Ignorance Was Bliss

It’s hard not to be mesmerized by the unfolding affair of Bernard Madoff, not to be in awe of how one individual kept such a gigantic fraud going over a period of decades. Those of us who monitor the allocation of valuable philanthropic dollars are bemoaning the funds that were lost by Madoff’s betrayal of trust, and wondering where the funding will come from to maintain programs that were supported by donors and foundations that invested with him.

It will take months, if not years, to fully understand how the Securities and Exchange Commission and other regulatory bodies failed to heed the warning signs. And it may never be possible to gauge the full impact on nonprofit organizations that provide educational, health and other human services. Some will immediately cut back or close, but less drastic long-term effects will only be evident as philanthropic funders reassess their allocations and contributions in both the short and long term.

A large number of Web sites have been listing the charities, private individuals and even foreign financial institutions that took the risk of investing in Madoff’s private funds. In many cases, victims were not even aware their funds were with Bernard L. Madoff Investment Securities LLC, as they had entrusted their funds with firms that reinvested with Madoff.

Which leads to the question: How could so many savvy people have placed such large sums of money in a privately owned investment fund? Could it be a sign of the times, in which seemingly easy money could be made by the mere flick of a switch on a trading room computer? Clearly, Madoff’s unusually high “guaranteed” rate of return attracted investors almost like a magnet attracting metal filings, and the “profits” he boasted were apparently too good to resist.

People leveraged their personal fortunes and organizational resources with hopes and dreams that a “financial wizard” could work wonders on both their savings and charitable funds. Professionals who should have known better allowed themselves to be drawn in by the attractiveness of the profits to be made on the investments. Had they requested more information on how the funds were invested and what “instruments” Madoff used to guarantee a steady, year-after-year return of 10 percent, they would be more solvent today.

Any way you look at it, all of us who make our living raising funds, whether for joint business ventures, in the world of finance or for the operation of nonprofit organizations, will now have to work harder. Now we know that even what seemed like reasonable accounting and reporting principles can be manipulated. Hence, there will be a much greater demand for transparency, and the more removed we are from the potential investors or funders, the more we will have to work to convince them of our integrity. This will require development of instruments that provide more in-depth information about our institutions.

This may well be the silver lining to the Madoff storm cloud – at least to those of us who didn’t see our personal fortunes destroyed. The call for greater financial controls and transparency may be good news for the world of “money making money.”

In terms of nonprofit organizations, we might experience major donors asking their accountants and advisers to examine yearly and multi-year reports. In addition to financial data, they may request management and/or program audits, to understand better how an organization functions. Undoubtedly there will even be some funders who request a seat on the board of directors or finance or budget committee of an organization. This will not only give them access to more information, but also direct control over investment decisions.

This increased need for accountability will be important for international nonprofit organizations in general and Israeli nonprofits in particular. In the wake of Madoff, they will be requested to demonstrate their fiscal solvency before receiving continued funding. “Sustainability” has been a growing theme in recent years; now it is likely to become a priority for funders charged with determining the allocation of limited, if not scarce, resources.

As we enter new times, I would like to think that my Israeli colleagues who are either members of boards of directors or occupy executive positions in voluntary organizations, will welcome the opportunity to become more accountable for the functioning of their organizations. Initially, this may seem like a nuisance, but by demonstrating their skills and abilities as lay leaders and professionals, they will communicate their understanding of the role of integrity in managing philanthropic funds. The road ahead will be arduous in the coming months and years, and it is the organizations that choose to go the “integrity route” that will be the beneficiaries of the committed philanthropists.

Stephen G. Donshik, D.S.W. is a lecturer at Hebrew University’s International Leadership and Philanthropy Program and has a private consulting firm focused on strengthening non-profit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.