NONPROFIT MANAGEMENT

CASE COLLECTION

SHARK FUNDRAISING AT THE FOUNDATION

David Paas

University of San Francisco

College of Professional Studies
Institute for Nonprofit Organization Management
2130 Fulton Street
San Francisco, CA 94117-1047

Copyright  1999, University of San Francisco

Permission granted to purchaser only to reproduce for classroom use.
Unauthorized duplication of copyrighted material is a violation of federal law.

CS-0016
 SHARK FUNDRAISING AT THE FOUNDATION

David Paas

Case Abstract

The raising of funds from public donors presents special problems for
nonprofit organizations. In this case an aggressive talk-show host
interviews two board members about fundraising practices at Children's
Family foundation. The interview raises such questions as: Does the
size of an individual donation affect how careful the organization must
be when taking control or custody? Are there ethical limits on how a
nonprofit organization goes about soliciting donations? How much
expense should be allocated to fundraising?

PLEASE NOTE: The material contained in this case does not

necessarily represent actual people or conditions.
 SHARK FUNDRAISING AT THE FOUNDATION

Dan Johnson, the president of Children's Family Foundation, called a hasty meeting in his office
for 9:00 a.m. The only people asked to attend were Irene, the marketing director, and Horace, the
accountant for the Foundation. Dan locked the door to his office and told the secretary to hold all
telephone calls.

Dan set the tone for the conference when he said, "We're in big trouble. Two of our directors
were mauled during a taped interview at KZAP-TV last night."

"Just who were the directors?" Irene could guess, but had to know. Dan grimaced, "Wendy
and Norman." Irene knew Wendy, who was from a wealthy family and had her fingers in every charity
in town. But Wendy could be publicity crazy and this had caused problems in the past. Norman had
attended a business college out East and came home to start a very successful computer business.
Norman's biggest problems were his political views and his tendency to shoot from the hip. Clearly,
KZAP had picked two very easy targets.

Dan went on, "It gets worse. The show was run by Suzie Dunker." Irene and Horace both
groaned. Suzie had been nicknamed "The Shark" by people who suffered under her questioning.
Rumors had it that Suzie was on the lookout for national syndication of her show and she was willing
to go to any lengths to ferret out scandal. "Suzie delivered a tape of the interview to me last night.
The show will air tomorrow evening and she will give us five minutes at the end for rebuttal." Suzie
was infamous for allowing rebuttals, since many people used their time to hang themselves all over
again.

Dan popped the tape into a VCR. "I don't know if we will want to rebut the show. It might be
better if we started some serious damage control. My wife and I watched the tape last night and it gets
really strange. Gloria thinks we might be able to salvage something out of the mess, but it will be
painful. I am inclined to agree."

The tape began with the show's logo and then a closeup of Suzie's face with its toothy grin.
Next came Wendy and Norman. Wendy was primping for the camera and Norman smirked with his
usual cocky self-confidence. Horace muttered under his breath, "The Shark and the meal. Lord, help
us."

Suzie began the show in the strident language which was her trademark. "Children's Family
Foundation: the truth and the fiction. Who runs our local charities? For whose benefit? And, how
can we tell?" Wendy and Norman were introduced as directors of Children's, along with statements
about their backgrounds. Suzie then asked Wendy to review the history of Children's.

"Well, we started about five years ago when a high school football player suffered a spinal
injury during a football game. The newspapers said that his parents could not afford his hospital bills
and a group of concerned citizens decided to set up a special fund for him. The public outpouring was
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so successful and touching that we collected enough money to pay all his bills! But we also discovered
some very sad things while visiting him and his parents. A lot of children in our city were in the same
condition as this young man. Many of them could not get adequate medical care and had other needs
which were not being met."

Suzie broke in, "But what about welfare? Aren't my tax dollars buying something here?"
Norman answered, "A lot of these kids are just above the poverty line and not eligible. Also, the
welfare system just doesn't reach a lot of kids who could benefit. Anyway, I'm personally not going to
worry about welfare when there are needy kids out there." Irene thought this was a good reply and
Suzie obviously did, too, because she arched an eyebrow and turned back to Wendy for the rest of her
story.

