In the fall of 1999, the Council of Better Business Bureaus' Foundation initiated the process for a third revision of the charitable solicitations standards, naming an expert Standards Review Panel (roster below) to assist this effort. The charge to the Panel is as follows:

This Discussion Document has been created to facilitate discussion and encourage input from constituencies of the CBBB charity standards, including, but not limited to: national charities; local charities; fund raisers; charity umbrella organizations; nonprofit associations; nonprofit accounting professionals; state regulators; researchers; technical assistance providers; individual, business and foundation donors; and local Better Business Bureaus. Comments received as a result of this Discussion Document will be considered by the Panel in developing the draft of the revised charity standards that also will be distributed for public comment.

We welcome your comments on any of the concepts or analytical questions that follow. Submit your comments online or direct them to: Bennett M. Weiner, Vice President and Director, Philanthropic Advisory Service, Council of Better Business Bureaus, 4200 Wilson Blvd., Suite 800, Arlington, VA 22203, fax 703-525-8277, or e-mail .

FUNDAMENTAL GOALS FOR THE REVISED CHARITY STANDARDS

Whatever guidelines result from the revision process, there are certain fundamental goals that are core to the creation of effective ethical recommendations. The standards should:

- Be meaningful and relevant to donors,
- Be easily understandable to users,
- Be fair and not overly burdensome to charities,
- Instill public trust and support of philanthropy, and
- Be reasonable for the Better Business Bureau to administer.

ISSUES TO CONSIDER

1. DETERMINING BROAD OBJECTIVES

In addition to the fundamental goals, there are a number of "threshold" issues that will be considered by the Panel. We encourage readers of this discussion draft to provide their opinions on the following:

a) Overall, would you recommend that the existing charity standards be retained, revised or changed entirely and why?

b) Should the standards' primary purpose be to recommend good practices to serve as goals for charities or to identify unacceptable (i.e., questionable) practices? In other words, is the role of the standards to help donors identify fully accountable charities or to help them avoid the proverbial "bad actors."

c) Can one set of standards apply to both small and large charities?

d) What basic information should donors have about a charity in order to make an informed giving decision? How and when should this information be disclosed to the donor?

e) What other objectives or concepts might be considered in this review of charity standards?

2. GOVERNANCE

The current standards address the independence and involvement of charity governing bodies by reviewing such factors as the frequency of and attendance at meetings, the number of compensated individuals serving on the board or executive committee, and whether the charity has any material transactions with board-member related firms.

a) Should the charity standards have a flat-out prohibition against all board member or staff member related-party transactions. Or, should the standards continue to address only related-party transactions that are material in nature? (Related- party transactions are situations in which a charity conducts business with firms in which a board member or charity staff member has direct or indirect interest.)

b) The current charity standards call for no more than 20% of the governing body to be directly or indirectly compensated. Should the charity standards eliminate, limit, or increase the participation (i.e., voting membership) of paid staff or other compensated individuals on the board of directors?

c) Should the standards recommend against compensated board members (for example, the paid CEO) serving as officers of the board, particularly in the positions of board chair or treasurer?

d) Should the charity standards require the governing body to review the budget, IRS Form 990, audit report, and other significant financial reports for both the charity and, if applicable, subsidiary entities?

e) Given the significance of the governing body in all aspects of charity oversight, should governance issues be given greater prominence in the charity standards?

f) Are there other issues about charity governance that should be considered for the charity standards?

