Nonprofit CEOs and Board Directors: How Expert Is Your CFO?
By: Eugene Fram Free Digital Image
When hiring a chief financial officer (CFO), nonprofit organizations often find themselves with a major challenge, since many financial and accounting functions and compliances are identical with those of for-profit organizations. To compete, the nonprofits may need to offer higher salaries than typical for nonprofit organizations. Some may trim the level of expertise required to fill the position. They hire a person with a bookkeeping background when the organization needs somebody with financial analysis skills. This is a dangerous move, especially when the organization is growing. It is difficult to terminate a financial person who is satisfactory for a startup, but isn’t able to navigate the challenges of rapid growth. Also it is a continuing challenge for the Board and CEO, to make certain that the person in the position now has the requisite skills. A mistake by a person who is not current with financial changes and compliances can make a major error that will harm the organization’s reputation, leading to a board restructuring and/or firing the CEO.
Both the nonprofit CEO and the board need to assess the CFO’s expertise annually by:
*Asking knowledgeable board members if they are receiving financial data and analysis in a format helpful for decision-making.
*Having an executive session with the external auditors yearly to obtain the firm’s assessment of the expertise of all financial personnel with whom they had have contact.
*Keeping track of reports that are submitted late. Something might be radically wrong. (I know of one case where the Board and CEO were only receiving a subsidiary report intermittently. The problem was the data reported involved old accounts that should have been written off months ago. The organization had to hire forensic accountants to determine what needed to be done to resolve the situation. The board terminated the CFO and then the CEO.)
*Making certain all financial personnel take two weeks vacation each year, so that a substitute needs to handle the duties.
*Having the CEO review the CFO’s expertise annually with knowledgeable board members, external accountants or others. Acknowledging the growth point when the nonprofit needs a CFO with analytical abilities as opposed to bookkeeping ones.
*Reviewing the causes for a high turnover rate among financial personnel.
*Providing local financial support for the CFO and others to stay current with accounting and compliance regulations.
For a current case of a board that evidently failed to adhere to such guidelines see:
Is Your Nonprofit’s Strategy Only Stating Ambitions Rather Than Solving Problems?
By: Eugene Fram Free Digital Image
McKinsey & Company in a recent article interviewing author and academic Richard Remelt discusses this strategy question for business organizations.* Following is my estimation how the article’s information might be applied to the nuances encountered in nonprofit strategy development.
In evaluating strategies, nonprofit boards often only use the easier to measure results, for examples, membership size and financial ratios.
But progress for nonprofits often also must be measured in qualitative formats. “Not being able to afford the time and money to develop excellent qualitative metrics (e.g., enhanced life quality, community commitment), to glean whatever they can from using imperfect metrics.” **
Richard Remelt suggests there is a big difference between strategies developed for actions versus ambitions. My experiences with nonprofit strategy development suggest that many nonprofits focus on ambition rather than the problems to be solved by the next three-year plan. He calls a strategy based on ambition “bad strategy.” “Bad strategy is almost a literary form that uses PowerPoint slides to say, ‘Here is how we will look as a company in three years.’ That is interesting, but it’s not a strategy.”
For nonprofits, his analysis also relates to the difference between program outcomes and program impacts. For example, A human services strategy can have good program outcomes but fail to have client impacts because basic causes aren’t/can’t be addressed.
Board Member Motivation
The median nonprofit board member serves a term ranging from four to six years. In contrast, the average tenure for a public board member is 9.7 years.
Assuming this frequent turnover, the nonprofit director/trustee will only be involved with one strategic planning cycle. Even with a board member highly dedicated to the mission’s objectives, the brief tenure structure can dampen motivations to rigorously participate in strategic planning.
I have seen this evolve frequently, especially when the board approves the performance of a “mind-the-store executive director,” as opposed to an “entrepreneurial” type. Operationally, the former executive director can be described as one seeking stability over innovation. She/h can produce modest income increases with balanced budgets, often supported by substantial legacy financial endowments.
Involving Staff in Strategic Planning and Other Insights
Rumelt suggests limiting the number of persons involved in strategic board planning. For larger nonprofits, this might only include senior and/or division management. For smaller and midsized nonprofits, this might involve management and some professional staff. Organizationally, in these nonprofits, the two groups may be only one or two levels apart.
Ask simple questions like: “If our organization were to disappear, who would miss us?” “If we were to establish a new agency, who among the staff, would we take with us?”
“Boards may not need strategy committees, but they just need a sense of best practice, just as ..(accountants).. have well-established best practice in accounting:” I agree that nonprofit boards do not need a standing strategy committee. The development and maintenance of the strategic plan is the joint responsibility of the CEO and Board Chair. Together they can use a simple maintenance device by relating most problem-solving efforts, generated in nonprofit board meetings to the strategic plan.
A Nonprofit Board Has A Problem With A Recently Hired CEO – What To Do? By: Eugene Fram. Free Digital Image
With some possible variations, is the following scenario one that is frequently repeated elsewhere?
• The nonprofit board had engaged, Joe, an experienced ED. The prior ED had been in place for 25 years, and was evidently unwilling to move to meet changing client needs. For example, the agency only offered counseling services five days a week, 9 am to 5pm, with hours extended to 8 pm on Thursday night. There were no client options for emergency calls during nights or during weekends.
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 in the article can be applied to nonprofit boards.
A blog developed by an internationally known board expert* raises some pertinent governance questions mainly targeted to for-profit boards. Following are my suggestions how these questions could apply to nonprofit and trustee boards. In addition, field examples show what happened when the questions had to be raised in crises situations.
