Nonprofit Board Crisis

Nonprofit Board Term Limits #NonprofitBoards

You know that folks have served too long in their board position when it takes a state attorney general to require change.  

In an effort to literally "clean house" to get the Hershey (yes, the chocolate people) Trust right-sized and right-focused, five members without term limits must or have left their term-limitless positions with the hope that the folks who take their seats will do a better job governing.  This departure didn't come without the intervention of the Attorney General who oversees the behavior of nonprofits in Pennsylvania.  The good news is that change will indeed take place and the beneficiaries of everything Hershey, the Hershey School students, will be put back into a number one spot at the decision-making table.  Here's the WSJ article.

Five Hershey Trust Directors to Retire in Settlement With Pennsylvania Attorney General

By MARIA ARMENTAL

July 29, 2016 4:04 p.m. ET

Five directors at a charitable trust that controls Hershey Co. will leave the board as part of a settlement agreement with Pennsylvania’s top law-enforcement officer.

The moves are the latest piece of overhaul for the trust’s board as the company has faced a buyout overture; four other members have resigned in the past several months.

Under the terms of the agreement, which also includes term and compensation limits, Robert F. Cavanaugh, Vice Chairman Joseph M. Senser and James E. Nevels are to retire by the end of the year; and Chairwoman Velma A. Redmond and James M. Mead, the trust’s non-executive director, are to retire by the end of next year.

The Wall Street Journal had reported preliminary terms of the settlement last week citing people familiar with the matter.

Messrs. Cavanaugh, Mead and Nevels also sit on Hershey’s corporate board.

The Hershey Trust Co., which oversees billions of dollars for a local, nonprofit school, controls 81% of the company’s voting power and is under pressure from the community to keep Hershey independent.

In June, Mondelez International Inc. bid $107 a share for Hershey, though that bid was rebuffed by the candy maker. The trust has opposed efforts to sell the company in the past, including rejecting an offer by Wm. Wrigley Jr. Co. in 2002.

The trust’s board has a legal obligation to act in the best interest of the Milton Hershey School for underprivileged children. Proceeds from the trust’s investments provide the revenue to run the school, which has about 2,000 students, many of whom get jobs and internships within the Hershey empire, including the chocolate factory in town, the Hershey resort and the local theme park.

Nonprofit Board Treasurers #NonprofitBoards

Here's a helpful and recently published article from Blue Avocado talking about the responsibilities of nonprofit board treasurers, specifically, those who are in the multitude of nonprofits that have no staff.  

Treasurers of All-Volunteer Organizations: Eight Key Responsibilities

By Dennis Walsh, CPA 

More than half of the nonprofits in the United States are estimated to be all-volunteer organizations. Here is a wonderful, succinct guide for the 600,000 + treasurers of such organizations:

My time as treasurer of a faith-based nonprofit was a labor of love. Starting out as an all-volunteer organization with a $20,000 budget, we developed financial systems, workable budgets, and demonstrated accountability. We served families affected by incarceration and there's no greater personal reward than seeing people realize they have real hope for a better life. In just three years the budget grew to over $330,000.

However, there was stress as well. As a CPA I found myself the recipient of unnerving deference at times. I frequently fell short in communicating financial information to board and staff. But the outcomes made it all worthwhile.

This experience helps me appreciate one of the many unsung heroes of our time: the treasurer of the all-volunteer organization (AVO). AVOs are among the most important and most invisible building blocks of our communities. Members of all-volunteer organizations read to children, care for the dying, get clean water legislation passed, serve as volunteer fire departments, help people overcome alcoholism, bring music into prisons, and help refugees get settled.

To do this and so much other important work, all-volunteer organizations raise and use substantial funds. And each organization has at least one volunteer leader counting the cash, writing checks, safeguarding financial integrity, and managing funds soundly. This guide is for you, Super Treasurer!

What do we mean by "all-volunteer organization (AVO)"? While AVOs range from small, relatively informal nonprofits to larger, more formal, affiliated organizations, in AVOs volunteers do most or all of the work. Following are some common attributes of AVOs:

• Most AVOs are managed by a board of directors or a core group, of which one member is a "hands on" Treasurer who writes checks, makes deposits, and provides financial reports to the board.
• Most AVOs don't have employees, although they may pay people for some non-managerial work such as refereeing at a youth soccer league, square dance calling at a dance club, or handling the distribution of books for a poetry society. These people are typically classified as independent contractors rather than employees.
• Although some AVOs have permanent locations (such as in the back room of a historical home or at the library for a Friends of the Library), many do not, and meetings and documents move from home to home as officers change.

Because most AVOs have an informal air about them, it's easy for finances to be treated in a casual way. But when money matters are treated casually, it can become too easy for money to get lost, or for some people to question how money has been spent, or even for individuals to take advantage of the informality and pilfer cash or other assets.

So as an AVO treasurer, what accountability and transparency issues should you be most concerned with?

1. Handle the money with high standards and set a tone of integrity.

In an AVO, close treasurer oversight of cash, checks, and deposits is vital. If you can't always be present when money is changing hands, be visible enough that others know that you're engaged. Be especially scrupulous about keeping personal funds (yours and others') completely separate from organizational funds.

