How Prepared Are Board Members for the Challenges of the Nonprofit Culture?
By: Eugene Fram Free Digital Image
Given that the typical tenure of a new board member is six years. In addition,a new director’s intention may beto make his/her unique contribution to the organization’s progress before he/s rotates off the board and is supplanted by another “new” director. With these factors in mind, I estimate that many volunteers enter the boardroom with little understanding of nonprofit culture. Even those who have served previously on business boards may initially spend valuable time in accommodating to the nuances of nonprofit practices and priorities before being poised to make contributions to the “greater good” that nonprofit create. Following are some areas that are endemic to nonprofits:
By: Eugene Fram Free Digital Image
“According to a Washington Post analysis of the filings from 2008-2012 … of more than 1,000 nonprofit organizations, … there was a ‘significant diversion’ of nonprofit assets, disclosing losses attributed to theft, investment frauds, embezzlement and other unauthorized uses of funds.” The top 20 organizations in the Post’s analysis had a combined potential total loss of more than a half-billion dollars. *
One estimate, by Harvard University’s Hauser Center for Nonprofit Organizations, suggests that fraud losses among U.S. nonprofits are approximately $40 billion a year. **
Vigilant nonprofit boards might prevent many of these losses. Here’s how:
NONPROFIT BOARDS HIRE AND CEOs MUST ACT!
By: Eugene Fram
Whenever the time is ripe to select a new nonprofit CEO, I think of the old joke that says “…every person looks for the perfect spouse… meanwhile, they get married.” By the same token, nonprofit directors seek perfection in a new ED/CEO– and find that they must “settle” for less. But there are certain definitive attributes that are essential to his/her success in running the organization. With the pressures of increasingly slim budgets, fund development challenges and the difficulty of recruiting high quality employees, the 21st century ED/CEO must be action oriented and come equipped with at least a modicum of the following abilities: *
Time Compressed Non Profit Board members – Recruit & Retain Them!
By: Eugene Fram Free Digital Image
Every nonprofit board has had the experience of having board positions open and being unable to fill them with highly qualified people. The usual response from qualified candidates is that they are too busy to be accept a board position. However, the real reasons, if speaking privately, are that they perceive the nonprofit decision process to be too slow, board agendas loaded with minutiae, presentations that take up more time than they should, unfocused discussion, etc. (more…)
Common Practices Nonprofit Boards Need To Avoid
Peter Rinn, Breakthrough Solutions Group, * published a list of weak nonprofit board practices. Following are some of the items listed and my estimation of what can be done about them, based on my experiences as a nonprofit board director, board chair and consultant.
• Dumbing down board recruitment – trumpeting the benefits and not stressing the responsibilities of board membership.
Board position offers frequently may be accepted without the candidate doing sufficient due diligence. At the least, the candidate should have a personal meeting with the executive director and board chair. Issues that need to be clarified are meeting schedules, “give/get” policies and time expectations. In addition, the candidate, if seriously interested, should ask for copies of the board meeting minutes for one year, the latest financials, and the latest IRS form 990.. These reports and the data revealed tell a great about the sustainability and impact of the nonprofit.
• Overlooking the continued absence of board members at board meetings, strategic and planning meetings.
Many bylaws have provisions dropping board members who do not meet meeting attendance criteria established by the bylaws. However, such actions are difficult to execute because of the interpersonal conflicts that can arise. For example, one organization with which I am familiar had a director who did not attend any meetings, but did make a financial contribution to the organization. When his resignation was requested, he refused. Not wanting to create conflict, the board simply kept him on the board roster until his term expired and then sent him a note acknowledging the end of his term. The board chair, not the CEO, has a responsibility to have a personal conversation with the recalcitrant director. He/s needs to offer a “tough love” message in the name of the board.
• Taking a board action without conducting enough due diligence to determine whether the transaction is in the nonprofit’s best interest.
Although each board member should sign conflict of interest statement each year, my impression is that this is rarely done. Board members should understand the potential personal liabilities that might be accrued as a result of violation of the federal Intermediate Sanctions Act (IRS Section 4958) and other statues. For example, under IRS 4958, a board member can have his or her personal taxes increased if involved in giving an excess benefit, such as selling property to the wife of a board member for less than the market rate. Some boards and their members need to be frequently reminded about their “due-care” responsibilities.
