Karla Simon

As I suggested in last month’s blog, major concerns for the new foundations in China include good fund management, human resources and board development – how foundations are seeking to make their giving more effective by enhancing each of these aspects of their operations is what I will address this month. The 2004 Foundation Regulations permit two different types of foundations to exist: public fundraising foundations and non-public fundraising foundations, often referred to as private foundations. The latter are set up, as explained in the last post, by wealthy families or corporations. Many of the public fundraising foundations are the old GONGO-type entities, such as the Soong Chingling Foundation, the China Charity Federation, the Red Cross Society, etc. There are newer public fundraising entities that have broken out of the structure in which they had to be subsidiary entities within such large, national groups – notable among these is Jet Li’s One Foundation, which is now registered in Shenzhen. But these are a minority. Most new foundations do not raise funds from the public.

Fund management and reporting

Against the backdrop of an increasing number of scandals in large GONGO-type foundations, basic management of funds is an important issue for all foundations. Some items that have recently been mentioned in the press:

• Xu Yongguang, a promoter of the China Foundation Center (CFC), a Beijing-based NGO that concentrates on making foundations in China more transparent, believes that the guidance issued in August by the Ministry of Civil Affairs (MCA) on transparency and accountability will not have the desired effects unless it is ‘reinforced by punishments and awards’. ‘The regulations will be nothing but empty talk unless the government can tell charitable organizations what punishments they will face if they don’t follow the rules and how they can benefit from making their work more visible,’ according to Xu. He said about two thirds of the country’s 2,000 charitable foundations have not set up websites, and the CFC still has difficulty persuading them to release annual financial reports. He also said that in 2010 only 70 percent of the foundations in the country disclosed such reports using the center’s website.
• Shenzhen One Foundation (which is a public fundraising foundation with local registration) and Ufida Software are working together to develop a donation information management system, but the foundation has found the task is filled with tiny details. Some donors do not leave their information, so foundation staff members have no idea who donated the money or how to reach them. The foundation must build connections with banks to ask donors to fill in forms and leave their contact information, so that it can record each donation and make the information available to the public. ‘It’s not technically complicated to build an information management system, but it’s very expensive to have a highly automated one,’ said Yang Peng, secretary-general of the foundation. ‘How much it will cost depends on which level of transparency you want to reach. If you just want to post bank statements on the web, it’s a piece of cake.’

China’s ‘private’ foundations have endeavored to establish self-regulatory guidelines, which were adopted at the second annual private foundation forum. The principles are based on previously developed self-regulation guidelines of the China NPO Network and others. They are, however, not enforceable.

In addition, the guidelines could do a better job of specifically addressing how foundations are supposed to manage their funds. Noting the failure of the Red Cross Society – one of the organizations involved in recent public scrutiny – to have adequate accounting records disclosing expenditures of funds received, Cheng Gang, president of the CFC, has said that ‘the society should adopt a more open and tolerant attitude by inviting all capable organizations, such as the Big Four accounting firms and large international IT companies, to join the information-releasing project [now required by government] and find a solution together.’

The following chart illustrates public sentiment about the information available from charities in 2010.

Watching developments in this regard will be interesting, and I plan to keep track of them on this blog.

Human Resources

One of the things that is most difficult for foundations in China is finding adequate and well-trained staff. According to the self-regulation guidelines, private foundations ‘should establish a standardized personnel and human resources management system, in order to attract, manage, nurture and inspire talents, so that they can provide high-quality and efficient services’. The guidelines urge foundations to have appropriate recruitment processes as well as conflict of interest guidelines. Similar principles are suggested for recruitment and management of volunteers, including telling volunteers about the nature of their work, skill requirements, time investment, working environment (including hardware and software environment), as well as the possible risks involved. In addition, foundations should ‘clearly show the voluntary nature of this work as well as the possible subsidies’.

With respect to training volunteers, there are numerous outlets in various localities. These tend, however, to deal with planned events, such as the Olympics or the Shanghai Expo. Dr. Zhang Wangcheng does some general volunteer training in connection with Beijing Normal University’s Volunteering Center in the Institute of Philosophy and Social Services.

Finding well-trained paid staff remains more difficult than recruiting volunteers. Tao Ze, the vice president of the CFC, said: ‘In the business world, the customers pay the fee for the trainee, so the trainer works really hard to refine the training. However, instead of trainee, it is the foundations that pay the fee to the trainers, so there is no powerful incentive for the trainer to refine the class or for the trainee to study carefully.’ A report commissioned by the CFC in 2010 notes the difficulty of recruiting good staff because of the low pay and difficult work the field requires; it is available in Chinese on http://gongyi.qq.com/zt2010/gyrc/.

Board development

A third relevant issue is board development. While the self-regulation guidelines address this issue in general terms as well, they clearly rely on the government mandated regulatory system, which requires both a board of directors and a supervisory council, to enforce good governance principles. In addition, the government has issued assessment guidance, which grades foundations (and other charities) on their ability to meet certain criteria, making it a necessity that plaques with the assigned grades be posted on the walls of all charities.

The informal self-regulation guidelines of course do not speak to the issue of where foundation boards should look for training, and current efforts to provide it are hit-and-miss. In addition, many staff members of foundations note that founders tend to control the boards that are appointed. Further, and most importantly, there is a notable lack of the concept of fiduciary duty contained in the regulations, and little in China reinforces a climate where developing board responsibility in this regard seems important. That may be changing, however, in light of some of the recent scandals.

One of these has received considerable attention in the press, among the academics who are involve with these issues and within the Ministry of Civil Affairs (MCA) itself: the largest foundation in China at the end of 2010 (3 billion RMB, though the source of the funds has been called into question), the Henan Soong Ching Ling Foundation (HSCLF)*, is currently embroiled in a huge scandal that has been reported extensively in the press and on the internet. Although a lot of intertwined allegations have appeared, the most serious were reported by Nanfang zhoumo (Southern Weekend) at the end of August: one was the conversion of 80 percent of a 148,000 m² plot of land − originally slated for a youth activity centre − into a luxury apartment community, with the HSCLF citing ‘insufficient funds’ for developing its charitable activities without the income to be generated from this activity.

A former official of the foundation appears to have admitted the problems with the relationship between the foundation and the investment company, stating: ‘Since the assets of the foundation and the investment company are not clearly separated, the company is actually a front for the foundation.’ Even though not expressly forbidden by the 2004 Foundation Regulations, such a control relationship raises questions about a conflict of interest and calls into question the ethics of the foundation personnel who permitted the transactions. In addition, the real estate investments may be entirely too risky to be condoned. Chinese academics have suggested that there are problems of perception even if not of strict illegality, but some commentators have laid the problems at the feet of lax regulators, such as in this editorial.

Other issues raised in the exposés include loans to companies controlled by HSCLF and its senior staff, which were ‘repaid’ by ‘donations’ to the foundation − these appear to be attempts at income tax avoidance. The issues have attracted the attention of the National Audit Office, which has launched an investigation of HSCLF.

The MCA is pursuing an aggressive agenda to prevent these and other misuses of funds, which will be discussed in the next blog. It will also look at how such problems are addressed by some of China’s neighbours, such as Singapore. There, a Commissioner of Charities was created in September 2006 with these strategic objectives: ensuring regulatory compliance of charities and Institutions of Public Character (IPCs); promoting good governance and best practices amongst charities and IPCs; and becoming a proactive and pre-emptive charity advisory.