Nonprofit Board Crisis

Nonprofit Board Counsel (and book review)

I was reviewing books I have to review and stumbled across "good counsel: Meeting the Legal Needs of Nonrofits" by lesley rosenthal (Wiley, 2012).  Ms. Rosenthal is corporate counsel for the Lincoln Center.  Lincoln Center has enough going on that it requires the advice of a full-time attorney.

Overal, good counsel provides a legal lens to the variety of elements that comprises a nonprofit.  Good counsel might actually serve as a useful introduction to board chairs who seriously want to understand the nature and being of nonprofits.  After-all, nonprofits are a corporate tax-law construct so for a nonprofit board chair, adding from a legal lens could be helpful.  More likely though, it will be nonprofit executives, particularly those who head-up nonprofits with at least five million dollar budgets who will find what is said in corporate counsel to provide added thought to the way they make decisions.  And of course, attorneys serving nonprofits will appreciate the wisdom of this primer.

Meanwhile, I found one chapter of particular interest: Good Counsel about Corporate Governance.  In this chapter Ms. Rosenthal answers provides insight about the functions of a nonprofit board, again, from a legal lens.  For instance, there are many consultants who emphasize that the board has one employee: the executive director.  Mr. Rosenthal is not prescriptive on this matter but simlply states and in this statement provides the rationale for the one-employee argument that

the board does not execte the day-to-day managment of the orgnaization; that role is reserved for its executives or managers.  It would be contrary to its oversight and visionary role for non-executive board members to get into the business of running the organization.  Good board members monitor, guide, and enable good management; they do not do it themselves.

Yes, the language of non-executive board members is a bit corporate and not generally applied to the nonprofit board but the picture is clear.  A legal obligation is to voersee management and ensure the organization fulfills its mission.  With this definition, the rest makes perfectly clear sense.

About board size: "there is no best number of board members (as long as the state minimum is met)." She further notes there is no best definition of a number of additional variables like leadership roles or number of membership slots to represnt various stakeholders or ideal committee structure.  "these matters depend on the structure, size, needs and history of the organization".  Again, the legal lens is not prescriptive nor subjective.  It is just plain and unbiased recognizing that unless law says otherwise, there is no wrong unless what is is not working.

Ah, but meeting frequency is a topic which Ms. Rosenthal offers a position: meet regularly and if the organization is "of size", "at least once every other month although reasonable practices differ--OR, there should be a robust executive committees that is empowered, within legal limits to discharge the duties of the board" and then be sure to let the rest of the board know.

A helpful description is offered for what should be included in a board handbook.  Additionally, advice is offered about the role for counsel noting in particular that outside and/or in-house counsel should have direct access to the board, its chair and key committee chairs.  

A section on minutes emphasizes that minutes

memorialize board action AND "serve as evidence that the board or a committee properly and fully considered and decided organizational matters and, therby, properly and fully discharged its "fiduciary" duties.

Ms. Rosenthal notes that a governance or nominating committee is critical to the nominating and assessment process and that the process in itself is essential to a board's demonstrating its prudence in the seating of members.  (Prudence is a standard regularly applied when determining if the actions of a board are reasonable or correct).

A large part of this section focuses on the audit followed by a briefer but equally deep section on executive compensation.

Like all chapters in this tome, focus questions (to demonstrate understanding and compensation) and a workplan are offered to inform corporate counsel and other readers about "what next".

Again, if you are corporate counsel, a nonprofit executive of a nonprofit "of size" or even a board chair, good counsel may prove a useful resource to you.  You don't have to read it all in one setting or even sequentially which makes this not just a one-off reference but a true tool that will serve many a situation.

 

 

 

Nonprofit Governance: Only One Approach?

Working daily with nonprofit boards while reading the never-ceasing prescriptive literature about how nnonprofit boards should work to fulfill their fiduciary duty has led me to consider whether we, the so-called experts, might be going at this all wrong.

To date, the popular thought is that there be only two approaches.  Generally, this thinking is best summed up as being either the Carver-Policy (Corporate) approach or, for want of another language, the BoardSource (traditional) approach.

To date I have proposed that at least rather than abiding completely in either of these two approaches, boards should review their stage of development and determine what their needs and what are the needs their nonprofit and then structure activities accordingly.  This might mean that for a nonprofit just starting up and without paid staff, the board will actually pay attention to operational and management matters and that that will indeed be paying attention to their fiduciary duties (of course adding-in some attention to by-laws and board development etc).

