The Paradox of Nonprofit Trustworthiness

Although Sept. 11, 2001, was undoubtedly the darkest day in New York City’s history, it had some bright spots — such as the heroic efforts of first responders and volunteers who pitched in to help and the unstinting work of nonprofit organizations, like the American Red Cross, to help the victims of the World Trade Center attack. Americans donated billions of dollars for assistance in the following months.

But a year later, The Chronicle of Philanthropy reported on a Harris Interactive poll which found that “42% of Americans have less confidence in charities after September 11.” Twenty-seven percent also said they were less likely to give to disaster-related charities and 29% said they were less likely to give to any charities. Although a survey done for the principal lobby for nonprofits, Independent Sector, concluded Sept. 11 had a “negligible effect on public support for charities,” a study by the Brookings Institution also reported a drop in public confidence.

The principal cause of this erosion in trust was an admission by the American Red Cross that it had received far more for its “Liberty Fund” than necessary to aid the Sept. 11 victims. Following its long-standing practice, the organization planned to set aside unused funds (and blood donations) to assist those who required help in future disasters. But that hardly mollified its critics, such as then-New York Attorney General Eliot Spitzer, who likened those who had responded to the Red Cross’ appeals for contributions to those killed or injured at the World Trade Center. In short order, the head of the Red Cross resigned, and the organization announced it would change its policy of using well-publicized disasters to accumulate resources for the far more numerous, but less visible, ones it responded to every year.

American charities have never been without scandals. Many have involved misuse of donations intended for needy people. In the 1990s, for example, the United Way’s CEO was found to have used his organization’s funds to purchase a pied-a-terre in New York City for his mistress; he wound up not only losing his job but serving a prison sentence. Other scandals have been driven by deceptive fundraising practices, such as paying excessive amounts to fundraising companies instead of using the gifts for charitable purposes. During the 1960s, Congress investigated whether foundations were mostly elaborate tax-avoidance schemes, rather than vehicles for supporting charities. Complaints about political partisanship by supposedly nonpartisan nonprofits have occurred regularly too.

Nonetheless, the public has usually held charities in higher esteem than most other institutions. Since 1973, Gallup has been measuring public confidence in major segments of American society. Higher education, the medical system and religion — where nonprofits play large roles — have consistently ranked high, while Congress, business and the media have regularly been at the bottom.

There are many reasons why nonprofits should be expected to be more trustworthy than business and other kinds of organizations. Since, under American law, they cannot have “owners” or shareholders (in the traditional sense), nonprofits presumably have more incentive to spend their resources on their public-serving missions than on the people who direct them. (In reality, many larger nonprofits do pay sizable salaries to their top executives or compensate their directors as businesses do.) That is why they have special privileges, such as income tax exemption. Some would also argue that nonprofits are likely to be more efficient with their resources because they are more mission focused.

Nevertheless, defenders of the nonprofit sector, like Independent Sector, have become increasingly worried about declining public trust. A 2023 report by the organization, based on a survey by Edelman Data, concluded that nonprofits had been losing trust more rapidly that year. (The next year’s study celebrated a minor increase for the first time in five years.) A recent report by the Better Business Bureau’s Give.org expressed a similar concern. While its December 2023 survey found that two-thirds of Americans thought that trusting charities before supporting them was especially important, only about one-fifth had a lot of trust, a share unchanged since the survey began in 2017. “There is ample space to build trust in charities,” the report’s summary concluded.

To be sure, Americans continue to donate substantial amounts of money to charities — in 2023, a total of over $550 billion, with two-thirds coming directly from individual donors — but a smaller number of Americans is responsible for the largesse. By one estimate, the share of households supporting nonprofits fell from two-thirds in 2008 to less than half a decade later. While several economic and social changes (such as a decline in religious affiliations) help explain this shift, lower trust may have played a role too. Whatever the cause, however, “fewer donors, more dollars” does not strike many nonprofit leaders as a good business model.

