Scales of Justice – Frankfurt Version. Photo by Michael Coghlan.
Three things about the media that are true: newspapers (and online journals) need to sell copies (or access) in order to stay in business. Headline writers are always eager for a scandal to feature prominently above the fold. There are responsible journalists out there whose job it is to uncover and shine light on unethical or illegal activities when they see them (and they should).
The Varsity Blues, Jeffrey Epstein, and Sackler sagas are just the latest in a regular series of public scandals that are like super-powerful magnets pulling dark clouds over the nonprofit sector. Before those, there were Lance Armstrong, the London School of Economics-Gaddafi Affair and the Catholic priest abuse scandals. They’re bad news, and it’s easy to lay blame on an eager press, but the truth is the warning signs were there for the nonprofits involved.
The good news is that every minute similar bad press is being averted in the background for nonprofits everywhere because of critical due diligence research.
For those of you who are fortunate enough to have a prospect research professional on staff (or you are one) you may be wondering, “If we’re doing prospect research, are we already doing due diligence on our donors?”
Well maybe. But maybe not.
One of the goals of prospect research is to find out if a person, company, or foundation has the financial means to make a major gift and if they have a past record of being philanthropic. Also, do they have a personal connection to your organization or cause? And do they have the personal interest or motivation to become involved as a donor and/or volunteer to your nonprofit?
These are simple-seeming questions (and a very simplistic breakdown of the scope of our work), but there are a lot of data points (and resources checked) behind the answers. They all come down to: does this person (or company or foundation) have enough money and care enough about our cause to donate?
The goal of due diligence is different.
Due diligence takes a different approach. It is not about the prospective donor, per se. It’s about risk. Protecting your organization – its values, its mission, and its reputation – from potential harm. Some organizations choose to do due diligence as a precursor to involving a new donor. Others perform due diligence prior to each major gift ask as part of their gift solicitation/gift acceptance policy.
Either way, if you decide to do due diligence internally, some of the resources you use may actually be the same that you use for prospect research, but you may use them differently or look at the data with a different lens.
Prospect Research vs Due Diligence
For example, when you do prospect research you will look to see if someone has made philanthropic gifts, especially major gifts, and to which nonprofits. This gives you an idea what level of gift they are capable of, what they’re interested in, and if they are philanthropic generally.
When you do due diligence research, you will also look to see if they have made major philanthropic gifts, but you will look at their giving patterns differently. For example, have they made multiple large donations in a new-to-them geographic area with no other affiliation to or involvement with the nonprofits they supported? That’s how Ponzi scheme operators build reputations quickly.
Prospect research rightfully asks the question can they give? Due diligence asks what does their giving say about them?
When you do prospect research, you’re looking at someone’s past career history to paint a picture of their track toward success. Have they moved up the career ladder? What might their salary trajectory be?
But doing that same work with a due diligence lens, we’re now looking at gaps or sudden changes in a prospective donor’s resume. Those holes require us to look for a newspaper article, or criminal or civil case explaining the reason for that gap. There may be a simple solution like a layoff or birth of a child, or a more complicated one like a bankruptcy or court-enforced “vacation.”
In the course of normal prospect research, we likely wouldn’t check a sex offender’s database. Or ask a prospect’s peers what their reputation for integrity is in business or in their community. Or find out if they are a politically-exposed person. Or if their company is on an international financial sanctions list, or has a failing grade from the Better Business Bureau. Those aren’t the questions we’re being asked to answer through prospect research, and it wouldn’t be appropriate (or time-efficient) to do that level of research on every single prospect. In certain cases, it also may not comply with privacy laws.
That said, anyone doing prospect research should always send up a red flag (and investigate further) if they see things that concern them!
These questions are increasingly important for us to ask because we are linking our organization’s reputation to a donor every time we ask them for a significant gift. It doesn’t even matter if the donor’s name is going on the side of a building anymore – stories about unethical or illegal activities by individuals, companies (and – unfortunately – nonprofits, too) are great fodder for selling papers. And the truth eventually comes out.
Due diligence and prospect research are increasingly important for the success and security of our nonprofit organizations. If you don’t do either type of research internally, think about outsourcing it at a level consistent with your budget and risk tolerance.
If you want to create your own due diligence policy, here’s a good place to start.