I am now thinking that while stages matter, perhaps nonprofit construct matters as well.  I propose first that there are at least three constructs: board as owner; board as caretaker; and, board as advisor.  

The board as owner focuses on fiduciary taking a hard look at pretty much all aspects of the organization maintaining a focus on outcomes but also needing to focus on some of the details of operations and management -- not necessarily doing like in the infancy stage of development -- but controlling like in the infancy stage of development.

The board as caretaker looks more like a policy board not paying attention to the day-to-day but ensuring it's will is done.  Many of the nonprofits that are essentially extensions of government, as contractors, may fit well in this category.

The board as advisor is literally that -- there to support the entrepenural staff who pretty much take care of and lead the organization.  Yes, the board signs-off on fiduciary matters but even there is significantly guided and informed by staff.

The "so what" to this proposed paradigm is that expectations about "good governance" are significantly altered.  Rather than preach that there are only two approaches and nonprofit boards are bad or good based on their ability to pursue these approaches, the reality of how boards function is factored-in and the role of the consultant is to focus on helping boards excel given these realities.  

Your thoughts are welcome as I continue to develop this paradigm.

 

 

Nonprofit Board Oversight?

A Wall Street Journal article highlighted the creative microlending practices of a nonprofit called Zidhisha.  The practices are technologically based resulting in significantly less costly lending processes that in turn result in more loans.  The loans themselves are going to folks who might otherwise be viewed as high risk borrowers but, again with the help of technolgoy, Zidhisha has been achieving a 90% collection rate.

Zidhisha's executive director Julia Kurnia -- a woman who clearly knows how to identify problems and develop solutions.  Her business model appears to be a win:win:win for her customers, her customer's communities, and Zidhisha which is able to afford its low overhead and put paid loans back in the hands of new borrowers.  

Of course, all this sounds and is great but in reading the Wall Street Journal I was struck with how the entrepreneural nature of Zidhisha is really the entreprenerual nature of Ms. Kurnia.  This of course led me to wonder: this is a nonprofit so where is the board and what is its purpose beyond being the cheerleader for Ms. Kurnia.

Perhaps the answer lies in Zidsha's web page which says about Zidisha's Governance:

Zidisha is governed by a Board of Directors, who have the responsibility to oversee the organization's activities to ensure that our assets are used responsibly and ethically in accordance with our mission and US law governing nonprofit organizations.  The Board of Directors appoints the Executive Director, who also serves as an ex officio member of the board.  The current members of Zidisha's Board of Directors are:

 

Ronald Cheng:  Palo Alto, California

John Fay:  Capetown, South Africa

Julia Kurnia:  Sterling, Virginia

Dianne Scent:  Maryville, Tennessee

 

So, Ms. Kurnia is clearly doing right by her nonprofit.  But is there not a "so-what" to what appears the reality that Zidisha is Ms. Kurnia's nonprofit?  Why instead not just establish Zidisha as a for profit?

 

I'm torn but would welcome your thoughts.  Is it ok that we set-up nonprofits to be an extension of an entrepreneur?  Is there any harm done here?

Nonprofit Board Inside Dealing

The facts speak for themselves.  When the public's interest is not served by those who are seated to serve the public's interest, should not the public act?

From the New York Times we learn:

The U.S.T.A.’s national board sits above three national charities dedicated to goals like player development and helping disadvantaged athletes. It also oversees 17 regional chapters, as well as a lower level of state and local boards. Most of those organizations are set up as distinct nonprofit groups.

The U.S.T.A. is classified for tax purposes as a 501(c)6 organization, meaning it is not a charity but rather a nonprofit group, akin to a chamber of commerce or the N.F.L. That means the organization is largely exempt from paying federal taxes on about $213 million it generates in revenue, much of which comes from the United States Open, by far the group’s biggest event.

The U.S.T.A. spends roughly $200 million a year on salaries, grants to tennis organizations, operating costs and outside contracts. But The Times was able to determine that at least $3.1 million of that annually goes to organizations with ties to board members.

An examination of those finances by The New York Times shows that several of the group’s current and recent board members have benefited from U.S.T.A. grants and contracts, raising questions about the unofficial perks available to the men and women at tennis’s highest rungs.

 Katrina Adams, the executive director of the Harlem Junior Tennis and Education Program. That group has received at least $217,550 from the U.S.T.A. and its charitable operations since Adams joined the U.S.T.A. board.CreditJason Kempin/Getty Images

The Times reporting shows that:

■ The Junior Tennis Champions Center in College Park, Md., received more than $840,000 from the U.S.T.A.’s charitable wings over the last three years. Ray Benton, a U.S.T.A. board member, is the chief executive of the center.

