A Nonprofit Board Must Focus On Its Organization’s Impacts
By: Eugene Fram Free Digital Image
“One of the key functions of a (nonprofit) board of directors is to oversee (not micromanage) the CEO, ensuring that (stakeholders) are getting the most from their investments.” * State and Federal compliance regulations have been developed to make certain that boards have an obligation to represent stakeholders. These include the community, donors, foundations and clients, but not the staff as some nonprofit boards have come to believe. The failure of nonprofit boards, as reported almost daily by one blog site, ** shows something is wrong. Following are some inherent problems.
Directors Are Involved Part-time: Like their for-profit counterparts, nonprofit board members have significant outside job demands and are often time-stressed. Although technology can allow them to attend meetings electronically, it can eliminate the interpersonal contacts necessary to build an effective team. For example, I have encountered some board members, who meet monthly, but still admit that they wouldn’t recognized the names or faces of other board members, whom they may only see three or four times a year. In addition, most nonprofit organizations have a board meeting attendance requirement in their bylaws. Yet I haven’t observed a nonprofit board attempt to enforce it. There are too many potential interpersonal conflicts involved. Dismissing a neighbor, friend or colleague can be rather stressful.
Board Members Can Be Over-committed: While outside board service can be a significant benefit for a CEO or senior manager in both for-profit and nonprofit firms, those in the for-profit sector have begun to recognize the downside of too much outside board involvement. Firms contractually limit the number an employee can accept—usually a maximum of one for-profit and one nonprofit. In the nonprofit environment, it is not unusual to have a volunteer serving on four or five nonprofit boards simultaneously. “In addition, there is evidence that boards suffer from many of the same group decision-making biases as other work groups, and the infrequency with which boards meet can make these dysfunctional group dynamics an even bigger issue.” *
Complexity of Compliance: Since the for-profit and nonprofit corporate debacles of the early 21st century, nonprofit boards have encountered a number of new compliance regulations. Some have even voluntarily agreed to abide by the regulations of Sarbanes-Oxley. Now demanded of all 502(C)(3) & (4) nonprofits is that they complete the IRS Form 990 annually, and they are subject to the Intermediate Sanctions Act—IRS Code 4958. The Form 990 has 38 questions related to governance, and boards must officially approve its content each year before submission. An excess benefit authorized by the board and/or management–a violation under the Intermediate Sanctions Act–can results in nonprofit directors and managers having added tax fees being levied to their personal income taxes! I also find it distressing to interact with many nonprofit board members who have no knowledge of this Federal legislation.
Ways To Solve The Problems
Improve The Work of Audit Committees: Instead of meeting once or twice a year, nonprofit audit committees need to meet more frequently, at least four times a year, in my opinion. Obviously, one or two persons need to have an accounting and/or financial background. But all need to have a deeper understanding of nonprofit governance. For example, I encountered an accountant nonprofit board member who had no knowledge of the requirements for completing the IRS Form 990 or any knowledge of the Intermediate Sanctions Act.
Understanding the Nonprofit Board Context: Too many nonprofit board members still view themselves in terms of an early 20th century context—the CEO is the person who needs to be micromanaged by the board. In the words of a colleague who was on a community board, “We tell the CEO exactly what to do. We have a real board!” But if one examines the backgrounds of many current nonprofit CEOs, the investigator will find CEOs have much more management experience and savvy than many of their board members. Board members must understand the important difference between micromanagement and over-viewing.
How to Use Board Expertise: Nonprofit boards tended to restrict board member expertise to narrow board needs rather than have some members use their expertise in an expansive manner. Example: A person with a broad understanding of marketing may be asked to help with writing and producing the annual report, rather than leading the development of a comprehensive marketing strategy that can benefit long-term results. Whether or not this occurs is dependent on the CEOs comfort with change. It will be difficult to change the situation if the CEO is not in agreement.
Focusing an organization on assessing its impacts can be a daunting task because many important ones, such as advocacy impacts, are not easily evaluated. But in the 21st century, boards will be increasingly required to present these types of evaluations
Yet another well-articulated, informative post. Thank you for mentioning the Intermediate Sanctions Act – it’s been a number of years and worth revisiting today!
Thanks for you comments. Strange that accountants and others involved with nonprofit governance know nothing about the Intermediate sanctions act.