June 12, 2018

To be seen, not heard

In February 2006, The Economist heralded a new era of giving it called philanthrocapitalism.1 This new way mirrors business. Entrepreneurs are more than cheque writers supporting charities. Instead they are hands-on, engaged, bringing their business skills and innovative ideas to scale by investing their time and energy. 2  Baby Boomers do good giving differently. Their way is a stark contrast to rich donors of the traditional Silent Generation. The Silent Generation typically defers to authority and gives by the established rules.3 This week, Canadian philanthrocapitalists were dealt a hard blow by Justice Morgan’s decision.

Morgan’s decision in Faas vs CAMH addressed donors’ rights. Donors, or anybody, can ask the courts to ask the Ontario’s Public Guardian and Trustee to investigate a charity.4 A judge hears the reasons and decides if it merits an investigation. In denying Faas’ case to proceed, Morgan writes

"the heart of the issue is whether a donor is like an investor in a business who can require detailed report[s] and can expect to be consulted on the implementation of a funded program.5

In short, no. Like good children, donors should be seen - hold the big cheque, smile at the camera - but not heard.

At the centre of this case was one donor’s request for meaningful financial transparency. Like many donors, he was seeking more information about how a restricted gift was spent by the charity. Faas v. CAMH highlights a wide gap between professional standards of transparency and existing charity practices.

Transparency and accountability have always been the largest challenges to social investors.6 Transparency is the cornerstone of investing. It requires clear and meaningful financial disclosure. In vying for Baby Boomer dollars, charities bandy around business terms like ‘return on investment’ and ‘impact’. Yet charities rarely report the meaningful information an investor needs to assess such impact or returns.

It comes down to defining “meaningful transparency”. Professionals across broad industries, like lawyers, mechanics, counsellors, and engineers, provide spending breakdowns. For example, legal bills show costs like billable hours, those of partners, associates and clerks, and other costs. This is common practice. Charities are not held to this professional standard. Unless there is fraud, Morgan finds such “granular” details excessive.

“Absent evidence of financial misdeeds, [the donor] has no particular right to a detailed accounting of [the charity’s] program and its use of funds.” 7

Without an itemized bill, can a donor assess financial management? Donor cases rest on money matters. The public trustee has no mandate to oversee administrative or management wrongdoings, only financial mismanagement.8

 

Raising more questions about misappropriated donations

Beyond financial transparency, it is unclear how Morgan’s ruling affects restricted donations. Restricted donations are very popular. Donors like giving to a particular purpose - a scholarship, a new building, even goats. Charities are keen to woo donors. Fundraisers offer specific purposes and programs as a powerful incentive to get donations.9 Programs promise to be “new”, “transformative”, and “innovative”.

What if a donor gave millions to fund a new scholarship for women in engineering and all, or part, of the donation simply paid for a charity’s existing programs and staff? So long as a) the charity uses the money for its charitable purposes (general operations), and b) there is no evidence of financial mismanagement, are there no grounds to investigate?

Misappropriation is when donations, given for a specific purpose, are diverted and spent on other charity programs. Misappropriation carries serious penalties. If a court finds misappropriation, the charity directors are found in breach of duty, could be fined, and face up to a year in jail.10 Given these severe penalties, charities must have stringent internal controls to handle restricted donations.

According to experienced philanthropic advisor, Doug White, donations for special purposes are often misappropriated. He urges donors to “be far more diligent in tracking how their money is used. They need to hold the charity to account.”11

Yet Morgan’s decision effectively prevents donors from tracking how charities use their money. Furthermore, fighting for this right is expensive. This donor, who tried to hold a charity to account, pays his own and an additional $130,000 in legal costs.

 

In the Public Interest

The provincial trustee is only called on to investigate financial mismanagement at a charity when it serves the public interest.12 Ontario’s Charities Accountability Act does not explicitly define this “public interest”. This is up to a judge’s discretion. Morgan refers to case law to suss out what the public interest is - and what it is not. One donor’s appeal for transparency does not merit an investigation. Public interest must be more than news headlines.13 As a public investigation is paid for by the public, it is “to be taken very seriously”:14 it “should not be initiated lightly. Charities …should not quickly be subjected to the disruption and expense of such an inquiry”.15 Morgan’s decision is that further investigation of Faas v. CAMH is not in the public interest.

