This week we welcome HBG Senior Consultant Heather Willis to The Intelligent Edge. Heather has been with HBG for over 11 years, and her breadth of knowledge on many topics – wealth held in ranching and farming and today’s topic, due diligence, are just two examples of why she’s frequently a go-to expert for all of us on the team. Today, Heather shares important issues to be aware of as you consider due diligence research for your nonprofit. ~Helen
The Good, the Bad, and the Ugly: Conducting Comprehensive Due Diligence
In the world of nonprofits, donors play a crucial role in funding and supporting various initiatives. Prospect research serves as the foundational step in any decision-making process with a potential donor, however, it’s equally important for nonprofit organizations to ensure that potential donors align with their values, ethics, and mission.
This is where due diligence comes into play. When a person closely associated with a charitable organization becomes the subject of a scandal, the organization’s reputation can be tarnished too. The stringent due diligence practices seen across the financial services industry to comply with regulatory standards are increasingly being adopted by nonprofit fundraising teams to protect their organization from financial and reputational threats.
By conducting thorough due diligence, nonprofits can establish productive and lasting relationships with donors while safeguarding their reputation and integrity.
Understanding Due Diligence on Donors
Due diligence involves the process of investigating and evaluating potential donors before establishing a partnership or accepting their contributions. This process goes beyond simply checking financial backgrounds; it delves into the donor’s history, motivations, and potential impact on the organization. Comprehensive due diligence helps nonprofits identify potential risks and ensure alignment with their goals.
Steps to Conduct Due Diligence on Donors
- Define Your Criteria: Clearly define the criteria that matter most to your organization. Consider aspects such as ethical values, mission alignment, financial stability, and the potential for a mutually beneficial partnership.
- Gather Information: Collect information about the donor from public sources, such as their website, social media profiles, news articles, and press releases. This information can provide insights into their philanthropic history, affiliations, and interests.
- Verify the donor’s identity, criminal history, and any potential legal issues. Various online platforms offer tools to perform such checks.
- Financial Analysis: Evaluate the donor’s financial stability and the source of their wealth. This step helps ensure that the donations are legitimate and that the donor’s financial situation aligns with the intended level of contribution. Some sources of wealth may be considered sensitive to your organization.
- Previous Philanthropic Activities: Research the donor’s history of philanthropic activities. Understanding their past contributions and partnerships can shed light on their values and interests.
- Stakeholder Interviews: If feasible, consider interviewing individuals who have interacted with the donor, either in the philanthropic sector or otherwise. Their insights can provide valuable perspectives on the donor’s character and reputation.
- Mission Alignment: Examine how closely the donor’s priorities align with your nonprofit’s mission and goals. A partnership is most effective when both parties share common values and visions.
- Legal and Regulatory Compliance: Ensure that the donor complies with all relevant legal and regulatory requirements. This includes assessing their potential involvement in any controversies or legal disputes.
- Conflict of Interest: Evaluate whether accepting a donation from the donor could create conflicts of interest for your organization. This is particularly important if the donor has ties to industries or causes that could compromise your nonprofit’s integrity.
- Consult Experts: For more complex cases, consider seeking professional advice. Legal experts, financial analysts, and ethical consultants can provide valuable insights to aid your decision-making process.
- News: General news helps you stay alert to trends, but for mitigating reputational risk, you’ll want the ability to narrow in on negative news. Given the increased focus on environmental, social and governance (ESG) commitments, it’s also useful to have the option to narrow to ESG news. Not only can this help you identify donors who might NOT be a good fit, but it can also help you identify prospects who align with your own mission.
- Sanctions, watchlists and PEPs lists: Geo-political volatility like we’re currently experiencing means that sanctions and PEPs (politically exposed persons) are changing rapidly. Doing business with a sanctioned individual or entity could do more than put your reputation at risk; it can lead to regulatory risk and fines.
- Legal news: This type of news can help you see if an individual or entity has a litigious past that could put your organization in jeopardy.
- Company and executive information, including beneficial ownership: When it comes to corporate sponsors, you need to look beyond the entity itself. For example, a company may have hidden beneficial owners who might not be a good association for your nonprofit. Likewise, corporate hierarchies can show tangential relationships that could prove problematic or another likely corporate sponsor, but the only way you’ll know is to do your due diligence.
Balancing Ethics and Accountability
While the intention behind donor due diligence is to maintain transparency, accountability, and ethical standards, it is not without its controversies.
- Preserving Donor Privacy vs. Ensuring Transparency: Controversy often arises from the tension between preserving the privacy of donors and ensuring transparency within nonprofit organizations. While donors may wish to keep their personal information confidential, nonprofit organizations argue that transparency is essential to demonstrate their commitment to ethical fundraising practices and maintain the public’s trust. Striking a balance between these two perspectives can be challenging, as both donor privacy and organizational transparency are valid concerns.
- Potential Chilling Effect on Philanthropy: Critics argue that if donors feel their intentions are being scrutinized too closely, they might be discouraged from contributing to causes they care about. This fear stems from the idea that donors may perceive the due diligence process as invasive and overly skeptical. This perspective emphasizes the importance of fostering a philanthropic environment that encourages generous giving without unduly deterring potential donors.
- Selective Acceptance of Donations: Some argue that extensive due diligence may lead organizations to reject donations from sources that may have had controversial affiliations or actions in the past. While this may be seen as a way to maintain ethical purity, critics point out that it could result in missed opportunities to redirect funds towards positive change. The debate lies in determining the appropriate level of scrutiny that aligns with an organization’s values while still capitalizing on potential contributions for the greater good.
- Misuse of Donor Information: Organizations that collect and store donor data must ensure robust data protection measures to prevent leaks, breaches, or unauthorized access. Mishandling sensitive donor information not only jeopardizes donor trust but also raises ethical and legal questions about the responsible use of such information.
- Uneven Implementation and Resource Allocation: The controversy surrounding donor due diligence is compounded by the uneven implementation and resource allocation across different nonprofit organizations. Larger, well-funded organizations might have the capacity to conduct thorough due diligence, while smaller ones might lack the resources to do so. This leads to potential disparities in accountability and transparency, which can undermine the sector’s credibility as a whole.
Conducting due diligence on donors is a critical practice that nonprofit organizations should prioritize to protect their values, reputation, and mission. While the process may require time and effort, it’s an investment that can lead to meaningful, sustainable partnerships with donors who are genuinely aligned with your cause.
By following these steps and staying diligent, nonprofits can ensure that their relationships with donors are based on trust, transparency, and shared objectives. The debate over due diligence on donors underscores the complex ethical landscape within philanthropy. While the practice is aimed at maintaining transparency, accountability, and ethical standards, it is not without its controversies.
Striking a balance between respecting donor privacy and ensuring organizational transparency, while also avoiding a chilling effect on philanthropy, requires careful consideration and open dialogue. As the philanthropic sector continues to evolve, finding common ground on this issue will be crucial in fostering a climate of ethical giving and meaningful impact. For an extensive list of due diligence resources please visit the Helen Brown Group’s Due Diligence Resources Page and let us know if you have others that we may have missed!