The Possibility Of Fraud – A Nonprofit Board Alert
By: Eugene Fram Free Digital Image
“According to a Washington Post analysis of the filings from 2008-2012 … of more than 1,000 nonprofit organizations, … there was a ‘significant diversion’ of nonprofit assets, disclosing losses attributed to theft, investment frauds, embezzlement and other unauthorized uses of funds.” The top 20 organizations in the Post’s analysis had a combined potential total loss of more than a half-billion dollars. *
One estimate, by Harvard University’s Hauser Center for Nonprofit Organizations, suggests that fraud losses among U.S. nonprofits are approximately $40 billion a year. **
Vigilant nonprofit boards might prevent many of these losses. Here’s how:
Whenever the time is ripe to select a new nonprofit CEO, I think of the old joke that says “…every person looks for the perfect spouse… meanwhile, they get married.” By the same token, nonprofit directors seek perfection in a new ED/CEO– and find that they must “settle” for less. But there are certain definitive attributes that are essential to his/her success in running the organization. With the pressures of increasingly slim budgets, fund development challenges and the difficulty of recruiting high quality employees, the 21st century ED/CEO must be action oriented and come equipped with at least a modicum of the following abilities: *
Time Compressed Non Profit Board members – Recruit & Retain Them!
By: Eugene Fram Free Digital Image
Every nonprofit board has had the experience of having board positions open and being unable to fill them with highly qualified people. The usual response from qualified candidates is that they are too busy to be accept a board position. However, the real reasons, if speaking privately, are that they perceive the nonprofit decision process to be too slow, board agendas loaded with minutiae, presentations that take up more time than they should, unfocused discussion, etc. (more…)
Peter Rinn, Breakthrough Solutions Group, * published a list of weak nonprofit board practices. Following are some of the items listed 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, directors 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
How Can A Chief Operating Officer (COO) Advance Your Nonprofit Organization?
By: Eugene Fram Free Digital Image
In my decades of involvement with nonprofit boards, I have encountered several instances in which the CEO has failed to engage the services of a COO–when this addition to the staff was clearly needed. In each case and for whatever reasons, this reluctance to act left the nonprofit organizationally starved.
This means that the CEO continues to handle responsibilities that should have been delegated, some of which a predecessor may had assumed during the start-up stage. I once observed a nonprofit CEO with an annual $30 million budget personally organize and implement the annual board retreat, including physically rearranging tables/materials and cleaning the room after the retreat! When top leadership is deflected in situations at this level, client services and the general health of the organization is likely being negatively impacted.
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.
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.
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.
I happened to read a report from Deloitte Consulting suggesting ways that for-profit organizations can improve their performance in uncertain times. The report centers on key drivers of board effectiveness that, in my opinion, resonate with similar nonprofit situations. * Most nonprofit boards typically live with uncertainty and are perennially “on the edge.”
Conservative leadership: Nonprofit boards are responsible for donor and charitable types of revenues that place directors in a public trust position. In addition board members typically will only be active for a median tenure period of four to six years. As a result they often become overly conservative in their strategic views and may accept CEOs that “mind-the-store” with modest incremental growth annually.
To prevent the organizational boat from capsizing in the perpetual seas of the pandemic and beyond, the board needs to rely on the best forward looking information about strategy, people, culture and clients. All of this must be in solid alignment with a substantial mission, or a modified one if the external environment requires it. This allows the nonprofit to cut through the barriers that impede strategy development.
Opportunities & Strategies: Even when the organization is prospering, the board has a responsibility to press for innovations and to support small-scale experiments as called for in a “Lean Management” structure. Within this structure, the staff can test the waters via experiments to move more boldly, as long as the experiments yield positive results. ** At a minimum, the the board and management, need to focus on near-term planning during the pandemic period. They then need to move to a “north star” approach, with a ten year framework, once the pandemic recedes. This requires management to balance the needs of the various client groups that can call for heartbreaking decisions. For example, should revenues be allocated to marketing or used for client programs?
Match fit: Boards have a responsibility to motivate the nonprofit to realistically evaluate the tensions between new models and existing ones, for example between face-to-face meetings and virtual ones. It is already clear the virtual format has caught the attentions of nonprofits. If nonprofits plan to rely on virtual meeting to a significant extent, board and managements will need to improve their technologies, presentations and develop better ways for participants to become involved in discussions.
Culture, culture, and culture: As Peter Drucker has noted, “Culture eats strategy for breakfast every morning,” Nonprofit boards’ cultures play a key role in determining the level of risk the board is willing to take. With key drivers, nonprofit boards will have to take reasonable risks to survive the impacts of the pandemic, and work with management to take some crafted entrepreneurial risks. It now appears that fund raising, for example, will emphasize greater focus on major donors, and board members will need to provide more time and effort
Diversity and inclusion: Board diversity is a well established need. Inclusion not only means differences by demographics but recruiting new board members and maximizing the best they have to offer. Nonprofit boards traditionally try to acculturate new board members to the current culture instead of maximizing their potentials. For example, a person with financial strategy and accounting backgrounds will be asked to work with the CFO on accounting related problems because this has been the prior process. Instead, he/s should be asked to develop a long term-term financial plan. This should be more meaningful work for the new board member and of significant benefit to the organization.
Meeting format: For the thousands of nonprofits that have had to suddenly change meeting format from face-to-face to a virtual format, it is time to consider what is best for the organization post-Covid. Can the board, management and staff be productive working from home? Will a virtual-face-to-face process be acceptable in terms of productivity and client satisfaction? How can productivity be assessed under the virtual format?
Curiosity is Key: To keep a nonprofit sustainable in the long term beyond the pandemic, Deloitte Consulting concludes, “Directors should get out of the ‘same old’ board room, and should even look across borders to learn from approaches in (different nonprofits) and companies… . Developing news skills and insights are essential for innovation and should be sought to create the questioning and challenging environment needed to imagine, inspire and deliver better outcomes (and impacts). Complacency (in uncertain times) can be a killer.”*
More Than Passion Needed in Prospective Nonprofit Directors
By: Eugene Fram Free Digital Image
What nonprofit selection committee would reject a candidate who demonstrates passion for the organization’s mission? I can attest to the fact that in many recruitment processes, an interviewee who shows strong empathy for the cause is a “shoe-in” for a board position regardless of any obvious weakness in other skill areas. By contrast, one who appears less than passionate about the organization’s mission can be overlooked or even eliminated from the list. (more…)