Errors That Can Cloud Nonprofit Board’s Decision Making–Tread With Care
By Eugene Fram Free Digital Image
In this age of information overload, nonprofits need to continually scrutinize the quality and source of the material received in preparation for major decisions. Since board members often come without broad enough experience in the nonprofit’s mission arena, they may not be prepared to properly assess its progress in moving forward–and not equipped to make relevant comparisons with similar nonprofits. In addition, naive or unscrupulous CEOs and highly influential directors may inundate their boards with information and data as a distraction tactic to keep them busy in the “weeds,” reviewing what has been presented. Board members need to avoid donning “rose-colored glasses” when assessing proposals from these sources.
I once encountered a nonprofit whose board was about to acquire a for-profit organization, headed by its founder. Pushing for the “deal” were the nonprofit’s CEO and an influential board member who were not, it turned out, capable of the due diligence needed for a project of this complexity. But the board approved the acquisition without sufficient review. When the acquisition was consummated, the founding CEO of the subsidiary refused to take directions from the CEO of the nonprofit. In addition, the normal financial settlement of the project requires that a portion of the price be withheld, in escrow, pending adequate performance. In this instance, the nonprofit paid cash for the acquisition. Based on a lack of performance, the operation was finally closed with a substantial loss.
Can Small Experiments Test Nonprofit Strategic Validity?
By: Eugene Fram Free digital image
When given a series of potential mission changes, modifications or opportunities, most nonprofit boards take the following steps: (1) Discuss alternatives (2) Develop working plans, board/staff presentations and funding proposals (3) All three usually are packaged into a three or five year strategic plan for implementation. Typically the process can take about six months to “get all stakeholders on board.” When something new is suggested, the conservative board and nonprofit management immediately respond, “Great idea, let’s consider it in the new strategic plan.” Results: It can take three to five years to implement the idea, assuming the plan actually gets off the shelf, not an unusual occurrence for nonprofit organizations!
Another alternative being implemented by some nonprofit is to use a rapid experimentation approach called Lean. “First developed for use in the for-profit world, … the method focuses on new ideas for products through iterative experiments. Lean practitioners build simple prototypes ‘called minimum viable products (MVPs),’ …move quickly to get feedback on these items from constituents/stakeholders.” * As long as they have some positive iterations they continue to full product development.
Example: The software division of a large firm suggested a program that it felt certain would have great marketability because of it perceived uniqueness. The software developers were required to present it personally to a small group of potential customers. As a result of the interviews, both marketing and development executives dropped it.
How Can Nonprofit Boards Utilize Lean Experimentation?
These lean experiments can be conducted at minimum costs and with small samples that initially may not be statistically significant. (For example, in the software case cited above, there were only four customers in the sample, but they generated significant sales.)
Not being able to afford the time and money to develop excellent metrics, nonprofit boards, especially in assessing ambiguous and qualitative impacts, need to initially glean what they can from the use of imperfect metrics. (http://bit.ly/OvF4ri). The metrics can be anecdotal, subjective, interpretive or qualitative. For most nonprofits, it is a great leap forward from doing nothing or taking years to implement action. Also it offers an opportunity for client centered investigations. The most critical requirement is that the directors and management agree that the process is reasonable and that outcomes from each experimental iteration constitute fair and trustworthy information.
A Current Example
There seems to be a growing body of knowledge of how to apply the art of lean in the nonprofit environment. * The use of lean to assess the proper venues to select social media by which to communicate with donors and other stakeholders is an example. All agree that the use of various social media venues is difficult to assess for both for-profits and nonprofits.
Here, as an example, is what might be done to obtain some directions on using social venues to reach millennials. Charitable nonprofits are seeking ways to communicate with this group as potential volunteers and future donors. Instead of a board waiting to take action on a broad social media strategy before taking some action on social media, it might start with some small-scale, low cost experiments. The information it obtains from one or two MPVs would be useful in backing into a comprehensive social media strategy when a new strategic plan is needed. But an early MPV also might also provide some information for immediate action.
Summary: Like any management process lean is not a panacea for either the business or nonprofit sectors. It has its advantages and disadvantages and will not replace more rigorous process, when required–longitudinal studies and strategic planning. However, its experimental design feature can help drive the nonprofit decision process to be more effective and efficient. That alone can help to recruit more able directors, who because of time-compressed lifestyles, now are impatient with the traditional pace of nonprofit decision-making.
