Nonprofit Board Crisis

Nonprofit Governance Action

When the going gets tough in nonprofit governance land -- understand, take action and be sure to tell eveyone what happened and what you did.

Perhaps as a poster child of relatively responsible governance, the board of an area soccer association is taking action now that it knows its former treasurer stole about $65,000 over a five year period.  

You might say, wait, this is a responsible board that took five years to learn that it's treasurer had been a thief?  Yes, this gives me pause too.  Yes, it appears there have been some mistakes.  I'm speculating that the officers did not have term limits on their positions.  I am hearing this to be a pretty frequent practice likely with the experience that once a board gets someone to serve, they don't want to let go.  I find that the secretary and treasurer are the two least sought-after position mostly because these jobs are more like jobs requiring actual work.

Anyway, yes, there does seem to have been a gaffe somewhere along the line.  One would think that the loss of this much money, let's say $10k annually, should show up.  But, according to the Philadelphia Inquirer, the thief in question did a fine job of masking their withdrawals.  Better part of the story though is the action to speak to the public openly about the situation (assuring calm) and promising changes.  This is what I believe the donor public in particular wants to hear.

Better than usual job soccer assocation!  

Nonprofit Succession Planning

The trends forecast many moons ago around a nonprofit leadership that was ready to retire comes to fruition (noting that the economy and other factors seriously delayed this reality) the topic of succession planning has become a more regular topic.

In a recent Wall Street Journal article the topic of succession planning is introduced specifically for family foundations.  I offer that much of what is written hear is pertinent to the many factual and symbolic founders of nonprofits.  Here's some of my takeaways noting that I have substitued senior staff and/or board members in some places as I believe succession planning is a topic pertinent to a nonprofit's paid and volunteer leadership.

There are lots of reasons why a family doesn't properly plan. Among them: The founder doesn't want to contemplate surrendering control, there is worry about creating conflict, or there isn't another (senior staffer or volunteer leader)  interested in assuming the responsibility.

Whatever the cause, the result can be a mess. A family can find itself under pressure to make hasty pick among candidates who haven't had a chance to become familiar with the organization's workings and mission.

Successful nonprofits anticipate this kind of problem and lay out a succession plan that enables them to vet and train potential successors.  Training is a central activity to preparing prospective successors.

Prospective successors need to make an explicit, genuine commitment to the nonprofit's mission, and that is easier to establish if the goals have been clearly set down in writing and maybe even on video.  If the mission is somewhat flexible and allows a new leadership to set some new priorities, it can help ensure a successor's enthusiasm.

Creating clear job descriptions for a director and for board members will help to minimize the conflict that can arise when there are multiple parties competing for a position. It can help make a fair playing field.

If no suitable internal successors are identified , some decisions need to be made: Is it time to bring in a professional from the outside? Or should the board consider alternatives like a merger with a like or similar nonprofit or even going out of business?

If there are potential internal or external candidates, but the founder still hates the idea of relinquishing control, one solution is to craft a senior-adviser role in the succession plan.  (We have seen this with Geoffrey Canada taking on the role of CEO and leaving the number two as President.)  That way the founder can stay involved, and new talent has a path for gaining experience and taking charge.  BUT, the leadership needs to give the next generation a chance to lead," he says.

Nonprofit Board Composition and Orientation

I recently observed a nonprofit's board members panicking over the organization's total annual deficit of $23,000.  Members seriously questioned the exec's abilities.  

The organization's annual budget: $8 million.   The deficit, less than 1% of the annual budget.

Many of the board members have grown old with their organization with some having been members for 25 years, since the founding of the organization (that's likely not the best scenario).  The nonprofit started as most do with only a bit of money: $25,000.  Imagine if at the end of the first year, the deficit had been $23,000.  Panic would have been conceivably in place and possibly justifiably so.

One of the realities I would observe of nonprofit board members is that many view a nonprofit's finances in the way they view their own personal finances.  Many do not have a lot of experience managing a business or a nonprofit and so their only world view when it comes to money is themselves.  The consequence: what appears alot on a personal basis is very small on a business basis.   

The panic that was set forth from this news, in my opinion, is to be expected.  A loss is a loss whether it's mine or the nonprofit's.  But the response to the loss -- this is clearly something that can be managed more effectively.

First, given that the majority of board members do not know what to expect or expect as reasonable when it comes to corporate finances, the Governance Committee would do well to a) learn the level of experience when interviewing prospective board members and b) be sure to include in the orientation and on-going training, what corporate finances are like and how they cannot be assessed at the same level as personal finances, perhaps using comparisons with other organizations.  In step (b), adjusting personal culture and awareness is essential.

