Nonprofit Board Crisis

Nonprofit Board, CEO, Communication, Process and Community Challenges #NonprofitBoards

At the beginning of June, the Board of the Martha's Vineyard Hospital fired its CEO.  According to the Vineyard Gazette, the firing was without cause and certainly at the "will" of the board.  The CEO claims that he was doing a good job and that the board had done no performance evaluation nor given cause and basically just told him to "go".

The Gazette (thankfully) continued to follow the story and reported a few days later that the board of the hospital did take a vote on firing the CEO, after the fact, and explained the basis for the firing as:

“Losing the confidence of the board is something you can’t get back. It really is a matter of trusted judgment. We were starting to go in different directions about what we thought was right for the future. In essence it was about how the hospital should govern itself. To his credit Joe took issues and ran with it. But there may have been a difference of opinion about where ultimate authority lies . . . It got more difficult about where final decisions should rest.”

Mr. Miller added: “Not in terms of the board micromanaging in any way, but in terms of where the final decision lay.”

Mr. Sweet also said Mr. Woodin had recently asked for a raise, which triggered an internal review.

“And out of that process concerns arose,” he said.

I would affirm that in my practice of supporting boards who face challenges with their CEO, "losing confidence"  for whatever valid or invalid reason, is in itself a valid condition making it near impossible for a board to have a positive relationship with a CEO and subsequently, unable to continue in the relationship.  As stated in this article, the CEO did no malfeasance or anything illegal - basically the relationship went sour.  I would also note that the home-court advantage of the very long tenured board members and officers in particular, would likely play a part in making it difficult for any newcomer to find favor - no matter how competent.

That said, of course, the story is not over.  Enter the community!  Outcries over the firing (apparently the now fired CEO did a good job of positioning positively outside the board) have led to further coverage and a recognition that maybe at least part of the real problems lay with the board officers who have no term limits.  Back to the Gazette:

Anthony James, MGH senior vice president for network development and integration, who is also one of five Partners representatives who sits on the Vineyard hospital board, said the affiliate boards reflect a Partners company philosophy of community input and local control. He said trustees are limited to three three-years terms, but there had been no term limits for officers until recently when hospital bylaws were changed. Mr. Sweet and Mr. Ray have been on the board since 1997. Ms. Brown has been on since 2003 and Mr. Miller has been on since 2004. Beginning next year, Mr. James said, every board member will be subject to the three-term limit, and current officers will begin to leave the board in a staggered fashion until 2021, beginning with the secretary and followed by the treasurer, vice chairman and chairman. The changed policy allows for the new chairman to serve an additional three-year term, he said. Commenting briefly on the ouster of Mr. Woodin, Mr. James said: “I think we all think this is an unfortunate series of events. In hindsight you can always say how can you do these things in a better way . . . but what we saw was a lack of alignment in terms of the vision of the board and how that was being interpreted and executed by the CEO.” He concluded: “These things happen — and I think we all recognize that in these cases it becomes a very difficult process and we certainly saw that this week.”

And now, 30 days later, the community has organized asking for more accountability and its own inclusion in decisions that are made by the board and directly affect the community (uh, pretty much all strategic decisions which include hiring and firing an executive).  As we see, the community has called for their own involvement to become a central part of what informs the board before it makes its decisions.  This "community engagement" demand is happening ever more frequently around the country and should serve as a reminder to nonprofit boards that they are the surrogate owners of a nonprofit on behalf of the community.  Yes, they are responsible but responsible to ensure that non-taxable dollars serve the mission, in this case, the health of the community, effectively.  From the Martha Vineyard community's perspective, at least as I glean from the story, the board has failed in its duty.

Here's today's installment of "what next" for the Martha Vineyard hospital:

...trustees have agreed to form a community advisory board and to add a person from the Island community to the hospital governance committee. He also said trustees have decided to hire an outside consultant to review hospital governance practices. No time frame has been set for the changes.

... two planned changes on the board of trustees will take effect in July if approved by Partners. Dr. O’Neill Britton, chief medical officer and senior vice president at MGH, and Bill Roman, manager of the Edgartown Yacht Club, will join the board.

I'm confident this will not end, at least on the part of the community, with these changes but progress is incremental.

 

 

 

 

 

Nonprofit Board Fiduciary Duty of Care #NonprofitBoards

The fiduciary duty of care by a nonprofit board is serious business.  Compliance and risk management are a big part of what goes into the fulfillment of this duty.  But if you are a board member of a nonprofit, particularly a smaller less staffed nonprofit, you know that between sometimes serving as a volunteer who is "doing the work" of the organization and other matters that come along, taking care of compliance and risk management matters may get put on the back burner.  

