Dysfunctional nonprofits

Are Dysfunctional Nonprofit Boards Interesting?
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By: Eugene H. Fram

My blogs have been drawing an unusual number of views related to dysfunctional nonprofit boards.  Is it because:

  • Nonprofit evaluations have become a prime media interest?
  • Compliance regulations have forced a greater number of nonprofits to substantially review their charters?
  • More boards have found board problems arising as a result of reviewing the expanded 990-form section on governance?
  • More audit committees are being given expanded responsibilities?

Can a nonprofit organization focus on its mission vision and values if it has a dysfunctional nonprofit board?  I have seen this accomplished in situations where the CEO is managerially oriented and can live with the board’s problems or foibles.  For example, one nonprofit I encountered had an eleven person board, four of which never attended meetings and several others were sometimes absent for personal reasons.  Meeting minutes clearly showed a focus on operational detail. However a strong CEO was able to focus well, and the organization prospered. On the other hand,the CEO openly complained that she was overworked, needed board member assistance and easily could become financially liable board, missteps.  

In another situation I encountered, the board chair and ED were very strong, but the board governmentally weak. Work and family pressures constrained the time board members could devote to their governance responsibilities. While the organization performed reasonably well, performance problems and board liability issues might arise, if either the chair or ED retired or resigned.

Although not desirable station, a dedicated mission oriented staff can, at a minimum, perform reasonably well when its board may be dysfunctional.  However the following conditions are needed.

  • Management is able to keep the staff focused on mission, vision and values.
  • A legacy staff person(s) becomes a mentor(s) for more recently engaged staff. 
  • The dysfunction is relatively brief and resolved by board member rotation.  If too long, organizational performance will decline.  
  • Board members involved with the dysfunction do not seek to involve staff in their disputes.  

Can Business Board Experts Can Offer Nonprofit Gems? 

  

By: Eugene Fram                                 

Chinese Proverb: The wise person learns from his/h own experiences. The wiser person learns from the experiences of others

The CEO Forum published an article covering the governance views of five business board members, known for their wisdom and vision.   Following are some of topics in the article that relate to nonprofit boards. *

Good governance is dependent upon well-curated boards. This means that nonprofit boards must look beyond the functional competencies (e.g. accounting, marketing, law, etc.) for candidates. Within these groupings, they need to seek candidates who have strategic outlooks, are comfortable with critical thinking and have documented leadership skills.   This requires recruiting and vetting efforts that go well beyond the friends, neighbors and colleagues who traditionally have been the sources for board positions. Also related is the issue of board succession, since that many will leave the board after a four to six year period. The current board(s) has an obligation to make rigorous recruiting and vetting become part of the nonprofit’s culture.

Assessing long-term sustainability. In the past, nonprofits have projected longevity because there will always be a need for the services or products they provide. This is no longer an assured proposition. Nonprofit day care centers now must compete with those that are for-profit. Improvements in medication have decreased the need for individual counseling and many new technologies can quickly solve problems that are embedded in the nonprofit’s mission.

Review governance best practices carefully! Know who is suggesting them and make certain they are appropriate for a specific organization. For example, some experts suggest that executive committees should be eliminated. However an executive committee that is responsible for a slim board committee structure can be effective in driving change and promoting better communications throughout the organization. **

Changing public accounting firms. Nonprofit accounting practice suggests changing public accounting firms about every five years. However one expert suggests, “It is important to ensure that judgment areas such as nonGAAP disclosures are well-defined, supporting calculations are well-documented and that the definitions and calculations are consistent across reporting periods.” At times of accounting firm change, nonprofit board members need to be able to add these issues to their question that they pose to management.

Ethics & Compliance. Like business organizations, nonprofits are subject to significant lapses in ethics and compliance. One study of  nonprofit fraud found that it 46% involved multiple perpetrators.  ***  As shown in the Wells Fargo debacle, establishing the tone for rigorous applications of a standard needs to start with the board and flow through all management levels. In the current environment, audit committees have to be especially alert and take immediate actions when red flags arise in either the ethics and/or compliance areas.   In my opinion, a nonprofit audit committee that meets only once or twice a year is not doing the necessary job.