Next, the Exec and the Treasurer should be sure to always keep members abreast of financial challenges and changes.  When something "bad" is coming, it is better to be prepared than surprised.

Finally, it's possible and likely that the characteristics and skills/knowledge of individuals who serve as board members in an earlier stage nonprofit are not the best skills/knowledge and characteristics of those who are best for a more mature, large nonprofit.  A so-called, corporate-focused or experienced indiivdual may be much more suited for providing fiduciary oversight of a big-budget nonprofit because their skills and knowledge are better matched.  These members will still panic but at a significantly different level than the individual with no corporate experience.

Should the characteristics change as the organization grows?  I would suggest: yes.  The early stage manager is different than a mature stage manger.  I would pose that the same is true for the board.

Nonprofit Board Meeting

Recently I have been thinking alot about board meetings.  Specifically I've been thinking about how to make meetings intellectually stimulating and action focused.  I have committed to the consent agenda as a vehicle for handling the many reports usually shared.  I have further focused on Chait et al's position that nonprofit boards essentially have three roles: fiduciary, strategic and generative and have been focusing on how this framing can frame a board meeting.

Today I received my Blue Avocado e-newsletter and rather than pick at the substance focused on enlivening the nonprofit board meeting, am going to just pick up the article and give it to you whole.  Happy reading.

And Now for a Different Type of Board Agenda

Board Cafe [1] • By Jan Masaoka • May 16, 2012 • Email [2] Print [3]

Board meeting time is deeply precious time, and the fulcrum of board-staff opportunity or disappointment. Let's be smarter about how we use it. Bonus: board meeting cartoon at end of article.

Every third Tuesday, or maybe four Wednesdays a year, a nonprofit board meets and discusses a few topics in order. Here's a traditional board agenda:

Traditional Board Agenda

1. Minutes approval
2. Executive Director's report
3. Program Director report
4. Finance Committee report
5. Nominating Committee report
6. Adjourn

We feel bored just looking at it. The unintentional message: staff is going to talk at us for most of the time and nothing interesting is likely to happen.

Now let's look at doing it differently:

New Agenda

Our mission: to strengthen the business and social vitality of our neighborhood

(Explanation: board members sit with an agenda in front of them and will look at this piece of paper many times during the meeting. Make use of this by putting your mission and other critical dates or messages at the top of it!)

1. Context and theme for this meeting: remarks from the chair. If you're the chair, what is on your mind? Frame the meeting for board members by giving them some context:

• "We're still getting to know our new executive," or
• "Our main topic is budget -- this meeting we're looking at projections and proposing guidelines to staff. At the next meeting we'll be voting on it."

2. Board Member Briefing: Too often our board members bring life experiences and professional knowledge that they never get to share with the board. Instead, take 15 minutes each meeting to rotate among board members making, for example:

• A 7 minute briefing on "Three things I've learned from marketing that our organization should be thinking about"
• A 7-minute briefing by a board member who uses the services of the organization, who describes his experiences -- good and bad -- as a client

Follow the briefing by seven minutes of Q&A for a total of 15 minutes.

3. Upcoming street fair: discussion led by board-staff task force

A core part of the meeting should be focused on substantive discussion of programs.

• Anticipated action: review of themes, suggestions for committee; sign-ups for day (focus the discussion by including an "anticipated action" for most reports)

4. Open-ended discussion on outside factors and how/if they might affect our thinking, such as a new governor, the close of a factory nearby, the opening of a new theatre in town, the aging of our donor base, and so forth. (Explanation: an unfortunate trend is that whenever something open-ended or strategic comes up, someone is likely to say, "we should have a retreat to discuss this." Instead, have a strategic discussion at every meeting. It is this kind of discussion where everyone both contributes and learns (and probably what board members joined the board expecting to have).

5. Minutes and Commitments Review

Rather than treating approval of the minutes as a perfunctory ritual, use the moment to go over what people promised to do at the last board meeting (whether board members or staff) and check in on progress. Then revise and then approve minutes.

6. Finance Committee report

Everyone always wants to know where the organization stands financially. But maybe even more importantly, every report from the board's finance committee should answer these two questions:

• Should we be worried about our financial situation?
• At the end of the year, will we be in a strong position to start the new year?