Given the limited personnel resources in most AVOs, it may not be possible to divide up financial duties as part of an internal control system, particularly since you can't always exert the same degree of control with volunteers as paid staff. However, a few essential rules should be followed:

• The Treasurer should receive and reconcile the bank statements, OR write checks, but not both.
• Incoming checks should receive immediate restrictive endorsement (preferably a bank stamp, or handwritten "For deposit only, ABC Bank, Account # 123445") and be deposited within a week, with no cash back.
• Outgoing checks must be supported by an approved invoice, receipt, or a voucher prepared by the volunteer if a receipt or invoice isn't available. If a fellow volunteer asks for a reimbursement but doesn't have a receipt, respond "I wouldn't be doing my job as Treasurer if I didn't insist on receipts from everyone."
• Checks should require two signatures and never be signed in advance. Alternatively, the board might set a policy that permits one signature for small checks below a certain amount, say $50, in order to help discourage checks from being signed in advance.

2. Manage the filings

• Keep a calendar of filing requirements and assign responsibility. Late fees and penalties can be very costly and diminish stakeholder confidence.
• File Form 990 - Except for churches and certain religious organizations, all nonprofits must file an IRS Form 990 annually. For fiscal years beginning in 2010, organizations with income less than $50,000 ($25,000 for 2009) need only file the online "e-Postcard," Form 990-N.
• File Form 1099 - Obtain an IRS Form W-9 from those providing paid services who are not your employees.
• File Form 1099-MISC to report payments totaling more than $600 per calendar year to such persons. Forms and related instructions are available at the IRS website. Otherwise, if the individual is an employee be sure to contact an accountant or other person experienced in employment matters and take all steps required for a new hire. See "Downsizing from Employees to Independent Contractors?" for more on these issues.
• Register with charitable solicitation agencies - Register, when required, with the charitable solicitation office in your home state as well as any state in which you regularly fundraise, including by email. Go to the Unified Registration Statement (URS) website for a summary of state by state requirements to determine if you must register as a charity, provide a copy of IRS Form 990, have a CPA audit or review, and whether the state accepts the streamlined URS application.
• Obtain permits and Licenses - Check on regulatory requirements before undertaking activities such as serving liquor at a special event, conducting a raffle, or starting a bingo night. Such laws vary from state to state. It may be helpful as a starting point to talk to another nonprofit leader whose organization is engaged in the same activity. Most state nonprofit associations have helplines or publish FAQs and other guides covering these types of issues. If you're uncomfortable asking for help, get over it quickly!

3. Identify and manage risk

Take the lead in safeguarding your organization's assets, data, and personal information. Risks associated with volunteer screening, vehicle use, and special events are often of particular concern to AVOs. The Nonprofit Insurance Alliance Groupand the Nonprofit Risk Management Center provide free introductory articles on ways to manage these and other risks.

4. Confirm contributions

A prompt thank you letter that includes what donors need for tax purposes is an effective way to keep your contributors up to date on the great work you're doing. The IRS says it's okay to send this information by email. When different financial duties are assigned to a variety of people, the chances increase that any misappropriated donations will be detected more readily.

Here's a sample of the essential information to include in your thank you letter:

"Date

"Name and address of nonprofit
"Donor name and address

"We wish to thank you for your 2010 contribution of cash in the amount of $500.00. We did not provide any goods or services in exchange for this contribution. XYZ Nonprofit is an organization exempt under Section 501(c)(3) of the Internal Revenue Code and contributions are deductible to the extent allowed by law."

Remember to separately list any single contribution of $250 or more. If the donation is other than cash, describe the property but do not indicate a value.

If you provided the donor with goods or services as part of the contribution, you could delete the second sentence in the above example and substitute the following:

"We provided you with two theater tickets with a fair market value of $50. Your tax deduction is limited to the amount of cash and value of any property contributed, reduced by the value of any goods or services received in return. Accordingly, the amount eligible for a federal income tax deduction is $450."

There are exceptions for items of minimal value such as pens and mugs. See the discussion regarding "quid pro quo" donations in IRS Publication 1771.

5. Track volunteer time

In many AVOs volunteer effort represents the majority of resource inflow. Tracking volunteers can help protect volunteers and the nonprofit from certain forms of liability and provide helpful data for planning future programs and events. And if you intend to seek grants you'll want to reflect the value of your volunteers in your budget and grant proposals. Otherwise, your board and other stakeholders may not know if you have the people in place to get the job done well. See "Tracking Volunteers to Boost Your Bottom Line" for more information along with sample volunteer tracking forms.

6. Plan and evaluate with a budget

Expressed in financial terms, a budget is a map that shows what you plan to do and how you plan to get there. It's a key tool for getting everyone to agree on what your group will and won't do in the coming year. And in informal AVOs where internal controls are often lacking, the budget is your canary in the coal mine. An unexplained variance between a budgeted and actual line item of revenue or expense, for example, may be the first red flag signaling a more serious problem.

Preparing an effective budget starts with asking leaders to estimate what they'll need and to provide specific proposals for financing it. Reviewing last year's budget is a key part of the process. Cost and revenue estimates need to be reasonable and attainable. Avoid the temptation to 'wing' estimates or to be overly optimistic about contribution increases. At the same time, don't act like a watchdog at the gate of the treasury, opposing all new funding proposals with knee-jerk resistance.