■ John Korff, who owned the New York City Triathlon, sat on a U.S.T.A. board that approved a $50,000 grant to Life Time Fitness, a health club chain. Months later, Life Time bought Korff’s company for an undisclosed sum.

■ Katrina Adams, the first vice president of the U.S.T.A. board, is also the executive director of the Harlem Junior Tennis and Education Program. That group has received at least $217,550 from the U.S.T.A. and its charitable operations in the nine years since Adams joined the U.S.T.A.board.

Where do conflicts of interest begin and end?  And, when the whole board is compliant, does not the whole board have a conflict of interest and therefore need to recuse itself -- oops, maybe, remove itself?

One additional noteworthy consideration from the Times article: 

“You begin to ask questions,” said Frances Hill, a professor at the University of Miami School of Law who has studied tax-exempt organizations. “Aren’t there any people out there who understand tennis who don’t need to have a deal and can just serve on this board and maybe get some tickets?”

I must close this piece with wondering aloud why it is that sports-related organizations in partiuclar (e.g. FINA or NCAA) that accountability and transparency are foreign language?  And, at the same level, why is it that the public is so tolerant when they are so much less tolerant of other nonprofits? 

Nonprofit Board Not Trusted?

For those afraid to fly, a sometimes helpful piece of advice: the pilot has the same interest as you in arriving safely.  Trust by passengers in the airline and pilot that all will be safe and secure and that both have the same interests is essential.

A recent contract agreement reached by the Metropolitan Opera raises for me the question: does the union (employees) not believe the board has the same interests as the employees?  My initial answer: I don't think so.  I should add, history would suggest that owners never really have the same interests as their employees but I sometimes like to hope that nonprofit owners (boards) are different.

According to the Wall Street Journal, a month of negotiations between the union and the management (representing the board) of the Metropolitan Opera will include  lots of pay cuts AND "they stipulate that an independent financial analyst, paid jointly by the Met and its three largest unions, will observe the Met's spending in the future...and have full access to the Met's books and board members, and would oversee equal implementation of the cuts.."  

Whew!  Aren't nonprofit board members supposed to care about the welfare of their employees as much as the outcomes of their efforts?  And isn't this "care" best demonstrated in the management they hire to implement mission?  Did the Met's board hire managers whose job it was to not look-out for the interest of employees?  If I were to wager, I might suggest that the corporate members of the board generally do have a different framing on how employees should be regarded and managed -- a framing that does not put employees at least equal in value to management.  Thus, the need for a union and in the case, the need for an auditor who represents the interests of the employees.  

Nonprofit Audit

The Day, a New London, CT newspaper has it out for Amistad America, (the owner/operator of the slave ship replica upon which slaves eventually gained their freedom).  Albeit, the organization has a history of economic struggles pretty consistent with other nonprofits who own and operate sailing ships for a variety of missions.

On August 9, 2014 The Day reported on the publication of a state audit.  Yes, the audit pointed out financial problems.  But more interesting to me was a side-bar where The Day identified indicators of nonprofit financial health.  I think this perhaps might be found useful for other boards who scratch their heads when it's time to read financials and who are looking for understanding what the "so whats" are.  These same concepts can form the basis of a dashboard, a graphic depcition of indicators that include financials as well as other measures of a nonprofit's achievements and status.

 Here's the metrics for assessing a nonprofit's financial health, according to The Day:

Months of cash on hand (number of months the organization can pay its bills if no further income is received.

Ratio of current assets to current liabilities (a measurement of ability to pay obligations on time); a ratio of 1.0 is desirable.

Program efficiency ratio (the percentage of resources expended that go toward the programs of the mission). Eighty-five percent is a goal for an efficiently run nonprofit.  ( would suggest that this is not that essential and that a truer measure might be the cost to serve a nonprofit's client -- e.g. total number served into total costs).

Administrative costs ratio (a means of measuring how much of the organizational costs are consumed by management) (I would suggest that this is the % found after subtracting program dollars from total and may include fundraising costs.  I would further suggest that I am not convinced this is that important if one considers that there is little or no program without management and fundraising.

Anyway, to the public and folks like The Day, these are measures worth paying attention to to help ensure the support of the public.  And, for the board, there may be more important ratios to pay attention to.  But these are certainly a starter point. 

