Chapter 7
Environment, Regulatory, and Compliance Issues
There are many similarities and some distinct differences across types of nonprofits and nongovernmental organizations. Assuming that all nonprofits are alike when thinking about risk can have disastrous consequences. Think about the kind of knee-jerk reaction that can happen when managers or boards react to a crisis in another organization by taking a course of action or proposing a solution to a problem you don’t have.
Nonprofit and non-governmental organizations are required to meet many statutory and regulatory requirements. For some activities, NPOs and NGOs are more heavily regulated than other types of organizations. This chapter explores some of these issues.
If you think that you’re too small (or too new or too specialized or too anything else) to have to worry about these issues that may seem to affect only other organizations, think again. On the one hand your organization may change in many ways and may find itself —perhaps suddenly—confronting new challenges in environment and regulatory areas. On the other hand, regulations and laws may change so that organizations that are not covered by some of the regulations discussed in this chapter are covered—again, perhaps with little warning. On the positive side, there are lessons to be learned and it’s good to be able to learn them before you’re suddenly confronted with the need to change your practices on someone else’s timetable.
Here are some activities commonly involved in environment and regulatory issues for nonprofits:
–Managing in the Community and Operating Environments
–Managing Compliance and Regulations
–Responding to Catastrophic Environmental Risks
–Being Part of the Nonprofit Environment
Managing in the Community and Operating Environments
The environment of a nonprofit organization is both the neighborhood or location in which the organization functions and the group or groups of people served or employed by the organization. The community includes staff, sponsors, funders, clients, elected officials, other organizations or users of services offered or they may also simply be neighbors. If your organization wants to close off the street for a block party, support from your community matters, especially if you need a permit or expect to use fencing or ropes that block access to their homes and businesses. Maintaining cordial relationships and being responsive to the needs of neighbors is key to reducing negative incidents and other environmental risks.
When it comes time to apply for funding or a building permit, support from neighbors can matter as much as or more than support from clients, users, and people who are served by the organization. (In fact, in some cases, having support from people who are not served by your organization enhances your chances of approval.)
Organizations can be viewed as “good” or “bad” neighbors. Organizations that might be considered possible bad neighbors need to make special effort to support neighbors or neighborhood groups in order to improve their relations or get permission to locate in a neighborhood. What makes a community consider certain types of organizations bad neighbors varies greatly. In some neighborhoods, any organization whatsoever that will bring more traffic to the area or compete for scarce parking spaces might be considered “bad.” Sometimes it’s residential programs, sites with heavy foot traffic or late hours of operation or programs that are noisy like a youth orchestra or an opera conservatory with vocal lessons or string quartet practice studios that can cause friction with the community. This is an issue that varies by type of nonprofit and the programming offered organization as well as by the preferences of a community neighborhood. Risk comes when you don’t balance organizational and community needs. Lack of sensitivity and failure to proactively build good will and good relationships create or exacerbate risk.
The operating environment for an organization also consists of the laws, rules, and regulations under which it functions. These change often and failure to stay current or update policies and procedures to reflect these changes pose risk for your organization.
The operating environment also includes fellow organizations or groups that join together to collaborate on activities, take action on shared priorities, advocate for change or against a law, regulation or budget cut (in a broader sense, any organization or body that has a stake in your organization or in which you have a stake).
What to Watch For
Don’t ask if your organization scans and keeps track of changes in the operating environment: ask how it does that. An important board oversight activity is to make certain that the organization has a process to receive and resolve community complaints, that it acts as a good neighbor and that it scans and tracks changes in the operating environment. Board members who are also community residents, service recipients or are involved with multiple community organizations, bring special value to a nonprofit organization. Their insights and relationships can be an invaluable asset and source of information. Nonprofit executives also monitor the operating environment for change, opportunity or risk and use this information to plan ahead.
At a high level, watch for an organization that has limited or no awareness of its operating environment: that is a clear risk. There should be formal and informal processes in place that allow the executive and board to receive notice of changing statutes, regulations, competitors, and alliances.
Part of the operating environment is the community in which your organization functions. Many nonprofits have formalized the way they do community outreach and engagement. They are able to produce an annual activity report that includes targets and goals met. Risk attentive organizations do community consultations before embarking on a new service offering and they conduct community surveys or hold open houses to elicit feedback and build constructive relationships.
Prevention
Because the operating environment changes frequently, it’s a good idea to identify a source that provides regular updates and a dynamic news feed, such as RSS or a blog, and social media platforms such as Facebook, Twitter, and Instagram or set up Google alerts, so that you can keep track of latest developments including discussions of pending changes or proposals under consideration.
