Nonprofit Board Crisis

Nonprofit Governance and "Flow" Funding

A Christian Science Monitor article about Marion Rockefeller Weber's Flow Fund Circle has me thinking a bit about the concept's application to nonprofit governance.

First, a bit about the Flow Fund Circle.  The Flow Fund Circle is Ms. Weber's invention.  The purpose of the Circle is to make a difference while teaching philanthropy.  Ms. Weber gives to "visionary friends and associates so they can, in turn, give it away."  And, her selectees do and philanthropy happens as do "good outcomes" and equally important, individual transformations on the part of those selected to be philanthropists (at least according to the article).

Now what does this have to do with nonprofit governance?  Well, I'm thinking that nonprofit governance can be, and has been for many, a form of "flow fund" circling.  Over the life of particularly great nonprofits, individuals are invited to serve as board members where they are given the opportunity to ensure that mission happens (fulfilling their duty of obedience).  Nonprofit board members get the opportunity to chart the nonprofit's path and allocate its resources and help get more resources and even sometimes, give themselves.  Like Ms. Weber's model, great board members, those who take their job seriously and with passion, make a difference by lending their skills and time personally.  

Folks who serve on nonprofit boards can effect a win-win-win situation.  Assuming they are taken seriously and they take themselves and take their tasks seriously.

Nonprofit Future Threatened: Board Diversity Failed

There's all kinds of negativity happening at the Center on Hearing and Deafness (CHAD) in West Chester (PA) which, according to Philadelphia Inquirer "is without a permanent director, and most of its staff has quit, including the co-founder and longtime executive director who has been replaced with an interim director who cannot sign and had difficulties with some staffers, half of whom are deaf."

So lot's of issues are on the table including the usual issues that surround the departure of a founder-director and a board that has successfully diversified to have as members some who are not deaf.  But one of the most interesting issues to me arises out of the statement by one of the board members referring to the situation noting that the former exec. "did not seem to understand that the executive director does not run the agency - the board runs it."

Indeed, if "run" means providing direction, oversight and care as though the organization was it's own, this director is absolutely correct.  On the other hand if "run" means being focused on evey operating detail, I can not disagree more.  True, the Board does have an employee: the executive director.  Also true, the board must establish the long range direction as well as measures for ensuring that the "ship" is pointed appropriately and stays on track in addition to understanding what results have been achieved.  But, a nonprofit and for-profit Board has only one employee: the exec.  This can be an occasionally challenging lesson for staff and board alike.

In my opinion, the CHAD board does appear to be taking the prudent steps required of a board fulfilling its duty of care.  It's wanting to make sure that the books are correct.  It has put an interim exec in place while it finishes the work necessary to prepare for a new exec.  It is conducting a forensic audit (actually an ok activity for any board).  It is visiting with funders to provide current information versus letting rumors rule.  And, to top it off, it appears concerned about its own diversity to ensure it can communicate the needs of all its clients.

If there's any possible room for improvement to address the issues championed by the critics, the board might undertake some more work to ensure all understand the reason for maintaining a diverse board.  It must do a better job explaining its own diversity in addition to why it might not hire an exec who can't sign.  I can think of lot's of reasons just off-hand.

Nonprofit Book Review: SWITCH, How (Nonprofits can) Change Things When Change Is Hard

Are you a nonprofit chair seeking to get more out of your board members (this is part of your job in case you didn't know)?  Or maybe you are a board trying to get more out of your Chair or your Exec.  Or maybe even you are an exec trying to change your staff or clients. 

Chip Heath and Dan Heath (the authors of Made to Stick) have provided an excellent introduction on "How To Change Things When Change Is Hard" through their 2010 book: SWITCH.  Yes, this is the latest in Pop Management literature right up there with Jim Collins and Peter Drucker.  And like Mr. Collins and Drucker, the Heaths have combined essential marketing, psychology and organizational development theory with lots of illustrative and real-life stories to defend and explain their theory.

Without giving away the plot, SWITCH offers the premise that each of us and we as groups have two sides: a Rider and an Elephant.  The Rider is the "head" and the Elephant is the "heart" or feeling.  The Rider sets the goals and points direction.  The Elephant must "feel" or see the benefits in order to follow the Rider.  Without the feeling side, no permanent change will occur.  There are a couple of other steps but this is the context.  Maybe not news but it's simple and makes sense.

I don't want to offer more because after all, the authors have done the work of ironing out their theory for practical use.  I will offer one example that provided me with an 'a-ha' about their thinking.  Let's say that coming out of the recession has been particularly hard for some consultants.  The consultants can certainly think about all the reasons that business is so challenging and develop a plan to address the challenges.  An alternative: identify the consultants who seem less affected by the recession.  Identify their chief characteristics or strongest elements and determine what personally needs to change to get to the goal.