7. Prepare timely financial reports

Timely and reliable financial information is the underpinning of good stewardship and sound financial decision making. Without this information there's no way to track budget performance.

For AVOs with minimal cash flow or whose finances revolve around a single event, paper-based record keeping may be acceptable. A template treasurer's report with blanks for handwritten amounts can be just as effective as a computer-based system if the figures can be easily traced to supporting documents and are presented clearly. For such organizations, a simple monthly reconciliation of bank account activity classifying receipts and disbursements and reconciling beginning to ending cash balances may be enough to form the basis for a summarized quarterly financial report to the board.

As the organization grows, a switch to commercial accounting software such as QuickBooks(r) may be the best next step. It is vital at this juncture that you get set up with a proper chart of accounts and get the necessary training from someone with nonprofit accounting experience.

8. Recruit the next treasurer

Like other volunteers, the treasurer will not serve indefinitely. Unfortunately, some AVO treasurers entrench themselves and resist transfer of control. Throughout their term of service, effective treasurers encourage and equip fellow volunteers to participate in financial management duties. When it's time for the treasurer to pass the baton, these AVOs will enjoy the least disruption.

Indeed, all board members share equal responsibility for the financial health of your organization. Officer titles vary, but those typically described as President, Vice President, and Secretary form a core board leadership group alongside the Treasurer. The Secretary should be diligent in taking complete and concise minutes that reflect filing of the treasurer's report and all board decisions.

All-volunteer organizations constitute a huge economic and social force, helping communities of all types work better. As a front-line volunteer, the AVO treasurer plays a critical role in sustaining the organization, maintaining essential stakeholder confidence and supporting overall mission effectiveness.

Dennis Walsh, a certified public accountant who lives in Jamestown, North Carolina, is the author of Legal and Tax Issues for North Carolina Nonprofits. Through the Deborah and Dennis Walsh Foundation, he provides volunteer technical assistance to help empower community nonprofits. He can be reached at drwalsh at triad.rr.com

Nonprofit Board Fiduciary Oversight #NonprofitBoards

The case of Cleveland Browns' Reggie Rucker's reminds us that being a "star" who is charitable doesn't mean that someone objective shouldn't be watching - all the time.  Hence a board.  

But clearly that's not what was going-on over at Reggie Rucker's charities where the player pleaded guilty to stealing over $100,000 from his charities to finance other activities.  

In admitting to his theft, the player has agreed to repay what he has stolen but he is awaiting a legal settlement that is resulting from head injuries received.  A bit amusing, his attorney claims that the player "endured repeated hits to his head and that such a history could explain why he stole from his nonviolence nonprofits."  

 

Uh, really?  Well, true or not, again, an objective board fulfilling its fiduciary duty of care oversight responsibilities might have been helpful in supporting the player.  

Book Review: Going For Impact

Eugene H. Fram has dedicated himself to the field of nonprofit governance.  His book, Policy vs. Paper Clips is in my opinion, THE essential tome on corporate governance (yes, Mr. Carver).  Doctor Fram's lifelong experience and knowledge is shared regularly in the Huffington Post among many venues including his own classroom at the Rochester Institute of Technology.

So you can imagine it is with great enthusiasm I await Doctor Fram's wisdom and so did with his latest book: Going For Impact: The Nonprofit Director's Essential Guidebook (2016).  Sadly, I don't believe there was a "there" in Going for Impact. I found this 115 page 19 chapter, easily accessible (thanks to Dr. Fram's storytelling writing style) seriously wanton of wisdom that could easily be found in any number of the publications available on nonprofit governance, or for that matter, what many nonprofit chairs could reflect.  

Topics like "Straight Talk about Nonprofit Directors' Responsibilities", "What the Board Should Expect from Management", and "What Management Should Expect from the Board" are predominantly prescriptive or at minimum, descriptive and are not inherently research or evidence-based, unless of course one considers the deep and wide experience of one individual research-esque.  At this point in the development of nonprofits, we should all be working to document what indeed must or should be a "best practice" and write accordingly.  Dr. Fram has not done this and perhaps he opted to take a different path.

Two content exceptions do stand-out.  Both timely and inclusive, there is the chapter titled "To Avoid Fraud, Boards Must Take Action".  In this chapter he does a fine job offering a laundry list of what structure and what should be the focus of nonprofit boards regarding fraud prevention.  I found this chapter helpful and inclusive and what would make an effective training pamphlet for boards trying to organize and understand their thoughts around fiduciary compliance.    A second subject, "Understanding How Millennials Impact Nonprofits" was a great start to a subject I believe everyone has on their mind.  This could make a book in itself and while there is only minimal content here, a sequel holds much promise.

Essentially and with some degree of disappointment, I found Going for Impact did not add anything of substance to the rather extensive body of prescriptive and descriptive information that is currently available on nonprofit governance.  But, for those who have skipped the literature, what is included may well enlighten more than not reading anything to increase effectiveness - a goal to which Dr. Fram is clearly committed.

 

Book Review: Make It So

As timing is everything (think summer reading) and a new Star Trek movie has just been released I just happened to come across, Make It So.  Make It So, by Wess Roberts and Bill Ross offers leadership lessons from Star Trek The Next Generation (which for those of you who are not Trekkies, is the series with Jean-Luc Picard as the captain of the starship Enterprise).  