In fact, relying on philanthropy has not been the business model for many charities for some time. Earnings — tuition, medical fees, concert tickets and the like — and income from government grants and contracts have long exceeded donations for nonprofits overall, and especially the largest and best-financed ones. (Smaller, community-based groups and religious organizations typically depend more heavily on contributions.) For example, while it raised around $900 million in contributions in 2023, the American Red Cross took in three times as much from government and selling “products,” such as blood and plasma.

These nondonation forms of income raise new questions about nonprofit trustworthiness. As they have become more businesslike, charities have invested more effort in making money. (“No margin, no mission” is how one observer described the new managerial ethos of hospitals.) That includes paying higher salaries (and offering more generous benefits) to executives, cutting back on less profitable activities and charging higher fees (including for admission at once-free museums). Some organizations partnered with for-profits to market their services, or even established their own for-profit subsidiaries, such as the Cystic Fibrosis Foundation, which works with pharmaceutical companies to develop treatments for cystic fibrosis. Others have used their resources to become major institutional investors or property developers. As a result, distinguishing between the commercial activities of businesses and those of nonprofits has become increasingly difficult. Calls for new restrictions, such as taxing endowment income or requiring hospitals to increase the amount of care they give to the needy, have been growing.

Maintaining trust has also been an issue for nonprofits that have become reliant on government grants and contracts. Although charities have long received public funds, the Great Society programs of the 1960s embodied a strategy of relying on government to pay the bills and nonprofits to deliver the services. This “third-party government” (as the late scholar Lester M. Salamon called it) supposedly had several advantages: It enabled government programs to leverage private dollars; kept them from becoming too rigid, bureaucratic and cautious; reduced the growth of the government workforce; and, not least importantly, broadened political support for the programs to include the directors, supporters and staffs of the nonprofits delivering the services. Despite attempts to curtail it, starting with the Reagan administration’s budget director, David Stockman, who viewed these kinds of partnerships as a “social welfare pork barrel,” the strategy has endured.

A recent investigation by Crain’s New York Business revealed just how extensive nonprofit service delivery has become. “In reality,” Crain’s reported, “much of the day-to-day work of running the city is overseen by a vast network of private vendors that provide services that millions of New Yorkers rely upon: from temporary shelter to job training, addiction rehabilitation to help escaping a violent home, cleaning public schools to maintaining animal shelters.” Crain’s examined 14 organizations that have received at least $1 billion from New York City in the past four decades. It found that many were not well known, received most of their revenues from government and had large workforces, sometimes bigger than the City agency whose services they were helping to deliver. Forty-seven of their top executives earned more than the mayor of New York.

The main point of the report was that “third-party government” in New York was not delivering on its promises — it was neither saving the City money nor improving the effectiveness of its services. The kind of graft and corruption that Boss Tweed would have recognized still occurred, exacerbated by weak municipal oversight. Too many nonprofit contractors were able to use political leverage to become “entrenched,” while “no prominent policymakers have shown a desire to shake up the system.” Relying on nonprofits was meant to improve public services, but in New York, at any rate — and undoubtedly elsewhere as well — this strategy has raised concerns about nonprofit trustworthiness.

Nonprofits not only deliver government services but also try to affect what the government does. Donors, practitioners and scholars have long distinguished between “charity” (providing help to needy people) and “philanthropy” (addressing the social, economic and political conditions causing need). For example, the Russell Sage Foundation, one of the first modern grantmakers, was established in New York in 1907 to study and improve “social and living conditions in the United States.” Its work helped shape Progressive Era legislation. Today’s largest foundations, such as Gates and Ford, take a similar approach, as do numerous other nonprofits, such as think tanks, government reform groups, advocates for various causes and many more.

Although supposedly rooted in nonpartisan analysis, such activities can be controversial and lead to accusations that the organizations engaged in them are pursuing a narrow — or even a partisan — agenda. One of the most famous examples occurred in the late 1960s, when a Ford Foundation-sponsored effort to foster “community control” of a school district in Brooklyn led to conflict between community members and teachers, a series of strikes that closed New York City schools for more than a month, with consequences that are still being felt to this day. More recently, San Francisco’s District Attorney cut ties with the John D. and Catherine T. MacArthur Foundation, which had made grants to the city for criminal justice reforms that voters had rejected. Grantmakers on the right, like The Koch Foundation, have long been accused of using their money, along with political donations, to promote a conservative agenda.