SWITCH makes this illustration make sense.  I appreciated the lessons SWITCH has to offer as well as the simple and direct approach to explaining and demonstrating the theory. 

Nonprofit Board Chairs -- I think this is a really excellent buy for you in particular!

Nonprofit It's Not

Apparently not everyone in business feels the same way about the disadvantages of establishing a nonprofit vs. establishing a for-profit to achieve social purpose (see Friday's blog).

As a matter of fact, the Dream Scholars Foundation appears to believe that a nonprofit offers many more benefits than a for-profit.  While the Foundation carries a nonprofit-like title (foundation) the Minnesota Attorney General believes it is otherwise and is suing accordingly (in essence suing on the grounds of impersonating a nonprofit).  For sure, the Dream Scholars Foundation uses all the nonprofit-like words including extolling its "board" but identifying who is on this board and the organization's finances is not possible.  Turning to Guidestar produces similar results.

Is there a caveat emptor here -- yes indeed!  But more importantly for me, I believe we have a way to go on understanding what is social enterprise, particularly to understand the virtues of the non-profit vs. for-profit and more importantly, what these differences and expectations mean to the donor or purchasing public.  We know that cause-related marketing is an effective approach at raising money for social purposes (e.g. Newman's Own).  We also know that for-profits can, within their production activities, have a positive social impact (e.g. Ben & Jerry's and Greyston Bakery).  And we also know that nonprofits can combine philanthropy with revenue to fill market niches (e.g. Benetech). 

Of course, for-profits can make contributions that meet social needs but that does not singularly make them social enterprises.  Or does it?  Maybe the first question to be answered: who is the primary beneficiary?  In nonprofits, the public or a segment of the public is the primary beneficiary.  In a social enterprise, owners and the public (or a segment) benefit.  It remains to be seen who is the primary beneficiary of the Dream Scholars Foundation.

The basis for today's blog was a story in the San Francisco Chronicle.

Nonprofit Only Advantage Is Not Paying Taxes

Oh boy, do these guys not get it!

According to Aaron Houghton and Ryan Allis, co-founders of iContact and, according to Entrepreneur Magazine, "socially aware college entrepreneurs",

My first piece of advice for college students considering starting a nonprofit is to consider doing it with a for-profit model.  The only advantage of having a nonprofit is that you don't pay taxes.  The big disadvantage is you can't get investments.  You can only get donations.  People are much less willing to give a sizeable donation that they are an investment.

Excuse me?  Oops, forgot to mention the HUGE so called contributions these guys are making from their profits to "charities" from their $26 million revenue in '09 including:

1. One percent of employee time--two-and-a-half paid workdays per employee--can be used to volunteer with a nonprofit group.

2. One percent of product--the use of iContact's e-mail marketing software for as many as 60,000 subscribers--is donated to qualified organizations in North Carolina.

3. One percent of payroll--in 2009, that was $109,000--is given to 501(c)(3) organizations along with matching contributions made by employees to a maximum of $300 per year.

4. One percent of equity--a 1 percent stake of iContact--has been committed to the iContact Foundation, forming this year.

First, I want to make it clear that yes, these folks are indeed giving something back and that's good and I suppose they are more socially aware than many young entrepreneurs.  But PLEASE, they have it soooo wrong in terms of their understanding about nonprofits except that getting investments can be challenging.  But let's be clear: nonprofits have missions that are not about putting their profits into the hands of the owners but back into mission.  Nonprofits have more or less independent caretakers who ensure mission is pursued and finances are used for mission.  Just to begin. 

Nonprofits are one form of social enterprise while for profits can take a different form.  Both contribute in different ways with different outcomes.  Both play a role in making society better. 

Nonprofit Board Says Nothing's Wrong; Exec Resigns; AG Investigates

Good Governance?  Has the board fully exercised its duty of care?

Putting a positive spin on what will clearly be a mystery, at least in the immediate, the Board of the CT Humane Society "announced Richard Johnston’s resignation Tuesday. Johnston said in a statement that he has decided to 'go on to other philanthropic pursuits' after 24 years of service to the organization." 

Back a couple of months ago the CT Attorney General announced he would be investigating the organization's finances.  The Board in the meantime, as described by the board president "said an internal investigation found 'no concrete evidence whatsoever' of wrongdoing..."

So, has the board proceeded correctly?  Initially the answer is "depends on exactly how they proceeded".  The board looked and found nothing.  But the exec is gone.  Should the case be closed?

I guess the AG will provide the answer.

See the story here.

Teaching Youth Philanthropy

Entrepreneur Magazine recently saluted Meri Zeiff for starting a T-Shirt company that "allows kids to make a difference--while communicating positive images".

