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The Enron Debacle, 20 years Ago—2021 Lessons for Nonprofit Boards?

 

The Enron Debacle, 20 years Ago—2021 Lessons for Nonprofit Boards?

By: Eugene Fram                Free Digital Image

In 2001 Enron Energy collapsed due to financial manipulations and a moribund board. It was the seventh-largest company in the United States. Andrew Fastow, the former CFO and architect of the manipulations served more than five years in prison for securities fraud. He offered the following comments to business board members that, in my opinion, are currently relevant to nonprofit boards. (http://bit.ly/1JFGQ6T) Quotations from the Fastow article are italicized.

• One explanation of his downfall was he didn’t stop to ask whether the decisions he was making were ethical (moral).

Nonprofits directors and managers can find themselves in similar situations. One obvious parallel is when a conflict of interest occurs.  In smaller and medium sized communities, it is wise to seek competitive bids, especially when the purchase may be awarded to a current or former board member or volunteer.

Board members and managers themselves can be at personal financial peril, via the Intermediate Sanctions Act, if they wittingly or unwittingly provide an excess salary benefit to an employee or an excess benefit to a volunteer or donor. Examples: The board allows a substantial above market salary to offer to the CEO. Also the board allows a parcel of property to be sold to a volunteer or donor at below market values.  See: https://www.irs.gov/charities-non-profits/charitable-organizations/intermediate-sanctions

One subtle area of decision-making morality centers on whether a board’s decision is immoral by commission or omission. Examples: In its normal course of client duties, the board allows managers to travel by first class air travel. Obviously, resources that are needed by clients are being wasted and morally indefensible. On the other hand the moral issue can come in to play, if the nonprofit is husbanding resources well beyond what is needed for an emergency reserve. The organization, in a sense, is not being all it can be in terms of client services or in seeking additional resources. Overly conservative financial planning, not unusual in nonprofit environments, can result in this latter subtle omission “moral” dilemma. Overtly, universities with billions of dollars on their balance sheets have been highlighted as having the issue, but I have occasionally noted smaller nonprofits in the same category.

• He (Fastow) said he ultimately rationalized that he was following the rules, even if he was operating in the grey zones (area).

There can be grey zones for nonprofits. Example: IRS rules require that the nonprofit board be involved in the development of the annual Form 990 report. But what does this involvement mean—a brisk overview when the report is finished, a serious discussion of the answers to the questions related to corporate governance, a record in the board minutes covering questions raised and changes suggested, etc.? A nonprofit boards needs to make a determination on which course is appropriate.

Boards implementing government-sponsored contracts can get into grey areas. Example: Some contracts require the nonprofits to follow government guidelines for travel expenses. I wonder how many nonprofit audit committees are aware of their responsibilities to make certain these guidelines are followed?

According to Fastow, a for-profit director can ask the wrong question—“Is this allowed?” A nonprofit director can make the same mistake. Instead, in my opinion, the better question for a nonprofit should be “Will this decision help the organization to prosper long after my director’s term limit?”

As Fastow did, human service boards can invite trouble if they falsely rationalize an action as being taken for client welfare, and then conclude they are following the rules.

• Mr. Fastow said one way to start changing an entrenched culture is to have either a director on the board, or a hired adviser to the board, whose role is to question and challenge decisions.

Nonprofit directors are often recruited from friends, family members and business colleagues, etc. This process creates an entrenched board.

When elected to the board, a process begins to acculturate the new person to the status quo of the board, instead making best use of the person’s talents. Example: An accountant with financial planning experience will be asked to work with the CFO on routine accounting issues, far below her/h professional level. One answer is to accept Fastow’s suggestion and to appoint a modified lead director or adviser to a nonprofit board. (For details: see: http://bit.ly/13Dsd3v)

An old Chinese proverb states, “A wise man learns by his own experiences, the wiser man learns from the experiences of others. Nonprofit can learn a something from Andrew Fastow’s post conviction recollections to hopefully help avoid significant debacles.

Enlarging the Nonprofit Recruitment Matrix: The art of selecting new board members

 

 

Enlarging the Nonprofit Recruitment Matrix: The art of selecting new board member

By: Eugene Fram        Free Digital Image

There’s never enough to say about the selection of nonprofit board members. Following my last post on board behaviors and cultures I ran across a guide fo desirable skills/abilities for “for-profit” directors. From this list, I suggest the following additions to the recruitment matrices of 21st century nonprofit board candidates to improve board productivity. * Those included will have:

Executive and Non-Executive Experiences: These include planners with broad perspectives needed to have visionary outlooks, a well as persons with unusually strong dedication to the organization’s mission. It may include a senior executive from a business organization and a person who has had extensive client level experience. Examples for an association for the blind could be the human resources VP for a Fortune 500 corporation and/or a visually impaired professor at a local university.