"A number of us have been involved in charity work for years and we saw the chance to help a
lot of worthy children. So, we set up Children's."

Suzie leaned over, "And what are you doing now?" Wendy went on, "Well, we are still helping
needy children with medical treatment, and we have expanded into helping them in other areas like
clothing." Dan was a little worried by Wendy's remarks. She had forgotten to mention the two
shelters, the abused children's home, free clinics, and a few other things. Wendy did not attend most
board meetings and spent little time with the organization except when it came to the charity balls. She
was always featured on the society page of the newspaper doing something charitable. She also had
access to a lot of wealthy people in town. Dan hoped that putting her on the board of directors had not
come back to haunt them.

"Just how did you get involved with Children's?" Suzie asked Norman. He gave a knowing
glance and casually replied, "Why, any good person in business knows that the whole economy benefits
by charity." Irene noticed that sparks were flying between Suzie and Norman. Suzie had made the
social rounds a year ago in Norman's company just after his divorce. The most incredible rumors had
circulated. But Suzie and Norman broke up just as suddenly as they started dating. An insider let
Irene know that Norman broke off the relationship when he discovered Suzie was using him to get
access to his business friends. This was confirmed when Suzie did a series of shows on the scandal
ridden banking system in town. Norman spent a lot of time repairing fences after that incident. Irene
could not understand why Norman would appear with Suzie again. If he thought he could get the best
of her, then he was wrong. Suzie was a lot brighter and had more street smarts. Norman never did
understand his own limitations. Irene hoped that the shark did not go on a feeding frenzy, since the
bait was clearly defenseless.

Suzie grasped her ever-present clipboard and fixed Wendy with a stare. "I am sure that
Children's does a lot of fine work. But I want to focus on the point where the public meets your
organization--fundraising." Dan suddenly stopped the VCR. Horace twitched and gave an inquiring
look. Dan said, "The niceties are over and Suzie is going for the throat. The rest of the show is a full
frontal attack on our fundraising. So, I want both of you to be ready to pick apart all the details." Dan
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flicked the VCR back on. Suzie had been framed in a single leer directed at Norman, who stared
dumbly back.

Suzie turned to face the camera and held up a donation can with Children's name in bold
letters. "We have all seen these cans around town and have been reminded of the plight of those less
fortunate. I myself have put my spare change in a can such as this." She then swung her look to
Wendy and Norman, "Our staff at KZAP has filmed some very odd donations at one of these cans." A
tape rolled on a monitor showing a Children's donation can at a convenience store. A group of boys
reached into the can and removed a fist of change which was then used to buy candy. A middle-aged
customer used the can to make change for himself, throwing in a dollar bill. Finally, a Children's
volunteer was shown collecting the donations. He tipped the can over and shoved the money into the
pockets of his slacks. He did not appear to carry a bank bag. Suzie smiled at Norman, "Is this what
the public can expect from you? How do we even know where the money is going or how much ever
reaches the children?"

An obviously irritated Norman shot back, "You probably noticed that most of the money was
pennies. People normally give us their leftover change, especially the pennies that accumulate so fast
and become a nuisance. I think we do pretty well collecting just a part of this." Suzie waited a
moment and then gave a victory smile.

Dan turned the VCR off and waited for a reaction. Horace tried a defense, "I don't see the
reason for the hassle. Norman is right. All we collect is small change. I would say that we get a total
of $500 each month from all the cans." Dan asked, "Do we know exactly how much we collect?"
Horace tightened his lips, "No, we never count the change. Instead, it just gets added to all our other
bank deposits. It would be too time consuming and expensive to do a count." Irene chimed in,
"Donation cans are really a marketing device to keep our name in front of the public. No one expects
to make money off the cans, and we do expect pilferage all the time. So, I don't see the issue, either."
Dan looked at the floor, "Do you think the public has the same perception?"