In my experience one of the "places" that fall off the radar for some boards is what happens to their money (after they have worked so hard to raise it).  There's tracking and reporting of course but there is also just having in place all the steps necessary to ensure the money goes where it's intended.  Now, I am not specifically endorsing the following product/service (but Worldwide United Way has) but the content leading-up to describing the product/service itself may prove helpful for a board conversation.   From the University of Buffalo:

Preventing employee theft before it begins

From left to right, Dan Verrico, chief marketing officer, and Dan Healy, founder and CEO, both of FiduciaSolutions.

Buffalo-based firm FiduciaSolutions has designed a fraud-defense system embraced by United Way Worldwide

By Grove Potter

Release Date: June 28, 2017

 

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We have people telling us that this solves a problem that has been unsolvable for years.

Dan Healy, founder and CEO

FiduciaSolutions

BUFFALO, N.Y. — A single mom who keeps the books at a small nonprofit organization starts stealing money from her employer to buy her kids clothes as the start of school approaches.

And so an embezzler is born.

Other embezzlers are more professional and take more money, protected by the trust they have built with their employers.

Removing the possibility for that type of theft is the goal of a company in the START-UP NY program that has received significant help from students in the University at Buffalo School of Management. FiduciaSolutions has designed a management tool to reduce the risk of embezzlement at small businesses and nonprofits. The company has been embraced by the United Way Worldwide, which is pushing its member organizations to utilize its services.

“Embezzlement is bad for everyone. Bad for the employer and bad for the employee,” said Dan Healy, founder and CEO of FiduciaSolutions.

Fraud and embezzlement cost nonprofits and small businesses an astonishing amount of money. Various studies put the losses at between 2 and 7 percent of annual revenues. Considering the nonprofit and charitable annual revenue in the U.S. is about $1.5 trillion, the annual loss could reach $70.5 billion in the U.S. alone. And most of those found guilty have had no prior run-ins with law enforcement.

Adding to the numbers, about 50 percent of the embezzlement cases go undetected or unreported, to avoid negative publicity.

“The losses are staggering,” Healy said. The average embezzlement lasts 18 months and totals about $40,000. “That can be a significant hit to a small nonprofit.”

So how can it be stopped?

One person in charge of the money

After working in corporate accounting and serving on several nonprofit boards, Healy realized the nonprofits were not following basic accounting procedures that could prevent theft. One person was often in charge of all the money.

“We have the tools, but many times they are just not being used,” he said.

FiduciaSolutions starts with a series of eight online surveys that all finance employees take. The information is used to create a flow chart of where money flows in the organization and to point out where theft could most likely occur.

In addition, the program instills a culture in an organization that theft will be reported. More than 43 percent of fraud is discovered by a tip, so FiduciaSolutions offers a free anonymous tip line and posters to any firm, client or not, urging employees to report internal theft. When that is the credo of an organization, thefts decline, Healy said.

“We think it will prevent people from stealing,” he said.

United Way recommends it

United Way Worldwide, which oversees 1,150 United Way chapters in the U.S. and others abroad, now requires chapters with budgets of more than $500,000 a year to undergo detailed audits, and they are urged to also do an assessment with FiduciaSolutions. Chapters under $500,000 can forgo audits, but then they must do an assessment every three years, and FiduciaSolutions is the preferred provider.

“The assessments have brought to the attention of the management and the governing body how important this stuff is,” said Kenneth C. Euwema, vice president and controller of United Way Worldwide. “We need to make this an important part of what we talk about in this organization… It doesn’t have to overwhelm the board meeting, but it has to be something you talk about on a consistent basis.”

The types of embezzlers run the gamut, from a CEO padding his expense account and stealing frequent flyer miles to a clerk who changed the address of a checking account to her home and absconded with $400,000 over 10 years.

“It doesn’t matter what the name of the charity is, every charity loses trust when we get hit by something like this,” Euwema said.

The United Way of Buffalo and Erie County started using FiduciaSolutions over a year ago, and detailed surveys were sent to everyone in the finance organization.

“They compare the surveys to established internal controls,” said JoAnne Mroziak, controller for the organization. “They map out your process, and you agree on items that your organization will work on to enhance your processes.”

Because, “trust is not an internal control,” Mroziak said.

Dan Barry, managing director of FiduciaSolutions, said the company’s goal is not to find and uncover fraud.

“Our real goal is to strengthen financial control systems so the potential for fraud is greatly reduced,” he said.