So, if you would like to combine your thirst for entertaining with educational reading, Make It So (Pocket Books, 1995) may fit the bill.  What Roberts and Ross have done is present chapters, vignettes you might say, from the Star Trek series and gleaned from these, management and leadership lessons as relayed in Jean-luc's post-experience journal.  As such, the chapters serve as parables for how an effective manager might think and act.  The topics covered include: being clear about mission; vision and focus; initiative; competence; communication; politics; symbiosis; interdependence; and, resilience.  

While it is clear that a significant portion of Make It So would offer some thinking to nonprofit CEO's, I think there to be some lessons that nonprofit boards, board chairs and committee chairs might also glean.  Clearly, being always clear about mission (this is of course one of the fiduciary duties) stands out but the task for board to both establish a vision and be focused no matter the "blips" is an equally important message.  Chapters about communications and politics are areas that surround boards and board chairs and the members should, I believe, regularly take the time to understand what is culturally established; what fully engages or disengages, and what collectively leads a board to make positive contributions to and for the organization.

Nonprofit board chairs and committee chairs might also benefit from the chapters on initiative, competence, symbiosis, and, interdependence.  For instance, about the topic of interdependence:

one good leader sometimes makes the difference in the success or failure of a mission.  The truth is, however, the cooperative, collaborative, and corroborative effort of the entire team is much more likely to result in mission success.  

About politics:

no one member or group of members can ever completely prevent others from sowing seeds of fear, doubt, and distrust.  Consequently, every member ought to stand prepared to boldly uproot any seeds so sown by any member.  Make no mistake, political games never end and are never totally resolved to everyone's satisfaction.  Indeed, there is always something that remains unsettled, always something left unsaid, and always someone ready to replace those people exposed for creating dysfunction with the organization.

And, about communications:

Always bear in mind that no matter the means by which messages are given or received, your method of communicating must allow messages to be understood.  Indeed, effective communication is the lubricant of effective leadership.  ....you can never become an effective leader without being understood or without understanding those upon whom you rely.

In conclusion, if you prefer beefing-up your management and leadership skills through anecdotes and are in the mood for some light but reasonably intriguing science fiction. Make It So may be just the read for you during these uber warm summer days.

Nonprofit Exec Term Limits #NonprofitBoards

Nonprofit executive transition is happening.  It's truly a fact as many of those who might have retired back 10-15 years ago when everyone predicted, actually are retiring.  One case in point: George Wein, the Artistic Director of the Newport Jazz Festival.  And, yes, as is often the case with the arts and health care and even in some environmental organizations, there are really two execs (aka co-directors): one focused on content and the other focused on finance, management and operations.

The Wall Street Journal article on this subject addresses some of the challenges faced when a long-term executive deems it time to retire after, in this case, 60 years.  Challenges for the board include keeping mission-focused and addressing the financial bottom line.  And, for the transitioning executive, knowing how to fully turn-over the reigns.

But while on the subject of transition, and this may be more peculiar to the arts than most nonprofits, what about this executive term of sixty years?  Is this a really sustainable concept?  George Wein IS the institutional history and memory of the Festival presuming that there has been some turnover.  At the very minimum, I'm thinking that Mr. Wein has certainly outlived some of those he first recruited to the board.  But should a nonprofit board not consider setting some parameters around just how many years makes sense to keep an organization healthy, thriving and adapting to the world.  Can one person's vision really serve like the Duracell bunny - just keep going?  Or shall we trust that a board will know when it's time to make a change?

Summer thoughts.....

 

Here's the WSJ article.

Newport Jazz Leader Passes the Baton
George Wein, the festival’s artistic director for six decades, will be succeeded by Christian McBride.   Mr. Wein has held the position since the festival’s founding in 1954.

July 24, 2016 6:51 p.m. ET
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George Wein, one of the most important figures in jazz history, is preparing to step away from his life’s work.

The co-founder of the Newport Jazz Festival will hand over the annual three-day showcase to bassist, band leader and multiple Grammy Award winner Christian McBride when this year’s festival ends on July 31. That transition will mark the first time since the festival began in 1954 that someone other than Mr. Wein is artistic director of Newport, the world’s oldest jazz festival—and one that set the template for modern, multiday music extravaganzas such as Coachella and Bonnaroo.

Now 90 years old, Mr. Wein will be stepping back from an endeavor that allowed him to shape America’s musical tastes and made his reputation as one of the most influential impresarios of the 20th century. He won a lifetime-achievement Grammy Trustees Award in 2015 for his work.

“It’s our job to create a stage for the musicians who deserve to be on that stage,” said Mr. Wein during an interview at his expansive Upper East Side apartment, filled with African and African-American art. “You have to treat that privilege very carefully.”

Mr. McBride, an accomplished bassist who just finished a European tour with pianist Chick Corea, calls Newport one of the touchstones of American culture.

RELATED

Who’s Thinking About Retirement? (July 30, 2014)
Newport Jazz Festival Immortalized (July 1, 2013)
Jazz Man Honors His Friends (Nov. 30, 2012)
Weekend Conversations: Jazz Legend Chick Corea (Nov. 6, 2011)
Just Asking…Christian McBride (June 20, 2009)
“To follow the history of the Newport jazz festival, is to follow a definitive history of jazz,” he said.