Industry Experience or Knowledge: An active or retired executive who has or is working in the same or allied field. However, those who can be competitive with the nonprofit for fund development could then present a significant conflict of interest.

Leadership: Several directors should be selected on the bases of their leadership skills/abilities in business or other nonprofit organizations. Having too many with these qualifications may lead to internal board conflict, especially if they have strong personalities.

Governance: Every board member should have a detailed understanding of the role of governance, their overview, financial/due diligence responsibilities and the potential personal liabilities if they fail to exercise due care. In practice, nonprofits draw from such a wide range of board backgrounds, one can only expect about one-quarter of most boards to have the requisite knowledge. But there are many nonprofit boards that I have encountered that even lack one person with the optimal board/management governance knowledge. Some become so involved with mission activities that they do what the leadership tells them when governance issues are raised. Example: One nonprofit the author encountered, with responsibilities for millions of dollars of assets, operated for 17 years without D&O insurance coverage because the board leadership considered it too costly.

Strategic Thinking & Other Desirable Behavioral Competencies: Not every board member can be capable of or interested in strategic thinking. Their job experiences and educations require them to excel in operations, not envisioning the future. Consequently, every board needs several persons who have visionary experiences and high Emotional
Quotients (EQs.) Those with high EQs can be good team players because they are able to empathize with the emotion of others in the group. Finding board candidates with these abilities takes detailed interpersonal vetting because they do not appear on a resume.

Subject Matter Expertise: Nonprofit Boards have had decades of experience in selecting board candidates by professional affiliations like businessperson, marketing expert, accountant, etc.

Other Factors Relevant to the Particular Nonprofit: Examples: A nonprofit dedicated to improve the lives of children needs to seek a child psychology candidate. One focusing on seniors should seek a geriatric specialist.

* http://eganassociates.com.au/disclosing-the-board-skills-matrix/

Want Better Nonprofit Board Cultures? Look for Four Board Behaviors

 

By Eugene Fram                Free Digital Image

Board cultures can be difficult to modify or change in for-profit and nonprofits. A recent McKinsey study demonstrated the strength of the board culture in three different levels of board operations—ineffective, complacent and striving. * Differentiated achievement seems to be largely dependent on four behaviors. (See bold type.) Centered on my experiences, they can be applied to nonprofit boards. At the least, the behaviors can motivate considerations for board modifications. (more…)

Can A Nonprofit Board Change Its DNA?

 


Can A Nonprofit Board Change Its DNA?

By: Eugene Fram        Free Digital Image

Genetic codes aside, the term DNA is now commonly used to describe distinctive characteristics and qualities in almost anything –living or inanimate. Every nonprofit has a DNA! And every board member, if questioned, will probably have a different take on that invisible life blood which — for better or worse—impacts the  actions of his/her board. One author goes so far as to suggest that   “…one common element to create sustainable success is evaluating and interjecting the right DNA.”

He goes on to recommend three steps to make the necessary changes in the nonprofit culture: Assessment, New Genetics and a Gestation period— the last step being essential …“for the new approach to take hold and grow.” * Following,, as an example, is how it might apply if a nonprofit board needs to move from a traditional Community Board to a Policy/Strategy Board.  This is a situation where the board increases its overview responsibilities and decreases or eliminates its involvement in operations, i.e. micromanagement.  

Assessment: Evaluations involve defining what the agency is doing well and what systems need to be removed or modified.  Listing the former is easy, but dropping long embedded practices can lead to unproductive board conflict.  Logically, board members still need to be in their third year of a median four or six-year tenure before sustainability assessment (5 to 10 Years) can be undertaken.Too much legacy culture has been embedded in the Board operations, calling for three to five year strategic plans. At that point, most or all of current board members will have been termed-out of their positions

I once observed, as an example, a board that made a strategy decision about changing the timing of an annual fund raising event.  Once the decision was made, the board took the remaining meeting time to review and formulate new platforms for the event, presenting management with implementation suggestions.  The prolonged discussion, in effect, was simply perpetuating a standard community board micromanaging process.  When I called this to the attention of the Executive Director, he claimed that it is part of the nonprofit’s culture to be operationally involved.