• Allowing board members to be re-elected to the board, despite bylaw term limitations.
This often occurs when the board has given little thought to a succession plan, and the only person who seems qualified is currently in place. It also happens when the board has significant problems and nobody on the board wants to take the time to hold a time consuming position. Some boards, however, have a bylaw exception that allows a board chair, if scheduled for rotation, an extra year or two to be chairperson. Succession planning needs to be a yearly routine for top managers and for the board itself.
• Allowing board members to ignore their financial obligations to the nonprofit.
To assess board interest in a nonprofit, foundations and other funders like to know that every board member makes a financial contribution within their means or participates in the organization’s “give/get” program. This topic should be discussed at the outset of recruitment so it can be full understood by all directors.
• Overselling the protection of a Directors’ and Officers’ (D&O) insurance and laws limiting the liability of directors.
The importance of a nonprofit having a D&O policy, even a small one, can’t be overstated. I recently encountered a nonprofit that had operated for seventeen years without a D&O policy, although its annual budget was $500,000, and it was responsible for real estate valued at least $24 million. Each director should be knowledgeable about the potential personal liabilities involved with the board position. Frequently, directors assume that a D&O insurance policy covers too wide a range of situations.
• Allowing ignorance and poor practices to exist keeps leadership in control.
Changing leadership and practice is difficult for both for-profit and nonprofit organizations. However, in the nonprofit environment it is more difficult because poor leadership and practices can continue for a long time period, as long as current revenues meet expenditures. They can even become part of the organization’s culture. In some situations, this state of affairs continues because the board has low expectations of management and staff. It’s critical that the leadership needs to be thoroughly evaluated annually.
There is much that nonprofit boards can do about avoiding common practices that weaken the effectiveness of the board.
* aka The Nonprofit Entrepreneur, Placitas, New Mexico
How Do Nonprofits Determine CEOs’ Productivity?
By: Eugene Fram Free Digital Image
Nonprofit organizations can’t have a traditional bottom line profits. If they did, CEO productivity determination could be less complicated. Determining a fair CEO salary or benefit based on productivity, can be a complex issue for a nonprofit board. Providing too little or too much can be dangerous for the organization and possibly the board members. Although the spadework for salary and benefits need to be done by a small committee, the entire board needs to fully agree on the rationale for the final decision.
Following are some of significant challenges that I have noted nonprofit boards face when determining what is a fair system.
• Evaluation Failure: Some CEOs might receive high salaries because a series of boards have not effectively evaluated her/h performance. It is not unusual to find CEOs who have not been formally and effectively evaluated for years. They are held in position because they are “minding the store,” not being professional managers. It isn a comfortable position for both board and CEO. As one CEO commented to me, ” I present the board with alternatives, they make the decision that I must implement.”
Market Forces: Nonprofit organizations are restricted by law from providing their CEOs with excess benefits. (Section 4958 – IRS Code) As a result, the benefits offered the CEO must reflect a market level found in the geographic area and/or the person’s professional qualifications. For example, nonprofit health insurance organizations may have to compensate CEO at levels that are competitive with for-profit organizations. In my opinion, unusual CEO benefits (e.g. luxury cars) that are hard to justify market-wise are invitations for an IRS inquiry
• Board Relationships: Obviously having a good, not perfect, interrelationship with the constantly changing board membership is critical to support a reasonable compensation level. It is especially important in association type nonprofits where the person holding the board chair position changes annually. I recently encountered one board chair who, although being very pleased with the CEO’s performance, expressed a concern that the CEO did not have good communications with board members. The chair welcomed a suggestion that the board might engage a professional coach to help the CEO work on the issue.
• Additional Benefits: Although not usual in the for-profit environment, special benefits can be offered the nonprofit CEO, especially if they relate to job performance. These can range from special insurance coverage to extensive travel benefits , educational opportunities. or even housing and entertainment allowances. If involved with fundraising, like a college president, housing and entertainment benefits may be appropriate. In some unusual instances the person’s spouse or significant other may also receive compensation for time spent to benefit the nonprofit.
