will “retain third party experts” to review “controls and practices” at the charity. No timeline for completion of the review was given.  Ball said a competitive process would be used to hire these experts. The Star investigation pointed out the foundation hired Szeman’s company Uncommon Results in 2005 without a competitive process.”

Is it not a little ironic that a competitive process is going to be used for a small contract to review the practices of the Oshawa Hospital Foundation including that there is not a competitive process for the much larger contract in question?

The Toronto Star notes;
““In her statement Friday, Ball said she is seeking confirmation in the review that how the charity does business “conforms to best practices in the broader charitable sector.” She said that “governance practices have evolved considerably in a relatively short period of time” and the charity wants to ensure it is “keeping pace.””

Do you really need a review to show that non-tendered contracts are not best practices?  It might not be a bad idea for someone at the Oshawa Hospital Foundation to read the CRA’s guidance on fundraising which I refer to above. 

“a) Sole-source fundraising contracts without proof of fair market value

A sole-source contract is a contract entered into where only one party was given an opportunity to make a proposal to the charity. Sole-source contracts for fundraising may lead to an excessive or disproportionate private benefit, which would make the fundraising unacceptable. Any private benefit associated with a charity’s operations must be a minor and incidental by-product of its work.
If a charity enters into a sole-source contract for fundraising services, it should be able to demonstrate that it paid no more than fair market value. Generally, this will show that the charity is acting reasonably in entering into the contract, and will address any concerns that the private benefit arising from the arrangement is excessive or disproportionate. However, other considerations related to the amount or percentage of public benefit may also apply. See Conduct that results in more than an incidental or proportionate private benefit to individuals and corporations.”


While sole-sourced contracts are not “prohibited fundraising conduct” the burden is definitely on the charity to show “proof” of fair market value.  The Oshawa Hospital Foundation may well be able to show proof that the services were obtained for fair market value or less - however there is no question that this is not “best practices in the broader charitable sector”.


Furthermore the CRA Guidance on Fundraising provides:

“b) Non-arm’s length fundraising contracts without proof of fair market value

If a charity enters into a non-arm’s length contract for fundraising services or supplies without determining the fair market value of the work to be undertaken, there may be an undue benefit associated with the contract that makes the fundraising unacceptable.  The sanction provisions of the Income Tax Act with respect to registered charities include a penalty related to a charity conferring an undue benefit on any person. [Footnote 8] If the charity enters into a non-arm’s length contract for fundraising services or supplies, it should be able to demonstrate the amounts paid either reflect or are less than the fair market value. Generally, this will show the charity is acting reasonably in entering into the contract, and will address any concerns that there is an undue benefit arising from the arrangement. However, other considerations, such as whether the arrangement is necessary to fulfill the charity’s purposes, may also apply. See Conduct that results in more than an incidental or proportionate private benefit to individuals and corporations.”


So again non-arms length fundraising contracts (like contracting with a company partially owned by the President of the charity) are also not a best practice and any non-arms length fundraising will be potentially an “indicator of concern”.

When you add sole-source and non-arms length together there will be greater concern.

And just in case anyone is confused when a charity employee bids on an item at an auction - they need to actually pay, like everyone else, for the item.  One should not later say that it is a “bonus” and not require payment to the charity. 

The Star article goes on:

“A series of queries by the Star (some over the past month, others made Thursday) of other questionable practices will go unanswered, Ball said.”  “After careful consideration, we will not be releasing the documents you have requested,” Ball said. “The board and I have decided to deal with these issues internally, not have them used as fodder for newspaper headlines. I hope you can see that this is the most appropriate, prudent course,” Ball wrote in an email. ““We are responding to the people who matter to us the most, our donors,” Ball said in her statement.”

There are many stakeholders in any charity.  In a presentation that I have delivered entitled “Governance 101” (no kidding) it sets out some examples of stakeholders
• Members
• Board
• Employees of charity
• Volunteers
• Government (CRA, federal, provincial, and municipal)
• Partners
• Media
• Public
• Donors
• Beneficiaries, clients

To somehow say “We are responding to the people who matter to us the most, our donors” is pretty ridiculous.  First of all if your donors mattered the most to you, some of this conduct probably never would have happened.  Secondly, a charity needs to be fair to all stakeholders, not necessarily treat them all equally or identically.  To say “We are responding to the people who matter to us the most, our donors” and we are not responding to others is also saying or implying that they could not care less what others such as the media, the public, the hospitals that receive funds, regulators, volunteers and others think about the matter. 

Another point I will just make is that this article proves quite definitively the point that you cannot just look to ratios when assessing the conduct of a charity.  While financial ratios have a place, it is a very small place in assessing the efficiency and effectiveness of a charity fundraising effort.  Ratios without significant context do more to distort than help understand.  No one in this case is criticizing the charity for its ratios - they are looking at other conduct.

A further point is that how you handle the media can be as damaging to the charity as the issues being raised by the media.

My suggestion to Canadian charities that fundraise is read the CRA’s Guidance on Fundraising.  While it does not answer every legal and ethical issue relating to fundraising it provides a good starting point.  As well all charities that do fundraising should be able to show that they are trying to comply with the requirements in the fundraising guidance.  Has your board been briefed on the requirements of the Fundraising Guidance?  While results are important, making a concerted effort and attitude is also important.

Here are some questions that I have come up with that perhaps would be helpful:


Have you read the CRA Guidance on Fundraising and do you understand it?
Have you provided a copy of the Guidance to your board of directors and senior staff?
Is your board of directors aware of the policy and its implications?
Are any of your activities prohibited?
Do any of the indicators of concern apply to your charity?
What are your charity’s ratios of cost to revenue?
Are your charity’s ratios in line with CRA expectations?
What steps are you taking to reduce your fundraising costs?
What steps are you taking to be more transparent and provide more disclosure?
What steps are you taking to enhance best practices?
Do you report regularly to your board about compliance with the Guidance?


For those interested in fundraising requirements here are also some upcoming seminars on fundraising and receipting by Canadian registered charities that I will be delivering:
http://www.globalphilanthropy.ca/index.php/blog/comments/upcoming_charity_law_seminars_across_canada_with_mark_blumberg_or_clip/

As well the Association of Fundraising Professionals (AFP) has some very good programming on fundraising issues.

If you feel that you are comfortable with the CRA’s Guidance on Fundraising, and most charities certainly don’t yet feel that way if they have actually read the document, then you might want to look at
“Charitable Fundraising:  Tips for Directors and Trustees” from the Ontario Public Guardian and Trustee http://www.attorneygeneral.jus.gov.on.ca/english/family/pgt/charbullet/bulletin-8.asp

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

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Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

mark@blumbergs.ca
416.361.1982
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