Assuming it will take about two years for a board member to become acclimated to the new board organization, it is clear that no single director can bring about a sustainable long-term approach until his/her third year of a six-year term. There should be two or three other older directors who strongly support the change.   Most importantly, the ED must see the value in it.  Otherwise, it will have to wait for the appointment of a new ED that may probably take place outside of the tenure periods of current board members.  Management and staff leadership who can take a broad view of the future also need to become involved.

New Genetics Include:

Growing the Future.  Early adopters are critical to change.  These are board members who, for example, fully understand the line between policy issues and operational ones.  They can be helpful to the board chair in keeping meeting discussions out of the operational “weeds.”

Equip, empower and encourage:  Allow the CEO to have full operational responsibility, with the understanding that a rigorous evaluation of quantitative and qualitative impact impacts will be reviewed each year.  The board and CEO should jointly develop these issues. ** Under no circumstances should the board singularly establish them.  

Assuming all these changes are in place and board members support them in their fourth or fifth tenure years. it’s then important to make sure that newer board members have a similar mindset.  Some new directors who may have had experiences in other more traditional nonprofits  might want to revert to the legacy operations because it is the way that “all nonprofits operate.”

Vet New Directors Carefully:  Make certain new directors understand the new board environment that is being developed so they are comfortable with it.  It can attract highly qualified directors and staff, with the DNA’s focus in creating sustainable long-term success.  Some, however, may have quite different views.  For example, I once encountered two board candidates, with social work backgrounds, who wanted to supersede management personnel and directly evaluate staff members, because they had field experience.

Gestation Period

It takes four to five years to firmly install the new system.  These environmental movements do not take place quickly. By then, the original directors leading the change will likely have termedout of their board positions. The recruitment committee will have to seek candidates who are attracted by the new environment and understand the need for substantial operational delegation to management.  Most of the problems will have been eliminated from the DNA, and it should set the nonprofit on a course for sustainable success.

*https://www.forbes.com/sites/forbesnonprofitcouncil/2017/12/13/how-to-create-an-organizational-dna-thats-sustainable/#71ba9f5030ac

** https://nonprofitquarterly.org/2012/07/24/using-imperfect-metrics-well-tracking-progress-and-driving-change/

How Seriously Does Your Nonprofit Board Take the Matter of Ethics?

How Seriously Does Your Nonprofit Board Take the Matter of Ethics?

By Eugene Fram                           Free Digital Photo

Most board members are aware of their obligation to ensure their nonprofit’s compliance with certain standard regulations e.g. making tax payments, submitting IRS Form 990s and/or avoiding potential fraud. But what I have found missing in the nonprofit environment is a sense of board member responsibility to provide for and sustain a viable ethics program.

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What Attributes Qualify a High Performing Nonprofit Board?

What Attributes Qualify a High Performing Nonprofit Board?

By: Eugene Fram       Free Digital Image

Every Board—whether for- or non-profit –creates its own organizational “stage.” True, there is an ever-revolving cast of characters and variable props. But as any artistic director will tell you, it’s the quality of the performance that can make or break the perceived value of the production.

On a parallel plane, Russell Reynolds Associates, an international executive search firm, lists six key issues (in bold) that can determine the performance level of a for-profit board.
(http://bit.ly/1f5Yt7F)  Following are my views on how these questions can be applied to nonprofits. Such information may help directors to assess their own organizational impacts.

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How Can Nonprofit Boards Overcome the Inertia of Certain Directors?

 

 

How Can Nonprofit Boards Overcome the Inertia of Certain Directors?

BY: Eugene Fram        Free Digital Image

Making major changes in mission, board structure, management or other significant matters is difficult. The typical nonprofit board will be divided into several groups on the issue: 1) directors who want change, 2) directors opposed to change, some strongly opposed and 3) what I call “process directors,” persons uncomfortable with major decisions who always want more data or information before voting.

The first and third groups (directors who want change and process directors) will be very willing to appoint a committee to review the alternatives, but it’s up to the board chair to satisfy process directors who create obstacles.

Process directors like to sit back and examine issues, often, in my opinion, sincerely feeling that their questions allow them to be on the cusp of showing some insights that others have failed to notice. They always ask, “Have we consulted everybody?” Or say, “Let’s make sure we have considered everything.” Often they are directors who call for postponement of the vote, even after a lengthy discussion.

Process directors are well-intentioned, sincere individuals. However, the board has to be careful that these directors don’t allow the board to continually examine one angle after another until they lose sight of the board’s main job. They can keep action in limbo indefinitely! It is up to the board chair to makes certain that this does not happen. But board chairs want to develop an inclusive board where all who want to voice their views can be heard.