The VCR was restarted. Suzie turned a page on her clipboard and assumed a serious pose.
"Children's also conducts an annual winter children's clothing drive in the fall, does it not?" Wendy
shook off her dazed look, "Of course, Suzie. In fact, I helped design the television advertising." Suzie
mimicked, "Of course, Wendy. In fact, we have last fall's advertisement. Please roll it." The monitor
now showed a small child huddled against a schoolhouse door in the cold while his warmly dressed
friends frolicked on the playground. Wendy looked proud. But Irene had a strange foreboding. She
had never liked the advertisement. It was too syrupy and seemed to patronize the child. When the
monitor went blank again, Suzie turned to Wendy to ask, "What did Children's collect from this
commercial?" "Why, winter clothing for little children," Wendy replied in disbelief. But Suzie seemed
very serious and went on, "Would it interest you to know that Children's also collected large amounts
of adult clothing, summer clothing, and some that was so tattered as to be unusable?" Wendy's
reaction was a little lame, "Well, I suppose you have to expect some of that." She looked to Norman,
who did not seem as ready to join the conversation. Suzie waited a moment and then reached for a
folder sitting on the coffee table next to her. "I have here the minutes of two board meetings from a
 Paas--Shark Fundraising
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year ago. Of course Wendy would not know what went on at either meeting since she was absent.
But Norman should be well-acquainted with the events which transpired since he was a prime mover."
Norman seemed to pale ever so slightly but then recovered. Suzie looked down at the minutes and
commented, "It seems that Children's was collecting quite a lot of surplus clothing. Two years ago it
received 15,200 pounds of clothing, of which only 3,800 pounds was suitable for the children. What
happened to the remaining 11,400 pounds?" Norman did not meet Suzie's look, "I don't really recall."
"Well, the minutes contain a full report of the matter. The usable clothing was transferred to other
charities, including some shelters for homeless adults. About 1,600 pounds was in such poor condition
that it was put in the garbage. Does that help your memory, Norman?" This time Norman met Suzie's
stare with a glare. But Suzie went on unperturbed, "In fact, the report lists the shelters. One of them is
the shelter for homeless men located on 10th Street. Isn't that where the police arrested the serial rapist
last fall?" This time Wendy lunged back, "Suzie, that's muckraking. Unless you have something else to
say, perhaps you'd better stop." Suzie took a moment to regain her composure, "Well, as a matter of
fact, I do. The next board meeting addressed the problems with the clothing drive. It was suggested
that Children's derive some income from the resale of the surplus clothing. The minutes contain the
names of importers in less developed foreign countries who purchase used quality clothing in the U.S.
and resell in their own countries. The minutes note that summer and adult clothing collected by
Children's is often in good shape, stylish, and marketable. The minutes also list the names of overseas
firms which buy tattered old clothing for use in rag bond paper. There is also a motion made by one
board member to sell this surplus clothing overseas instead of donating it as in the past. I see that
Norman spoke in favor of the motion." Suzie glanced up in triumph.

Dan quietly turned off the VCR. "Before we talk about this, let me say that I favored the
motion, too. No one at the meeting looked at the sale of the clothing the way Suzie did, and maybe we
should have." Horace broke in, "Look, Dan, nothing says that we cannot sell donated property which
we legitimately cannot use. Like any other firm, we need cash to operate. So long as we give good
quality clothing to the kids, we should be able to do what we want with the rest." Irene spoke slowly
and carefully, "Horace, people who donate clothes expect to see those same clothes on needy people in
town. They certainly would not expect them to be resold at a profit, no matter how much we need the
money." Horace answered, "But how could a donor have this expectation when we ask for warm
children's clothes and they give us adult summer stuff? People aren't stupid. They have to know that
we get rid of the extra donations." Dan joined, "But I don't know if our donors expect us to sell the
surplus. Maybe they expect us to give it away. But no matter what they expect, I think we have a
problem. Could we solve it next year with a disclosure in our ads that surplus clothing may be
disposed of as the organization sees fit? Before you answer, let's see the last segment of the show. I
warn you that it gets even worse."

Suzie looked up from her copy of the minutes. "The treasurer's report shows that Children's is
a very healthy organization. It collected $3.5 million last year and expended only $2.1 million. The
remaining $1.4 million shown in the report was invested in securities." Norman began to lecture Suzie,
"Okay, people sometimes need a lesson in running a business. Whenever you have this kind of profit,
you have a luxury. It could be re-invested in the business, passed on to employees or customers, or
any number of things. One sensible alternative any of us can understand is investing the money in a
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safe place." Horace was stunned by Norman's remarks and waited for the inevitable reply. "But
Norman, you are a nonprofit organization. By what right do you take all this extra money and invest it
instead of helping more children? Do you think that your donors would approve? Had they known,
wouldn't they have given the profit to some other charity which would have used it to help the needy?"