3. FINANCIAL REPORTING AND OTHER ANNUAL STATEMENTS OF ACCOMPLISHMENT

a) Should charity standards continue to require an audited statement? If so, at what income level should an audit be required?

b) Should charity standards question the accuracy and completeness of financial statements? If so, should they address only the most flagrant problems (for example, a misleading breakdown of expenses) or any element that is not in conformity with generally accepted accounting practices (GAAP).

c) In some instances, a charity may be involved in activities that combine fund raising efforts and educational/advocacy functions. Current professional accounting guidelines allow charities, under certain conditions, to allocate (i.e., divide) the expenses for such activities among the program services, fund raising, and administrative expense categories. This is known as "joint cost allocation." If this is done inappropriately, such joint cost allocations may result in an under-reporting of total fund raising costs. Should the charity standards question the accuracy of such allocations within financial statements, including audit reports? If so, should only the most egregious aberrations be challenged?

d) Should charity standards include a recommended maximum level of charity reserves (i.e., end of the year net assets also known as ending fund balance)? If so, should there be different recommended levels for reserve funds that are available for use by the charity as opposed to those funds that are permanently restricted by donors (i.e., endowment funds, of which only the interest will be available for use by the charity)?

e) Should standards address the potential concern about charities that have continuing deficits (i.e. expenses exceeding income) over several years?

f) Please identify and comment on any other financial issues that should be considered.

4. CHARITY USE OF FUNDS

The amount spent on program service and fund raising activities is of significant interest to donors, charities and professional fund raisers. It is the area of the current standards most cited by both users and critics of our reporting efforts. (For your reference, see standards B1 through B4 of the current CBBB standards.) How can the standards analyze program and fund raising costs meaningfully, fairly and understandably?

a) Should the existing percentage-based provisions of the standards addressing program service and fund raising expenses be raised, lowered, remain the same, placed in a different context, or eliminated? If ratios are eliminated, what would be an alternative meaningful way to assess charity use of funds?

b) One current charity standard (standard B1) calls for at least 50% of total [available] income from all sources to be spent on the charity's program service activities. If the charity standards continue to include some recommended level of program service expenditure, how should the program ratio be calculated? Specifically, should program service expenses be calculated as a percentage of total income, as a percentage of total expenses, or as a percentage of some other financial reference amount?

c) Are such expenditure guidelines inherently more difficult for small or local charities to meet (as opposed to large national charities)? If so, how should these differences be taken into account?

5. SOLICITATIONS

One of the distinguishing features of the current standards is the emphasis placed on the appeal - within their title and content. One third of these standards refer to the charity's solicitations. This focus reflects the Better Business Bureaus' long standing promotion of "truth in advertising." It also recognizes that the solicitation is the most frequent form of contact donors have with a charity.

a) Should the charity standards continue this focus on solicitations?

b) The current charity standards call for certain information to be included in appeals, such as a clear description of the charity's programs, so that donors know exactly what their gift will support. In revised standards, what level or type of disclosure should charities be encouraged to include within solicitations? Should this vary depending on the fund raising medium, for example, direct mail or Internet? (Also, see issue 9.) How much and what type of information is needed to make an informed giving decision?

c) Should charity standards continue to require telephone and other in-person solicitors to disclose their relationship to the charity (i.e., paid fund raiser, staff member, volunteer, etc.)? Does this provide meaningful information to donors?

6. CAUSE-RELATED MARKETING

More and more charities are partnering with corporations to help generate additional revenues. The typical message is "Buy product XYZ and a donation will be made to Charity ABC." The standards currently call for cause-related marketing appeals to disclose the actual or anticipated portion of the purchase price (e.g., five cents for every bottle of XYZ liquid sold) to benefit the charity and to identify, if applicable the term of the campaign (e.g., during the month of September) and any maximum donation limits (e.g., up to $100,000) or guaranteed minimum contribution.

a) Should the charity standards strengthen, modify or eliminate this disclosure recommendation for charities?

b) Should the charity standards address other features of cause-related marketing besides point of solicitation disclosures? If so, what should be addressed?

7. FUND RAISING PRACTICES

The current charity standards seek to verify that the charity has appropriate oversight and control over fund raising activities conducted in its name. For example, the standards call for charities to have written agreements with outside fund raising companies that provide the charity with prior review and approval of all solicitation materials.

a) What fund raising control mechanisms should be recommended by the charity standards?

b) Besides excessive pressure, what other questionable fund raising practices might be identified by the charity standards?

