People Problems Can Put Nonprofits at Risk
By: Eugene Fram
Like the Streisand song lyric, nonprofit people who need people must first have the know-how to choose and cultivate those people! If not, the risks to a board can range from modest to substantial. It all begins with making the right choices and vetting board and CEO candidates. Most nonprofit board members know that they are only required to make one hiring decision—the engagement of the CEO. This is a process that always involves some risk factors. Take the case of the university that has expended substantial amounts to engage a CEO. After a brief “honeymoon period” it was determined that the candidate lacked the requisite background to move the organization forward. His resignation was forthcoming, and with it, a disruption that was costly not only in dollars but in board/faculty morale and public confidence. A nonprofit board is usually confronted with several people risks. Following are some that should be noted by board members.
Colleagues on the Board- Modest Risk: Except when a crisis occurs necessitating additional time and effort to address the problem, there is usually little opportunity for collegiality among nonprofit directors. In recent times, with many board members living time-compressed lifestyles, colleagues not only don’t know each other but can pass each other on the street without recognition! This lack of personal interaction makes it difficult for directors to understand and share perspectives regarding the organization. It is clearly the board and CEO’s responsibility to provide these opportunities by organizing social events and/or small gatherings for board people to interact– perhaps over breakfast, lunch or wine. Another option is to extend an invitation to attend local or regional professional events. Or to invite board members to join a conference call during the weekly meeting between the board chair and the CEO. People contact within the board cements relationships and becomes an asset to working together as a group.
Financial Personnel-Might Be Substantial Risk?: Financial people, as a group or individually, can constitute a potential risk group. At the very least, each board member should be thoroughly acquainted with the CFO, his/h senior reports and the professional qualifications of each, especially in relation to their abilities to stay current with financial requirements. The board needs to provide sufficient signals to all staff personal that it is alert to unethical behavior, especially fraud. Similarly, the board and/or its committees need to make certain that there is substantial compliance with all regulations imposed by governmental or professional organizations. Example: One CFO delayed the delivery of an accounts receivable report for an extended time period. Neither the board nor management demanded it. When the report finally arrived, the board found that the CFO had been carrying a substantial number of bad debts as assets. To rectify the situation, the nonprofit had to engage costly forensic accountants. Although the board was also substantially at fault in its due care, both the CFO and CEO were fired.
The CEO-Can Be A Substantial Risk: Like a marriage, there needs to be substantial trust between the board members and CEO. However the CEO should to becomfortable with a policy of “trust but verify.” This requires that the board members and/or its audit committee ask questions or make inquiries that sometimes might appear be insulting. Some examples:
- Why has he/s engaged family or friends for part or full-time work, if this has occurred?
- Has she/h placed contracts for services, such as insurance, for competitive bid? Example: One highly valued CEO in the New York area kept the insurance contract with a friend for 15 years, until it was discovered that the friend was inflating insurance costs to give the CEO kickbacks. Loss to the charity amounted to millions of dollars.
- Are conflicts of interest for board members and/or management clearly listed on the IRS Form 990? Example: A board member’s firm may offer the nonprofit very competitive pricing, and the nonprofit purchases from the firm. Obviously records need to be kept to substantiate the advantage.
- The board refuses to take appropriate actions related to their due care responsibilities related to CEO compensation. Example:
The Staff- Can Be Moderate Risk: Board members need to be have enough contact with lower management and staff in order to be able to identify those who may be eligible for promotion, even when the CEO has is responsible for internal promotions. Unfortunately this is a nonprofit board responsibility that is often neglected. But it needs to be reviewed annually at the time that CEO succession is reviewed by the board.
A nonprofit is only as good as its team of people. With many of the board members rotating off after their terms have expired, it becomes an ongoing challenge to keep them apprised of potential risks and challenges. The board must assess its own to a nonprofit’s success. In addition, it must overview management and staff to build background knowledge on those with potential to become future leaders