One of the basic ideas behind socialmarkets is that there are some features of the for-profit sector that translate well to the non-profit. We’ve looked at financial markets, with an eye towards separating out those features we should flatter with imitation from those we should not.
This is sometimes easy: Do we want donors to see the potential return on their investment in any particular non-profit? Absolutely.
This is sometimes hard: Do we want a non-profit that shows poor returns on investment to be starved of resources? Hmmm… probably not, and certainly not as indifferently as financial markets do.
This is sometimes really hard: Do we want to hold non-profits and their officers to the same ethical standards as their for-profit counterparts? Um, well… let’s think about this.
There are several potential points of ethical contention within socialmarkets. The easiest starting point is at the root of all evil – money. The most concrete output of socialmarkets is the dollars flowing from donors to non-profits. The primary force behind those cash flows is information that comes from the non-profits themselves, including a range of historical and projected metrics of both budget and performance.
The better those numbers look, the more likely it is that the associated non-profit will get the funding it is looking for. The temptation to make those numbers look good is clear, and giving in to that temptation introduces an ethical slippery slope: from optimistic performance projections; to creaming only the most attractive candidates from a general pool of clients; to simply lying about how much a program costs.
Add to these temptations the lack of regulation and consequence that pervades both for-profit reporting, and non-profit reporting to other agencies (most notably the U.S. Treasury) and you see how as unpleasant a topic as it is, ethics needs be part of the socialmarkets conversation.
One key question we need to ask is: who are we trying to protect? The idea that we need to protect trusting donors from manipulative non-profits make us squirm for several reasons. For starters, it is an accidentally hilarious misrepresentation of the true balance of power between most non-profits and their sponsors. More personally, it is a misrepresentation of our general position as advocates for non-profits as well as donors, from where we argue that non-profits can generally be trusted to do the right thing.
This latter reason makes the idea of protecting non-profits from themselves equally uncomfortable: inserting safeguards to remove the means, motive or opportunity to game socialmarkets makes sound business sense objectively, but the related assumption of ethical criminals - on either the donor or non-profit side - does not sit well with us subjectively. Fortunately, I think we’ve come up with a practical ethical platform from which we can deal with the reality of socialmarket’s exposure to abuse without compromising our own integrity: we really just need to protect ourselves.
Self-preservation is the key to navigating these dangerous ethical waters. Socialmarkets will not survive if donors feel they cannot trust our participating non-profits, or if non-profits feel like we are strong-arming them into proving they are worthy of that trust. We need to have safeguards in place for everybody’s good, but most notably our own.
It only takes one bad apple to ruin the fun for everyone in the socialmarkets space, particularly when the publicity that bad apples typically attract comes into play. Just one non-profit discovered to be misusing funds and/or providing false data could be enormously damaging to us. Certainly, we can’t be responsible for the behavior of all our participating non-profits; we don’t have the resources to attempt that even if we wanted to (and we do not…) But at the very least we have to be able to show that we take reasonable precautions, so it comes down to how we interpret the term reasonable.
For now, with just a handful of non-profits who we have been working with for months and know very well, we are starting with a pretty loose interpretation. As the number of participants grow, we may have to tighten the reigns; but we will err on the side of trust (i.e. innocent till proven guilty) wherever practical, and let experience be our guide.
To see this interpretation in action, let’s go back to the money. Donations to a project listed on socialmarkets can be passed on to the relevant non-profit in one of two ways: restricted or unrestricted funds. Initially it seemed obvious that the correct manner was restricted, i.e. earmarked for the specific project the donor funded. It turns out it’s not that simple.
Non-profits are often forced into an accounting shell game because of the restricted vs. unrestricted issue. In the most extreme cases, they find themselves struggling to keep the lights on despite having tons of money on their balance sheet, because all of that money is restricted to purposes which do not include paying the utility bill. This is an enormous structural problem that the entire sector is wrestling with, and while socialmarkets can’t offer a solution, we can at least not exacerbate the problem.
We can do this by sending unrestricted funds to our participating non-profits. This means we are trusting them to manage their internal finances in such a manner that the projects they list with us get funded and the utility bills get paid. This is actually quite in keeping with the socialmarkets model, since there is clearly a positive social return associated with both raising the visibility of non-profits’ burden, and making it just a little bit lighter.