8. DONOR PRIVACY

The use of donors' personal information (e.g., name, address, phone number, e-mail address, organizations they support, and amounts contributed) is receiving significant public attention.

a) Should charity standards include donor privacy protection provisions?

b) If so, should the charity standards require charities to disclose, at the point of appeal, their privacy policy, or provide some other means to inform donors about their use of personal information?

c) Should charities be asked to provide donors with a convenient means to inform the charity that they do not wish their personal information (name, address, etc) to be shared with others? If so, how might this be accomplished? For example, some charities currently include a check-off box within a direct mail appeal reply card that provides donors with this choice (this is known as an "opt-out" policy).

d) Are there other issues about donor privacy that should be considered for the charity standards?

9. INTERNET

For a growing number of charities, the Internet has fast become an important means of sharing information and raising funds. This relatively new form of communication raises a number of accountability issues.

a) Should charity standards require a minimum level of disclosure on a charity's web site (for example, description of program services, financial summary, a sentence identifying tax-exempt status, governing board roster, or the physical location of the charity)?

b) Should charity standards include recommendations about Internet sales activities such as auction sales and shopping mall sites that indicate that purchases will benefit a specified charity? (See also issue 6.)

c) Are there other issues about charity Internet activity that should be considered for the charity standards?

10. EFFECTIVENESS

Since their inception, the current charity standards have focused on charity accountability practices that were verified through a review of materials made available by the charity. Increasingly, however, donors also are seeking ways to measure a charity's success in delivering its programs (i.e., the impact it has made on the community it serves)?

a) Should the charity standards address charity effectiveness? And if so, how might this be accomplished taking into account the practical limitations of BBB evaluations? If you believe the standards should not address effectiveness, please explain.

b) If the charity standards do not address effectiveness, how can donors be confident that their donations are used well?

c) Should the standards call for charities to establish some type of internal evaluation of their effectiveness? If so, should the standards recommend that charities publicly disclose both the nature and results of these internal evaluations?

11. LEVELS OF STANDARDS

The current charity standards can be applied to all types of charities. However, some have suggested that it takes more of an effort for small or new charities to meet the standards.

a) Should there be a set of core (or basic) standards that might be applied to all organizations, along with a set of supplemental standards that would be applied under certain, defined conditions?

b) What practices might core standards address (for example, finances, governance, etc.) and what practices might supplemental guidelines recommend?

c) Should there be supplemental guidelines for large charities? (For example, should more detailed budgets be recommended for larger charities?)

d) Should there be supplemental guidelines produced for specific types of charities (for example, child sponsorship, environmental, veterans organizations, etc.)? If so, what role might professional associations of charities (for example, trade associations for health charities, international relief organizations, etc.) play in the development of such guidelines?

e) Would the creation of different levels of standards be confusing to charities, the public, and other users? If so, how could this be addressed?

12. INTERNATIONAL

Global philanthropic issues are receiving increased attention due to the expansion of non-governmental organizations in other countries, the impact of the Internet, and other factors. This expansion has raised some potential accountability questions.

a) Some charities are affiliated with organizations headquartered outside the United States. In effect, the U.S.- based organization operates as a "chapter" of this larger body. Should the charity standards include accountability recommendations for these affiliated international offices? If so, what areas might be addressed?

13. REACH OF THE STANDARDS

The current charity standards reviews involve a level of effort for charities to comply and for Better Business Bureaus to carry out. As a result, many have suggested the need to broaden the reach of the standards so that many more donors and other interested parties can benefit from their availability.

a) Should the BBB charity standards programs incorporate the use of a seal that could be used by charities to inform donors of their compliance with the standards? If a seal is initiated, should it be available to all charities that meet standards or as a means of providing special recognition for those organizations that meet supplemental ethical recommendations?

b) What other means might be considered to help strengthen donor and charity awareness of the standards?

14. OTHER ISSUES

Please feel free to identify and comment on any other issues that should be considered for charity standards