Nonprofit Board Crisis

Junior Boards #NonprofitBoards

Here's an "ad" I found in today's New York Nonprofit Media:

Calling all social butterflies! We all know your place in young New York Society is defined by where you live, what parties you’re seen at, and which charities you support. So if you want to step up your social standing, it’s time to invest in sitting on a junior board or two. 

In the company of young professionals and socialites alike, you can fill your social calendar, increase your philanthropic footprint, and enjoy the elite society that New York City fosters like no other. Junior boards were created to groom young patrons into full-fledged board members one day, when your social connections and financial status allows. Start on a junior board and you’ll be rubbing elbows with the Lauren Santo Domingos of society in no time!

It’s time to leverage your social connections and bust out your wallets for these elite foundations and institutions. But remember, joining a junior board isn't all about glamorous parties and writing checks. Commitment is key, so you want to genuinely have a passion for what you are funding, especially when you’re up at 3 A.M. sending event invitations to your entire inbox.

Hm....The cynic in me says: "really"?  But I asked my cynic to step-back a moment to ask my rational, marketing-focused side the question: is this what it takes to excite and interest the 25-35 year-olds in nonprofit board service?  And, apparently, based on the ad - the answer is "yes!"  But I must ponder further to ask: what makes one junior board "better" than another as is suggested by the title of the item "Who Has the Best Junior Boards in New York City?".  Apparently there are "Best"  or "Chisest" (um, I guess this is a word) in this category.  My only clue focuses on the Junior League which is all women and folks who want to socialize while rolling-up their sleeves putting-on activities which actually enable each other to be engaging socially.

Seems like a lot of work to support BUT if the end result is folks who are skilled and ready to serve as a full nonprofit board member - EXCELLENT!

Recognizing Your Board Members #Nonprofit Boards

 

In case you missed it, my recent column in the NonprofitPro magazine was just released.  You can see the full article here.

The article offers my thinking about if, when and how to recognize the individuals who sit on your board.  One spoiler: time is not THE indicator of a member's performance.

In the meantime though, my associate Jane Garthson sent me some additional thoughts on ways to recognize a board member, again, not for just showing up although I acknowledge many are grateful for just this commitment.

- ensure board members are included in general volunteer awards for length of service and such. I’ve found some Volunteer Managers see the board members as so separate they get forgotten

- name an award, meeting room, whatever, after a founding or long term board member as they depart the board

- set up a scholarship fund in their name, or rename an existing fund, e.g., so service fees can be waived when the fees would be a financial hardship

- name an education program after a board member who was instrumental in developing education on that topic

- put bricks or flat stones with one name on each into a path or walkway or wall

- plant a tree for them in a special place and mark it with a permanent plaque

- ask past directors onto a special advisory council that is asked maybe once a year to give feedback to the board on a potential major change in mission or structure (and make sure the council members are named and applauded at the AGM, listed in the annual report, etc.)

 

 

Community Engagement Governance #NonprofitBoards

Last year I had the opportunity to learn about a board that was in disarray.  The board had been violating its bylaws and doing a disservice to its community constituents.  But the constituents stood up and said "no more". Be inspired and follow this link to learn the complete story as told by one of the participants.

https://upriseri.com/2019-06-09-george-wiley/?fbclid=IwAR1S4ZLFHorfR0Ai4BaafnvI1OScDp8Tr2aJs9tJKT8ZY-ZajKDI7l-U5mY

I should note that this is a nonprofit story not unlike thousands where once the founding group goes awry, there will be those who will ensure that services rise again from the ashes.  There is actually research that highlights this cycle where a group sees a problem, organizes, begins to deliver services and becomes the very institution that it fought against originally followed by a new group that must come in and start the process anew.  Congrats to these folks.  Be inspired.  Governance is not of the few.

