Nonprofit Board Crisis

Nonprofit Arts and Why Nonprofit

While I continue to scratch my head over the idea that a for-profit going nonprofit makes better economic sense than failing economically as a for-profit, there's an interesting Wall Street Journal article listing all the reasons that the Burning Man Event hosts have dreamed-up.  I'm figuring they have learned a bit from George Wein who announced the same intent to convert the Newport Festivals in the same direction.

Here's the rationale:

The Burning Man Project also would be better able to raise money since it could qualify for grants awarded only to nonprofits, and donations to the group would be tax-deductible to the givers, organizers say. Moreover, it would more readily be able to form partnerships, they add.

Having nonprofit status also would shield a group from federal income tax and could be "a reputational enhancement," said Darryll Jones, an associate dean at Florida A&M University College of Law and an expert on nonprofits and taxes.

The foundation also was formed during an economic downturn, the dot-com bust last decade, and struggled through some uneven fund raising and difficult years. As a result, Burning Man's organizers say they absorbed real-world schooling on how to build a board of directors, raise money and implement fiscal discipline.

Well, ok then.  For sure, I want to stay tuned to the "building a board of directors" part.  A good number of nonprofits would welcome this lesson.

Nonprofit Ex Officio Board Member's

Some nonprofit boards have seats assigned to ex officio members.  According to a number of sources, an ex officio (often times a government official and often an official who reprents a money-path) is assigned a seat "because of the position they hold".  The bylaws define whether this representative has a vote but ex officio status and voting rights are not implied by the title.

The Penn State situation reminds us though that an ex officio has the potential to wield significant authority.  The Governor of Pennsylvania holds an ex officio position on the Penn State board.  While he rarely attends meetings (not something I'm particularly fond of) he likely sends a representative on his behalf just to keep his ears to the ground.  As the New York Times article on this matter points out, the Governor had a great interest in this situation at Penn State and wanted to ensure the best results.  The Governor exercised his authority and rights as an ex officio member of the board and in my opinion, for the right reasons and results.

Thanks Claire and thanks Penn State for affording us all one more lesson in governance.

Nonprofit Board Demonstrates Responsible Stewardship

The Penn State situation is certainly not over but I believe the Board of Trustees exercised its duty of care (assuming they were truly kept in the dark prior to this point).

 The Board also broke a rule that needed to be broken for the occasion: they became operational.  The "rule" such as it is, is that a board has only one employee.  But what happens when you fire that one employee like this Board did?  Well, you appoint an interim.  But this Board needed to do some house cleaning that couldn't be trusted to an interim, and because there were policies to be enforced that had clearly not been previously, the Board had to step up and fire folks at other levels. 

I believe the Christian Science Monitor to have presented a good overal review of the many lessons resulting from the Penn State situation.  For those of us working on the governance side of nonprofits, let's remember and raise-up the responsiveness of the Penn State Board of Trustees.  They have, as best I can tell, demonstrated responsible stewardship.  Let's hope the students can eventually learn the same. 

 

Nonprofit Board Duties of Care and Loyalty

In a Times Union (Albany, NY) article describing the pending bankruptcy of a medical research center developed by the founder of Sysco (which started as a small grocery store -- who knew?) there is the following statement: "the board, which had been kept in the dark in most cases, failed to investigate the conflicting loyalties, self-motivation and greed, of the two men" (Chair of the Board and the Center Director).

An attorney, overseeing the bankruptcy of the Center, has filed suit against the entire former board, claiming that they mismanaged the Center's finances and that the former Chair forced the organization into questionable financial transactions, with the rest the board looking the other way.

The duty of care demands that board members be prudent in their actions (including asking the right questions on behalf of preserving mission and assets). The duty of loyalty demands that board members not act in their own personal interest, or rather, that they put the best interest of the organization ahead of personal interest.

The idea that nonprofit trustees can be sued for essentially failing in their duty of care (essentially, assets appear to have been frittered away through either neglect or bad caretaking) and more so, for not conducting due dilligence on a board member raises very interesting issues for everyone involved as nonprofit governors.

We of course look forward to hear how the courts find this case but for now, nonprofit boards might want to take a serious look at how they exercise their obligation of prudence and equally important, how they exercise their due dillignece in screening prospective and evaluating current board members to ensure conflicts of interest or the potential for such conflicts are kept to a minimum.

