Ethical dilemmas in nonprofit organizations and how to navigate them

Nonprofits and charities often find themselves under intense public scrutiny and suspicion whenever ethical dilemmas or lapses surface, particularly when these issues are highlighted in high-profile news stories.

Some recent examples: A Tennessee nonprofit’s executive director is facing accusations of paying himself “developer fees” out of a grant earmarked for a rehabilitation house.

Different accusations of inappropriate spending have been made against a group dedicated to countering LGBTQ+ discrimination.

The Charity Commission’s inquiry found that the Genesis Philanthropy Group’s trustees were responsible for misconduct and mismanagement, particularly regarding conflicts of interest. The inquiry led to the charity being wound up, with its remaining funds distributed to other charities.

And many nonprofit universities have faced questions about donations from Jeffrey Epstein and members of the Sackler family.

These examples demonstrate that boards need to be aware of common ethical issues for nonprofit organizations, the issues that lead to them and how to prevent trouble.

Lack of ethics breaks down trust and confidence

Unethical behavior, which is different from illegal activity, erodes confidence in nonprofit leaders and breaks down trust. Many nonprofits have good intentions of upholding integrity and ethics; however, their policies don’t always meet reality.

Public trust in the nonprofit and philanthropic sectors is mixed, and with some good reason. A 2019 survey from the Association of Fundraising Professionals reported that 50% of members faced ethical challenges once a year, with another 25% even more frequently. The most cited ethical scenarios involved donor gifts and restrictions on how those gifts were used.

A 2007 National Nonprofit Ethics Survey, still regularly cited, showed that just over 50% of nonprofit employees had observed at least one act of misconduct within the prior year. Almost 40% of nonprofit employees responded that they didn’t report unethical behavior because they didn’t think their employer would address it or they feared retaliation from their superiors or peers.

Independent Sector’s 2024 annual report, Trust in Nonprofits and Philanthropy, sheds more recent light on public opinion. While nonprofits are the most trusted sector, this position (57%) is partially due to declines in other sectors, such as government, business and media.

As Robbe Healey, member of the Association of Fundraising Professionals Ethics Committee, pots out: “If ethics were cut and dry, there wouldn’t be ethical dilemmas; we wouldn’t have to use our moral compasses. Unfortunately, life is a little more complicated than that.”

“If ethics were cut and dry, there wouldn’t be ethical dilemmas; we wouldn’t have to use our moral compasses. Unfortunately, life is a little more complicated than that.” – Robbe Healey,  Association of Fundraising Professionals Ethics Committee

Issues that lead to unethical behavior in nonprofits

With so much at stake, we have to wonder why so much unethical behavior continues to exist in the nonprofit sector. The answer lies primarily in human nature and each individual’s commitment to ethical behavior.

People have various capacities for moral judgment. Some people have trouble recognizing morality and others have trouble analyzing it. Everyone has different priorities related to moral behavior. In addition, outside influences can impact everyone’s ability to hold tightly to their moral values.

To uphold ethical behavior, people have to be morally aware enough to recognize that ethics and integrity are at risk in certain situations. Moral recognition leads to moral decision-making which requires individuals to decide how to act in an ethically correct manner. Moral intent also plays a factor because it requires us to decide which of our moral values should take priority before making a decision. Finally, moral action requires us to follow through on an ethical decision.

Common types of ethical dilemmas in nonprofit organization

Certain areas of ethics tend to plague nonprofit organizations more than others.

The topic of compensation is an ethical issue for many people. Is it ethical to support a nonprofit where leaders are paid more than a modest salary? That question becomes even more complicated when the organization is struggling to meet its purpose or goals. Some volunteer leaders and staff of nonprofits feel that it’s ethically appropriate to benefit from perks provided by the nonprofit because they’re not getting paid.

Travel expenses are another hot-button issue for nonprofits. If volunteers or employees earn frequent flier miles in the course of nonprofit work, is it fair to use them for personal purposes? Is it ethical for nonprofits to hold meetings or events at expensive venues? The Panel on the Nonprofit Sector recommends in its Principles for Good Governance and Ethical Practice that nonprofits have clear written policies for reimbursement that are reasonable or cost-effective. These are very subjective terms.

Conflicts of interest are also common concerns in the nonprofit arena. There is a lot of subjectivity around what constitutes a conflict and what is considered preferential treatment. Recently, concierge donor stewardship programs in healthcare have recognized donors with upgraded hospital rooms and personalized assistance among other perks, and the Association for Healthcare Philanthropy was prompted to issue ethics guidelines on the practice.

Donors also expect transparency around how nonprofits spend their money. Sometimes donors are compelled to donate sums of money based on an emotional response only to find out that a nonprofit allocated an unacceptable amount of money for reserves, publicity or other indirect purposes.

Another issue that nonprofits struggle with is financial integrity related to who is donating to them. If they receive donations from people or organizations whose values are vastly different from the nonprofit, it doesn’t always reflect well on the nonprofit.

Lately, all industries are facing ethical dilemmas around generative AI, which includes tools such as ChatGPT. Information created with such tools can have inaccuracies and biases, and nonprofit staff can create privacy risks by uploading donor information into the tool — say, to generate messaging quickly. Nonprofit boards should evaluate the use of this new technology when creating policies.

How technology can help nonprofits operate ethically

Boards need to ensure that they have solid code of conduct policies and compliance programs. Clear rules and expectations that are consistently enforced help to give nonprofits a strong reputation. Ethical behavior by senior leaders helps to reinforce a nonprofit’s core values. In turn, strong ethics will prohibit misconduct, promote trust and reduce liability.

Similarly, nonprofits should also be aware of how they’re using their resources and practice transparency around their finances.

Both efforts can be supported by the organization’s board management system like BoardEffect. It offers specific features that support ethical conduct in mission-driven entities:

• Automated workflows simplify crafting, reviewing, revising and approving policies. With notifications built-in, board members always understand where they are in the process
• The document library provides transparency, with accessible storage for policies, financial documents and other materials with granular permissions — so the right roles can find what they need
• Strong security with optional two-factor authentication keeps donors’ and other stakeholders’ data safe

When it comes to ethics, the best practice is vigilance at every level of the organization. BoardEffect is designed to support the ethical behavior of every contributor to the nonprofit’s mission. At Diligent, we’re here to help you.