Boared meetings

Once Again! Should a Nonprofit CEO Be a Voting Member of the Board of Directors?   

Once Again! Should a Nonprofit CEO Be a Voting Member of the Board of Directors?

BoardSource, a professional governance organization, reports that this question is one of the most asked. Google reports about eight million citations, in a brief .52 second search, related to the issue or related issues. The question continues to be debated, and the need for comment and opinion seems insatiable.

But here are the issues as I see them:

State Legislation: Most nonprofit charters are issued by states, and it appears that the vast majority of American nonprofits are governed by these regulations. California permits the CEO to be a voting member. Until a recent change, New York did allow the CEO to become a board member. The motivations behind the legislation center on preventing a CEO developing conflicts-of interest, especially as they relate to salary decisions. Also, there is a feeling among some nonprofit directors that the board must be the “boss.” This attitude can even go as far as one nonprofit board member’s comment: “We have a real board, we tell the CEO exactly what to do.”

It appears that the restriction is considered a “best practice.” Some nonprofits move around it by naming the CEO an ex-official member of the board, a member without a vote. However, there is a “better practice,” available where permitted by legislation.

Developing An Even Better Practice in a Nonprofit

Start At The Top: Allow the CEO to hold the title of President/CEO and allow the senior volunteer to become Board Chair. This signals to staff and public that the board has full faith in the CEO as a professional manager. In addition, the change absolves the senior volunteer of potential financial liability, not unlike the volunteer who unwittingly received a $200,000 bill from the IRS because it appeared he had strong control of a bankrupt nonprofit’s finances and operations.

Ask The CEO: Make certain the CEO is willing and able to accept full responsibility for operations. Not all CEOs, designated as Executive Directors, want the increased responsibilities attached to such a title and to become a board member. These managers frequently feel comfortable with having the board micromanage operations and often openly discuss their reservations.

The CEO Becomes A Communications Nexus: Under the CEO’s guidance, board-staff contact takes place on task forces, strategic planning projects, at board orientations and at organization celebrations. It openly discourages the staff making “end runs” to board members, not a small problem in community-focused nonprofits

Brand Image: As a board director, the CEO can be more active in fund development. The board position and the title can easily help the CEO to build the organization’s public brand image through the clear public perceptions of the board’s choice to lead the organization. This provides leverage to make greater use of the board-CEO relationship required to develop funds. It can allow the CEO to be the spokesperson for the organization’s mission and to quickly become the center for public statements when a crisis develops.

Peer Not Powerhouse: Probably descending from early religious nonprofits, its personnel may be seen by part of the public as not being “worldly.” They must be over-viewed by a group of laypersons that encounters the real world daily. The CEO, as a voting member and a board team peer, takes on increasing importance to reducing these attitudes. As long as the CEO works successfully as a peer not a powerhouse, there should be substantial benefits to the organization.

 

 

 

 

Mismanagement Causes Huge Agency Failure—A Word To The Wise Nonprofit?

Mismanagement Causes Huge Agency Failure—A Word To The Wise Nonprofit?

By Eugene Fram

Rarely do failed for-profit or nonprofit organizations get a posthumous review of what actually went wrong. The collapse of one of the largest nonprofits in the US, the Federal Employment Guidance Service (FEGS) of New York City, is a noteworthy exception. Details of the causes that led to the human service’s demise were aired widely throughout NY media. * This organization had a $250 million budget, with 1900 employees who served 120,000 households covering a range of mental health and disability services, housing, home care and employment services.

Following are my interpretations of what its board should have done to avoid such a tragedy.

Failure of nonprofits: Failure of small nonprofits is rampant for a wide variety of known reasons. For example, “Nonprofits tend to be more trusting of their employees and have less stringent financial controls than their for-profit counterparts.” **

Outside of fraud being involved, the FEGS failure demonstrates that no nonprofit is too big to fail, probably because of a lack of board due care. Boards have to be acutely aware of the professional financial competencies of their CFO and CEO or well-meaning people who naively believed that loans could be easily repaid. There should have been a well-documented financial l strategy. The nonprofit closed with $47 million in loans/liabilities/debts.