Strategy. The nonprofit board has an obligation to help management see “around the next corner.” This involves board members assessing coming trends and sparking civil and meaningful board and committee discussions.

Board member comfort zones. Like their business counterparts, few nonprofit board members are “comfortable testing how to rock the norms.” It is easier to acculturate new directors to the current norms, a process that is inward bound and self-defeating. But a start can be initiated with questions such as, “If we were to start a new nonprofit across the street, what would it look like and who of the present board and a staff members would we ask to join us?”

*https://www.forbes.com/sites/robertreiss/2017/05/22/americas-five-governance-experts-share-perspective-on-boards/#2a2ee326659a   

**For documentation see: https://goo.gl/QEL8x3

***https://nonprofitquarterly.org/nonprofit-fraud-its-a-people-problem-so-combat-it-with-governance/

Stay on That Nonprofit Board!

By: Eugene Fram

Gene Takagi, noted San Francisco attorney, who specializes in nonprofit organizations published an article listing 12 reasons for resigning from a nonprofit board. It is worth reading.*

BUT

Nonprofit board members often become impatient with the slow pace of progress toward positive change. Here are some actions that may change the situation, improve service to clients and prepare the organization for any long-term mission disruptions.

• Talk With The CEO: He/s may feel the same frustrations and be delighted to find a board member who shares his goals. In fact, she/h may be thinking of leaving or be wedded to the current area only because of a family situation. As a result, your conversation may give a chief executive new hope and energy. On the other hand, if the CEO is too aligned with the past, it will be unlikely that the board will terminate the current CEO, unless there are some performance malfeasances involved. Then, estimate the CEO’s remaining tenure and use remaining time to find opportunities to make modest increments in change.

• Talk With Other Directors: Between board meetings, have informal coffee sessions with other directors to determine their views on the areas in which you feel change is necessary. Three or four board opinion leaders can garner positive movement, assuming there are no strong objections from the CEO.

• Outside Validation. If sufficient budget is available, ask the board to engage a consultant to examine the potentials for change. The rationale for the request might be: “We are doing well, let’s determine how we can better serve our clients.” If budget isn’t available or the CEO is against the expenditure, try to have the board arrange, for an outside speaker or two who might validate the need for change. This might be a person from the field or a local professor who has some insights aligned with change-focused board members .

• Seek Outside Financing: Personally seek sources for capacity grants that, if awarded, might be developed to further help clients. Ask the board to take leadership in applying for several of these grants. A single successful grant might be the linchpin to promote the type of change desired by the group having similar views.

• Chair The Nominations Committee: As chair, the director can be in a position to search for candidates who are forward looking. In addition, the committee, under the urging of the chair, can seek candidates who have served on other nonprofit boards and who have proven their meddle to bring about change.

Summary
For any single board member of a status quo nonprofit to lead a change on organizational culture will require tenacity, time and patience. The person will need to be extremely dedicated to the organization’s mission and want to improve the services to its clients. Very few board members have the grit to lead such a change. However, a small-motivated group can be an advanced guard to initiate some actions in the right direction. But the group will have to keep Peter Drucker’s insight in mind when the going gets tough, “Culture eats strategy change for breakfast.”

An unusual case of an ED accused of serious malfeasance, but the board refused to fire him. http://bit.ly/1om6XUw

*https://nonprofitquarterly.org/12-reasons-resign-nonprofit-board/

Measuring Nonprofits’ Impacts: A Necessary Process for the 21st Century

 

Measuring Nonprofits’ Impacts: A Necessary Process for the 21st Century

By Eugene Fram      Free Digital Image

Unfortunately, outcomes and impact are often unrelated, which is why a program that seems to produce better outcomes may create no impact at all. Worse, sometimes they point in opposite directions, as can happen when a program works with harder-to- service populations resulting in seemingly worse conditions, but (has) higher value-added impact. … Rigorous evaluations can measure impact (to a level of statistical accuracy), but they are usually costly (a non starter for many nonprofit), difficult and slow. * But how do the medium and small size nonprofits measure actual results in the outside world such as enhanced quality of life, elevated artistic sensitivity and community commitment?