Consider these public interest facts:

  • In 2016 (the most up-to-date information), 5,397,060 Canadians donated $8.9 billion to charity.16 In Ontario, where the Charities Accounting Act applies, 2,135,570 donors gave $3.9 billion to charity in 2016.17 
  • 30% of Canadian donors (1.6 million donors) report not giving more to charities because they believe their money will not be used efficiently or effectively.18 They have unanswered questions about how charities spend money.

Uncertainty around charity spending is undermining public confidence and support. This harms charities too. Perhaps addressing this is in the public interest.

Donors with a “bad gut-feel” about how their donation was actually spent rarely seek justice. Most stick to the upper-class code of silence about all things unpleasant.19 Morgan’s decision sends a chilling message to donors: charities do not have to account for spending using standard professional practices, and donors’ concerns, without evidence of fraud, have no recourse.

Little wonder Canadian donors are paying pledges in installments. Pledges are not legally enforceable. Intelligent social investors give slowly. If clear answers to basic questions are not forthcoming, donors walk away.  

Ironically, this legal case highlights how similar giving and investing are. As with investments, some grants exceed donors’ expectations, some fall short. Just like investors, donors will naturally experience many "learning opportunities". Philanthrocapitalism lives on.

#DonorsToo

Read more:

Lessons learnt the hard way: Doug White’s recommendations for donors in making restricted gift

Uncharted waters: Donor rights in Canada

Abusing Donor Intent: Doug White's book about the epic Robertson v. Princeton University lawsuit and other American legal cases

Sources

1. The Economist, “The birth of philanthrocapitalism – The leading new philanthropists see themselves as social investors”, February 23, 2006 

2. Matthew Bishop, Michael Green, Philanthrocapitalism – How the Rich Can Save The World, Bloomsbury Press, 2008

3. Time, November 5, 1951 http://content.time.com/time/subscriber/article/0,33009,856950,00.html

4. Charities Accounting Act, RSO 1990, C.10. Section 6 (1)  https://www.ontario.ca/laws/statute/90c10

5. Faas v. CAMH, 2018 ONSC 3386, June 6, 2018

6. Wikipedia, “Philanthrocapitalism” https://en.wikipedia.org/wiki/Philanthrocapitalism

7. Faas v. CAMH, 2018 ONSC 3386, Section 63

8. Boldrini v. Hamilton Naturalist Club, 1995 Carswell Ont 3756 paragraph 8

9. Ellis Carter, Managing Donor Restricted Gifts”, Charity Lawyer, April 14, 2014 http://charitylawyerblog.com/2014/04/14/managing-donor-restricted-gifts/

10. Ontario Charities Accounting Act “If a charity director does not apply property, fund, or money in the manner directed by the will or instrument (donor giving agreement), and if the court finds spending misallocations then,

  1. in addition to the directors of the charity being found in breach of trust,
  2. the directors could be fined, and
  3. face a maximum of 12 months in jail.

Terrance S. Carter, Donor-Restricted Charitable Gifts: A Practical Overview Revisited II (originally published The Philanthropist Fall 2003), 2006 Canadian Association of Gift Planners Annual National Conference, p.43 http://carters.ca/pub/article/charity/2006/tsc0421.pdf

11. Doug White, Abusing Donor Intent: The Epic Lawsuit between the Robertson Family and Princeton University, Paragon House, 2014

12. Boldrini, supra paragraph 5

13. Ruffolo v. Sun Life, 2008, OJ No 599, at paragraph 72.

14. Faas v. CAMH 2018 paragraph 56

15. Stahl, supra paragraph 11

16. This conservative figure is reported by Statistics Canada. The Charities Directorate, a division of Revenue Canada, reports a far larger figure of $17.5 billion that includes money paid in fundraising events (not tax receipted) and foundation donations in 2016.

17. Statistics Canada Cansim Table 111-0001 Charitable donations – Canada, provinces and territories https://www150.statcan.gc.ca/n1/daily-quotidien/180214/t001a-eng.htm 

18. Stats Canada, Spotlight on Canadians: Charitable giving by individuals, 2016, February 14, 2018 https://www150.statcan.gc.ca/n1/pub/89-652-x/89-652-x2015008-eng.htm December 16 

19. Sammy Hudes, “CAMH donor says more transparency needed about money”, Toronto Star, October 16, 2016 https://www.thestar.com/news/gta/2016/10/16/camh-donor-says-more-transparency-needed-about-money.html

 

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