Boards appreciate it

Healy said volunteer boards that operate nonprofits are relieved to have the increased oversight.

“Our program is based on three tenants,” Healy said. “First is tone at the top. We focus on communication. Second is segregation of duties. How do you make sure each of the duties in finance are properly segregated? And third is having a perception of detection.”

FiduciaSolutions received some valuable help from the UB’s School of Management. Seeking new ideas about expanding into new markets, the company linked up with the consumer behavior class taught by Charles Lindsey, PhD, associate professor of marketing. Four teams of four second-year MBA students did case studies of the company, and examined how it could expand its services into the professional services market.

“FiduciaSolutions was wonderful,” Lindsey said. “They shared company information with the students so they could really understand the business model.”

Dan Verrico, chief marketing officer for the company, said the students’ input was extremely valuable.

“They gave us some terrific ideas which we are going to use,” he said. “They also helped with our billing models.”

Rhonda Frederick, CEO of People Inc. in Amherst, New York, recently received a review from FiduciaSolutions, and was very pleased with what they found and what they taught.

“It was a little different from what a typical audit might look at,” Frederick said. “They did a day in the life of a dollar… They gave us a good feeling. We’re not perfect, and the bar is pretty high. It gave me a better understanding, too, of how things should be separated out.”

IRS rule change

The Internal Revenue Service gave FiduciaSolutions a tremendous boost when it changed the 990 form for tax-exempt organizations. In section 6, line 5, the government now asks if the organization has suffered a significant diversion of funds.

“If someone stole money in your organization, you have to put that on your tax return,” Healy said. And that also means that if a charitable foundation granted money to a group, and that group had money stolen, then the granting foundation must include that on its tax return.

That kind of scrutiny of embezzlement increases the urgency to prevent it.

Pricing varies

The program is priced on a sliding scale, from about $2,500 for small organizations, to $25,000 for those over $100 million in revenues. The prices drop in succeeding years, because much of the work is done in the first year.

Healy is a Buffalo native now working in Chicago at the financial company Guggenheim Partners. He set up representatives of FiduciaSolutions in six U.S. cities, and the people in Buffalo far exceeded all others.

“The people in Buffalo grabbed this and are running with it,” Healy said. “And the University at Buffalo has been phenomenal.”

Healy said he expects the company will be expanding soon in Buffalo and doing some hiring.

With 41 clients, “we’re at the precipice now,” Healy said. “People are liking it. They are calling us. We have people telling us that this solves a problem that has been unsolvable for years.”

Nonprofit Accounting #NonprofitBoards

Is your accounting "house" in order?  Check-out the following instructional to ensure everything is in order.  Yes, if you haven't money your books don't matter but...

 

https://www.accountingtoday.com/opinion/nonprofits-should-be-bracing-for-their-next-audit

Nonprofit Board Liability #NonprofitBoards

I am fascinated by the historic roots of policies and practices be they public or nonprofit.  In a Maui News story (yes, Maui, Hawaii) there's a law on the books that: 

requires nonprofit organization leaders and volunteers to submit to extensive background checks and fingerprinting and to list all employment from age 18 and any traffic tickets of more than $25 for one-day events.  In recent days this process has been "beefed-up"  to include the background checks, fingerprinting, lists of fundraiser auction items and volunteers and their Social Security numbers two months in advance of the event.... Additionally, wholesale distributors can only donate alcoholic products for fundraisers held at hotels and restaurants with liquor licenses.

Yes, of course this is stringent and interestingly, unlike the policies on other islands.  But the root of this rule, that's even more interesting to me.  Specifically: The reason they started doing background checks, as they came out of Prohibition, was trying to prevent the mob from getting involved.  So, do you think circumstances have changed since Prohibition or......

By the way, there is of course protesting (rightly so in my opinion) from the nonprofit community noting that the remaining Islands don't have such a policy (or at least have made more reasonable policies) and a review of the State rules says that there is no state requirement which Maui officials had alluded to.

 

Nonprofit Board Practices #NonprofitBoards

The following story presents many of the challenges nonprofit boards and nonprofit chairs in particular face: fiduciary duty of loyalty (conflict of interest); fiduciary duty of care (prudently: what others with the same responsibility would do in a similar situation); term limits (chair and board); community engagement and inclusion; board/CEO relationship; and, I'm sure there's more but this is enough for now.  Whew!  What a mess and pretty much because one individual, the board chair, doesn't recognize that he is in a position of power and influence which can leave everyone else involved out of the picture.  No, this shouldn't happen, there are other board members but privilege and power provides a foundation for both legitimate and illegitimate actions as is evidenced in this Spokesman-Review story.