Norman looked beaten. Suzie did not even glance up from her clipboard before going on.
"Let's go back to the original purpose of Children's. It was designed to help needy children with their
medical care. Over the years, Children's has consistently emphasized this purpose in its fundraising. A
particular instance is the annual charity ball, which has become one of the premier social events of the
season. After dinner and before the dancing, the audience is introduced to a number of clients helped
by Children's. Let's take last year's ball. It was memorable for two reasons. First, it was attended by
Starlet." Horace recalled the ball, his first. Starlet was a well-known Hollywood personality and
extremely good looking. She was on the front cover of all the scandal sheets, usually about some new
man in her life. Wendy knew her and had convinced her to attend.

Suzie had gone on. "Second, Children's introduced eight extremely cute children who had
recently undergone extensive plastic surgery after being cured of bone diseases in the face and jaw.
The treasurer's report shows that the ball took in $225,000. But the interesting fact is that Starlet was
paid $75,000 to attend. That means 30 percent of the receipts went to a movie actress who has
nothing to do with the organization and has certainly never been known for her charity work."

Wendy took up the gauntlet with vigor. "It was worth every dollar. The year before we took
in a lot less. I believe $130,000 or so. Starlet's presence made all the difference. And I noticed that
Suzie Dunker was happy to attend and be seen with Starlet." Suzie answered Wendy with the same
vigor, "But $75,000 for one evening where Starlet did nothing more than eat and stand around to be
gawked at?" Norman came to Wendy's rescue. "Starlet always travels with her secretary, a
bodyguard, and her best friend. We had to pay for them, plus she needed a secure hotel suite. And, as
Wendy said, we got results."

Suzie let the remarks pass. "KZAP has also interviewed the eight children who were produced
for the ball. Did either of you know that Children's paid not a single cent for their medical treatment?
Every one of these children was treated at hospitals outside the state and none of their bills were paid
by Children's. How can you justify such deception?"

Norman gave it one more try. "Okay, I think we can acknowledge some error on our part, but
deception is an ugly word. At the time of the ball we had two children in a local hospital undergoing
similar surgery. We were paying, I guess, about half of their medical bills. But they could not be
released for the ball. Anyway, their surgeries were not completed and they looked a bit too gruesome
for a ball. So, we picked up some kids who had already gone the whole route. People at the ball were
told the truth about what we were doing, they just didn't see the right kids."

"But you never told the audience any of this," Suzie said, "and no one knew you were helping
only two children instead of eight." Suzie looked from Norman to Wendy.
 Paas--Shark Fundraising
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Dan flicked off the VCR for the last time. "The rest of the tape is Suzie's summation. Frankly,
I think we were pretty well blasted. I need a strategy to repair matters."
 Paas--Shark Fundraising
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DISCUSSION QUESTIONS

1. Is it relevant that amounts received in the donation cans are not material and probably
insignificant? What if Irene is correct in claiming that donation cans are only a marketing
device? Is that all they are? Is there any accountability to the public for the cans?

2. When should a nonprofit sell donated property (assuming the donation is unrestricted)? Is such
property like cash, where the donor expects it to be spent? Isn't the purpose of some
organizations to collect property like used clothing, repair it, and then sell?

3. How much should nonprofits spend on fundraising? Is it related to the type of fundraising
activity? Could there be something inherently suspicious about Starlet's participation? Why
was she actually invited? What effect could this have on the organization in the long run? But
Starlet did raise all kinds of money, didn't she?

4. When is it appropriate for a nonprofit to invest donations? Don't some foundations have large
endowments? Or is Children's different? How?

5. Would deception have been eliminated if the two children receiving aid had been used at the
ball? Or could it also be misleading to use these two children when the organization seems to
be just starting this kind of aid? Are the children being exploited? Do we expect more of
nonprofits?

David Paas
Professor
Texas Woman's University