The Donor Who Wants Control
A donor offers a $250K gift to a $1.5M nonprofit to fund a new after-school program. The donor wants: (1) to approve the program director hire; (2) to receive quarterly financial reports; (3) to have the program named after them; (4) a clause allowing them to withdraw funds if they are not satisfied with the program's direction. The ED is enthusiastic because the gift would double the program budget. The board is concerned about mission drift and liability. The organization has no gift acceptance policy. The donor is also a major vendor to the organization, providing $50K in services annually. The finance committee notes that the gift would create a dependency on one funder for 17% of the budget.
1. What are the key ethical and governance issues with accepting this gift, and what should the ED recommend?
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Key issues: (1) Donor control-approval of staff hire and withdrawal clause compromise organizational autonomy and could violate IRS rules if the donor gains control over the nonprofit's operations; (2) Conflict of interest-the donor is also a vendor, creating a self-dealing risk; (3) Mission drift-the program may be shaped by donor preferences rather than community needs; (4) Financial dependency-17% of budget from one donor is risky; (5) No gift acceptance policy-the board lacks a framework to evaluate such gifts.
Recommendation: Do not accept the gift as proposed. The ED should propose a counter-offer: (a) a gift agreement that specifies program outcomes and reporting but does not give the donor operational control; (b) naming rights subject to board approval and consistent with organizational policy; (c) removal of the withdrawal clause, or a limited right to redirect funds to a similar purpose; (d) disclosure of the vendor relationship and recusal from any decisions involving the donor's company. The board should adopt a gift acceptance policy before negotiating further. The ED should also explore diversifying funding to reduce dependency.
2. How should the board handle the conflict of interest with the donor as a vendor?
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The board should require the ED and any board members with a relationship to the donor to disclose the conflict in writing. The donor should not be involved in decisions about the vendor contract. The board should review the vendor contract to ensure it is at arm's length and competitively priced. If the gift is accepted, the organization should establish a firewall between the donor's philanthropic role and their vendor role. The board should also consider whether accepting the gift creates an appearance of impropriety that could damage the organization's reputation. The audit committee should review the arrangement annually.