According to the story, Ms. Zeiff was frustrated over seeing the many negative messages presented on her first-grade students' T-shirts.  With a bit of money from her mom, Ms. Zeiff created the verimeri T-shirt company.  The new messages tested positively on her students and their parents and she went forward.

Early on Ms. Zeiff donated a portion of her profits to a program called Free Arts for Abused Children.  Today, each winning designer (kids under 18 who submit a design that is voted on and wins and gets 3% of the profits from their design) chooses his or her favorite charity and another 3% of profits from the sales of a designer's shirts are donated to the child-selected organization. 

Additionally, Ms. Zeiff's company runs school fundraisers where "the schools can create their own school spirit shirts, students vote for the winner, and 20% of that design's profits go back to the school."

Ms. Zeiff is indeed to be commended for her creativity in identifying an opportunity for youth to begin to learn through doing about philanthropy.  These young philanthropists will be tomorrow's major donors.

Nonprofits As Revenue Sources To Cities

While I've been covering a few attempts by cities and states to use nonprofits as a source for offsetting their many economic challenges, Penelope Lemov of Governing Magazine has painted a particularly good portrait of what's going on around the country and more importantly, where cities may find "legitimate taxing opportunities" (although that is not always a criteria for public officials).

I thought Ms. Lemov particularly helpful in highlighting the distinctions between types of nonprofits, making certain types more practical tax targets than others.  Specifically, Ms. Lemov suggests that targeting religious groups raises constitutional issues; going after social services is first mostly about getting back the money government doles out (as these are really contractors and extensions of government and government then is just adding another administrative layer) as well as potentially large political consequences; but healthcare and universities are more consumers of government services and so they are the better targets.  I don't know what happened to museums but maybe that's ok for the moment.

Ms. Lemov's last point -- PILOT (payment in lieu of taxes) deals may be more effective in generating revenue than actually taxing these institutions for a number of reasons. And, of course, let's not forget the taxes on revenue-generating activities (unrelated business income -- UBIT).  I know one municipality that has calculated the amount of space being used for "non-charitable" activities and sent property tax bills.  Right or wrong and for-sure a hassle to the nonprofits, I've gotta give credit to the municipality for making the attempt.

Caveat nonprofits!

Nonprofit in California Owns 87 Homes worth $52 Million

If you're at a party and want to drop a factoid that should then give everyone something to talk about, mention that the Salvation Army (yup, the red kettle folks) in California owns 87 homes and condos worth $52 million.  You might, just to extend the conversation, mention that nationally, the Salvation Army owns about $4 billion worth of real estate but that includes commercial properties.

Yes, it is shocking!  A nonprofit with all these properties, some, according to the LA Times article, really, really nice properties.  But now for some other facts.  Salvation Army officers, the career folks who manage the Army's work, make around $12,500 a year.  They get a car to use to do their work.  They get housing -- the Army-owned housing just mention in the previous article. 

The Salvation Army, through these real estate properties, have, at least until the more recent housing crisis, found a great way to invest their limited resources, the resources they depend on to achieve mission, and get a short term benefit (housing for their managers) and long term benefit (financial profits when needed).  In marketing there is an addage: perception is reality.  Donors want to believe that the quarter, dollar or five-dollars they drop in the kettle makes it possible for the Salvation Army to do the work they do.  Reality, there's way more challenges than those kettles address and the money to address those challenges needs to be creatively earned.  Hence, the Salvation Army thrift stores.  Hence, real estate investments. 

Ok, so maybe there's a transparency problem and donors, who perceive that all the money the Army lives on comes through those kettles.  Yes, maybe the Army should say something about that.  But would donors not find a way to then defend why not to give?  In essence though, the Army faces the same challenge faced by those nonprofits I regularly blog about who have chosen to pay competitive wages to their execs.  It's the right thing to do but donors have a problem with perception.  Nonprofits need donations but they also need creativity.  They must be competitive and get the most out of these donations.  And, like the Salvation Army, they must constantly emphasize their outcomes -- that's what it's all about.

As noted in the LA Times article, "In 1997, the late management guru Peter Drucker told Forbes magazine that the Salvation Army was "by far the most effective organization in the U.S. No one even comes close to it in respect to clarity of mission, ability to innovate, measurable results, dedication and putting money to maximum use."

Nonprofit College Goes For-Profit

I've regularly been asking the question: why are private colleges tax-exempt?  What is REALLY charitable about private colleges given their high tuitions and deep pockets (buildings and investments) and the proportional few who may get a financial break unless they themselves bring something to the table (e.g. athletic skills)?

Well, investors have recently purchased Dana College in Blair, Nebraska.  And no, I don't know the numbers or even what's going on in Blair, Nebraska.  The fact remains, we should be applying a "charitability test" on private college tax exemptions.  That they can be appealing to investors reinforces my position.

See the New York Times for the story.