Symptoms of impending collapse: Clearly with $47 million being owed, common financial ratios should have alerted knowledgeable board members to the coming catastrophe. But in the nonprofit environment, it is not unusual to that find directors, even business executives, are unfamiliar with the fund accounting approach used by nonprofit organizations.

In addition, contracting city and state agencies failed in their reviews of the organization’s finances. However, some nonprofits, either intentionally on unintentionally, can saddle contract reviewers and directors with so much information that even the most conscientious can’t spot problems. (Humorously, directors in this category are referred to as “mushroom directors” because like growing mushrooms, they are kept in the dark an covered with excrement. But this type of tactic was successfully used against IRS auditors in the Madoff debacle.)

Government or Foundation Contracts: In accepting these contracts, nonprofits must be realistic about whether or not there is enough money to cover full costs. They can’t be blinded by what the contract can do for the organization’s client. If adequate overhead funding is not attached to one or more of these agreements, they eventually can cause bankruptcy, because the nonprofit eventually will have to borrow or seek additional donations to cover them.

How Nonprofit Boards Can Avoid Problems

Review Financials: Current financials need to be given to directors monthly, or at least quarterly if the board meets less often. The very detailed budget data can often be difficult for those without budget experience. At the least, everybody on the finance committee needs to be able to intelligently review the income statement and balance sheet. Also they need to be aware that funding accounting permits some unusual twists—food donations, for example, can be included in revenues, based on an estimate of their value. Consequently, cash revenues and expenditures need to be a focus for directors’ analysis.

Make certain that financials are delivered on timely and complete bases. Problem Example: One CFO didn’t submit accounts receivable reports for nine months because he said he was too busy to compile it. Neither the board nor the CEO demanded issuance of the report. When finally delivered, it was clear that the CFO was listing a substantial number of noncollectable accounts as active ones. Both the CFO and CEO were fired, and the nonprofit had to hired expensive forensic accountants to review the impact.

Gaps Between Revenues and Expenditures: This is the ultimate red flag, if not followed carefully. It may vary from period-to-period in a predictable pattern that everybody understands, but if the gap continues, say for four to six months, strong board action is necessary.

Adopt written financial policies: These are necessary to make sure all concerned with finances are on the same page. Since interpretation is often required in financial decisions, nothing should be left open to broad interpretation.

Contracts with governments, foundations and others: Make certain that reimbursements for indirect costs are included. If not included, have a benefactor ready to step in to cover the costs.

An old Chinese proverb, “A wise man (or woman) learns from his/h own experience. The wiser man (or woman) learns from the experiences of others.” One hundred twenty thousands households and individuals lost services from an 80 year old human service nonprofit. There is much to learn from the collapse of FEGS.

* https://www.councilofnonprofits.org/thought-leadership/what-we-learn-when-nonprofit-closes-its-doors

**https://www.blog.abila.com/nonprofit-fraud-facts-2016-global-fraud-study/

How Often Do Nonprofit Board Members Need to Question Strategic Norms?

 

How Often Do Nonprofit Board Members Need to Question Strategic Norms?

By Eugene Fram

A new nonprofit director has a lot to learn. Considering that his/h term of service will be relatively short (typically four to six years), he/s must quickly learn the “ropes” to participate in a meaningful way. In this process, colleagues and leadership will acquaint him/h with prevailing board systems and culture—often ignoring the depth of expertise she/h can employ. Example: An expert in financial strategies may be asked to assist the CFO with accounting details, far below the person’s skill level. Oftentimes the new board member also is greeted with a mantra that says, “We’ve always done it this way.” As the director moves in his path from novice to retiree, during a short tenure, there is little opportunity to suggest innovations that differ from the accepted fundamentals and to successfully advocate for change. (more…)

Can Nonprofit Management Usurp Board Responsibilities?