How to Steal from Your Nonprofit Begins with a Sham-Board #Nonprofit

Marcus May has helped write some chapters on how to personally benefit from a nonprofit.  Mr. May is now facing legal charges from the Feds (there was Federal money involved) but his playbook should serve to at least provide some wisdom to funders and state/federal administrators when they suspect something isn't right.  The biggest problem, no one could look to the boards of Mr. May's Charter Schools to be the accountable body.  Mr. May picked the boards to ensure they wouldn't get in the way.  This of course serves as a good reminder that good boards do indeed "get in the way" to ensure that all is "right" with the nonprofit they oversee.  Here's some of the Law360 article that provides details on this case, particularly about the board.

 

 

Convicted Charter School Operator Hit With Racketeering Suit

 

By Hannah Albarazi

Law360 (June 10, 2019, 8:19 PM EDT) -- A former charter school operator convicted of defrauding Florida schools out of millions of dollars is being sued for racketeering by schools that he and his business associates ripped off by using shell companies to sell them school supplies at grossly inflated prices.

Three public, nonprofit charter school organizations in Florida that receive funding from local, state and federal sources filed a federal lawsuit Friday against Marcus May, his business associates and their shell companies, many of which appear to be named after fictional characters and companies from Ayn Rand’s novel, Atlas Shrugged.

The lawsuit alleges violation of the federal Racketeer Influenced and Corrupt Organizations Act and Florida’s Civil Remedies for Criminal Practices Act.

Galt Solutions LLC, Rearden Capital LLC and D’Anconia Development are among more than a dozen shell companies set up by May, his business associate and longtime friend Steven Kunkemoeller, and their wives, the complaint alleges. Due to the lost revenue, the schools say they were often forced to operate with few supplies or classroom materials.   

“Teachers were forced to teach without textbooks,” the schools allege.  

Through the shell companies, the Mays and the Kunkemoellers unjustly awarded themselves contracts that resulted in the charter schools' overpaying, sometimes as much as 300 percent, for equipment and supplies, according to the complaint.

“The ill-gotten proceeds were then paid to Kunkemoeller with public funds from the schools’ bank accounts. Upon being paid, Kunkemoeller shared approximately half of the profits with May as kickbacks,” the complaint alleges.

Kunkemoeller’s wife, Susan, and May’s ex-wife, Mary, helped carry out the schemes as well, according to the complaint. The Mays and the Kunkemoellers are accused of carrying out fraudulent invoicing, money laundering, and a real estate acquisition scheme.

In addition to purchasing properties in Ohio and Florida with the proceeds, the complaint also alleges that Mary and Marcus May divorced to protect the assets they acquired as a result of the schemes.

“In an effort to conceal and impede the ability of victims of the May Enterprise Scheme to recover funds from which they were defrauded, Mary May and May agreed to a sham divorce, whereupon Mary May ended up with millions of dollars’ worth of ill-gotten cash and other property,” the complaint alleges.

The proceeds of the fraud should be located, assessed and returned to the schools, the complaint says.

The schemes date to around 2007, the complaint says, when May formed his charter school management company, Newpoint Education Partners, and started managing schools across Florida, helping them develop their charter applications and seek approval from school boards.

May took the lead in forming governing boards to oversee each school’s operations and often filled seats on the board with his friends or colleagues, according to the complaint.

“The financial oversight each board exercised was generally to review financial statements prepared by bookkeepers that were handpicked by May. With May’s intentional limited oversight from these charter school governing boards, defendants were generally free to undertake their fraudulent financial transactions without much scrutiny,” the complaint says.

Newpoint Education Partners managed 14 charter schools across Florida, providing services such as negotiating leases for the school buildings, selecting bookkeepers, opening bank accounts for the schools, and purchasing equipment, education materials, furniture, and supplies, the complaint alleges.

May’s company took control of charter schools’ finances and then abused the fiduciary relationship, according to the suit.

Paying Nonprofit Board Members: Or Not #NonprofitBoards

As you might know by now (if you regularly peruse this blog) one of my "issues" with NANOE, this nonprofit focused on redesigning nonprofit boards, is the organization's insistence that paying board members for meeting attendance has issues.  At minimum I wonder aloud, that volunteer board members should certainly have other incentives for meeting attendance than pay (noting this is not about reimbursement for reasonable expenses).