During its heyday, Newport Jazz was a glamorous showcase. It was the site of the renewal of Miles Davis and Duke Ellington’s careers. The festival helped introduce gospel music and singer Mahalia Jackson to white audiences in the U.S. Frank Sinatra once emerged from a helicopter flown onto the festival grounds before performing with the Count Basie Orchestra. In his biography, Mr. Wein called the singer “a god stepping out of the machine.”

Today, Newport Jazz struggles to make money. Its losses are balanced out by the still-profitable Newport Folk Festival, which Mr. Wein co-founded with Pete Seeger in 1959. Both events have been under the same umbrella nonprofit since 2010.

Mr. Wein said his aim this year, as always, is to produce a great festival. This year’s performers include Mr. Corea’s trio with Mr. McBride and Brian Blade on drums. Much-heralded West Coast saxophonist Kamasi Washington plays two out of the three nights, and Norah Jones headlines on Saturday. That night will probably sell out, the first time in a long time that has happened, said Mr. Wein. The folk festival, by contrast, tends to sell out every night in advance.

Jazz traditionalists argue the music lost popular appeal by swinging too far toward a self-indulgent avant-garde. Others say that traditionalists have held the music back, and kept it from evolving with the times.

The festival, during this moment of transition, seems to embody that debate.

John Hailer, chief executive officer for the Americas and Asia of financial firm Natixis Global Asset Management and a member of the Newport Festivals Foundation board, said if the festival is going to thrive, the board and Mr. McBride are going to have to keep it “pure jazz.”

But he struggles to define what exactly that means. “I’m not exactly sure of that; no one is,” he said. “That’s the beauty of it.”

It’s Mr. McBride’s job to distill that idea, he added.

Mr. McBride, who first played Newport in 1991 when he was 19 years old, said the diagnosis isn’t complicated. “Jazz has always had this reputation, for better or worse, for being stuffy, a bit on the conservative side.” He said getting young up-and-coming players onto the stage could help attune new ears to the music.

“Groups with young blood—that’s what you need at a festival,” he said.

Mr. Wein doesn’t seem to hold any fixed notion of purity. A businessman as much as a music lover and performer—he’s a pianist in his own right—he has willingly moved with his audience’s tastes. The 1969 festival, for example, included performances not only by jazz greats Miles Davis and Buddy Rich, but by funk-soul stars James Brown and Sly and the Family Stone, and British blues-rockers Jethro Tull and Led Zeppelin.

This year, he programmed Mr. Washington on two nights, hoping to put people in the seats who are intrigued by the saxophonist’s background playing with hip-hop star Kendrick Lamar.
“I have an obligation,” said Mr. Wein. “The festival is part of the world. You have to pay attention to what the world says.”

Soon after this festival ends, Mr. Wein said he will be meeting with Mr. McBride and other administrators to start work on next year’s program. It will the first time he won’t be at the center of those discussions.

It won’t be easy, he said: “I will have to just sit back and listen. I’m afraid I won’t be able to do it for the whole meeting.”

Write to Vipal Monga at [email protected]

Nonprofit Governance Principles #Nonprofit Boards

A day ago a group of big names like Warren Buffett and Jamie Dimon (JP Morgan Chase) and Mary Barra (GM) came together to release what they're calling a set of commonsense principles around corporate governance. You can find these here.

According to NPR Marketplace, the development of these principles were stimulated by the worry that "investors in public companies were losing out because of too much short-term thinking."

“We’re concerned in instances where companies and/or boards may be more focused on short-term results than on long-term sustainable results," he said.

He said effective corporate governance can re-focus a company on the long term. Among the recommendations? Paying less attention to quarterly earnings

“We’re concerned in instances where companies and/or boards may be more focused on short-term results than on long-term sustainable results," he said.

He said effective corporate governance can re-focus a company on the long term. Among the recommendations? Paying less attention to quarterly earnings.

Now you might want to say, hey Mike, your blog is all about nonprofit boards, why do you care about what the big corporations have to say or do?  My immediate answer: corporate governance, be it for-profit or nonprofit has some core rules that are common to both sectors.  Take for instance, fiduciary duties of care, loyalty and obedience.  While perhaps executed with appropriate nuances, both sectors must abide by this law.  Take Sarbanes Oxley which includes the Whistleblower policy now common to all corporations.  

But you would be correct in saying not all principles applies equally to nonprofit.  But in my review of the document, there are some important principles nonprofit board members should consider.

Under the category "composition" (note, substitute "shareholders" for community or stakeholders):

 Directors’ loyalty should be to the shareholders and the company. A board must not be beholden to the CEO or management. A significant majority of the board should be independent under the New York Stock Exchange rules or similar standards.

 All directors must have high integrity and the appropriate competence to represent the interests of all shareholders in achieving the long-term success of their company. Ideally, in order to facilitate engaged and informed oversight of the company and the performance of its management, a subset of directors will have professional experiences directly related to the company’s business. At the same time, however, it is important to recognize that some of the best ideas, insights and contributions can come from directors whose professional experiences are not directly related to the company’s business.

 Directors should be strong and steadfast, independent of mind and willing to challenge constructively but not be divisive or self-serving. Collaboration and collegiality also are critical for a healthy, functioning board.

 Directors should be business savvy, be shareholder oriented and have a genuine passion for their company.

 Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions is critical to a high-functioning board. Director candidates should be drawn from a rigorously diverse pool.