• Nonprofit CEO: It is not unusual for the nonprofit CEO to undervalue his/h own worth, especially when associated with a human services type of organization. This then keeps a cap on the whole salary scale and can make it difficult to hire capable people. Example: I encountered one CEO with degrees in human services and management areas plus 30 years of excellent experiences. Admired for his performance by peers in a nearby university, he refused to use that leverage to seek equitable compensation.
• Personality: Now doubt a positive CEO personality can be an attribute in working with boards and staffs.mAt an extreme, some nonprofit boards continue to support well-liked CEOs, even after they have been found to be involved with fraud. The board then has to be removed by state attorneys’ actions.
Nonprofit boards can do a poor job of determining nonprofit CEO salary and benefits because of inherent challenges. Evaluating critical qualitative outcomes and impacts, like improving life quality and successful advocacy, can be daunting. Nonprofit compensation must in line with market levels and professional qualifications, or the board members may acquire an IRS personal liability if they provide excess salaries and benefits!
Once Again! Nonprofit CEO: Board Peer – Not A Powerhouse
By: Eugene Fram Free Digital Image
Some nonprofit CEOs make a fetish out of describing their boards and/or board chairs as their “bosses.” Others, for example, can see the description, as a parent-child relationship by funders. The parent, the board, may be strong, but can the child, the CEO, implement a grant or donation? Some CEOs openly like to perpetuate this type of relationship because when bad decisions come to roost, they can use the old refrain: the board made me do it.
My preference is that the board-CEO relationship be a partnership among peers focusing on achieving desired outcomes and impacts for the nonprofit. (I, with others, would make and have made CEOs, who deserve the position, voting members of their boards!)
Different Strokes For Nonprofit Board Folks
By: Eugene Fram Free Digital Photo
Over decades of service on nonprofit boards, I have interfaced with board colleagues who possess a variety of performance styles and behaviors. Certain of these types seem to be common to all boards. My comments below are based on adaptations of a director classification system suggested by David Frankel, Partner of Founder Collection. *
The Eager Beaver
This board member (30s to early 40s) has probably been successful as an entrepreneur or is, perhaps, rapidly rising through middle management in a larger organization. He/she wants to “get things done”. His/her impatience with the typically slow nonprofit rate of progress can be channeled and directed by the CEO or Board Chair. Discouraged by lack of action, this director may quietly exit the board on the pretext that work pressures have increase. On the other hand, if properly nurtured, this category can offer substantial leadership contributions.
The Checked-Out Check Writer
Serving on a nonprofit board has likely become a family or company tradition for some directors. (Some local nonprofits are now about 100 years old or older.) Regardless of the person’s dedication to the mission, nonprofit board service becomes part of this director’s DNA. Often they develop into respected leaders and can be conduits to modest or substantial donations. In addition, they have access to interpersonal networks that are useful in recruiting other able board members. This cohort should be valued and their contributions, acknowledged.
The Vanilla Director
This is a director who attends meetings regularly, occasionally makes an interesting comment. He/she is dedicated to the mission of the organization and can make substantial financial or other contributions. One such director I observed, volunteered to assist the staff with a difficult field problem. According to Frankel, these directors are “less critical and offer encouragement…. ” However, like many other nonprofit board members, across behavioral types, avoid rigorous discussions at board meetings. If substantial conflict appears between factions of the board on a major issue, they may resign instead of taking an unpopular stand.
The Nonprofit Entrepreneur
This is a director who has a substantial understanding of the nonprofit sector. He/s has served on other nonprofit boards and is dedicated to the nonprofit’s mission. He/s has a desire to help move the nonprofit to its next level of service to clients. He/s often brings bold or different perspectives to the board and management. She/h knows that to achieve growth and improve client services, it is necessary to “sell” ideas to other board members, as well as the CEO. It’s important that the nonprofit entrepreneur and CEO are on the same page in terms of the organization’s future and potential to serve clients. If not, the CEO, unfortunately, may view the entrepreneur with his/h “fast track” style as a disrupter.