But the National Rifle Association, this is a different story.  As a Washington Post story has highlighted, the NRA contracts with a good number of the board members.  Specifically, "18 members of the NRA’s 76-member board, who are not paid as directors, collected money from the group during the past three years, according to tax filings, state charitable reports and NRA correspondence reviewed by The Washington Post."  Again, I will not discuss further what I believe to be a ridiculously-sized board (although, to each their own, if you can manage it), but even 18 members who have received payments for services or products strikes me at minimum a questionable practice - one maybe should ask why the remaining 58 board members aren't compensated for their services or products. 

Ah, but I digress.  The real question: when and is it ok for a nonprofit to buy services from board members and if yes, how much can these purchases be construed as "buying" member "votes" and is there a limit that affects this ok-to-do activity.

Back to the Post, services and/or products are purchased "from about one-quarter of board members, the extent of which has not previously been reported, deepen questions about the rigor of the board’s oversight as it steered the country’s largest and most powerful gun rights group, according to tax experts and some longtime members.  The NRA does not require board members to donate or raise funds for the group, as many nonprofit organizations do. They do not have term limits.  State and federal laws DO allow members of nonprofit boards to do business with their organizations under certain guidelines. The Internal Revenue Service can impose penalties if top officials and their families receive economic benefits that exceed fair market value.  BUT, tax experts said the numerous payments to certain NRA directors create potential conflicts of interest that could cloud the board’s independent monitoring of the organization’s finances.

So, can nonprofits purchase services and products from board members: sure.  Is it always a good idea? Not necessarily although the correct answer: it depends.

The NRA defends its practice stating that its members have special skills not otherwise available - that's why they are at the board table.  Maybe?

Risk Reduction for a Prospective Nonprofit Board Member #NonprofitBoards

In terms of fulfilling one's fiduciary duty on a nonprofit board, risk reduction and prevention comes to mind.  But what about risk reduction and prevention in terms of even becoming a nonprofit board member.  Here's what an article in the Tallahassee Democrat had to say on this subject.

 

Ask questions first about board service obligations |Notes on Nonprofits

Bob Harris, Notes on Nonprofits Published 3:38 p.m. ET June 8, 2019

After we heard Bob Harris speak at Leadership Tallahassee Building Better Boards program we immediately reached out and ask if he could share with our readers information about protecting the Boards of Directors.

“What could go wrong?  I’m just a volunteer on a board of directors.” It’s better to ask about risks and protections before accepting a nomination to serve. Directors are trustees of the corporation.They are responsible for governance and the well-being of the organization.    

Although organizations are characterized as “nonprofit” and directors are “volunteers,” liabilities can arise. Consider Murphy’s Law: “If anything can go wrong, it will.”  Liability could result from discrimination, copyright violation, harassment, embezzlement or antitrust violations, for instance.  

Every organization faces risks. Nonprofit organizations may have some added risks, for example public record requests, election procedures, committee authority and member demands 

Consider these five methods to afford board protection. Every organization is unique.  Read the governing documents and understand applicable laws. Be sure to rely on legal, accounting and insurance counsel.

 

Board Orientation (ABSOLUTELY) – One of the best ways to avoid risk is to discuss the potential.  Plan an annual orientation to inform directors of liabilities and how to avoid them.   Risk management includes awareness, avoidance, mitigation, transference and/or insurance.   

For example, a nonprofit that offers liquor at a meeting may want to have policies requiring the purchase of host liquor liability insurance, among other safeguards.  Or the event could forego liquor entirely.  Another option is to hire a caterer trained and insured to serve alcohol.  

TIP: Record in the minutes that the organization provided an orientation, including risk avoidance. Distribute or provide access to the governing documents at an annual orientation.

D & O Insurance – Directors and Officers’ liability insurance is used to protect board members and officers from personal losses if they or the organization is sued. The coverage pays legal costs for the defense of the board and may pay associated fines. 