7. Nominating Task Force

• Anticipated action: approve the list of 15 possible candidates from which the Task Force will approach individuals.  See: Blue Ribbon Nominating Committee [4]

8. Executive Director responds to questions about items in the written Executive Director's Report sent out in the packet. The CEO or ED should not give a report that repeats that information. Limit this item to 10 minutes and put at the end of the meeting.

Why does this work?

• The chair's opening remarks bring everyone to where we are and sets a purpose for the meeting
• The board tracks the commitments members have made
• Instead of standing committee reports, task forces (also called ad hoc or temporary committees) only report when they are bringing decisions or other actions to the board (See: Abolish Board Committees [5]? And Boards Should Only Have Three Committees [6]!)
• Instead of a one-way communication from the executive director, by only allowing questions this becomes a discussion, not a reason to skip reading the written report
• Instead of board members taking the stage only to give committee reports, board members speak bringing their expertise and experiences to the board. See: Board Member Briefings [7]

9. Round robin or reflections: a quick go-around for a word or sentence from each person

Let's remember that board meeting time is a valuable resource being donated by time-stretched volunteers, and staff time used for the meeting is expensive. We must make thoughtful, smart use of this scarce, precious resource.

If you are a board member: did the last board meeting make good use of the resource of your time that you brought to it?

And now, here's the  bonus cartoon:

[8]

 

Nonprofit Board Liability

A $10 million legal settlement by UCLA (see LA Times) around a whistleblowing-retaliation case and a discrimination case should serve as a reminder as to why it is important for nonprofit boards to keep their Directors & Officers insurance policy as well have in place current formal policies around whistleblowing and discrimination.

But whether or not your board has indeed discussed and put into place, policies around whistleblowing (see Sarbanes-Oxley pertinent to nonprofits) the following laws apply in which a board and its members can be held wholly (all together) and severally (individually) liable: 

•Equal Pay Act of 1963—prohibits wage discrimination on basis of sex

•Title VII—Civil Rights Act of 1964, 72, 91—Prohibits discrimination

•Pregnancy Discrimination Act of 1978-Prohibits employee benefits discrimination on basis of pregnancy

•Age Discrimination in Employment 1967—Prohibits discrimination in the conditions of employment on basis of race, color, sex, religion, or national origin—also covers sexual harassment

•Older Workers Benefit Protection Act 1990—Prohibits benefit plan discrimination based on age

•Immigration Reform & Control Act of 1986—Prohibits discrimination based on citizenship or national origin (hiring illegal aliens prohibited)

•Americans With Disabilities Act of 1991—Prohibits discrimination on basis of physical or mental handicap

 

This list may not be totally update so nonprofit boards may want to ask for additional guidance from their insurers and attorneys.

 

Failure to consider these issues can prove costly.

Nonprofit In-Trouble

As a nonprofit board, when your single biggest funder says it is suspicious about the way you do business and the way you spend your money, you should sit-up and say "where have I been and what should I do next?"

According to the Chicago Tribune, Annie B. Jones Community Center "is being investigated by state officials for using taxpayer funds to pay for its founder's condo, car and other personal expenses..  State funds also were used to subsidize the former nonprofit leader's expenses related to riverboat casino ATM withdrawals, parking tickets, prescription medication and spa services, according to state officials and records."

But wait, there's more:

DCFS continued to financially support the nonprofit despite long-standing concerns about its management practices, finances, "bounced checks" and a warning a decade ago that it should cut ties, the newspaper found. The nonprofit stands to receive another nearly $1 million in taxpayer money this fiscal year from other public sources.

The apparent lack of oversight has drawn fire from DCFS Inspector General Denise Kane.

"While the private agency was to blame for excessive mismanagement of public funds, (DCFS) stood by for nearly a decade noting the agency's substantial deficit, lack of board oversight, failure to timely prove requested documentation and failure to comply with prior audit findings," Kane wrote in a recent stinging report.

So, who's got the problem now?  Well, clearly the State has not been on its "A" game when it comes to the agency in question (and later in the article there is some evidence of political connections helping with this).  But, the agency's board -- clearly not in charge and not fulfilling its fiduciary duty.  What to do?  Me, I'd change management and the board but not without getting at a better understanding of what exactly is the relationship between the management and board recognizing that perhaps replacing just management will fix the problems going forward.  This is doubtful but I have to believe that ineptness does not supplant the best of intentions -- a group of community members who really want to serve.  Still, this many years of ineptness?

Nonprofit Closure

$100 million from the Gates Foundation, InBloom has faded into the night.  In brief terms, InBloom was designed to wharehouse and store student data for public school systems which in turn can streamline how teachers and administrators accessed student records. The system was meant to extract student data from disparate school grading and attendance databases, store it in the cloud and funnel it to dashboards where teachers might more effectively track the progress of individual students.  

