One of Britain’s most famous art institutions has reversed a sponsorship deal after it was revealed that the sponsor’s owner had backed a ban on teaching LGBT issues. As art organizations, universities and non-profits become more reliant on sponsorship rather than government funding, they need to strengthen their due diligence procedures to mitigate reputational, financial and strategic risks.

A sponsorship U-turn

Last month, Britain’s biggest art prize excitedly announced that it had secured a sponsorship deal for a new exhibition with Stagecoach South East. It seemed a no-brainer for the prestigious Turner Prize to accept a large sum from a transport firm with no legal or financial red flags. Yet within twenty-four hours, it said the sponsorship deal would not go ahead after campaigners protested that the chairman of Stagecoach had backed a ban on Teaching Lgbt Issues. It was pointed out that Sir Brian Souter backed a campaign to keep a law banning teachers discussing gay rights in schools 19 years ago.

This is a Risk faced by more and more arts organizations. Public funding of the arts in the U.S., UK and many European countries has fallen in recent years, so these Institutions are looking more to corporations and philanthropic individuals to support their work. But this brings greater due diligence requirements, and many organizations are simply not ready. The organizers of the Turner Prize, for example, admitted they did not know about Sir Brian’s views on gay rights when they signed the deal.

It is no longer good enough for these institutions to check the credentials of a company looking to sponsor them in a ‘box-ticking’ way. Indeed, the Turner statement pointed out that “the relevant legal and financial due diligence was observed.” Arts organizations must also ensure the personal values of a sponsor’s management and ownership are compatible with their own charitable objectives. This requires a detailed search of previous media coverage of the company, its ownership and management and, crucially, their social media accounts.

Universities risking their reputations

Another sector that should pay attention to the Turner Prize’s difficulties is universities because in the U.S. and parts of Europe they are also becoming increasingly reliant on philanthropy. Some of the biggest universities and arts institutions in the U.S., UK and France are currently facing significant media scrutiny for accepting gifts from the Sackler family, whose company Purdue Pharmaceuticals has been blamed for allegedly fueling the deadly opioid crisis in the U.S.

A recent article in the Washington Post called out the Sacklers’ beneficiaries, including Harvard, Cambridge, the Louvre and the Metropolitan Museum of Art, in its headline: “Why haven’t major institutions cut ties with the Sackler family?” Some of these institutions pointed out that the Sacklers have not been legally convicted of the alleged actions, and that the institutions have already spent the money they received from the family. But this decision to hold firm could cost them in other ways as they seek to attract young people to study or visit. That’s because surveys show that millennials want to work and study somewhere that shares their ethical values.

Globalization brings added risks

The globalization of philanthropy adds another layer of complexity to the due diligence requirements of arts institutions and universities. Twenty years ago, most of their donors were local companies and individuals, but today institutions receive major gifts from donors in China, Russia and other countries which require extra due diligence checks.

For example, British universities including Oxford and King’s College London and the Photo London Art Fair recently faced demands from politicians and media to sever their ties to the Sultan of Brunei after his regime introduced a law which could make gay sex and adultery punishable by stoning to death.

As a result of the ease of making global transactions, the art world in particular has come to be used for money laundering. For a wealthy individual looking to turn their ill-gotten gains into legitimate assets, spending £20 million on a painting in a reputable gallery in London or New York is seen as a way to wash money gained from corruption and crime. Auction houses and galleries must take AML regulations into account in their compliance procedures.

What can organizations do?

Consider taking the following steps to mitigate the rising risks involved in accepting donations:

1. Update their due diligence procedures to cover alternative data sources, like newspaper and broadcast coverage and social media traffic.
2. Hold prospective sponsors to a higher standard. Do not simply check that they meet legal and financial criteria but consider the commitment to ethics from the firm and its directors.
3. If an existing sponsor is found to have acted unethically, be quick to respond by condemning its behavior and spelling out your institution’s own ethical policies. Consider rejecting or returning the donation. This might cause a short-term financial hit, but it will bring longer-term reputational value.

Arts organizations, universities and non-profits often rely on modest budgets, so they might be reluctant to increase their spending on compliance. But as recent headlines show, the reputational, financial, legal and strategic impact of lax risk management can be even more costly.

Take Action:

1. Read about managing reputational and financial risk on our blog.
2. Learn how Lexis Diligence® and LexisNexis® Entity Insight helps organizations stay alert to emerging risks.
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