Can Nonprofit Management Usurp Board Responsibilities?

By Eugene H. Fram     Free Digital Image

On balance management will always have more information about the organization than volunteer board members. As a result, board members must be proactive in seeking information from management and a variety of other sources, even if they must involve employees other than senior management. Following are three field examples showing what has happened when boards failed to be proactive (more…)

The Search For a New Nonprofit CEO Needs To Be Realistic

 

The Search For a New Nonprofit CEO Needs To Be Realistic

By Eugene Fram  Free Digital Image

Boardmember.com in its October 11, 2012 issue carries an op-ed item by Nathan Bennett and Stephen Miles titled, “Is your Board About to Pick the Wrong CEO.” Although targeted to for-profit boards, all of the five items listed can be applied to nonprofit boards. Following are my applications to nonprofit boards. (more…)

Can Nonprofit Boards Afford To Underinvest In Management Leadership Development?

Can Nonprofit Boards Afford To Underinvest In Management Leadership Development?

By: Eugene Fram:

McKinsey & Company has published a substantial nonprofit study: To better understand the state of (nonprofit) leadership in the US social sector… The findings suggest that chronic under-investment in (management) leadership development for 337,000 small or midsize nonprofits,..(may risk) the sector’s capabilities to fulfill emerging missions effectively and to adapt to fast-changing demands.
(http://www.mckinsey.com/insights/social_sector/what_social_sector_leaders_need_to_succeed) (more…)

Is there truth in the statement that ALL nonprofits are actually businesses,and they need to be run like businesses?

Is there truth in the statement that ALL nonprofits are actually businesses,and they need to be run like businesses?

By Eugene Fram

In my opinion, too many board and staff members in the nonprofit environment:

Do not realize that a nonprofit can focus even more effectively on “caring” missions, visions and values while operating under a business model. Many functions of a business and are the same for both types of organizations — financial operations, human resources, marketing, board governance, etc. (more…)

Why Are Some Nonprofit Boards Missing the Mark? What to Do?

Why Are Some Nonprofit Boards Missing the Mark? What to Do?

By Eugene Fram     Free Digital Image

Stephen Miles of the Miles group (http://milesgroup.com) recognizes that many business boards are coming up short in performance. As founder and CEO of a strategy and talent development agency, Miles has identified five areas of potential improvement for commercial boards. I believe these categories are also quite relevant to nonprofit board operations in the following ways:

Knowledge Gaps

Many new board directors are in the dark about some of the operating issues facing their organizations. Such information gaps are less prevalent in trade and professional associations because most directors are in associated fields or are in practitioner positions. However, new directors of community based charitable organizations and human services focused nonprofits should be much more attuned to discussions at initial board meetings. Current methods of orienting new directors don’t seem to be doing the job. This is critical for those boards with rapid turnover. For example, one board with which I am acquainted has 80% of its membership with no more than 18 months tenure.

Orientations can take a variety of forms, ranging from brief pre-board session to pre-meeting phone calls from the CEO or Board Chair. These updates will provide the new board member with information that should make his/her participation in the board meeting more meaningful.

Lack of Self-Assessment

“When it comes to the (business) boards (assessing their) own performance, this is often done by using the check-in-the box exercise, (along) with some form of gentle peer review,” reports Miles. In the nonprofit environment, board self-assessments are not usually a priority because nonprofit directors often have time constraints. In addition, nonprofits need to more broadly examine qualitative outcomes, such as community impacts. But business boards are also beginning to move in the same direction, and at this time seem to be behind nonprofits!.*

The media, Internal Revenue Service, foundations and accreditation organizations are asking for more information and transparency to ensure that nonprofits have quality processes to overview management impacts. Few nonprofit boards can afford rigorous third party directed board self-assessment, the gold standard. However a self-review deficit might leave some board members with significant personal liabilities.** Consequently, it is my personal opinion that nonprofit boards need to make good faith efforts to have reasonable self-reviews, understanding that management and board members may hesitate to negatively reflect on volunteer directors who have adopted poor decisions.