What you want is an expert and validated information source that is easily digestible for managers who can translate it into alerts for executives, board and staff as needed. You will also want to follow community newsfeeds and blogs so your organization knows about community concerns and where you can learn about what is and is not happening—in other words, what neighborhood problems have been averted. This kind of scanning is useful in identifying and averting risk early.
An operations feed can be duplicated automatically to a Twitter account. Keep that feed focused and Twitter account tightly targeted to capture actional information (notifications and updates about school closings, for example) and make certain that you create or pass along only verifiable information. You can also use these information platforms or your own website or blog or social media to notify the community of organization activities, local events or to congratulate active volunteers and community residents, or solicit volunteers for a project. Community engagement is a necessary feature of nonprofit life. Well managed, it is a tremendous asset.
Here are some other prevention tips.
–Do you hold an annual community meeting to gather feedback and celebrate the community?
–Does the organization participate in or sponsor community events to support local interests or promote the organization and its activities? Sponsoring or cosponsoring a “fun run” for kids or buying a table at a community event is the type of outreach that can be an effective way to build strong relationships.
–Is there a policy for responding quickly to written, verbal or online complaints from the community? Is a staff person tasked with monitoring and responding to on-line feedback or comments about your organization?
–Does the organization know and follow rules and regulations for advocacy, lobbying, and community relations with officials?
–Does the organization use a social media dashboard such as Hootsuite, Mention, Sprout Social, or Spredfast to track community news or mentions?
Managing Compliance and Regulations
Regulations and compliance cover everything from the treatment of patients in a medical facility to the placement of exit signs in a place of public assembly (or even in an office). Some nonprofits have dedicated central staff who manage compliance issues. Others handle compliance with program or department staff who are responsible for stating current and notifying the executive team when changes occur.
All nonprofits need a process for monitoring and complying with regulatory or other required changes. Failure to comply can result in loss of an operating license, steep fines, revocation of a government contract or other significant negative consequences. Compliance is never an optional activity.
What to Watch For
Compliance with government requirements requires particular vigilance and formal processes for implementing requirements and changes. It raises a red flag when compliance work for the organization is tacked on as additional work for a staff person with a host of other responsibilities. This is especially true for nonprofits where compliance activities are decentralized or where staff are stretched very thin. This is another reason for reinforcing the fact that nonprofit risk is everyone’s business. Compliance requirements come with deadlines and penalties. Once a compliance problem is found or noted in an oversight review, there is likely to be significant additional corrective actionable work to be done, perhaps a fine to be paid, heightened monitoring by the oversight body and sometimes more intense reviews that follow. Noncompliance can create a cascade of issues. For example, failing to apply timely for a work permit needed to do a program facility repair or maintenance can quickly mushroom into a project that disrupts normal operations. Some compliance requirement changes may allow grandfathering in or give organizations time to transition to the new rules.
Tip: If your nonprofit organization is contemplating changes in programming, operations or mission, or if you have or are considering a merger with another organization, make certain to review compliance requirements and other mandates carefully and early in the process. A conservative approach includes review by your board and counsel and the assumption that you might be required to comply with the most stringent rules.
Prevention
Every nonprofit organization operating today should have a formal policy and processes for board, staff and volunteer compliance training on an annual basis. Any number of costly and disruptive penalties can come to nonprofits who don’t keep track of certification or recertification deadlines. One of the best ways to keep compliance current is for managers and board managers to take it seriously. When the tone and expectations are set at the top and when compliance activities are formalized, the organization’s risk exposure is reduced.
Here are some other issues to consider.
–Do you have a routinized protocol for reviewing compliance activities and updating policies to align with new compliance requirements? If staff needs guidance or the board requests information on compliance activities, is your organization prepared to provide them with a written document?
–Do you have a database or use a spreadsheet to track compliance deadlines, completed activities or progress made on corrective actions including updates needed, ratings (positive or negative) from external oversight entities of your compliance status?
–Do you conduct quarterly and annual reviews with managers to monitor completion and produce a dashboard or report to the board on the organization’s compliance status and vulnerabilities?
Responding to Catastrophic Environmental Risk
All organizations need to be prepared for the possibility of floods, fires, extreme weather and other natural disasters. Emergency preparedness has also grown in scope to include safety and security, active shooter policies and protections against other acts of man. Detailed disaster plans, drills and testing have become an essential part of nonprofit risk management. Environmental risk today is defined more broadly and requires more insurance coverage and planning than in the past.
“Catastrophe” is a word that is often used when describing extreme environmental risks. External conditions are causing nonprofits to think more planfully about catastrophic events that cause loss of life, property damage and service interruption or that require storage of food, water, medical supplies and back-up generators. We use “catastrophic” in a very specific way to describe a single event or linked chain of events that threaten lives and essential operations.
