Ethics & Compliance

The Enron Debacle, 20 years Ago—2021 Lessons for Nonprofit Boards?

 

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.

How Seriously Does Your Nonprofit Board Take the Matter of Ethics?

How Seriously Does Your Nonprofit Board Take the Matter of Ethics?

By Eugene Fram                           Free Digital Photo

Most board members are aware of their obligation to ensure their nonprofit’s compliance with certain standard regulations e.g. making tax payments, submitting IRS Form 990s and/or avoiding potential fraud. But what I have found missing in the nonprofit environment is a sense of board member responsibility to provide for and sustain a viable ethics program.

(more…)

Can A Nonprofit Find Strategic Ways To Grow in Unsettled Times?

 

Can A Nonprofit Find Strategic Ways To Grow in Unsettled Times?

By: Eugene Fram                                Free Digital Image

Nonprofits have always had to struggle to meet their client needs, even when economic conditions and social turmoil were much less constraining than today  and they have dim prospects for the immediate future.   How can mid-level nonprofits uncover growth opportunities in the present environment?

Plan Strategically: Any nonprofit board needs a core of directors and managers who are capable of identifying potential new strategic directions. The CEO must be highly conversant with changes in the mission field. He/s then needs a core of board members to assist in realistically reviewing his/h long-term insights for growth, as well as board insights developed from generative discussions. The CEO, supported by several board members, can then be the keystone for board discussions about implementing change. Should the CEO not have the requisite forward-looking knowledge, the only alternative is to try to replace the CEO, a difficult change even under the best of circumstances.

Capacity Investment: As expected, nonprofits invest their assets in maintaining and improving programs. It seems that client needs will always be there to operate and expand existing programs. But success in nonprofits and elsewhere also involves beginning to solve tomorrow’s problem today. Example: The challenges for serving the aging cohort of baby boomers is clearly showing demographic impact. Those in the field or allied fields serving this cohort need to be concerned with finding new modalities to assist the baby boomers in an efficient, effective and humane manner. Where funding is a barrier to participate in such an effort, foundations and governmental agencies need to be aggressively tapped to fund with small-scale projects, if the foundation can partner with the nonprofit.  (See: https://www.snpo.org/publications/sendpdf.php?id=2024)

Impact & Evaluation: Midsized nonprofits should have the capacity to conduct a few small-scale studies every  few years, if growth and development are cultural values for the organizations. Resources might come from within the nonprofit and/or from outside sources. Once a small-scale study provides evidence of impact; the nonprofit can find outside interest for more small-scale improvement, additional evaluation and possibly some outside support.

Obviously a small new project  won’t be able to have an extensive evaluation component. However, if imperfect metrics are used in the process, the impact findings can be useful in seeking an interest from other sources. (These are metrics that are anecdotal, subjective, interpretive or qualitative. For more details see:http://bit.ly/OvF4ri)

Importance Of the Board & Management: Growth opportunities will be initiated in nonprofits, only if the board constantly asks for them, especially in the current environment.  The board, overtly or indirectly, has to ask management about innovations that are taking place or can take place within the organization. Annual questions to management such as “ What do you want to do innovatively or creatively this coming year?” are mandated. When it appears an innovation can be scaled a little or an innovative person has potential to be creative, the nonprofit board has to support this learning culture for testing.

Nonprofits in Limbo: Preparing for the Unexpected

id-100463945
                                                                                                                                                                                                                        

Nonprofits in Limbo: Preparing for the Unexpected

By: Eugene Fram          Free Digital Image

 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.”*

*https://www.google.com/search?q=Sevn+ways+to+im%5Bprove+board+effectivness+in+uncertgain+times&ie=utf-8&oe=utf-8#q=Seven+ways+to+improve+board+effectiveness+in+uncertain+times

**https://npengage.com/nonprofit-management/lean-implementation/

 

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:

(more…)

Unwritten Protocols for Directors Can Boost Nonprofits’ Effectiveness

id-100214085
Unwritten Protocols for Directors Can Boost Nonprofits’ Effectiveness

By:  Eugene Fram                                        Free Digital Photo

Nonprofit boards are governed by a series of obligations —some are clearly defined as legal responsibilities such as financial actions. Others, however, are less clearly defined and relate to people who are, in some way, associated with the organization. Guidelines to these diverse interactions are not typically archived in policies but are important to the overall professionalism of the board. They include consideration of its: board structure, internal operations, recruitment methods and leadership style.

(more…)

When Nonprofit Missions Get Muddled

 

 

When Nonprofit Missions Get Muddled

By: Eugene Fram   Free Digital Image

It happens over time. A passionately conceived mission starts to drift from its original intentions. Stakeholders begin to view a nonprofit’s purposes from a different angle. There is a discrepancy between how the organization is committed to act and external perceptions of its current actions. Nonprofit boards need to be on the alert to such misalignments that can go unnoticed in the perceptual “fog” of daily challenges. It can limp along for years without acknowledging the impact of the client reality by which the nonprofit is being judged.   

(more…)

Should Nonprofit Boards Be A Boot Camp for Corporate Executives?

id-100264513

Should Nonprofit Boards Be A Boot Camp for Corporate Executives?

By: Eugene Fram

Alice Korngold, President of Korngold Consulting, suggests, “Nonprofit board service is the ultimate leadership opportunity, giving business executives the personal and professional skills they need… .“ * She suggests that the following abilities can be developed from such experiences. But will the neophyte board member become attuned to some inappropriate nonprofit practices, such as micromanagement,  and promote them on subsequent nonprofit board assignments?  Following are some of the different experiences the business executive might encounter on a nonprofit board. 

(more…)

Can Nonprofit ZOOM Meetings Be Humanized?

 

 

Can Nonprofit ZOOM Meetings Be Humanized?

 By: Eugene Fram               Free Digital Image

From my observations and those of my colleagues, zoom meetings are more efficient for reporting operational items like compliance updates.  But they lack the robust human social interactions provided by face-to-face meetings. 

While it appears that some nonprofits will increase the proportion of zoom meetings post-covid, both groups, those using it now and those using it post-covid, may now be looking to reduce the human deficit incurred.

Here are some suggestions: (more…)

What Role Should Directors Play in Over-viewing Nonprofit Management/Staff Talent?

 

NonprofitWhat Role Should Directors Play in Overviewing Management /Staff Talent?

By: Eugene Fram    Free Digital Image

Nonprofit boards rarely develop an in-depth strategy for assessing its organization’s human capital. Some will keep informal tabs on the CEO’s direct reports to prepare for the possibility of his/her sudden departure or is incapacitated. Others –smaller organizations with fewer than 20 employees—need only a basic plan for such an occurrence.

Need for Strategy: In my view, maintaining a viable talent strategy to assess staff and management personnel is a board responsibility, albeit one that is often ignored. The latter stems from the constant turnover of nonprofit directors whose median term of service is 4-6 years—hardly a lifetime commitment. Like for-profit directors whose focus is on quarterly earning results, their nonprofit counterparts are likely more interested in resolving current problems than in building sufficient bench strength for the organization’s long-term sustainability.

(more…)