TIP:  As a best practice circulate a copy of the policy (or the cover page) at the board meeting when it is renewed.  Directors should be aware that the policy exists and the amount of coverage.  

Indemnification – Some bylaws, not all, include an indemnification clause. The concept intends to cover the legal expenses of officers and directors who may need to hire an attorney to protect themselves in organizational related work. For instance, a member sues the organization for misuse of funds and the treasurer decides it is prudent to hire a personal attorney.

TIP:  I’ve read indemnification clauses that are narrowly defined and others so broadly stated that even the sons and daughters of board members have access to reimbursement. An organization offering indemnification may want to consider the amount of savings reserve that would be necessary if the clause is used.

Corporate Veil – A corporate veil is a legal concept that separates the actions of the board from the liability of the corporation. The association is incorporated in hopes that a court would not pierce the corporate veil to go after directors’ personal assets.

TIP: The majority of states require an annual report by the organization. Failure to submit the report can result in dissolution of the corporation.  

Volunteer Immunity – Many states and the federal government have adopted laws that protect members of a nonprofit organization. Volunteer immunity will not apply to actions outside of governance, for example, hosting a reception.  

TIP: Realizing volunteer immunity relates to governance and the organization’s governing documents, I like to be certain the minutes reflect that an annual orientation was conducted and directors have access to a leadership manual or portal where governing documents are stored. 

The board is responsible for governing, strategic direction, serving the membership and protecting assets. Directors should be advised of any protections in place. It is worth repeating, be sure to rely on legal, insurance and accounting counsel regarding protections, risks and governance.  

Bob Harris, CAE, provides free governance tips and templates at www.nonprofitcenter.com. You can email him at bob@rchcae.com. Notes on Nonprofits is co-written and edited by Alyce Lee Stansbury, CFRE and Kelly Otte, MPA.  Write to us and tell us who you think should do a guest column at notesonnonprofits@gmail.com

Nonprofit Governance Benchmarks and Ratios #NonprofitBoards

As a part of their fiduciary duty of care, and many say THE part, nonprofit boards must, yes, must, be at least conversant with and make decisions about the financial health of their nonprofit.  Toward that end there are a number of tools all beginning with the Income statement and Balance Sheet.  But below these regularly produced and usually briefly discussed tools there are or can be benchmarks and ratios.  A word of caution: larger budgeted nonprofits will find benchmarks and ratios more helpful and in different ways than tiny budgeted nonprofits.  Alas, in my experience, the majority of nonprofit board members are "number shy".  So, perhaps the very clearly defined analysis of benchmarks and ratios will initially prove overwhelming but if the finance committee can first take a look followed by a series of training of the full board, the board members will be up and running and better able to fulfill their fiduciary duty of care.

From the CPA Journal here's an overview of a comprehensive tutorial to "Using Benchmarks and Ratios to Their Fullest"

The requirement that all tax-exempt organizations complete and make available their Form 990s provides access to a wealth of financial information about peer organizations at minimal cost. In some cases, it may be desirable to develop multiple benchmarks. For example, colleges and universities commonly develop benchmarks for both peer and aspirant institutions. Doing so enables organizations to evaluate how well they are doing and what is required to move up to the next level.

Financial ratios can be useful tools for those in charge of monitoring a not-for-profit’s financial position and operations. Ratios are not a goal in themselves, however, and care should be taken in their interpretation. Conventional wisdom regarding desirable levels for some ratios may be unsupported by empirical data. For example, not-for-profits often feel pressured to lower overhead ratios, even though research shows that investment in overhead is often critical to overall not-for-profit mission success.

Each not-for-profit faces unique circumstances, and pursuit of a given strategy may improve one ratio while worsening another. It is also important for boards to understand that resource providers monitor the organization’s ratios. Management should anticipate and be prepared to address the concerns of donors and grantor agencies regarding the organization’s financial position.