These kinds of examples have led to questions about the propriety of philanthropy in a democratic society. Scholars such as Stanford’s Rob Reich have argued that because they depend on the money of wealthy people, nonprofits cannot be trusted to act in the public’s interest without major changes. Then-Sen. JD Vance was more direct, telling a Claremont Institute conference that large foundations were “social-justice hedge funds” and calling for curtailing their tax privileges. Progressive populists, such as Sen. Bernie Sanders, have followed suit, though they view funding from “right-wing billionaires” as the problem.

In his classic history, “American Philanthropy,” the late Ohio State University scholar Robert Bremner seems to agree with the critics of philanthropy:

Though the details differ, today’s concerns about the trustworthiness of nonprofits and their donors echo those expressed throughout American history. Paradoxically, Americans have long made philanthropy a central part of their civic life (as Alexis de Tocqueville famously noted), but at the same time, have never entirely trusted it.

In fact, the United States employs several mechanisms to try to control the nonprofit sector. Although enforcement is inconsistent, both federal and state regulatory agencies can challenge philanthropic groups over the salaries they pay, conflicts of interest and other matters. (In 2018, for example, New York’s Attorney General dissolved a foundation because its grants excessively benefited its donor, Donald Trump.) Several private organizations — such as higher education and hospital accreditors — also promulgate standards and have ways of requiring compliance. Accompanying government grants and contracts are a host of rules binding on recipients, ranging from the procedural (e.g., using certain accounting methods) to the substantive (e.g., stipulating staff qualifications). Nonprofits can “entrench” themselves as public contractors partly because competitors must incur substantial costs to meet such requirements.

Although protected by the First Amendment’s guarantees of freedom of speech, assembly and religion, nonprofits are also restricted by a variety of laws and court decisions, including prohibitions on endorsing candidates for public office. (Controversies over their involvement in recent election campaigns and protests on university campuses have led to calls for additional restraints.) Foundations must disclose their grantees to the public, but many other kinds of nonprofits can withhold the identities of their supporters. Even so, detailed information about their governance and operations — such as their annual reports to the Internal Revenue Service — is now easily available. Once relegated to the society pages, reporting on charities, as the Crain’s investigation demonstrates, has become a regular beat for many media outlets.

It is also worth remembering that the public regards nonprofits as more trustworthy than other social and political institutions. The public also seems capable of distinguishing among parts of the philanthropic world — foundations and high-net-worth donors are regarded more skeptically — and among the various kinds of activities that nonprofits undertake (with election-related activities much less likely to be trusted).

Important as it is, trustworthiness is not the only valuable aspect of nonprofits. Also important is their ability to address issues or provide services that governments and businesses cannot or will not. Nonprofits can — and do — take on causes that may be unpopular. Many attempt novel ways of addressing problems. Performing this kind of work risks arousing suspicion, criticism, opposition and, yes, distrust from those who prefer more conventional approaches. Indeed, many would argue that nonprofits’ increased reliance on government funding and earned income has already made them too averse to risk-taking and championing unfashionable causes.

It also turns out that people typically have more trust in organizations or individuals they know. Independent Sector’s surveys have found that among those “familiar” with nonprofits, in 2023, 58% had a great deal of trust in them and only 11% had little trust. For those unfamiliar, the respective proportions were 28% and 24%. The more one is engaged with nonprofit organizations (such as by volunteering or receiving assistance), the more one is likely to have confidence in them.

Although Americans continue to hold lofty expectations for philanthropy and the nonprofit sector, they are increasingly skeptical about what these institutions really do. The organizations they are most likely to trust are those they are involved with directly. But the ones that have the greatest capacity to deal with urgent problems are apt to be more distant, managerial, complexly financed, politically engaged and, as a result, less trusted. What was true a half-century ago when Bremner wrote remains true today. American attitudes toward philanthropy and nonprofits are paradoxical: embracing them and wanting them to do more, but ready to distrust and criticize them when they do.