A Special Relationship: Nurturing the CEO-Board Chair Bond
By Eugene Fram Free Digital Photo
Here are tips to assure the best possible partnership between the board chair and CEO.
Keeping boards focused on strategic issues is a major challenge for nonprofit leaders. This leadership crisis is intensified by the fact that board chairs tend to have short terms (according to BoardSource, 83% stay in office only one or two years). Thus, nonprofit CEOs and board chairs need to bond quickly. For the good of the organization, they must come together swiftly and create a partnership that works. Here are golden rules for the CEO and board chair to follow:
1. Be sure the CEO and board chair share strategic issues with each other—negative as well as positive ones. A failure by either the chair or CEO to share information, such as a potential cash flow issue, can be disastrous for the nonprofit.
2. It’s critical for the CEO to conduct orientation sessions with a new chair, explaining the challenges facing the nonprofit, and reviewing the fundamentals of the mission. The CEO can help the chair keep the board focused on strategic issues, whether they’re programmatic or financial. With many nonprofits electing a new president each year, the CEO needs to prioritize these tasks.
3. Make sure staff know who has the final say. Some employees mistakenly view the board chair as the ultimate authority, even when the organizational table lists the CEO as holding that position. As a result, they may try an end run around the CEO, asking the board to overturn the CEO’s decision about salaries, promotions, or programs, for example. Both the CEO and board chair must emphasize the fact that the CEO is the final authority. If they make this message clear enough, they can probably keep staff from attempting any end runs. If an end run still occurs, the board chair must refer the issue to the CEO for resolution, except if the CEO is being charged with malfeasance.
4. The CEO should arrange for individual board members to meet with management staff on occasion so that the board can gather information about how the organization is operated and obtain an understanding of the promotional abilities of managers. The Sarbanes-Oxley act (a federal statute relating to public corporation boards) recommends this process for for-profit boards, and it’s also a good one for nonprofit board members.
5. Give staff members opportunities to participate in strategic planning and to support board committees. The board chair and CEO should work together to arrange such board-staff interactions, including joint celebrations of organizational success.
6. The CEO and board chair need to agree on the use of ad hoc board committees or task forces and their relationship to standing committees. For example, should the HR/personnel committee be a standing one or only an ad hoc one to address major personnel policies? In the 21st century, a board should only have maximum of five standing committees, many can only have three. If task forces are used to provide provide options for occasional policy issues, for example pension plan changes, there may be little need for a standing board HR/personnel committee.
7. The board chair and CEO should be the active leaders in fundraising efforts, with the CEO as administrative leader. The board chair and other board members must provide the CEO entrée to funding sources. They often need to accompany the CEO on fundraising visits. The CEO should keep the board chair informed of all entrepreneurial development activities being explored.
8. The board has only one major employment decision to make – to recruit and hire the CEO. It’s usually a long and exhausting process. But once it’s completed, the employment of all other staff personnel is the responsibility of the CEO and the CEO’s management team. For senior positions, most CEOs ask their chairs and/or other board members to meet with candidates, but the ultimate responsibility remains with the CEO. The board also has a responsibility to overview staffing to make certain that adequate bench-strength in in place for succession placements, at the CEO and the senior management
9. When hiring a CEO, or soon after employment, the board chair and CEO must face a stark reality—the need for emergency leadership should the CEO become temporarily incapacitated. These plans can either be established informally by the chair-CEO partnership or more formally via board resolution. The following are possible interim CEOs: a senior manager in the organization, a semi-retired experienced CEO living near headquarters, a consultant living in a neighboring city. CEO succession planning is an important issue for the partnership should the CEO decides to leave or retire.
10. The CEO can be helpful to the board chair in recruiting new board members by suggesting possible volunteer candidates or other contacts who have demonstrated an interest in the organization’s mission, vision, and values. Board candidates will want to meet with the CEO as part of the interview process. As a result, the two partners must agree on how to present the organization to board candidates.
11. The chair and CEO need to lead in establishing meeting agendas. The two partners must work together to assure there’s sufficient meeting time to discuss and resolve strategic issue While many nonprofits call their top executive the “executive director,” the term CEO or president/CEO is a more leader-focused.
12. For the current environment, board members should be ready and willing to be ready to involved in a heightened level of board activity. If not, the board chair and board member should determine what constraints the member needs to be in place for his/h activity.