 While no one size fits all – boards need to be large enough to allow for a variety of perspectives, as well as to manage required board processes – they generally should be as small as practicable so as to promote an open dialogue among directors.

 Directors need to commit substantial time and energy to the role. Therefore, a board should assess the ability of its members to maintain appropriate focus and not be distracted by competing responsibilities. In so doing, the board should carefully consider a director’s service on multiple boards and other commitments.

Under the category "board effectiveness", 

 Boards should have a robust process to evaluate themselves on a regular basis, led by the non-executive chair, lead independent director or appropriate committee chair. The board should have the fortitude to replace ineffective directors.

Under the category "communication with third parties",

 Robust communication of a board’s thinking to the company’s shareholders is important. There are multiple ways of going about it. For example, companies may wish to designate certain directors – as and when appropriate and in coordination with management – to communicate directly with shareholders on governance and key shareholder issues, such as CEO compensation. Directors who communicate directly with shareholders ideally will be experienced in such matters.

 Directors should speak with the media about the company only if authorized by the board and in accordance with company policy.

Again, please substitute stakeholder or community wherever you see the term "shareholder".  And, there are quite a few additional principles, many which can be applied to nonprofit governance.  

Nonprofit Board Diversity #NonprofitBoards

Today United Continental (the merged airline) announced that the board was adding a 15th "independent" member.  As I understand this addition, the goal was meant to reduce tensions between (not too independent) investment factions (not so independent) currently on the board.

Why should we in the nonprofit sector care about such compromises?  I believe this action by the airline board provides the opportunity to consider the subject of board member diversity.   In my experience, many nonprofit boards are constructed through networks.  Networks tend to be comprised of individuals with "like" core values and beliefs and it makes sense that a group of like-minded folks would share a theory of change that brings them to a nonprofit table to take action.  But over time, the criteria for how members are recruited should change with the times. 

There is a paradigm about nonprofits that indicates that nonprofits formed to make a specific change can develop beyond calling for change to being (at least in olden times) the actual provider of services for the state and federal governments.  And in subsequent time, this nonprofit, now "the system" moves other folks to step-up and call for change recognizing that the original change agent is what needs to be changed.  So too for nonprofit boards.

I believe that the effective board is one that reflects and recognizes when its lens no longer provides as clear a picture about who has what needs, how to serve best, and how best to pay for serving.  Different "hands-on-deck" can embrace the founding mission while enriching the theory of change to make it current and appropriate AND reach new audiences that will make the connections between the nonprofit and the community.  And equally important, folks with different lens can add balance to a board who's prior balance only meant "no change" or disharmony.

 

Nonprofit Board Informal and Formal Culture #NonprofitBoards

As now noted by the Nonprofit Quarterly and Association Now (see below) the Healing Arts Initiative (somewhat ironic of a name) in New York has now become a case study in how a nonprofit board can be an exemplar failure in executing its fiduciary duty of care.  Mr. Athitakis adds to the assessment around fiduciary duty the topic of culture.  

A "formal" "organizational culture is a system of shared assumptions, values, and beliefs, which governs how people behave in organizations."  I would have assumed from its name that the Healing Arts Initiative board intentionally stated values that would have it fulfilling its fiduciary duty of care: ensuring success and the pursuit of mission - doing no harm.  The reality: not so much.  Clearly, to me the "formal" system did not match the reality of an informal dominant system of values and beliefs that led to universal internal failure.  The lesson to boards: annually revisit core values (and theory of change) to ensure all agree and that the informal culture mirrors those values at the board and staff level.  This annual exercise also ensures that new board and staff are clear and embrace what are these values.   When informal culture and systems do not match the formal systems, either the informal must be made formal or the formal must be reinforced from the top down.  

Here's the Association Now analyses of the Healing Arts Initiative failings.

THREE LESSONS FROM ONE NONPROFIT'S DRAMATIC FALL

BY MARK ATHITAKIS / JUL 18, 2016(iStock/Thinkstock)

Embezzlement, violence, and lawsuits are the last things an organization expects. But the Healing Arts Initiative story underscores how simply a culture can get messy.

It’s not often that a nonprofit organization provides an object lesson in leadership, financial management, culture, and governance all at once. But the grim, at times horrifying tale of the Healing Arts Initiative is a special case.

HAI is—or, it appears, was—a New York nonprofit that supported the area needy and elderly through arts performances. When a new executive director, D. Alexandra Dyer, joined the organization last July, she quickly recognized it had problems. Money had been embezzled from the organization for years—more than $750,000, according to a legal filing. Dyer called a staff meeting to discuss it; two days later Dyer was attacked with drain cleaner by a man hired by HAI’s bookkeeper, who’s since been charged with the embezzlement.

Basic concepts of oversight, accountability, and responsibility were not exercised by either the professional or volunteer leadership.

In April, after months of hospitalization, Dyer (on behalf of the organization) sued HAI’s board, which she claimed “violated their duties” and was negligent in the face of the embezzlement. The board responded by firing Dyer in early May, and thenshutting down the organization two days later.

So, not good.