The simultaneous unavailability of power, communication, and transportation over a wide geographic area means that many backup protocols and procedures in place for a single nonprofit organization will not suffice. A catastrophic environmental risk is any event that puts your people and operations at risk from an internet and cell outage to a water main break in your lobby. Disaster planning is only a starting point. Staff must be trained in emergency procedures and emergency communication processes must be in place.
Many nonprofit organizations are also expected to respond to disasters. Whether it’s opening a central food distribution outlet or providing shelter or medical assistance or helping relocate displaced people after a hurricane or other catastrophic event, nonprofits are often first responders and partners in recovery work. While it is impossible to forecast with certainty catastrophic damage caused by all environmental risks, it is possible to build organizational capacity to respond to emergencies.
What to Watch For
In addition to the factors you consider when assessing the likelihood that an environmental risk event will occur and affect your organization, consider the possibility that your organization may have to deploy its resources in the service of others.
–Are your evacuation, disaster and recovery procedures formalized in writing, current and tested through drills with staff and clients regularly? Do you train staff in emergency response?
–Have you done worst and best case scenario planning with senior staff and applied lessons learned to your disaster plan and preparedness activities?
–Have you worked collaboratively with local government and other organizations in crafting a community disaster response?
–Do you store or back-up vital information offsite? Do you maintain emergency supplies on site?
Being Part of the Nonprofit Environment
Nonprofit organization tax exemptions are based on an expectation of public good. These organizations may be active in a variety of areas ranging from providing food and medicine to people in need, to building and maintaining a social club. Nonprofit tax status may exempt an organization from sales or property taxes and may confer the right to give a tax deduction for qualified donations but, it doesn’t provide a blanket exemption from all fees or tax look-alikes. In some jurisdictions where government budgets are tight, nonprofits can be asked to pay PILOTS: the payment of fees for government services in lieu of taxes. Nonprofits renting space may also have leases that include payment of all or a portion of the landlord’s property taxes. As well, there are often referenda or legislative proposals pending locally or nationally that threaten to strip tax exemption status from nonprofit organizations—typically but not exclusively universities and hospitals. It is important to track tax obligations and filing deadlines. In the US and Canada nonprofit organizations must file annual tax statements with the federal government. Best practice includes board review of all tax documents before they are filed. These filings are public; the details can serve as a red flag for a variety of fiscal and operational improprieties.
Peer organizations are also an important part of the nonprofit operating environment. Nonprofits can have formal or informal relationships with peer organizations. The relationships can include formal collaboration on collective impact or community projects, memoranda of understanding or contracts to deliver services to the clients of another organization, provide back-office support or serve as a fiscal intermediary for a peer organization, or pay dues to a coalition or association representing multiple organizations.
Being part of a community of nonprofit organizations has many advantages but it also carries risk. It’s just as important to know your partners and how they work when doing community events as it is when there are shared financial transactions, fundraising appeals or volunteer recruitment drives.
What to Watch For
Whether you look at the nonprofit environment from the vantage point of a cause or project or in the context of place, your nonprofit organization sits in an ecosystem of relationships, obligations and activities. The board and executive director are responsible for setting the parameters of staff and organization involvement with other organizations. These parameters can be formal or informal. Recipients, staff, managers, and funders compare organizations. This creates challenges in staff recruitment and retention particularly when salary scales are not comparable. When problems occur in one organization, it is an easy leap for worry to spread and implicate all organizations even when no problem has occurred. Conversely, organizations that operate without engaging peers, risk being left behind or uninformed about opportunities.
Prevention
Staff and volunteers need to know how your organization works with partners and how to represent the organization in the community or when they are working alongside partners on a joint project. They need to have guidelines for what information can be shared and which is confidential.
Note: One of the benefits of conferences is that they provide a forum for sharing techniques and strategies without worrying about confidentiality (although conferences are sometimes closed to outsiders). Look at this from the other side and make certain that there are clear protocols to be followed to get permission when someone speaks about the organization’s operations at a conference. Nonprofit organizations share many attributes, problems, and solutions, but not all of them, so make certain that you know how other nonprofits function before you work with them even on a small scale.
Summary
This chapter provides an overview of rules governing the nonprofit operating environment and the community in which nonprofits operate. Nonprofits are not identical in mission or operations, even within a small region. Human services nonprofits are both similar to and different from cultural organizations such as libraries and museums. Nonprofit industry associations may function like commercial trade groups. It’s important to know your community, your partners and the environment in which your organization operates.