A Compromise Solution:

To close the gap, funders and recipients would need to agree to apply imperfect metrics over time. These are metrics that can be anecdotal, subjective or interpretative. Also they may rely on small samples, uncontrolled situational factors, or they cannot be precisely replicated. ** This would require agreement and trust between funders and recipients as to what level of imprecision can be accepted and perhaps be improved, to assess impacts. It is an experimental approach

How To Get to Impact Assessment:

1. Agree on relevant impacts: Metrics should be used to reflect organizational related impacts, not activities or efforts. Impacts should focus on a desired change in the nonprofit’s universe, rather than a set of process activities.
2. Agree on measurement approaches: These can range from personal interviews to comparisons of local results with national data.
3. Agree on specific indicators: Outside of available data, such as financial results, and membership numbers, nonprofits should designate behavioral impacts for clients should achieve. Do not add other indicators because they are easily developed or “would be interesting to examine.” Keep the focus on the agreed-upon behavioral outcomes.
4. Agree on judgment rules: Board and management need to agree at the outset upon the metric numbers for each specific indicator that contributes to the desired strategic objective. The rules can also specify values that are “too high” as well as “too low.”
5. Compare measurement outcomes with judgment rules to determine organizational impact: Determine how may specific program objectives have reached impact levels to assess whether or not the organization’s strategic impacts have been achieved.

Lean Experimentation

The five-point process described above closely follows the philosophy of lean experimentation, ** now suggested for profit making and nonprofit organizations.

Lean allows nonprofits to use imperfect metrics to obtain impact data from constituents/ stakeholders over time. Under a lean approach, as long as the organizations garners some positive insights after each iteration, it continues to improve the measurement venues and becomes more comfortable with the advantages and limitations of using these metrics.

Organizationally the nonprofit can use this process to drive change over time by better understanding what is behind the imperfect metrics, especially when a small sample can yield substantial insights, and actually improve the use of the metrics.


* https://nonprofitquarterly.org/2012/07/24/using-imperfect-metrics-well-tracking-progress-and-driving-change/
** http://ssir.org/articles/entry/the_promise_of_lean_experimentation

The Possibility Of Fraud – A Nonprofit Board Alert

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 Houser 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:

• Have an audit committee charged with reviewing the overall results of a yearly independent audit conducted by an outside auditor.
• Carefully oversee executive compensations, pension benefits and other finance activities.
• Conduct a yearly review of conflict-of–interest policies, have employees/board members sign a conflict-of-interest statement and have board members involved with development of IRS Form 990 before submission.***
• Assure new hires are well vetted for honesty by searching background.
• Meet with external auditors at specified times, including an executive session without management present.

• Ask the auditors:
1. Have they perceived any fraud problems?
2. Are internal controls adequate, e.g., those handling financial matters must take at least two weeks vacation per year so their duties can be temporarily assigned to others?
3. Are financial records accurate? To what extent were material mistakes located or was there an increase in non-material mistakes?
4. Do the proper managers or officers properly authorize activities and expenditures?
5. Do all assets reported actually exist?
6. Is the organization performing any activities that might endanger its tax-exempt status? For example, provide misinformation on the IRS Form 990.
7. Is the organization paying its payroll taxes, sales taxes and license fees on time? ****

Trust But Verify

Some board members argue boards can do little to prevent fraud. I argue that every member should know enough about finances to raise issues about questionable activities. At the least, everyone in the organization should be alerted to the fact that board members are paying attention to the possibility of fraud. That knowledge, in itself may deter some people from trying to steal.

* Joe Stephens & Mary Pat Flaherty (2013) “Inside the hidden world of thefts, scams and phantom purchases at the nation’s nonprofits,” Washington Post, October 23rd.

**Janet Greenlee, Mary Fischer, Teresa Gordon & Elizabeth King, “An investigation of the fraud in nonprofit organizations: occurrence & deterrents, “ Working Paper#35 hauser-center@harvard.edu.