 

Gritman director wants board chairman out

By Elaine WilliamsLewiston Tribune

 

A key figure at Gritman Medical Center in Moscow is calling for the resignation of the hospital’s board chairman, citing concerns about the way he has handled his conflict of interest involving contracts that have gone to him and his family.

Board member BJ Swanson’s questions surround property coverage Gritman receives from the insurance firm of board chairman Greg Kimberling and unanticipated modifications to building plans for medical offices that Sprenger Construction is building for Gritman. Sprenger Construction is owned by Greg Kimberling’s sister.

“I believe (Kimberling) has lost the trust and confidence of the community and continuing on the board would be detrimental to Gritman,” Swanson said in an email.

Kimberling said he has no plans to resign. Kimberling, his sister, Linda Sprenger – owner of Sprenger Construction – and Gritman CEO Kara Besst disagree with Swanson’s stance.

The board has provided a thorough review of all dealings involving the Kimberling family, making choices with the best interest of the hospital in mind, they said.

“From my perspective, I would say there’s tremendous oversight,” said Kimberling, who assumed the chairmanship in May 2016. “The board has the authority to ask any questions they want and it’s (Besst’s) job to answer them.”

The roots of the issues extend back more than five years, to when Kimberling’s business won a contract to insure Gritman buildings against property damage, said Swanson, who was chairwoman for 16 years prior to Kimberling.

That contract is worth $118,000 annually and covers 12 structures, three office suites and their contents, which includes millions in hospital equipment, Besst said.

Kimberling said he won the contract in 2010 when he was on the board, bidding against other providers at the request of Jeff Martin, who was CEO at the time. The first-year savings for the hospital was more than $50,000, Kimberling said.

Since then, he has not had to bid against others when it’s renewed annually, but the board receives detailed regular reviews, he said.

The most recent of those would have been in 2015, and the board members were pleased with what they saw, Besst said.

At the same time, Swanson said her efforts to obtain numbers about change orders for a multi-million-dollar, 54,000-square-foot medical office were fruitless after she was no longer chairwoman, though she examined them routinely as chairwoman.

The change orders in question totaled $23,759 per month when Swanson was chairwoman and have averaged $19,333 per month since Kimberling became chairman, said Besst, who provided the figures in response to questions from the Tribune.

In February or March, the board listened to a report about the medical office building, Kimberling said. After the update, he said, Swanson sought information about the change orders.

“I said no because we had completed the discussion,” Kimberling said. “We had given it back to the administrative team and we were moving forward.”

That choice reflects the new approach to the relationship between the administration and the board he has instituted as chairman, Kimberling said.

“The whole process of change we’re going through is to stop the micromanagement of the hospital administration.”

Overall, Besst is the one supervising the construction of the medical office building, Kimberling said.

“Since I have been board chair, (Besst) has made every decision relative to this building project. … For obvious reasons, it would be important for me not to be involved in making those decisions, because I know there’s a conflict.”

Besst said she directs the project with feedback from the architect, contractor, subcontractors and employees who lead the departments that will be housed in the building, experiencing no pressure from Kimberling.

Going with Sprenger Construction to begin with also had nothing to do with Kimberling being on the board, Besst said.

The Gritman board has used Sprenger Construction as a general contractor since 2005, appreciating a local company was available for a wide variety of jobs, Besst said.

“(The board) has confidence in the quality of work that they have been able to do at a reasonable cost,” she said.

She also noted that the full board reviews construction projects, and the entire board evaluates her job performance, Besst said.

“I answer to the board of directors. The board is not one person.”

Nonprofit Board Recruitment #NonprofitBoards

Perhaps as an alternative to the traditional "relationship" approach to recruiting individuals for nonprofit board membership, the Glendale Arts folks have initiated a more "tech" method.  According to the LA Times, the Glendale Arts has posted (presumably on-line and in other venues) the following:

Glendale Arts, the nonprofit organization that manages the Alex Theatre and provides various arts programming in the community, is seeking nominations for new members on its board of directors.

All nominees will be contacted to schedule a 10- to 15-minute phone interview with a nomination committee member that will take place the week of July 10.

Glendale Arts’ board of directors is expected to make its final selection of new board members on Aug. 15.

Those interested may apply online at http://bit.ly/2q7EOcl   

Presuming that the nomination committee has specific criteria that goes beyond just "any fresh body will do", the good news is that one doesn't have to know a board member to get to be a board member (a common recruitment strategy).  Of course some folks who may not be the ideal candidates may also apply and rejection, if there aren't other places already thought through to channel these interests, has the possibility of alienating a body of folks.  I actually believe that having folks serve in other positions, like committees or as volunteers, is a very effective way of identifying the optimal board member but maybe the Glendale Arts can produce those folks through this method.

