CEO Evaluations

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/

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Going For Impact: A Non-Profit Blueprint For the Second Half of the Year  

 

Going For Impact: A Non-Profit Blueprint For the Second Half of the Year

By Eugene Fram     Free  Digiatl Image

For organizations and individuals, the end of the calendar year is the traditional planning period – the time used for self-assessment, strategizing and putting in place “game plan” for improvement and growth for the 12 months to come.

For many nonprofits, June 30th is the end of the fiscal and planning year. Yet the blueprint also offers the same opportunities to focus on improvement and growth.

But in today’s volatile, hyper-competitive and uncertain environment, this one-a-year exercise isn’t enough.

It just isn’t. Especially for nonprofits. And their boards of directors.

Here’s the good news: The year’s midpoint – upon us now – is a great point for an interim review. It’s a good time to review your game plan. Develop a vision goes beyond reviewing current budget projections against actuals and other compliance requirements.

I have identified five areas of focus – the last being a kind of “action plan” you can use to implement what’s of interest. Adopting just one of the many suggestions can yield a substantial return on investment.   They are: 

  • Your Leadership
  • Your Talent Pool
  • Your Fundraising
  • Your Impact Data
  • Your “Fix-It” Points

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Are Your Board and Staff Ready For Change?

Free Digital Image

Are Your Board and Staff Ready For Change?

By: Eugene Fram

“Ideally, change takes place only when is “a critical mass of board and staff want … it. A significant … portion of leadership must realize that the status quo won’t do” * Based on my experiences, this ideal is rarely achieved because:

  • The CEO needs to support the changes being suggested and/or mandated by a majority of the board.   But, if not fully invested in the change, he/s can accede to board wishes for action but move slowly in their implementations. The usual excuse for slow movement is budget constraint.

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The Nonprofit Dream Team: a Board/CEO Partnership that Works!

The Nonprofit Dream Team: a Board/CEO Partnership that Works!

By: Eugene H. Fram    Free Digital Image

Re-balancing and maintaining important relationships in a nonprofit organization can be important to its success. Do various players fully understand and accept their specific roles. Is there mutual trust between players? Are communications open and civil?

I recently encountered an association CEO who complained that his board wanted to judge him without establishing mutually agreeable goals, outcomes or impacts. He felt what is needed is a partnership arrangement where the board does not judge the CEO and organization based on political or personal biases but overviews the two in terms of mutually accepted achievements. This, he contended, forms a substantial partnership between board and CEO and staff. If the board thinks it can judge management, he stated, it gives it a personal political type of power, unrelated to performance. As an example he pointed to an unfortunately common nonprofit situation where a CEO is given an excellent review and fired six months later because there had been a change in the internal board dynamics. (more…)

Can Groupthink Hamstring Change on a Nonprofit Board?

Can Groupthink Hamstring Change on a Nonprofit Board?

By: Eugene Fram        Free Digital Image

Dictionaries typically define groupthink as “…the lack of individual creativity, or a sense of personal responsibility that is sometimes characteristic of group interaction.” In my opinion, the process is as lethal to the nonprofit board as smoking can be for humans. It ties boards to past experience and discourages experimentation. Since many nonprofit charters require boards to “conserve assets” and board members are characteristically volunteers, the nonprofit culture inevitably defers to groupthink–it’s in their DNA! “One goes along to get along.”
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Once Again: How Should Nonprofits Conduct Board Evaluations?

Once Again: How Should Nonprofits Conduct Board Evaluations?

By: Eugene Fram

Recent (2017) data from BoardSource show that only about 58% of boards have had “formal, written self-assessment of board performance at some point. Only 40% of all boards have done an assessment in the past two Years,” a recommended practice. With the rapid turnover of directors that nonprofit boards traditionally experience, this seems inexcusable. As a “veteran” nonprofit director, following is what I think can be done to improve the situation. (more…)

How The Nonprofit CEO Can Exit Gracefully

How The Nonprofit CEO Can Exit Gracefully

By: Eugene Fram   Free Digital Photo by Membio

Like many nonprofit CEOs, Tom Smith has held the position for 10 or more years. As he reported, and I agreed with his assessment, the association he heads was doing well. The membership has increased substantially, revenues exceed expenses each year, and through a series of development events, the reserve account now exceeds $2million. But Tom was not satisfied. He said the job has become “boring.” In his words, it’s like turning on automatic at the beginning of each year—adjusting to a new board chair, developing a budget and being alert for “Black Swan” events that nobody can anticipate.   He quietly said to himself at the beginning of each year, “I wonder what the big problem is going to be this year?”

Preplanning  

Tom had a preplan: Several years ago, he had purchased an avocado farm in California, and had a partner-manager operating it successfully. He and his wife planned to move there, once he decided it was time to leave his CEO position.

Other potential preplanning actions he might have taken:

  • Buy a second home in a more temperate climate, as retirement dwelling.
  • Quietly investigate the potential to join a nonprofit consulting firm.
  • Assess whether or not he can be successful as a solo consultant.
  • Quietly interact with contacts in nearby education institutions to determine how his experiences and educational credentials might qualify him for teaching or administrative positions.
  • Review grant proposal requests from foundations and governments to assess how his expertise might match those of people needed to manage the grants.   (Be certain none of this type of activity creates a conflict of interest with his current CEO position.)
  • Register with search firm to test his “marketability’ for a more interesting CEO position. (Beware of any firm that requires a fee from you.)

Be Proactive

Once preplanning is complete, discuss it carefully with your family, financial advisors and possibly with an attorney if a major relocation is going to be involved. Be sure that they view the change as you do. Make certain they don’t see a missed opportunity within the current position. Also be certain that the time frame is reasonable for the CEO and the organization. It would be a mistake for the CEO to leave when the CFO is planning to retire. Traditionally, a one to three year period is needed from first discussion to the time the CEO departs.

Inform the Board

This should be accomplished in several steps. First quietly inform the board chair. Then at intervals alert other members of the board, the management team and staff.   The CEO has been around for a long time and has an obligation to prepare the organization for a major change. I recently watched a nonprofit executive group “tread water,” for 18 months from the rumors of the CEO’s departure through the selection of the new CEO and his arrival at the office.   To develop a graceful exit, the incumbent needs to be aware of the situation and help provide s smooth transition.

Leaving With Dignity 

Leave as scheduled. Any delay will extend the uncertainty that surrounds the transition.   As noted above, nonprofit organizations have their own ways of remaining static during these transition periods.   Your CEO nonprofit successor deserves better strong support.