Nonprofit Board Responsibility

According to an analysis by Bridgespan: 

The Nonprofit Board's Role in Onboarding and Supporting a New CEO

By Lisa Walsh, Libbie Landles-Cobb, and Leah Karlins
The number one responsibility of any board—for-profit or nonprofit—is effective management of the senior executive, especially a new one. Yet, many nonprofit leaders report to Bridgespan that their boards fall short of that goal. 

IFrom my observation, nonprofit boards are indeed challenged by providing effective oversight of their paid executive.  It's really hard for a group of volunteers who dedicate maybe 40 hours a year to "manage" the individual who spends their days and nights thinking about their (the board's) nonprofit.  But, I believe that even utilizing a Carver-esque approach to governance (Policy Governance), managing the CEO may be one of the top responsibilities but number one; not so convinced.

I propose and in this order, that the Board first ensures they have defined mission and strategy; next, are clear who they (the board) want to be and how; and, then, oversee the CEO. Strategy defines even if and what type of CEO and subsequently, expectations which in turn lead to the needs for managing.  

 

 

 

 

Nonprofit Governance Matters: Founder

As reported in the Wall Street Journal, 

Michelle Rhee ... is leaving her post as chief executive of StudentsFirst, a nonprofit that she founded four years ago.  The former chancellor of the Washington, D.C., public schools sent an internal memo to her staff on Wednesday.... She will remain a board member of the organization.

Clearly there are benefits to a founder/CEO staying on the board of their nonprofit.  The most important benefit is they can ensure fidelity to what they started.  But this assurance is about the founder, no?  

I believe that if the founder has done a good job, their organization and particularly fidelity to their model, will be sustainable without them.  Sustainability and fidelity are free of the controls of founders.  True, founders, especially at only 4 years, can certainly bring more to the table and add value but there are certainly other means for gaining these benefits than creating a board seat (if one did not previously exist).  

Good move for Ms. Rhee: not so sure.  Good move for the board and the next administration: even less sure.

Nonprofit Non-governance: Why engagement governance can matter

The board of the Park Southern Appartments in Washington, DC appears to be violating a lot of rules.  For one, there's the golden rule of marketing strategy: know (listen) and provide what the customer wants and values. For another, there's (my) "do no harm" rule.  And yet another: obey the laws.  And most pertinent to the focus of this blog, believe that a nonprofit board matters.

The root of this saga rests in the story of the "owner-operator" politician of the Park Southern Appartments who appears to be running a slum for 700 of Washington's low-income residents.  Regulators of course must balance harms: shut-off the money versus doing equally or greater harm to the residents.  While structured to be tenant-run, the operator is accused of "stacking the Board with her friends and relatives.” And there is evidence of this and it is clear that tenants would not willingly permit their living space to have devolved into such disarray.  

The simple solution is to mandate control by the tenants in selecting a new operator who is an effective and honest manager.  The regulators believe that a whole new arrangement is necessary.  Perhaps but I can only hope that any arrangement would continue to ensure a voice for the tenants while ensuring proper managment.  Clearly, honest governance that included the voices of those most affected would have mattered in preventing what has become the reality.

For more on this story, see the Washington Post.

Nonprofit Boards Matter Differently?

On Sunday, the New York Times had what I thought an interesting story about Harpers Magazine, the primary product of the Harpers Magazine Foundation.  The Foundation was established when:

John R. (Rick) MacArthur and his father, Roderick, urged the boards of the John D. and Catherine T. MacArthur Foundation and the Atlantic Richfield Company to make a grant of assets and funds to form the Harper’s Magazine Foundation......solely dedicated to promoting Harper’s Magazine as an independent voice in American culture.

The Times article pretty much focused on John MacArthur (the current publisher) and his insistence on continuing the magazine in the print tradition revisiting of course the trend away from this modality.  The article pretty much suggests that the magazine, the foundation and MacArthur are, well, all that MacArther wants it to be.  I thought hmm, nonprofit, isn't there a governing board (that no likely does not stand-up to the founder/primary source of the money)?  

There was no mention of the governance of the Foundation or magazine in the Times article so I visited  the website (not Guidestar) where there is alas, little or no mention of a governing body.  So, my question and/or conclusion: is it possible that for some if not many, nonprofit boards really don't matter?  It certainly "feels" this way with Harpers.  And, for all practical purposes, it doesn't appear to matter.  

It doesn't appear to matter, but if it were to matter, as I believe this construct may not unusuall in a great number of nonprofits, what is missing?  Succession planning? Oversight and evaluation beyond the will of the founder/operator?  Strategy outside the head of the founder?

Your thoughts?