This paper examines and compares the ethical responsibilities and liability exposures of non-profit organizations and for-profit corporations. It explores how public scrutiny following major corporate scandals and events such as the September 11 attacks prompted both sectors to adopt stricter ethical codes and transparency practices. Key topics include donor fraud, fund misuse, employment discrimination, internet liability, and product safety lawsuits. The paper concludes that while the specific liability concerns differ between the two organizational types, both ultimately hinge on the same fundamental principle: honesty and full disclosure in dealings with the public.
There have been many scandals in recent years involving large for-profit businesses. These scandals stem from both ethical and legal failures, and many have resulted in lawsuits and even criminal proceedings against those involved. The true extent of corporate liability is only beginning to be fully understood in our society. Large corporations are now watched more closely than ever before, to ensure they are acting in an ethical manner. For their part, corporations are exercising extra care in their actions and statements, fully aware of the liability they face should their conduct fall outside socially acceptable bounds.
With so much focus on the ethics and liability of large corporations, the question naturally arises of how much of this, if any, applies to non-profit organizations. Do non-profits have the same ethical standards to adhere to as for-profit companies? Do they perhaps operate under a different set of ethical practices? Do non-profits face liability to the same extent as for-profit companies? This paper compares the ethical and liability issues of both non-profit and for-profit organizations.
While it may seem that non-profit organizations should not receive as much public scrutiny as for-profit companies — after all, non-profits exist to help people, not to generate profit — the fact is that there is just as much potential for corruption in a non-profit corporation as there is in a for-profit one. This realization struck the public forcefully in the aftermath of the September 11 terrorist attacks. Following those attacks, Congress began to subject non-profit organizations to the same rigorous scrutiny it had long applied to for-profits, in order to protect a trusting public and those in genuine need from unscrupulous and fraudulent charities.
Because of this newfound concern about the potential corruptibility of non-profits, many organizations are adopting their own ethical standards, while some national associations that oversee multiple non-profits are developing codes of ethical practice for the organizations in their care. A growing number of charity watchdog groups now exist with the explicit aim of keeping charities honest in their dealings with the public. While we would all prefer to believe that charities maintain high ethical standards given their philanthropic purpose, it must be recognized that charities are only as ethical as the people who run them. Many an unscrupulous individual, or board of directors, has treated donated funds as a personal money pool or directed donations toward purposes that donors did not intend or know about. The new ethical standards being adopted by charities and associations nationwide are designed to prevent exactly these situations.
In today's environment, no organization — private or public — can afford to ignore liability issues. Present and former employees, donors, volunteers, board members, and even recipients of funds from non-profit organizations can all be potential sources of lawsuits. Litigation can cost a non-profit hundreds of thousands of dollars, which can destroy the organization entirely and divert much-needed resources away from those the charity exists to serve. That is an unfortunate consequence of our increasingly litigious society.
Lawsuits against non-profits can arise from a variety of circumstances. Gender or race discrimination in the distribution of funds or in hiring decisions can trigger legal action, as can sexual harassment and age or disability discrimination. One type of lawsuit particularly common in the non-profit sector is the retaliation lawsuit — a claim that the organization retaliated against a complainant through actions such as failure to promote, job reassignment, or termination of services.
In recent years, a growing number of donors have sued non-profits over the use of their contributions. This trend has made it increasingly important for non-profit organizations to carefully document and disclose how they use their funds. A well-known example involves the type of children's charities frequently seen advertising on television, soliciting sponsors for impoverished children overseas. Donors give a monthly sum to supposedly support one specific child, and the organization sends pictures and letters purportedly from that child. When it was discovered that many such charities did not direct each donor's funds to a single child but instead pooled all contributions to support broader programs, numerous lawsuits followed, as donors felt they had been deceived. Other lawsuits have been filed against non-profits for spending a disproportionate share of donated funds on administrative costs, when donors believed their money was going directly to those in need. In response, non-profit organizations are now taking extra care to publicly disclose precisely how donated funds are spent.
The internet represents another significant area of liability for non-profit organizations. By maintaining websites, non-profit groups become publishers and assume all of the legal risks that publishers face, including defamation, copyright and trademark infringement, and invasion of privacy. Data theft by hackers and the destruction of information by computer viruses can also expose non-profits to litigation. Even an organization that has done nothing wrong may find itself the target of a lawsuit arising from its online presence.
To protect against potential lawsuits, today's non-profit organization must carry adequate insurance coverage. Increasingly, non-profits are required to hold higher and higher levels of insurance. This costs money, and some donated funds must be directed toward insurance premiums. The organization must then carefully document and publicly disclose this use of funds to avoid inviting further legal challenges. In this way, liability insurance requirements for non-profits create something of a vicious circle.
For-profit businesses have also found it increasingly necessary to present an ethical public image, particularly in the wake of the Enron scandal and other high-profile corporate failures. Public trust in for-profit corporations reached historic lows following these events. Because public image is closely tied to profitability, and for-profit corporations exist to generate profit, it is essential that these companies present themselves as ethical in their dealings with the public. A company perceived as dishonest risks losing customers — and, ultimately, its viability as a business.
"Corporate ethics codes and executive accountability"
"Product safety, false advertising, and supplement claims"
It is clear that both non-profit corporations and for-profit companies have ethical and liability issues that they are dealing with in this day and age. Both non-profits and for-profits must ensure that they are being completely honest with the public and practicing full disclosure in order to avoid any hint of secrecy in their organizations. In that respect, the ethical standards required of both types of organization are much the same.
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