***https://papers.ssrn.com/sol3/papers.cfm?abstract id=2604372

****More actionable details can be found: Eugene Fram & Bruce Oliver (2010) “Want to avoid fraud? Look to your board,” Nonprofit World, September-October.
Eugene Fram (2013) “Preventing and managing leadership crises in nonprofit organizations, “ in Handbook of Research on Crisis Leadership in Organizations, Andrew J. DuBrin, editor, London, Edward Elgar International Publishing.

A Nonprofit Board Must Focus On Its Organization’s Impacts

A Nonprofit Board Must Focus On Its Organization’s Impacts

By: Eugene Fram        Free Digital Image

“One of the key functions of a (nonprofit) board of directors is to oversee (not micromanage) the CEO, ensuring that (stakeholders) are getting the most from their investments.” * State and Federal compliance regulations have been developed to make certain that boards have an obligation to represent all stakeholders.  These include the staff, community, donors, foundations and clients, but not only the staff as some nonprofit boards have come to believe.   Following are some inherent problems.

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Nonprofit Board Disruption—A Board Member’s Reflections

Nonprofit Board Disruption—A Board Member’s Reflections

By: Eugene Fram          Fre Digital Image       

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 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 year. 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.

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Errors That Can Cloud Nonprofit Board’s Decision Making–Tread With Care

 

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.

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Nonprofit Boards and the Oversight Gap in Internal Leadership Development 

Nonprofit Board and the Oversight Gap in Internal Leadership Development 

By: Eugene Fram                    Free Digital; Image

Although the nonprofit CEO is charged with nurturing the development of his/h staff, the board is responsible for over-viewing the process. Research evidence shows both board and management may be neglecting their duties in regard to this responsibility. Only (20% to 30%) of nonprofit CEO positions are filled internally, a rate that can be about half the rate of for-profit organizations–(about 30% to 50%.) The same research shows that, “Hiring the more (internal personnel) can improve performance at the two-year mark by 30%.”  * These figures are averages and can vary widely based on organizational practices and industry standards. (more…)

How Can Nonprofit Boards Overcome the Inertia of Certain Board Members?

 

How Can Nonprofit Boards Overcome the Inertia of Certain Board Members?

BY: Eugene Fram        Free Digital Image

Making major changes in nonprofit  mission, board structure, management or other significant matters is difficult. The typical nonprofit board will be divided into several groups on the issue: 1) members who want change, 2) members opposed to change, some strongly opposed and 3) what I call “process board members,” persons uncomfortable with major decisions who always want more data or information before voting.

The first and third groups (members who want change and process directors) will be very willing to appoint a committee to review the alternatives, but it’s up to the board chair to satisfy process members who create obstacles.

Process members like to sit back and examine issues, often, in my opinion, sincerely feeling that their questions allow them to be on the cusp of showing some insights that others have failed to notice. They always ask, “Have we consulted everybody?” Or say, “Let’s make sure we have considered everything.” Often they are members who call for postponement of the vote, even after a lengthy discussion.

Process members  are well-intentioned, sincere individuals. However, the board has to be careful that these members don’t allow the board to continually examine one angle after another until they lose sight of the board’s main job. They can keep action in limbo indefinitely! It is up to the board chair to makes certain that this does not happen. But board chairs want to develop an inclusive board where all who want to voice their views can be heard.

A certain level of board process is necessary to operate efficiently. But when it gets out of hand, it can have a serious negative effect. Boards often lose some of their best volunteers, who get frustrated and quietly resign. Their usual reason for resigning is “the pressure of job obligations.” To me, that’s a covert message that the board is getting mired in minutiae, usually initiated by process members.

One friend recently from a board, using the “job obligations” excuse. The real reason was that the executive director, a process oriented person, used board-meeting time inappropriately, including asking the full board to review detailed public relations powerpoint presentations.

In another situation, I watched a board make a strategic decision involving the combining of two programs. Even after a thorough discussion of the decision, the board insisted on discussing the tactical decisions needed to implement the change, all of which were the responsibility of management. The board was unable or unwilling to shed an imbedded process culture that the status quo nonprofit had used for over 50 years.