Can Nonprofit Boards Learn From The Mistakes of Others?

Can Nonprofit Boards Learn From The Mistakes of Others?

By: Eugene Fram

An old Chinese proverb states: “A wise man learns from his own mistakes, the wiser man learns from the mistakes of others.” Since nonprofit boards of directors are continually changing, volunteer directors typically serving three to six year terms, it seems that board members should immediately want to learn from the experiences of others.

Example

A recent report in the NFP Quarterly news-wire describes sad experiences encountered by the board of The American Academy of Arts & Sciences. Its membership includes 250 Nobel laureates and 65 Pulitzer Prize laureates. * The board apparently approved of the CEOs fundraising, budget balancing and raising the nonprofit’s profile. But they missed the following:

• They provided her with an “excess benefit” salary without properly investigating comparable salaries, relying on the CEO said were comparable salaries. This reliance is a clear violation of the Federal Intermediate Sanctions Act.
• The CEO provided herself with excessive perks (e.g., first class air travel, catered dinners at the Academy) without questions or oversight from the board.
• The board never conducted a due diligence process when they hired the CEO. She listed her academic background as including a PhD. from NYU. She only had been a candidate for the degree.
• They ignored both staff and newspaper reports about her heavy-handed management style.
• She was reported to be very deferential to the board “and was quick to offer them perks of one kind or another.”

Other NFP board members can use this case to become wiser!!

• Nonprofit directors should have some familiarity with the Federal Intermediate Sanctions Act – covered by Section 4958 of the IRS Code. Both directors who approve an excess benefit and those who receive one can pay substantial IRS penalties. At the least, a nonprofit board should invite competent legal counsel to occasionally review it, its current cases and other board legal obligations.
• A traditional question that an audit committee needs to ask external auditors every year is: “Have you noticed any unusual payments?” The committee should expect the auditors to have reviewed travel and entertainment expenses. In this instance, that action should have highlighted the unusual flight and catered dinner costs.
• The lack of a rigorous due diligence during a CEO search process is inexcusable. It is a simple matter of asking for official transcripts that show degrees.
• Every leader will have people on his/h staff who are supporters and iconoclasts, so some staff dissatisfaction is not unusual. But any serious report of heavy-handed management, let alone newspaper reports, requires board investigative actions. It is a significant red flag that there is more at stake than a couple of staffers unhappy with the CEO or changes taking place.
• NFP managers and staff tend to very deferential to board members because they don’t have frequent contacts with them and can fear the power of an ever-changing board. Consequently, board members have to be certain that their egos are in check. They also need to use all the available tools (financial reports, audit committees, external or internal auditors, imperfect qualitative metrics) to “trust but verify” in a robust manner.

* https://nonprofitquarterly.org/governancevoice/23965-venerable-institution-makes-dumb-mistakes-can-we-learn-from-them.html

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6 comments

  1. Good article. In addition to the IRS, board members should also check state law — many state attorneys general have authority to sanction and/or remove directors and trustees for violations of state laws regulating excess payments.

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    1. Keith: Thanks for adding to the discussion. As an attorney, you also may be interested in these articles and links, especially the lead director article, if you haven’t already seen them. The book contains late informtion on the 990 Form and the Intermediate Sanctions Act. I am appalled by nonprofit boards and managers lack of knowledge about the latter piece of legislation.
      Blog site http://bit.ly/yfRZpz Book: http://amzn.to/eu7nQl Links: http://bit.ly/OvF4ri http://bit.ly/13Dsd3v

      frameugene@gmail.com
      The nonprofit governance model in the book is based on: building trust between the board and management, eliminating redundant board committees; eliminating board micromanagement; focusing the board on policy & strategy and having a robust board evaluation focused on outcomes and impacts, not processes. It has been adopted or adopted by thousands of nonprofit boards.

      Many ways book can be used: Adopt or adapt the model; Reference source for board issues; Training tool board development; Motivational tool for director engagement; Reference to understand board governance & compliance obligations. A leader’s guide is available for the book for those who want to use it as a base for collegiate/ continuing education classes or for short seminars that appeal to board members and CEOs.

      BTW: My partner on the book is a professional writer. The material in the book is however, is based on my extensive field experiences as a NFP board director and consultant. All examples reported have a fact base without embellishment. The material is presented in story line format for interesting and easy reading.

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