According to the New York Times story, the environment, particularly regarding privacy and security, isn't ready for what InBloom had to offer.  I recognize that the message grantmakers have been giving in recent years is that there is much to be learned from failure (so it's ok -- especially if the source of the money has really deep pockets) but $100 million to learn this lesson?  And which should come first: the investment in figuring out the solution, or figuring out the demand?   

This of course raises the question, did the InBloom board really fulfill its fiduciary responsibility using the process it used?  And yes, I know, I'm the armchair quarterback offering my own opinion on what InBloom has done (or not) but this of course is the job of a blogger.  What's your opinion: good investment; good board; good learning?

Nonprofit Governance Matters in Education

What's the differences between nonprofit and for-profit?  Sometimes, not so much.  But sometimes, a lot. Take for example for-profit schools.  For-profit schools are about making money.  And according to a New York Times editorial, it makes great sense to apply rules to the for-profits that for a variety of reasons, aren't necessary to apply to the non-profit and public.  First, some of the facts about for-profit schools. 

For-profit schools often hurt the poor by luring them into questionable programs that cost considerably more than comparable courses of study at community colleges.

According to federal data, graduates of two-year, for-profit career training programs average a loan debt of $23,590. By contrast, most community-college graduates owe nothing.

The Department of Education recently reported that, of the thousands of for-profit programs it analyzed, an astonishing 72 percent produced graduates who, on average, earned less than a high school dropout who worked full time. This means that the most debt-ridden students are unlikely to earn enough to ever repay their loans. While students at for-profit colleges are 13 percent of the total higher education enrollment, they account for nearly half of all student loan defaults.

The department’s analysis, which covered both for-profit and nonprofit career programs, found that 98 percent of the students enrolled in the lowest-performing programs are in for-profit schools.

And among the certificate programs most commonly found to be substandard are the ones that typically advertise on buses and subways in cities all over the country, targeting less sophisticated audiences; these include programs that claim to train cosmetologists, medical assistants, paralegals and other fields.

So what makes for-profits so different from non-profits and public schools?  I pose that one element is governance.  Nonprofits, usually, have caretakers who have one outcome in mind -- success for their constituents -- not personal financial gain.  To achieve this outcome, nonprofits have core values and impose a set of standards and often engage third parties to ensure they are following these standards.

Perfect? Perhaps not.  Intent on making a positive difference?  I believe so.  Possible without good governance?  No.

Nonprofit Fraud

I frequently come accross and like to muse about incidents in nonprofits where fraud or general impropriety has occurred as a source of "lessons" for boards in the "what not to do" or "what happens when you do" category.  For sure, "fraud" is a risk in any business but for nonprofits it can mean the difference between pursuing mission and failure.

I received the following short article authored by accountant Keith Jennings which may be helpful to nonprofit boards and managers when considering the development and implementation of anti-fraud policies.  A particular focus of this article: prevention while understanding the impact on employee morale.                            

Mr. Jennings begins by suggesting that "even the most trusted employees can become perpetrators of fraud. A number of factors can contribute to an employee’s transgression, such as financial problems, mental health, substance abuse, or simply a feeling of being undercompensated for their time."

Toward this end then, Mr. Jennings offers that the focus should be on reducing the likelihood of fraud occurring and this includes: "having Human resources should perform background, credit, and reference checks to increase the chances that trustworthy employees are hired. All employees should be subject to reasonable IT and employee-monitoring systems. Finally, financial responsibilities should be segregated so that each employee’s work is subject to review and no one person has too much responsibility.  

You may not think it is possible, but there are controls that can work for a one or two person nonprofit organization, or even an all-volunteer organization.:  All this would appear relatively fundamental but I would not be surprised to learn that nonprofits, particularly those with annual revenues of less than $1 million don't have all these steps in place and thus put themselves at risk of fraud.

 Mr. Jennings goes on to offer that "Once the proper systems and policies are in place, a nonprofit (should seek to) strike a balance between maintaining internal control and a fostering a welcoming environment? Without managing the perception of your internal controls, it’s possible that an organization’s culture will suffer – creating a perceived division between staff and management, damaging employee morale, and dampening the entrepreneurial spirit that sustains your nonprofit.