Clearly the purpose of a nonprofit board is to serve the constituency that establishes it—be it community, industry, governmental unit and the like. That said, the “how” to best deliver that service is often not so clear. An executive committee, for example, can overstep its authority by assuming powers beyond its scope of responsibility. I encountered this in one executive committee when the group developed a strategic plan in an interim period where there was no permanent ED. The board then refused to share it with the incoming executive. In another instance, an executive committee took it upon itself to appoint members of the audit committee—including outsiders who were unknown to the majority on the board.
The fuzziness of boundaries and lack of defined authority call for an active nonprofit system of checks and balances. For a variety of reasons this is difficult for nonprofits to achieve:
A typical nonprofit board member is often recruited from a pool of friends, relatives and colleagues, and will serve, on a median average, for four to six years. This makes it difficult to achieve rigorous debate at meetings (why risk conflicts with board colleagues?). Directors also are not as eager to thoughtfully plan for change beyond the limits of their terms. Besides discussing day-to-day issues, the board needs to make sure that immediate gains do not hamper long-term sustainability.
The culture of micromanagement is frequently a remnant from the early startup years when board members may have performed operational duties. In some boards it becomes embedded in the culture and continues to pervade the governmental environment, allowing the board and executive committee to involve themselves in areas that should be delegated to management.
The executive team is a broad partnership of peers –board members, those appointed to the executive committee and the CEO. The executive committee is legally responsible to act for the board between meetings–the board must ratify its decisions. But unchecked, the executive committee can assume dictatorial powers whose conclusions must be rubber-stamped by the board.
Mitigating Oversight Barriers: There is often little individual board members can do to change the course when the DNA has become embedded in the organization. The tradition of micromanagement, for example, is hard to reverse, especially when the culture is continually supported by a succession of like-minded board chairs and CEOs. No single board member can move these barriers given the brevity of the board terms. But there are a few initiatives that three or four board members, working in tandem, can take to move the organization into a high-performance category.
Meetings: At the top of every meeting agenda there needs to be listed at least one policy or strategy topic. When the board discussion begins to wander, the chair should remind the group that they are encroaching on an area that is management’s responsibility. One board I observed wasted an hour’s time because the chair had failed to intercept the conversation in this manner. Another board agreed to change its timing of a major development event, then spent valuable meeting time suggesting formats for the new event—clearly a management responsibility to develop.
“New Age” Board Members: While millennial directors may be causing consternation in some legacy-bound nonprofit and business organizations, certain changes in nonprofits are noteworthy. Those board members in the 40- and- under age bracket need some targeted nurturing. I encountered a new young person who energized the board with her eagerness to try to innovative development approaches. She was subsequently appointed to the executive committee, deepening her view of the organization and primed her for board chair leadership.
Board members who understand the robust responsibilities of a 21st century board need to accept responsibilities for mentoring these new age board people, despite their addictions to electronic devices.
Experienced Board Members: Board members who have served on other high-performance boards have the advantage of being familiar with modern governance processes and are comfortable in supporting change. They are needed to help boards, executive committees and CEOs to move beyond the comfortable bounds of the past. They will be difficult to recruit, but they are required ingredients for successful boards.
NEW Projects: Boards and the CEO must be bold and try new approaches to meet client needs. For example instead of going through a complete planning process for a new program the board must ask management to complete a series of small experiments to test the program. When a series of results are positive, the nonprofit can work on a plan to implement the program.
Conclusion: Individual board members working alone will probably become frustrated in trying to contend with the overview barriers discussed. But working with three or four colleagues, over time, on a tandem basis, they can make inroads on the barriers. Meetings can become more focused on policies/strategies, new age board members can become more quickly productive, experienced board members can become role models and new programs and other projects can be more quickly imitated via the use of small scale experiments.
Board Members: Are Your Managers & Staffs Effectively Engaging Business Donors?
By: Eugene Fram Free Digital Image
Fund development should be a partnership between board members and CEOs/Development Officers, if the latter is available. However, I have noted that board members don’t take sufficient responsibility to make certain that CEOs and Development directors are well prepared when they approach potential business donors. This, in my view, is the first step in building a relationship fundraising approach. Many involved with NFP fundraising or management have spent their entire careers in the nonprofit environment, resulting in a gap in communicating with those in the business environment.* Some may even privately believe that those in business contribute less significantly to society. While little can be done about the latter, here is what I think can be done to fill or reduce the unfortunate gap in cultures often found between for-profits and nonprofits, especially when it relates to fund development.