Ultimately, the courts will sort out the particulars of the stolen money and the responsibility of leadership in the face of the theft. But as dispiriting as it is to read about, the HAI story is a useful reminder of a few important tentpoles of management and leadership:

1. Financial controls are essential, especially at smaller organizations. There were a few red flags at HAI, according to reports: checks bouncing, credit cards declined, duplicated payroll checks produced, and a prior CFO fired by the board for challenging its financial management. A few simple processes for handling finances can help keep things in order—requiring multiple signatures on checks above a certain amount, segregation of financial duties, making the finance staffer go on vacation (to note potential discrepancies in the staffer’s absence). My colleague Joe Rominiecki reported on how some associations have addressed these issues; my 2011 article on financial controls includes a few small-staff tips as well.

2. If the relationship with the board is fraught, get a buffer. The dynamic between the board and staff leader can be hard to read on a good day, so it’s impossible to speculate on how Dyer was relating to HAI’s, especially considering that she was new to the organization. But in any circumstance, it’s important to tread carefully when it comes to discussing an issue like ongoing sustained embezzlement. “No question about what to do here,” says consultant Glenn Tecker. “Consult the organization’s attorney, notify the officers, then notify the board of the course of action you are taking upon advice of counsel.” That may not make the relationship between the board and staff any more comfortable, but having the attorney serving as a third party offers a measure of protection.

3. Culture matters. In a thoughtful assessment of the HAI fiasco in Nonprofit Quarterly last week, nonprofit scholar and consultant Paul Sturm saw a lot of cultural dysfunction in the organization. Unwittingly or not, he writes, HAI developed “a culture where basic concepts of oversight, accountability, and responsibility were not exercised by either the professional or volunteer leadership. Although some elements of culture are in an organization’s DNA, other aspects of culture are developed consciously, and both types have to be reinforced over time.”

That “over time” strikes me as important in this case. Any organization with long-term issues such as embezzlement has created a culture where recklessness and rogue behavior are being fostered; changing that culture is not something that can happen immediately, especially not by just one new leader coming in. Anybody entering that environment wants the bad behavior to stop fast. But it may be just as important to understand what created the environment.

“The deeper issue is what allowed it to happen,” Tecker says. “We always assume [in cases of nonprofit scandals] the board was unengaged. But we’ve also seen scandals where boards have taken an adversarial relationship with staff rather than a consultative partnership.”

There aren’t any easy answers for a situation like this one. But understanding the reasons why organizations go off the rails—and how best to get them on track—can go a long way to keeping your organization’s name out of the papers in a bad way. And it can also help ensure that an organization with an admirable mission doesn’t miss its chance to keep doing good work.

 

 

 

 

 

 

There aren’t any easy answers for a situation like this one. But understanding the reasons why organizations go off the rails—and how best to get them on track—can go a long way to keeping your organization’s name out of the papers in a bad way. And it can also help ensure that an organization with an admirable mission doesn’t miss its chance to keep doing good work.

 

Nonprofit Board Policy #NonprofitBoards

It's not always clear to outsiders what exactly nonprofit boards do.  The simple answer: make policy and discern how that policy is being implemented.  Making policy is not a simple task but it's one of the activities that really give a board purpose not excluding of course other activities like evaluating the progress or attention to policy and planning (which is another form of policy) and advocacy (e.g. public speaking, lobbying, fundraising).

Policy, according to Webster is: a :  a definite course or method of action selected from among alternatives and in light of given conditions to guide and determine present and future decisions and b :  a high-level overall plan embracing the general goals and acceptable procedures especially of a governmental body.   So it shouldn't be surprising that nonprofit boards aren't always aware of when and what policy should be made.  My best advice: learn what other similar nonprofits have developed at the board level.  Some policy is preventative focused on reducing risk and observing regulations.  Other policy focuses on resource acquisition and use (I believe a budget to be policy).  But sometimes, policy gets developed circumstantially.

Take of instance the policy to be acted upon by the University of California.  The board there has decided it needs to "reign-in" its administrators because they have effectively "embarrassed" the board.  Hence, policy.  Sound familiar?  

Here's an article from the Sacramento Bee describing the situation.  What would you a nonprofit administrator have done differently or do now that you are facing this plan?

 

UC regents consider tougher rules on outside pay for top administrators

Board will vote on proposal to tighten restrictions on outside jobs

Changes come after Sacramento Bee reports on UC Davis Chancellor Linda P.B. Katehi

Watchdogs say proposed policies do not go far enough, should allow more public oversight

Controversy not an unfamiliar companion for UC Davis Chancellor Linda Katehi 2:40

 

UC Davis Chancellor Linda Katehi has undergone significant scrutiny and criticism during her tenure at the university, stemming from incidents such as the pepper-spraying of peacefully protesting students to her service on corporate boards. Patty Couse-Baker The Sacramento Bee

BY DIANA LAMBERT

[email protected]

 University of California regents this week will consider new restrictions on when top administrators can accept outside work after months of controversy about lucrative board positions UC Davis Chancellor Linda P.B. Katehi had with a textbook publisher and for-profit university.

The recommendations by UC President Janet Napolitano would reduce the maximum number of outside paid jobs from three to two, add a second layer of approval and require consideration of whether an outside board seat poses a “reputational risk” to the university.

“The revised policy is strengthened to prevent actual conflicts of interest or commitment,” states the recommendation from Napolitano.

Regents will consider the changes Thursday at their meeting in San Francisco. The vote comes after The Sacramento Bee reported in March that Katehi accepted board seats with for-profit DeVry Education Group and textbook publisher John Wiley & Sons that students and watchdog groups said were a conflict of interest.