To read the whole tutorial: https://www.cpajournal.com/2019/06/05/using-ratio-analysis-to-manage-not-for-profit-organizations/ 

Tainted Money #NonprofitBoards

While the Sacklers are taking the hit for distributing their opioid-fuelded wealth to museums etc., the Koch Brothers are distributing their wealth to nonprofits who they believe approach solving poverty as long as these nonprofits use the methods the Koch Brothers approach - a no-government, business-focused approach.  Yes, you all know that nonprofits guided by inexperienced volunteers aka boards, just can't be effective because they take government money and don't understand how to operate efficiently like businesses.  Offended?  I think boards should be.  And, wait, what makes Koch Brother money NOT tainted any more than the Sackler money?  If you didn't know the Koch Brothers' money comes from oil, chemicals and paper products as well as from speculative trading of these products.  Polluters to the max?  Absolutely!  Wealthy beyond all reason and against taxes?  Absolutely!  Tainted money: absolutely.

But, how much should it matter to the boards that can solve some of the issues around poverty where the money comes from to achieve this goal?  Isn't the benefit greater than the evil?  This is the question for nonprofit boards to answer.

Here's today's Washington Post article on this subject.

ESG Ratings: Not Applicable to Nonprofit Boards? #NonprofitBoards

There's a heightened corporate shareholder interest in their businesses maintaining ecological balance while avoiding harm to the environment and depleting natural resources environmental, social, and governance (ESG) or alternatively, sustainability. 

According to the Harvard Business Review, “Environmental” disclosures include greenhouse gas emissions, water usage, waste disposal, and more. “Social” disclosures include diversity, labor relations, product safety, employee health and safety, community development, and more. “Governance” disclosures include ethics, board diversity and composition, shareholder rights, supply chain engagement, and more."

The article goes in-depth to review the responsibility of corporate boards to be conversant in their ESG ratings and act particularly when the ratings are unfavorable but not just wait, be proactive and all as part of their fiduciary duty of care.  With the exception perhaps of hospitals, nonprofits have pretty much escaped scoring and the inherent consequences of bad ESG scores.  The consequence of bad scores on corporations tends to be unhappy shareholders and possibly the public.  And, while there may be those companies that pursue good ESG scores because they really believe in ESG, well, that's another story.

Meanwhile, nonprofits should, I believe, in their pursuit to create a society that lifts all boats consider the ESG goals consistent with their own and pair these with the rest of their strategic goals and mission.  How can one just work to ensure someone is fed or housed and not consider the other factors, impacted by the nonprofit I pose.

YES, ESG is not just for the for-profits!  Nonprofit boards, pay attention!

The Case for Nonprofit Board Term Limits #NonprofitBoards

Do board term limits matter?  Yes, this is a real question and despite the fact, in my experience, many nonprofit boards sidestep, ignore, or even forget that they have term limits, there are as many boards who do not recognize as do recognize what their bylaws have to say about how long an individual can remain on the board.  In a Washington Post article on the debacle continuing to play out at the University of Maryland Medical System board, there is rumination on the value of board member term limits.

According to one state legislator: “If members were allowed to essentially stay on the board in perpetuity, it’s a direct threat to the independence and accountability of the board,” he said.

But then the Post notes: There is debate about term limits on nonprofit boards, but most commonly they are recommended, even though dedicated board members with institutional knowledge are sometimes forced out. 

And, A national health-care survey released this week by the American Hospital Association flagged among “opportunities for improvement” that almost a third of organizations reported not limiting how long board members can serve.

But then the American Hospital Association says “Board term limits offer a formal process for longtime trustees to conclude their service, while also providing a way for members to leave a board who may no longer be a good fit for the organization’s governing body,” Debra Stock, an AHA vice president, said in an emailed statement. “Hospital and health system boards must balance the value of experienced trustees with the opportunity to bring fresh thinking and new competencies to the board.”

Me, I believe in term limits.  They can accomplish everything described in the Post article.  They strengthen a board and actually ensure a board reflects the times - something long-standing members may not do.  They also set the stage for achieving additional goals like diversity.  But term limits begin with by-laws.  And this is where a good Governance Committee can step-in and be of service.