An overview of nonprofit boards tends to focus on the unique set of skills and work experience they bring to the table (doctors, professors, accountants, full-time homemakers etc.) A closer look at the board suggests another layer of classification i.e. individual styles, motivation and behaviors. Herein is challenge and opportunity to develop meaningful board experiences for each individual who has said “yes” to the call to service.*
Do Your Board Members View Their Board Work As Being Meaningful?
By Eugene Fram Free Digital Image
For several decades, I have suggested that nonprofit Board Chairs and CEOs have a responsibility to be sure that each board member perceives his/h continuing relationship as being meaningful. Following are some organizational guidelines that can assist Board Chairs and CEOs in this effort.*
- Developing or hiring strong executive leadership: Obviously when hiring externally it is necessary to engage a person with a managerial background. But many nonprofit CEOs can be appointed after years of being an individual contributor or leading a small department. These experiences condition them to do too much themselves, rather than to assume a strong management posture. This involves focusing more on strategy, on talent development, interacting more with the board/community and creating a long-term vision.
A strong CEO, if appointed internally, should understand the role changes that take place once appointed. He/s must delegate activities that was once performed was once performed within a comfort zone and seek new challenges. Examples: The new CEO needs to be enthusiastic about becoming a fundraiser. She/h must become well acquainted with peer CEOs regionally and nationally to stay abreast of the state-of-art in both management and mission areas. He/s needs to become acquainted with cohorts in the business and public management communities. Over time, those involved with the nonprofit internally and externally must perceive the organization is lead by a capable executive.
- Creating impact: In the 21st century, funders, board members and other nonprofit leaders are attracted to organizations that create impacts as opposed to outcomes. A nonprofit can have great program outcomes with little long-term impacts on clients. Impact is often hard to measure, but it can be done, only if started with imperfect measures that are improved over time. ** For example, one local human services organization, with which I am acquainted, operates groups of apartments offering social services that allow elderly clients to live independently for years on their own, rather than in an assisted living facility. The impact in this instance is well-defined and an impetus to attracting board members and donors that find the impact meaningful.
- Building relationships externally and internally: Board candidates who have broad contact networks are sought by search committees to enhance community or industry relationships or to strengthen the organization’s fund development efforts. Little effort is directed to fostering closer relationships among current board members who often don’t get to know each other personally because of crowded board and committee agendas. Example: I consulted with one board where some board members complained that they might not recognize their board peers when they meet them in outside social situations.
To solve the problem, both the Board Chair & CEO must acknowledge that it exists—in the above example; it took an extensive personal interview board survey to highlight the problem. Then creative tactics like the following can be employed.
- One CEO has a weekly one-hour conference call with the board chair to discuss current issues. Other board members are invited to join the calls if they wish. This is an excellent way for new board members to quickly become attuned to the nonprofit.
- Another CEO, each Sunday, sends a one-page e-mail summary of major events to board members. He reports that his high school English teacher would never approve of his grammar or format, but he knows emails are reviewed. They are reflected in the level of discussions at meetings
- Low-key self-funded social events for board members and significant others can help board members to become better acquainted and work together.
- Another classical approach is to allow 10 minutes each meeting to allow board members to briefly report changes in their personal or professional lives.
- Assuming an organization is successful in developing a cohesive board, what can be done to retain these efforts once they have termed-out? The answer is to ask them to join the organization’s “Alumni Association.” The process can be found here: (https://onlinelibrary.wiley.com/doi/epdf/10.1002/ltl.20305)
- Organizational stability: Unstable nonprofits have common telltale signs—rapid employees or management turnover, excessive bank borrowing, reserve depletion, late report filings, etc. It’s difficult to provide meaningful board experiences under these conditions. However it is not unusual to find board members who will accept responsibility when the nonprofit is unstable, if they are dedicated to its mission. Some may even “enjoy” the turnaround challenge.
While no nonprofit will be perfect, those with the best opportunity to provide meaningful board experiences will have a well formulated strategic plan that allows it to be stable operationally and financially.