Katehi has been on administrative leave since April 27 amid allegations of misusing student funds, nepotism and misstating her role in hiring online image consultants.

Ed Howard, senior counsel for the Center for Public Interest Law, said the new policy doesn’t go far enough. He said it should offer specific guidance on avoiding conflicts of interest and preclude senior managers from taking board seats with companies that do business with the University of California.

“I think there is no there there,” he said. “It’s like they don’t understand why people were mad.”

In February, Katehi accepted a position with DeVry Education Group, a for-profit company under federal scrutiny for exaggerating student outcomes. She did not receive final sign-off from Napolitano before accepting the seat that paid $170,000 annually in stock and salary. She resigned the post days later under pressure from the UC president, Assemblyman Kevin McCarty, D-Sacramento, and watchdog groups.

She previously received $420,000 in income and stock across the 2012-14 fiscal years as a board member for John Wiley & Sons, a publisher of textbooks, college materials and scholarly journals. Critics said that represented a conflict because students and state leaders were simultaneously seeking to reduce the cost of textbooks and push for the use of free, digital alternatives. She pledged $200,000 toward a UC Davis student scholarship in March but has withheld those funds and may rescind her pledge depending on the outcome of the UC investigation, her private spokesman, Larry Kamer, said earlier this month.

Kamer could not be reached Friday afternoon to comment on her board positions. Katehi previously told The Bee she erred in accepting the DeVry seat before getting Napolitano’s approval but defended her Wiley tenure as a way to make textbooks more accessible for students.

George Mason University professor James Finkelstein, an expert on corporate board participation by university executives, estimates that a board seat requires at least 10 days of service per year.

Howard said the policy should have restricted how much outside time administrators can spend on outside work.

“What they did was to limit it to two boards,” he said. “One could be a massive time distraction and three could take little time at all. The problem is the amount of time moonlighting for a second job.”

Finkelstein said that the review of outside board seats should not take place behind closed doors. He said that administrators seeking UC approval for board seats should be required to post their pre-approval form and other supporting documents online, with a window for public comment.

“This seems to us to be critically important,” he said. “Without such discussions in open session, this becomes yet another instance of disclosure rather than transparency.”

UC Office of the President spokeswoman Dianne Klein said she could not address those criticisms because it would be inappropriate to comment before regents consider the proposal.

The proposed policy applies only to the university’s 165-member Senior Management Group, which includes Napolitano, campus chancellors, medical center chief executive officers and directors of national laboratories, as well as some directors that report directly to them. Similar policies for staff and faculty won’t be revised, according to UC officials. Senior managers who already hold more then two paid outside positions will be allowed to continue in those positions.

Despite the recommended changes, UC officials have long defended the practice of allowing its top leaders to take outside work, saying it enhances the university’s reputation and strengthens ties to the community. Napolitano said she serves only on nonprofit boards and is not paid for her time. She says she chooses instead to focus on her job at the university.

The outside professional activities policy for senior management was last revised in 2010 after public outcry over the extensive activities of some campus chancellors. Faculty policies underwent a major revision in 2014, and there are no current plans for additional revisions, Klein said.

Nine University of California chancellors received nearly $1.5 million in cash compensation, in addition to deferred compensation and other stock options for outside work for corporations and nonprofits from 2012 to 2014, according to data provided by UC.

In 2014, the most recent year data are available, top university officials earned at least $2.58 million in jobs as consultants, advisers, speakers and corporate board directors. The exact compensation is hard to determine because the report, which lists income from cash and stocks, doesn’t always include the value of the stock.

The biggest earner appears to be Mark Laret, chief executive officer of UC San Francisco Medical Center, who earned $589,820 serving on the boards of medical firms Nuance and Varian, according to UC records. In 2014 Laret earned $1.59 million in salary and other compensation from UC.

Eight senior managers with outside jobs, including Katehi, held three or more outside paid positions in 2014. That would exceed the proposed policy’s maximum of two, though UC will only apply the limit when current administrators seek new positions rather than ask them to step down from existing ones.

Katehi sat on the Wiley board, National Science Foundation Division of Electrical Communications and Cyber Systems, as well as on the board of a company in which she has ownership, EMAG Technologies. Katehi did not list income for EMAG Technologies but said she spent 80 hours on company work that year.

UC San Diego Chancellor Pradeep K. Khosla had seven outside jobs in 2014 that included being member of two corporate boards, advising three companies, chairing the Infosys Foundation Jury of Engineering and Computer Science and being the the co-founder of Biometricore. He lists $24,000 in income and stock valued at about $106,000. He says he spends 45 hours a year on these outside jobs.

Acting UC Davis Chancellor Ralph Hexter, who served as the school’s provost before Katehi’s leave, falls within the limit, having received $1,500 in 2014 for serving as a review board member, according to UC records.

Katehi earns $424,360 a year as chancellor of UC Davis. Napolitano ordered a review of the board seats of all senior managers and chancellors to ensure each had accurately reported the compensation they received. The report has since been completed but was not available Friday, Klein said.

Diana Lambert: 916-321-1090, @dianalambert

Read more here: http://www.sacbee.com/news/investigations/the-public-eye/article90080342.html#storylink=cpy