There was no particular reason for Steven J. McCormick's salary to raise a red flag. In fact, his 2003 remuneration as CEO of the Nature Conservancy, the world's largest environmental charity--at $275,000 plus health and retirement benefits--might even have seemed inadequate. With operations in 28 countries and claims of having nearly a million members, the Conservancy that McCormick was running was, after all, the nonprofit equivalent of a multinational. But it turned out that McCormick had also received a $75,000 sign-on bonus, $75,000 to cover living expenses, a $1.7 million loan to buy a new house and a no-strings-attached discretionary fund to use toward finishing pet projects.
After an exposé by the Washington Post in May 2003 revealed his benefits package and other irregularities, Congress launched an inquiry, and the Conservancy has spent the past two years overhauling its accountability practices. The nonprofit has instituted mandatory ethics training for its staff and voluntarily implemented sections of the strict new governance guidelines in the Sarbanes-Oxley Act, which does not apply to charities. McCormick took a 5% pay cut, discontinued the discretionary fund and immediately paid back the loan. "The management has taken this situation very seriously," says Stephanie Meeks, the Conservancy's chief administrative officer. "We have taken specific steps to make sure there isn't even the perception of wrongdoing." McCormick was not available for comment.
McCormick and the Conservancy learned the hard way that charity is no longer beyond reproach. Corporate America has been penned in by new regulations imposed by the Sarbanes-Oxley Act, but the nonprofit sector faces few rules for disclosing financial health, paying executives or explaining spending. But in the postscandal era, state and federal lawmakers are pushing for stricter standards of governance for nonprofits.
The new scrutiny is a response to the exponential growth of the nonprofit sector over the past decade--and to concerns that some institutions are scamming the system by seeking tax-exempt status. The Internal Revenue Service lists more than 1.8 million charities, up from 739,000 charities 25 years ago. The tax-exempt sector includes not just soup kitchens and scholarship funds but also labor unions, hospitals, the NCAA--even Major League Baseball. "Today you see nonprofit holding companies," says Minnesota state attorney general Mike Hatch, who has aggressively pushed for better nonprofit governance. "We're dealing with multibillion-dollar enterprises, many times with no tie to the community."
The IRS has been working overtime to catch the scammers. Flush with funding to root out nonprofits connected to terrorism and given a new institutional mandate to do a tougher job, its Exempt Organizations Division has added 160 auditors over the past two years. Since August 2004, according to Mark Everson, commissioner of the IRS, the agency has contacted 1,240 organizations with questions about how they pay their executives. So far, 719 returns have come under audit for suspicious accounting. State regulators, who have traditionally policed nonprofits, are pushing for new laws. The House and Senate held hearings this summer on nonprofit governance and drafted legislation that is being reviewed as part of a tax-reform package. (The last major regulations covering the industry were adopted in 1969.)