Homework: Development officers, executive directors and others meeting potential business donor have an obligation to know a great deal about the potential donor’s firm. The worst opening for those seeking a business donation or grant is, “Tell me about what XXX produces.” It appears the solicitor has no interest in the environment in which the firm operates. In the Internet age, there is no excuse for such lapses. A Google or LinkedIn search is also critical in preparing to understand each of the persons who might be involved in initial contacts.
With this information, a conversation can be appropriately opened with “How’s business been recently?” It can be followed by a discussion of the donor’s industry trends and challenges, establishing a level of comfort for the donor.
What can your nonprofit do for the donor? Sophisticated development officers have ways of asking this important question. Some examples: (1) In the case of a university, this may range from suggesting capable entry-level employees for the firm to answering personal questions such as guidance on seek a relative’s admission to a selective university. (2) In the case of a nonprofit whose mission to assist qualified persons to find locate new employment, its work can be related to the firm when the firm has significant layoffs.
A Business Posture: A development officer or executive director needs to convey they have grounding in the business world and its basics, especially to be able to quickly show that their nonprofit is well managed. A recent study of Silicon Valley donors and nonprofit leaders cited a empathy gap between the two. Generally speaking, nonprofit leaders and new philanthropists don’t move in the same social circles. For the latter, community is increasingly defined not by physical place but by socioeconomic class: a particular psychographic and a set of shared experiences that only wealth can buy.*
The objective is to develop a continuing conversation with the donor related to his/h business interests and outlook. This offers a connection to show that the nonprofit fulfills a human service, professional or social need. These may include:
Explaining the scope of the “executive director” title directly or indirectly if the operating CEO does have the well-known title “president/CEO.” The ED title puzzles many in the business environment, since the top operational person in a business firm most often is the “president/CEO.” **
Showing the nonprofit has a viable mission that is being carefully shepherded and the organization doesn’t engage in mission creep.
Clarifying that an achievable business plan is available.
Having a well managed internal structure that can achieve impacts for clients. (Like the results of the Zuckerberg gift to Newark schools, many business people are aware that process goals can be achieved without having client impacts.)
Unfortunately nonprofit organizations can have a reputation among members of the business community as being less effective and efficient than for-profit ones. These people may not have encountered many local nonprofit leaders, as I have, with significant management savvy. Consequently, nonprofit representatives first need to be sure they begin their relationships with donors by showing interest in their business, industry, or firm. This then offers the opportunity to demonstrate that the nonprofit’s mission is managerially strong and looks to impacts, not processes, as measures of success.
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 four to six years. And assuming that a new board member’s intention is to make his/her unique contribution to the organization’s progress before he/s rotates off the board and is supplanted by another “new” board member. 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:
Does Your Nonprofit Have A Process For Implementing Strategy?
By: Eugene Fram Free Digital Image
My observation is that intense interest in nonprofit organizational strategy only takes place very three or five years when the strategic plan needs to be reviewed. The cause, as I see it, is that substantial numbers of nonprofit board members and senior managers lack substantial strategic backgrounds and interests to enable them to give the plan implementation attention. Most boards I have encountered are fortunate to have one or two board members with broad based strategic experiences. With nonprofit board members rotating every four to six years, it’s likely that any board member will only participate in one strategic plan change experience. Also some nonprofit CEOs and senior managers can be directly appointed from staff positions, lacking knowledge of strategy development.
Based on a survey of commercial organizations by McKinsey, it appears that these boards and their managements have similar strategic challenges as nonprofits. *
Following (in bold) are McKinsey’s three suggestions for implementing strategy development and my suggestions for adapting them to nonprofit organizations (more…)
Peter Rinn, Breakthrough Solutions Group, * published a list of weak nonprofit board practices. Following are some of the items listed (in bold) 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, board members 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
In the decades in which I have been a nonprofit/business board member or consultant, I fortunately have only been in the mire of a crisis situation twice. In both cases, the board was totally unprepared to take appropriate actions to minimize the turmoil that followed.
Following some guidelines that nonprofit boards can use to plan to respond effectively to crises in the 21st century: *
Nonprofit Management 