Thanks Dr. Fram for the heads-up.

Nonprofit Board Fires President and...

The Board of Trustees at Penn State have fired their President and their Head Coach as a result of the child sex abuse scandal of another former coach.

For sure, no tolerance means no tolerance and there are consequences for those who don't pay attention.  But, is this good governance or just a board protecting itself, after-the-fact?  How was it possible for this situation to occur in the first place?  And, besides firing people, what steps might the Trustees take next?

Meanwhile, what of the nonprofit board that never acted with its founder (the original source of this scandal)? 

Nonprofit Duplication

Foundations, these days, are often the very first to yell that there are too many nonprofits, there just aren't enough resources to go around and there should be some serious consolidations going on. 

But, throw in some celebrities and what do we have: a new national nonprofit supported by some of the biggest funders and nonprofit institutions.  And if there are nonprofits who have been working on these issues for years, just accept that you obviously didn't have, or were unable to get the "right" connections.  This is just the way the market operates.

Meanwhile, the operation I am speaking of is Lady Gaga's Born This Way Foundation (to be opened in a year) and it may be that something will happen here that will be good for all those nonprofits that have been toiling around these issues, and for the kids who have been affected by these issues.  The nonprofits all know, that if they are to gain, now is the time to start positioning themselves.

Nonprofit Hospital a White Elephant?

Health Care is one of those few businesses that just keeps growing even in a bad economy.  But nonprofit health care, especially hospitals, seems to tell another story.

According to the Wall Street Journal, the board of the nonprofit Hobokon (NJ) University Medical Center, a hospital refinanced with $50 million in municipal bonds some four years ago, has just sold the operations for $10 million to a for-profit after the nonprofit declared bankruptcy.

Now, how or why is it that a for-profit will be more successful than a non-profit?  Will it be that the for-profit will provide less care for those that can not afford to pay? While the City can argue that a health care resource has now been preserved for the community, I wonder how true this really is.

Nonprofit Board Duty of Care

The very public focus on the retired Penn State football coach might also serve as a helpful reminder for nonprofit boards around their Duty of Care.  In simple terms, a board's duty of care asks a board to make policy decisions about the organization as they would if it were their own.  Reducing risks to the organization then becomes a primary obligation for the board under this duty.  And, if an organization's focus is on engaging volunteers that work with children there are a number of policies that should be in place that both protect the welfare of the children and the organization.  

In the case of the Penn State story, the person being charged is also the founder and an active volunteer in the organization.  Would this situation make a board less focused on ensuring that all the screenings and insurance and policies and procedures are in place on behalf of the children being served, the organization and, yes, the volunteers?  Let's hope not.

Nonprofit Mergers Have Potential As Win-Win

Here's a story about two museums which out of necessity have decided to be one.  The financial details for both are ugly.  The future was likely not pretty.  But a merger provides a ray of sunshine to each while not necessarily making the whole picture pretty as discussed in the Nonprofit Quarterly.  Welcome to hard times of necessity.  I hope for you that it is opportunity not necessity that will move your nonprofit to consider a merger.

 Thanks to Claire Morduch, of Connecticut Voices for Children, for pointing out this story.

Nonprofit Invests Locally

I regularly question how private nonprofit universities justify their exempt status (not unlike private nonprofit hospitals).  It often appears that what these universities do best, besides providing access to a life-long network of connections, is amass money.  And even when universities spruce up their neighborhoods, buying-up continuous properties and bringing in chains to satisfy student interests, the net result is first, profits for the universities (yes, I know, also increasing tax revenue to the community).

So when a private nonprofit university makes an investment that does not singularly serve its students and is maybe a questionable business proposition, I think it's worth noting.  Fairfield University is one such institution that has invested in reopening a Borders Book Store (not under that name) that was a kind-of anchor to the small town of Fairfield, CT.  Such a venture is potentially risky.  In business planning processes I always ask the question when a nonprofit wants to open a revenue generating business where once a similar business operated: why do you think the previous business failed.  And yes, there are a number of factors that contribute to failure but let's be honest -- new bookstores?

That being said the University is wisely considering additional services like a chain coffee shop and a computer vendor.  But more importantly and despite the risks, it is heartening to see a private nonprofit university do more than just collect money.