Nonprofit Board Crisis

Nonprofits Must Demonstrate Public Benefit

The British Charity Commission has "rejected an application for charitable status from an organisation that promotes an ancient mystical belief system called gnosticism."

The Commission stated that the applicant organization "did not promote a positive, beneficial, moral or ethical framework because it focused too narrowly on the spiritual welfare of individuals" and more importantly from this blogger's perspective, the "application would also have failed on public benefit grounds because it was not demonstrated that the benefit was to the public or a sufficient section of the public".

Now, imagine if the IRS used this latter standard -- demonstrating that the benefit was to the public or a sufficient section of the public -- to grant nonprofit status.  Can all US nonprofits say they benefit the public or a sufficient section of the public?  And, should they be able to demonstrate that they do?  I think so.

Nonprofit Foundation Means Celebrity Needs Different Street Cred

The Yele Haiti Foundation is getting lots of, but less than positive attention.  The Yele Haiti Foundation is founded and apparently operated by Wyclef Jean (Rapper, formerly of Fugees).  But, unlike most of the charities working hard to address the events that are going on in Haiti right this moment, the Yele Haiti Foundation is not getting the most positive review.

The Smoking Gun reported a couple of days ago that the Foundation, actually only recently called the Wyclef Jean Foundation, hasn't been very good about filing its tax returns and more importantly, paid the board members, including Mr. Jean, some pretty good sums of money "for services provided to the Foundation".   And, on Saturday, the Washington Post, noted that the Foundation, "has spent money in the past, with administrative expenses that appear to be higher than comparable charities". 

Sunday, the Washington Post reported that Mr. Wyclef released a youtube video defending that he and his Foundation was indeed doing good work and more importantly "you can give to who you want to".    Maybe it's a good strategy for Mr. Jean to take this action but I'm thinking that he would do just as well to recruit some "outside" board members to help address the variety of issues that at minimum, are not well received by the public.  If he is truly committed to the work of the Foundation, it's time for Mr. Jean to understand that the philanthropic world demands another type of street "cred".

Nonprofit Board Duty of Obedience

I like chatting about the nonprofit board's duties as a jumping-off point for thinking about what to expect from boards, individually and collectively.  Today I got an a-ha about the nonprofit board's duty of obedience that, because I like to muse about the board's duties, I thought I would share.

Now generally, the nonprofit board's duty of obedience refers to conflicts of interest.  But a corporate law paper I reviewed also adds the dimension of a legal principle called "dead hand control". 

As I understand this principle, a nonprofit (more often, trusts and foundations) board's first, understanding and obligation for operating the nonprofit comes from the founder -- often, dead.  As the paper states:

Obedience to that will is the source not only of the duties of care and loyalty, but also of a peculiar but widely ignored obligation. This is the duty of private and charitable trustees to follow the directions of principals who are dead.

So what's all this to you?  The principle of dead hand control is actually referred to in really big legal cases like when previous trustees challenge the direction of current trustees, especially when the current trustees want to use endowment funds for a purpose that really changes the nature of the organization or maybe want to do something like move a museum from the burbs to the inner city (a real case in Philadelphia).

I really believe that all nonprofit boards, especially those without their original founders and exec still around, do well to understand the theory of change, origins and history of their missions and organization as they guide the organization forward.  There are lessons to be had and duties to be fulfilled. 

According to the dead hand control principle, nonprofit boards have a duty to the past.

Nonprofit Theaters: The Bad and The Ugly

"Playwrights say artistic directors (of some of the nation's major nonprofit theaters) are obsessed with selling tickets in spite of their nonprofit missions, and with pleasing board members by favoring world premieres or playwrights who are already admired by critics." according to a recently released study from the Theater Development Fund.

However, "Theater leaders and artistic directors, meanwhile, are frustrated by the lack of private and government money available to produce new plays and feel under pressure to balance budgets just to survive, according to the study. These executives also tend to view playwrights as insufficiently savvy about the cold realities of the business and say playwrights harbor misperceptions — that executives are less concerned with audience reaction or controversial subject matter than playwrights assume, for instance."