Does bad news rise in your organization? “You may be the last to know.” For example, the board of a human services organization knew that the professional staff was not happy with a new ED with an authoritarian management style, but the board felt it needed to give him a chance to modify his style. Board members didn’t know that the staff professionals had been meeting with a union organizer for nine months. A labor election resulted, with the professional staff agreeing to work under a trade union contract.
Do your CEO & CFO have integrity? “If the CEO or CFO holds back, funnel information, manages agendas, is defensive or plays…. cards too close to the, vest, this is a warming sign.” For example, a CFO was delinquent in submitting a supplementary accounts receivable financial report. The board and CEO accepted his excuses, but the data, when submitted, had a significant negative impact on the financials. Both the CEO and CFO lost their positions. Should the board have also accepted some responsibility for the crisis?
Do you understand the (mission) and add value? The board members need to seriously answer this question: If this organization were to disappear tomorrow, who would care?
Do you know how fraud can occur in your (nonprofit)? Common wisdom prevails that there is little for-profit or nonprofit boards can do avoid fraud. To review nonprofit boards actions that can be taken, especially for medium and small size nonprofit boards, see; Eugene Fram & Bruce Oliver (2010) “Want to Avoid Fraud? Look to your Board,” Nonprofit World, September/October, pp.18-19.
Do you compensate the right behaviors? “You are at the helm as board members. Whatever you compensate, management will do.” Be certain the organization is compensating for outcomes and,more importantly, today impacts. Too often compensation is given for completing processes that are not tied to client impacts
Do you get disconfirming information? Management is only one source of information. With the agreement of management, visit privately with people below the management level. Set a Google Alert for the name of the organization to see what others on the Internet are saying about your nonprofit’s relationships.
Do you get exposures to key (operational areas) and assurance functions? “Bring key people into the boardroom, without Power Points. See how they think on their feet. It is good for succession planning and is an excellent source of information.”
Do you get good advice and stay current? “Bring tailored education into the board room and stay on top of emerging developments. “ This is especially important for the nonprofit directors or trustees who serves on a board that is out of their area of expertise. For example, bankers might serve on a hospital boards.
Do you meet with (stakeholders) – apart from management? Board members need to join with management in meeting key funders occasionally to determine if their expectations are fully met and what the board might do to foster a continuing relationship. This lets funders know that the board is involved over-viewing the organization’s outcomes and impacts.
*Richard Leblanc, “The Board’s Right to Know and Red Flags To Avoid When You Don’t.” http://www.boardexpert.com/blog, September 14, 2012 Note: Bold & quoted items are from the above blog.
Too Much Information 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 accepted their work without question. When the acquisition was consummated, the founding CEO of the subsidiary refused to take directions from the CEO of the nonprofit. In addition, although the normal financial settlement of the project requires that a portion of the price be withheld pending adequate performance, the nonprofit had paid cash for the acquisition. Based on a lack of performance, the operation was finally closed with a substantial loss.
The Succession Dilemma: Why Do Nonprofit Boards Fail to Plan Ahead?
By: Eugene Fram Free Digital Image
There are many types of crises common to an organization. But one event seems to trigger a large proportion of the ensuing trauma. It frequently happens when a CEO or another top manager retires, resigns or leaves for other reasons. The flow of leadership is about to be disrupted and there is no viable replacement for the departing executive.
This transitional panic happens in both for-profit and nonprofit organizations. The National Association of Corporate Directors (NACD) reported that 50 % of public company directors concede that CEO succession planning needs to be improved. * In the nonprofit environment, only 27% actually have succession plans to replace a suddenly departing executive. ** This demonstrates the low priority nonprofits place on over-viewing talent succession to prepare for unexpected vacancies.
Here are some insights (in italics) from the NACD report that are applicable to nonprofit succession planning, be it management talent overview or implementing the replacement process.
“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.
Why Are Some Nonprofit Boards Missing the Mark? What to Do?
By Eugene Fram Free Digital Image
Stephen Miles of the Miles group (https://miles-group.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:
Many new board members 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 board members 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 turnover 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 been poor decision makers.
“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 board members 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 questions related to nonprofit governance.
A tsunami can suddenly erupt on a nonprofit board. Or, instead, dissension can smolder within the organization, and finally burst into flame. In any case, polarization of opinion can damage an organization unless skillfully managed. It can occur on many fronts: fraud, sharp division of opinion, staff morale or any number of issues. In turbulent times such as the Covid 19 environment, latent problems can swiftly escalate and create chaos.
Disruption on the Board can only be resolved with strong leadership. In most cases, the Board Chair (BC) assumes the responsibility of addressing the problem. In my 30+ years of board consulting and participation, I have had a number of opportunities to view nonprofit boards in trouble. In this post, I share some of the suggestions that have “worked” to resolve problems and help rebuild broken organizations.
When the BC has to accept the challenge of uprooting the problem, he/she is likely to be met with some resistance. Board members may resign from the board in anticipation of a substantial increase in meetings and time involved. Some may be concerned that their management reputation could be sullied or personal financial liabilities leveled by the IRS, the possibility of lawsuits.
If the BC is unable to persuade the distressed board members that their expertise is needed to achieve the nonprofit’s mission, and has made them aware of the Directors & Officers’ Insurance policy which will protect them from financial liability, it will be difficult to recruit new people in this period of instability.
However, the BC can ask former board members to return for another term or two. In one case, a human service organization persuaded a board member about to be termed out to stay for another two years. He happened to be a senior vice president of a listed firm–and a valuable asset to the nonprofit. He accepted the offer to stay and agreed to become BC of the weakened organization. During his extended tenure, he successfully recruited some former members dedicated to the organization’s mission.