Nonprofit Board Size #NonprofitBoards

Just how big is too big for a nonprofit board?  This was my first question after reading sections from the Bradenton Herald (FL) news article about a new board member.

The Board of Directors has five executive officers, 27 directors representing geographical districts in the state, and FSBA members who serve as an officer or member of the Board of Directors of the National School Boards Association or the Southern Region School Boards Association

“The benefit is that (Manatee, DeSoto and Hardee) have a voice in helping to shape policies for the FSBA and receive information with what is happening in education reforms legislatively and professionally,” Miner said. “I’m the ears and voice for the districts on that.”

The FSBA is a non-profit that advocates for elected school boards across the state and provides training to board member

Ryan McKinnon: 941-745-7027, @JRMcKinnon

Too small is most commonly a State regulated number - often, 3.  Three of course is an amazing number when it comes to achieving efficiency and likely producing a higher confidence that everyone knows everything they should know as fiduciaries, attend every meeting, and do what is needed to be done.

Too large - that's a different story.  Popularly touted "manageable" sizes of 12-15 are frequently recommended.  This number represents a lot less efficiency than 3 but isn't so large that it isn't impossible to get everyone together (although there is a wide variety of argument on this point); accommodates varying points of view and skills/knowledge; and can often enough produce good thoughtful outcomes.  In this size, representation and inclusion matters more but even this size doesn't guarantee diversity of opinion, experience or demographics.  On the other hand, as the numbers expand, so too does efficiency diminish and the prospects of including everyone's voice in every discussion.  

So what  to do?  For sure, a board doesn't have to be large to fulfill its fiduciary duty.  To be effective it should include the voices of those it serves but this can be accomplished in multiple ways without necessarily making everyone a board member.  But clearly, balancing effectiveness and efficiency - please tell me what's worked for you.

Nonprofit Board Term Limits #NonprofitBoards

"It’s not unusual for Burke, the longtime chairman of the air board, to engage in prolonged discussions with environmentalists and other agency critics from the dais during public hearings. He has served for over two decades on the panel, which is responsible for cleaning the air and protecting public health across a four-county basin of 17 million people." (Washington Post)

This article is ostensibly about an issue that has advocates raising numerous questions as to whether the board is really serving the public's interests but more of the article is focused on how and the legitimacy of the way the board is conducting its business.  But possibly connected, the chair has served as a member for at least twenty years and has also been the chair for an unspecified "longtime".  These facts prompt me to ask: just how long is too long, for individuals to serve both as board members and as officers? 

Now of course there is no reason to question the competency of the chair per se but when folks hold onto board positions for extended periods of time, I find there is little opportunity for new voices to be heard and for change that may well be in the best interests of mission to occur - not always mind you but perhaps what is going on with so many folks unhappy (and I don't know that there are a lot but that there are any speaks to me volumes - that anyone comes and is willing to organize and speak out on a board's work) may also be connected with a board that hasn't changed its membership for a really long time.

Board term limits serve a purpose - they reduce burnout; they make it possible for others to champion mission at the governance level; they make it possible to bring in new and different solutions - not that "old" doesn't have its value but these benefits are less likely when change never occurs.  This air quality board may be a good example of why term limits matter.

 

Nonprofit Board Executive Committee

In the June edition of Nonprofit Pro , I discuss if nonprofit board executive committees are a benefit or a curse. Nonprofit board executive committees are often hailed as essential structural elements, but perhaps it's time for executive committees to go the way of the first Apple computer. Click here to read the full article.

Nonprofit Board Competing Interests #NonprofitBoards

By now you have likely heard that the Sandy Hook Foundation has dropped Megyn Kelly as host of their upcoming Gala.  The reason: Megyn planned to have as a guest on her new show (a 60 Minutes-like news show) this "guy" who denies that Sandy Hook ever happened.   Megyn's position is that only by having this "guy" as a guest is it possible for the public to understand where he is at all coming from and more importantly, have a platform for challenging his position.  Megyn offers that news is about getting out the facts and only through an interview is this possible.

But the folks at the Foundation don't accept this argument and while the presence of Megyn Kelly as host of the Gala would certainly have helped increase the profile of the Gala (and increase ticket sales).  The Foundation is clearly putting "mission first" ahead of the possible loss of revenue.  And in reality, the press this story is getting will likely ensure that the Foundation will not lose revenue.