HMMM.....nonprofit mission challenged by the need to generate funds; boards have a different standard for success; not enough money; not enough business sense.  Surprised?

Check out New York Times for an article on the study.

Nonprofit Vs. ForProfit

The paradigm that values the nonprofit organization suggests that when the government doesn't have a mandate and the for-profit doesn't have an economic incentive, nonprofits should fill the gap.

There's a fight going on right now that effectively challenges this paradigm.  The fight is over a nut-based peanut butter-like product that can provide nutrition to the malnourished of the world.  It's even relatively affordable.  And, it's produced by a French for-profit that has a patent pretty much blocking everyone else from creating a similar product.

So what's the fight about?  Two US nonprofits are suing, I guess based on a higher principle that suggests that more product would be produced and distributed if it wasn't under the sole control of one for-profit.  I think that's the point.  But, if a for-profit can address a social need and of course, profit, are nonprofits needed?  Can a for-profit have a profit and a social motive?

That's a debate for a really large table and one that social entrepreneurs have already developed the answer to: Of course they can!

To read the story, check the New York Times.

Nonprofit Board Insurance

Nonprofit Board Insurance, generally known as D&O -- Directors and Officers liability insurance, is generally considered a best practice purchase for nonprofits. 

As described in a recently received mailing from BoardSource (a new purveyor of D&O insurance), "D&O insurance safeguards your board members, your volunteers, your employees and your organization against costly management liability lawsuits not covered by your general liability policy.  It provides coverage for claims alleging mismanagement of your organization's assets, libel, slander, third party discrimination, as well as employment practices liability (wrongful discharge, failure to promote, sexual harassment).

I hear lots of different opinions about why D&O is important for a board.  Many, many "authorities" state that boards and board members will not be individually or collectively held responsible for most of what they do unless someone suing them for a bad act can prove that members were grossly negligent or even not prudent (again, have to both defend what negligent is and prove it).  So, if these exceptions are the only times board/board members can be held responsible, what exactly is the purpose of D&O insurance? But of course, there's always the cost of litigation and D&O does cover the cost even if you are not worried about the consequences.

Anyway, most folks say D&O is just the cost of doing business as a nonprofit and I agree.  Nonprofits should just purchase a policy.  I might think though that an interesting study would also be to find a way where the value of all these investments couldn't somehow be returned to the investing nonprofit -- maybe like a whole-life policy which one can borrow against or actually draw-down on after 20 years or so.

Back to BoardSource.  The letter that started me off on this email is an invitation to buy D&O from a BoardSource "endorsed" vendor which should give BoardSource members substantive discounts -- always good in my book.  I hope BoardSource is getting something back monetarily from being an "endorser".  Is "endorser" actually code for "donor?"

But no, I'm not done.  The real insight from the letter is the form that must be completed to apply for this insurance.  While some of us in the Board Development business are busy trying to find ways to help Boards function in ways that best match their cultures and needs, this form suggests that there are some "requirements" that make for an effective or at least, "least-liable" board.  The form asks:

Does the organization maintain an audit committee (this is a Sarbanes-Oxley recommendation)?

Does the organization maintain an investment committee (I think only applicable if there's anything to invest)?

Does the Organization maintain an executive compensation committee (a committee?)?

Is the Organization currently or has it at any time over the last year been in breach or violation of any debt covenant or loan agreement or any other material contractual obligation?

Is the organization involved in any standard setting, certification or peer review activities?

Anyway, there are a whole lot more questions that are certainly interesting as questions around how "responsible" an organization, aka, the board, is behaving, and how that behavoir affects liability. 

 

 

Nonprofit Arts: What It Takes To Survive and Prosper

Nice piece in the New York Times that offers insights about what it takes for nonprofit arts, particularly museums, to survive and prosper.

The article begins with an update about two new museum execs, east coast and west coast.  They "lack experience in museum administration but have plenty of hands-on, real-world experience running businesses, collaborating with other practitioners and making creative things happen in the fields their museums focus on."

Next the article talks about two other newly appointed museum execs who "galvanized their institutions and their boards, siphoning attention, trustees, art and money away from their competitor."

I believe these to be lessons for all in the nonprofit sector.