Self-Delusion

“Management Capture” occurs when a board too readily accepts a delusional view from management that organizational performance is significantly better than reality. As a result, some board self-examinations may take place only after a crisis has been resolved. So it is mandatory that the boards develop rigorous impact measures, both quantitative and qualitative by which to judge organizational and board performance. Models for self- board assessments are available from professional groups and consultants.

Recruitment Shortcomings & Board Inexperience

Miles maintains that most for-profit directors lack real experience in succession planning: this is also true of nonprofit directors. Even in for-profit boards where a chief executive is temporarily incapacitated, there often is no plan for interim succession. Plus there is always the possibility that a CEO will leave quickly for a variety of reasons. Planning for his/her unanticipated exit should be an ongoing board concern.

One root cause for having a nonprofit culture of board inexperience is that often there are too few directors who have served on other for-profit or nonprofit boards and know how to be role models for newer recruits. Also, normally serving one or two terms, lasting three years, some experienced nonprofit directors may not be motivated to serve in this role because there are no financial incentives offered. However, as demonstrated in the Penn State debacle, a director’s reputational risks can be substantial. How a board evaluates and improves its organizational talent pool is critical to performance. Miles characterizes the optimal board as composed of ” … directors who are active in their roles engaging individually and collectively (to engage with) other directors and (overview) management.” It is a tall order in today’s nonprofit environment.

For-profit organizations or nonprofit organizations, in my opinion, have five identical basic board guidelines. For Deloitte Partners, a worldwide accounting and financial advisory firm, these constitute board responsibilities that can’t be delegated to management. The board has responsibilities to have: a viable governance structure, annual assessments of (board and) organizational performance, driven strategic planning, improved management talent and assured organizational integrity.

A relentless pursuit of these lofty goals will enable nonprofits to be “on the mark.”

*For nonprofit qualitative outcomes, see: Jerry Talley & Eugene Fram (2010) “Using Imperfect Metrics Well: Tracking Progress & Driving Change,” Leader to Leader, winter, 52-58. For commercial boards see: Emily Chasan, (2012), “New Benchmarks Crop Up in Companies’ Financial Reports,” CFO Journal Section, Wall Street Journal, November 11th,

** For examples, see the Intermediate Sanctions Act, Section 4958 of the Internal Revenue Service Code. Also see the Expanded IRS 990 form guidelines for board structure and performance–38 new questions related to nonprofit governance.

Nonprofit Board Members Can Be Change Agents

 

Nonprofit Board Members Can Be Change Agents

By: Eugene Fram     Free Digital Image

Nonprofit boards should always support policies that will allow the organization to drive innovative actions. Following is a list developed from successful for-profits (in italics) that can be easily adapted to the nonprofit environment. *

Having a Succession Plan: This includes two elements: The first is a plan to avoid disruption in the event that he CEO is temporarily incapacitated. Hopefully it allows designating someone internally who may be capable to take the position. However in many nonprofits, I have encountered, the CEO has not developed this staff talent because of budget limitations. When this occurs, the board should have an experienced consultant in mind to fill the position for an interim period.   In my opinion, it’s not usually desirable to have a board person replace the CEO on an interim basis.   This can tend to blur the line between board and management when the position is permanently filled. The new CEO may hesitate to modify changes instituted by an interim board CEO. (more…)

Board Member Networking Pays Off for Nonprofits

Board Member Networking Pays Off for Nonprofits

By Eugene Fram    Free Digital Image

Over decades of nonprofit board membership and consulting, I have rarely observed volunteer board members effectively networking with their peers to develop best board practices. Also rarely do I see them accompany management to regional or national conferences related to the nonprofit’s mission. These types of exposures are necessary to have groups of board members capable of making generative suggestions.

For directors who are willing and able to network, I suggest the following: * (more…)