A certain level of board process is necessary to operate efficiently. But when it gets out of hand, it can have a serious negative effect. Boards often lose some of their best volunteers, who get frustrated and quietly resign. Their usual reason for resigning is “the pressure of job obligations.” To me, that’s a covert message that the board is getting mired in minutiae, usually initiated by process directors.

One friend recently resigned from a board, using the “job obligations” excuse. The real reason was that the executive director, a process oriented person, used board-meeting time inappropriately, including asking the full board to review detailed public relations Powerpoint presentations.

In another situation, I watched a board make a strategic decision involving the combining of two programs. Even after a thorough discussion of the decision, the board insisted on discussing the tactical decisions needed, all of which were the responsibility of management. The board was unable or unwilling to shed an imbedded process culture that the status quo nonprofit had used for over 50 years.

Can A Nonprofit Find Strategic Ways To Grow in Unsettled Times?

 

Can A Nonprofit Find Strategic Ways To Grow in Unsettled Times?

By: Eugene Fram                                Free Digital Image

Nonprofits have always had to struggle to meet their client needs, even when economic conditions and social turmoil were much less constraining than today  and they have dim prospects for the immediate future.   How can mid-level nonprofits uncover growth opportunities in the present environment?

Plan Strategically: Any nonprofit board needs a core of directors and managers who are capable of identifying potential new strategic directions. The CEO must be highly conversant with changes in the mission field. He/s then needs a core of board members to assist in realistically reviewing his/h long-term insights for growth, as well as board insights developed from generative discussions. The CEO, supported by several board members, can then be the keystone for board discussions about implementing change. Should the CEO not have the requisite forward-looking knowledge, the only alternative is to try to replace the CEO, a difficult change even under the best of circumstances.

Capacity Investment: As expected, nonprofits invest their assets in maintaining and improving programs. It seems that client needs will always be there to operate and expand existing programs. But success in nonprofits and elsewhere also involves beginning to solve tomorrow’s problem today. Example: The challenges for serving the aging cohort of baby boomers is clearly showing demographic impact. Those in the field or allied fields serving this cohort need to be concerned with finding new modalities to assist the baby boomers in an efficient, effective and humane manner. Where funding is a barrier to participate in such an effort, foundations and governmental agencies need to be aggressively tapped to fund with small-scale projects, if the foundation can partner with the nonprofit.  (See: https://www.snpo.org/publications/sendpdf.php?id=2024)

Impact & Evaluation: Midsized nonprofits should have the capacity to conduct a few small-scale studies every  few years, if growth and development are cultural values for the organizations. Resources might come from within the nonprofit and/or from outside sources. Once a small-scale study provides evidence of impact; the nonprofit can find outside interest for more small-scale improvement, additional evaluation and possibly some outside support.

Obviously a small new project  won’t be able to have an extensive evaluation component. However, if imperfect metrics are used in the process, the impact findings can be useful in seeking an interest from other sources. (These are metrics that are anecdotal, subjective, interpretive or qualitative. For more details see:http://bit.ly/OvF4ri)

Importance Of the Board & Management: Growth opportunities will be initiated in nonprofits, only if the board constantly asks for them, especially in the current environment.  The board, overtly or indirectly, has to ask management about innovations that are taking place or can take place within the organization. Annual questions to management such as “ What do you want to do innovatively or creatively this coming year?” are mandated. When it appears an innovation can be scaled a little or an innovative person has potential to be creative, the nonprofit board has to support this learning culture for testing.

Do Nonprofit Directors Face Cyber Security Risk?

Do Nonprofit Directors Face Cyber Security Risk?

By: Eugene Fram      Free Digital Image

Solarwinds and Target and others may seem far afield from the concerns of nonprofit directors, except for the giants in the area, like AARP. However, think about this hypothetical scenario.

A group of high school students hacked into the computer system of a local nonprofit offering mental health services and gain access to records of clients, perhaps even placing some of the records of other teenagers on the internet.

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How A Nonprofit Board Member Can Initiate Positive Change

How A Nonprofit Board Member Can Initiate Positive Change 

By: Eugene Fram              Free Digital Image

A nonprofit board member comes up with an idea that he thinks will do wonders for the organization. He is convinced that establishing a for-profit subsidiary will not only be compatible with the group’s mission but may even bring in new sources of revenue. It’s his ball–now what’s the best route to run with it? All too often in the nonprofit environment, initiating change can be as daunting as trying to get consensus in the US Congress! There are, however, certain interpersonal levers, which, if pushed, can accelerate the process–although one hopes that not all the levers will be needed in any specific situation.

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