Nonprofit Boards

The Conference Board Review's Winter 2010 issue is now out although not yet up on their site so I will apologize that I can't give you a copy right here and right now but when the magazine put's the issue up, this article titled The Board That Couldn't Think Straight: Why Smart Leaders Sometimes Turn Out to Be Bad Directors is a great read, even for nonprofit boards, who really aren't the intended audience.  However, you can also purchase a related book, entitled: Money for Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions.  The author of the article and co-author of the book is David Zweig and no, I have not yet read the book so I am not endorsing it either way.  I should also note that David Zweig is also the co-founder of Salon.com, in case that provides you with an aha about who this guy is.

So, here are some highlights...

The article opens with the question: "If you're so rich, why aren't you smart?"  Amusing question and really a great question for those nonprofit boards who are filled with reasonably smart and sometimes rich(er) people who for some reason or another, leave their smarts at the boardroom door.  Or as Zweig headlines it: board members are "leaders in the field, followers in the boardroom".  Zwieg notes (and this is true for the failed banks which are the focus of his conversation but he says applies to other sectors as well):  

Directors weren't thinking straight and consequently performed poor; among many other lapses, they failed to challenge managers with tough questions and capitulated to group-think and their CEO's hubris?

Zweig is also referring to a number of legislative attempts (e.g. Sarbanes-Oxley) to get boards to get their acts together (noting how well that worked and also noting that there's lots of talk about this for the nonprofit sector as is even evidenced with the new 990). 

But Zweig correctly observes, I believe, that "these measures do not move the good-governance needle half as much as would reforms that focus on cultural and perceptual improvements and lead to even one additional good director sitting at the table."  Zweig quotes Nell Minow to state: "You cannot fix behavioral problems with procedural solutions".

So what to all this you say?  I'll wrap up today with two thoughts.  First, and using some of Zwieg's observations, board-selection MUST take into account the need for capable people who will be leaders, not followers; be willing to challenge managers with tough questions, be strategic (at least understand the "so-what of the environment" and not operational, to be able to learn from the organization's efforts, and, finally, not serve with their own best interest as their primary focus. 

My second point, boards must regularly assess their work to ask how they are collectively and severally performing.  We hopefully do this with our execs and they with their staff and volunteers.  As Zwieg observed: "Boards carry bad directors--those who leave their spines and better judgments at the door--far too long.  This continues much too long.  Directors--good directors, anyway, should welcome evaluation."

More later.

Nonprofit Embezzlement, Audit Task Force, and, Board Training

I regularly look out for incidents of nonprofit embezzlement to provide a learning opportunity for nonprofit boards.  Unfortunately, these incidents are too frequent and it's clear that learning a) looking out for signs of embezzlement falls to the board as part of the duty of care and being prudent b) how to reduce the risk of embezzlement, should probably become part of a new board member's orientation program.

Well, here's another incident.  This time it's a church where, like most nonprofits, there's a committee assigned to, at minimum, assess the year-end numbers (aka, audit task force). The church I identified for this story is actually in my neighborhood.  What caught my attention was the following: "Police said the accused was in charge of the church's investments and used church funds targeted for charitable acts and scholarships to bankroll his race car business, possibly since 2001."

SINCE 2001?  The church didn't miss the money?  How did the accused explain where the money went?  Uh, they invested in Bernie Madoff?  Can you believe that this has been going on for nine years?  Come-on folks -- what happen to the prudence rule?  If this was your business, would it take you 9 years to figure out an insider was ripping you off?

When will we ever learn?

Nonprofit Fundraising: It's Who You Know

A recent release about who are Bill Clinton Foundation donors certainly confirms for the many nonprofits currently scratching the earth for money that exceptional fundraising is about "who you know".  Seriously, the Foundation's donor list is a who's-who of the world's rich.  

But an interesting phenomon of late is indeed this giving by the rich to other reasonably wealthy folks to give away money.  The Gates Foundation is certainly a prime example with Mr. Buffet.  At the same time, we know that Community Foundations foster similar relationships, but it's not really the rich giving to the rich, but rather, the rich asking for a nonprofit to be a care-taker that can then respond to the community needs. 

So what's the lesson?