 To avoid harming a well-established nonprofit culture, organizations should follow these  practices:

First, be transparent about fraud prevention and detection systems. Provide information to all new hires about the function of internal controls. Each employee should be able to confidently answer the following questions: What is the goal of the program? What specific data do monitoring systems collect? Why are financial responsibilities segregated in specific ways? Why preventing fraud is a priority for our nonprofit? Be up-front about the purpose of internal controls, explaining that fraud can quickly throw an organization off-course and lead to massive, long-term setbacks, such as a loss of funding. 

Second, set the tone at the top. Employees will look to the nonprofit’s leadership for cues as they form their perception of the organization’s culture. Nonprofit leadership should not only be consistent in their messages about internal controls, but should also publically demonstrate their compliance. For example, if an organization requires employees to wear badges for access to secure areas, the leadership should visibly display their badges as well. Leadership should also share with employees how high-level functions are dispersed to ensure accuracy and appropriate oversight.

Third, create a channel for questions and concerns. It’s estimated that 40% of fraud is uncovered because of an employee tip, but without a proper outlet for questions about internal controls or concerns about potential fraud, employees will head straight to the rumor mill. Establishing appropriate pathways for expression – a secure forum, an online equivalent to a suggestion box, or even an anonymous email function – will help employees feel like they’re a critical component of the solution, not the target of the system.

By carefully monitoring the perception of internal controls and crafting clear communication to keep employees informed, nonprofits will be able to lessen the chance of fraud while continuing to encourage employees to share big ideas, work as a team, and produce results that will propel the organization to future successes.

Thanks to Mr. Jennings for sharing.  He  can be reached at [email protected]. 

Nonprofit Governance Lacking

The following lessons about the lack of governance was pulled from a Chicago Tribune story on the Bernie Mac Foundation. Comedian Mr. McCullough died about three years ago but one of his legacies is a foundation focused on supporting sufferers from sarcoidosis.  Mr.  Nonprofit board members: please take note.

1. But public records and interviews show that the charity is falling short of key benchmarks for such organizations, as well as the generous intentions of its founder. For instance, records for the six years ending in 2012 show that 13 percent of the Bernie Mac Foundation's spending has gone to charitable programs, far below the 65 percent minimum benchmark recommended by the Better Business Bureau's Wise Giving Alliance and the 75 percent threshold recommended by CharityNavigator.

2. A national sarcoidosis group also told the Tribune that it never received an agreed-upon grant from the Bernie Mac Foundation. Ginger Spitzer, executive director of the Foundation for Sarcoidosis Research, said the Bernie Mac Foundation pledged $100,000 to the group in 2010 but paid out only $50,000.  She said her group then cut ties with the charity, though the Bernie Mac Foundation until recently continued to claim on its website that the two groups are "partners."

3. Mac's daughter, Je'Niece McCullough, resigned from the Bernie Mac Foundation board of directors almost three years ago because, she said, she felt the organization lacked focus or direction.  "It was like the blind leading the blind," she said. "When my dad was alive, he seemed to have a goal in mind. We didn't seem to have one."

4. Board President Rhonda McCullough, who is Je'Niece McCullough's mother and Bernie Mac's widow, said she was unfamiliar with the details of the organization's finances. "Not really knowing what a foundation entails, you learn as you go," she said.  (Uh, big RED FLAG here -- thre board president doesn't understand the finances).

5. About $121,600 (from a total of $767,636) during the 2007-12 period went to salaries paid to Rhonda McCullough's two sisters, who work for the charity.  Records show that more than $200,000 was paid out to two firms that have similar names to companies run by Edward Williams, who is treasurer of the Bernie Mac Foundation. Those companies have the same office address as the charity.  Mary Ann Grossett, a third sister and executive director of the Bernie Mac Foundation, told the Tribune in a letter: "I do not know about Attorney Williams with respect to his companies."  She added: "I only know that my brother-in-law, Bernard McCullough (Bernie Mac), thought the world of him."  

Payments to relatives and board members are permissible under the law. Grossett, a third sister, was paid an annual salary of $40,000 as executive director in 2011 and 2012.

6. Attorney Joseph Ament, the nonprofit's secretary, declined to answer detailed spending questions, citing confidentiality. "The principal beneficiary of the Bernie Mac Foundation is the University of Illinois," he said.

Clearly, this is a good news, bad news story. the foundation has issues, particularly around governance.  Interestingly, fixes are easy and not highlighted here, and it should be noted that the family is still raising money for the purpose of the foundation and grants are continuing to be given although not at the level equal to what is being raised.  Let's hope that the purpose of the story was not about embarassing the family as much as seeing more fully to the intent of Mr. McCullough.