Do Today’s Business Leaders Make Effective Nonprofit Directors?
By: Eugene H. Fram Free Digital Image
The names of the new board nominees have been announced. They include several outstanding recruits from the business community. Will these new formidable board members perform well in the nonprofit environment? William G. Bowen, a veteran director in both the for-profit and nonprofit environments, raised the following questions about such beginnings in a 1994 article:* Is it true that well-regarded representatives of the business world are often surprisingly ineffective as members of nonprofit boards? Do they seem to have checked their analytical skills and their “toughness” at the door? If this is true in some considerable number of cases, what is the explanation?
Although this is not a good idea for nonprofit organizations, it is not an unusual occurrence, especially among start-ups. A director in a start-up nonprofit will need to assume some staff responsibilities as a volunteer. But he/s will need to organizationally report to the CEO. In the event the position ceases to be a volunteer one, i.e.,the person wearing the two hats is compensated for the staff work. he/s should resign the board position. With two hats, a director would be in conflict-of-interest on important matters like salaries. Although some state statutes specifically forbids a director to hold multiple roles, enforcement of the statues is haphazard, especially among smaller nonprofits that are short of people to carry out staff functions.
How Is Your Nonprofit Board Adjusting To “The Great Resignation”?
By: Eugene Fram Free Digital Image
An article in The New York Times (12/23/2021) reports, In Louisville Ky, nonprofit groups are losing social workers to better-paying jobs at Walmart and McDonalds. *With 34.5 million American job resignations reported by, August 31, 2021, it’s reasonable to estimate that by the end of 2021 about 46 million Americans will have left their current jobs during the past year. This is about 25% of the American work force. ** The movement has been named “The Great Resignation.”
Reasons for change range widely. Beyond salary, some families may have found living on one salary acceptable, others may have moved to rural areas for quieter living, still others may have used a lay-off bonus to have time to get away from an authoritarian boss. ***
It appears this robust employment turnover will continue. As a result, nonprofit boards, within theiroverviewingresponsibilities, must focus on recruiting and retaining organization talent, like few nonprofit boards have done in the past. (more…)
The Nonprofit Board’s New Role In An Age of Exponential Change
By Eugene Fram Free Digital Image
Most nonprofit boards are being faced with huge pressures—reduced financial support, challenges in integrating new technologies, recovering from Covid impacts and difficulties in hiring qualified personnel who will consider “nonprofit” wages. To survive long term, board members need to be alert to potential opportunities. These may be far from the comfort zones of current board members, CEOs and staff.
Once Again! What Are the Best Risk Levels for Your Nonprofit’s Investments in a COVID 19 environment and after it?
By Eugene Fram Freed Digital Image
Some nonprofits have significant investment accounts. The following are some guidelines to help develop investment policies during and after COVID 19. These funds may have been accrued through annual surpluses/donations or have been legally mandated to cover future expenditures through a reserve account.
How does your committee define risk, and how much are you willing to take? * Most nonprofit by-laws require a nonprofit to conservatively manage and invest its funds. This give the investment committee a wide range of policies to employ.
I have encountered ultraconservative nonprofits that invest all funds in several bank savings accounts that are protected by the Federal Deposit Insurance Company (FDIC). Those that advocate this position feel that they don’t want to assume responsibility for loss of donor or membership funds that might occur, even temporarily, with investments in a mix portfolio of investment opportunities such as stock funds and/or rated bonds. (more…)
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: *
Nonprofit organizations can’t have a traditional bottom line profits. If they did, CEO productivity determination could be less complicated. Determining a fair CEO salary or benefit based on productivity, can be a complex issue for a nonprofit board. Providing too little or too much can be dangerous for the organization and possibly the board members. Although the spadework for salary and benefits need to be done by a small committee, the entire board needs to fully agree on the rationale for the final decision.
Following are some of significant challenges that I have noted nonprofit boards face when determining what is a fair system.
• Evaluation Failure: Some CEOs might receive high salaries because a series of boards have not effectively evaluated her/h performance. It is not unusual to find CEOs who have not been formally and effectively evaluated for years. They are held in position because they are “minding the store,” not being professional managers. It isn a comfortable position for both board and CEO. As one CEO commented to me, ” I present the board with alternatives, they make the decision that I must implement.”
Market Forces: Nonprofit organizations are restricted by law from providing their CEOs with excess benefits. (Section 4958 – IRS Code) As a result, the benefits offered the CEO must reflect a market level found in the geographic area and/or the person’s professional qualifications. For example, nonprofit health insurance organizations may have to compensate CEO at levels that are competitive with for-profit organizations. In my opinion, unusual CEO benefits (e.g. luxury cars) that are hard to justify market-wise are invitations for an IRS inquiry
• Board Relationships: Obviously having a good, not perfect, interrelationship with the constantly changing board membership is critical to support a reasonable compensation level. It is especially important in association type nonprofits where the person holding the board chair position changes annually. I recently encountered one board chair who, although being very pleased with the CEO’s performance, expressed a concern that the CEO did not have good communications with board members. The chair welcomed a suggestion that the board might engage a professional coach to help the CEO work on the issue.
• Additional Benefits: Although not usual in the for-profit environment, special benefits can be offered the nonprofit CEO, especially if they relate to job performance. These can range from special insurance coverage to extensive travel benefits , educational opportunities. or even housing and entertainment allowances. If involved with fundraising, like a college president, housing and entertainment benefits may be appropriate. In some unusual instances the person’s spouse or significant other may also receive compensation for time spent to benefit the nonprofit.
• Nonprofit CEO: It is not unusual for the nonprofit CEO to undervalue his/h own worth, especially when associated with a human services type of organization. This then keeps a cap on the whole salary scale and can make it difficult to hire capable people. Example: I encountered one CEO with degrees in human services and management areas plus 30 years of excellent experiences. Admired for his performance by peers in a nearby university, he refused to use that leverage to seek equitable compensation.
• Personality: Now doubt a positive CEO personality can be an attribute in working with boards and staffs.mAt an extreme, some nonprofit boards continue to support well-liked CEOs, even after they have been found to be involved with fraud. The board then has to be removed by state attorneys’ actions.
Summary: Nonprofit boards can do a poor job of determining nonprofit CEO salary and benefits because of inherent challenges. Evaluating critical qualitative outcomes and impacts, like improving life quality and successful advocacy, can be daunting. Nonprofit compensation must in line with market levels and professional qualifications, or the board members may acquire an IRS personal liability if they provide excess salaries and benefits!
Do Your Board Members View Their Board Work As Being Meaningful?
By Eugene Fram Free Digital Image
For several decades, I have suggested that nonprofit Board Chairs and CEOs have a responsibility to be sure that each board member perceives his/h continuing relationship as being meaningful. Following are some organizational guidelines that can assist Board Chairs and CEOs in this effort.*
Developing or hiring strong executive leadership: Obviously when hiring externally it is necessary to engage a person with a managerial background. But many nonprofit CEOs can be appointed after years of being an individual contributor or leading a small department. These experiences condition them to do too much themselves, rather than to assume a strong management posture. This involves focusing more on strategy, on talent development, interacting more with the board/community and creating a long-term vision.
A strong CEO, if appointed internally, should understand the role changes that take place once appointed. He/s must delegate activities that was once performed was once performed within a comfort zone and seek new challenges. Examples: The new CEO needs to be enthusiastic about becoming a fundraiser. She/h must become well acquainted with peer CEOs regionally and nationally to stay abreast of the state-of-art in both management and mission areas. He/s needs to become acquainted with cohorts in the business and public management communities. Over time, those involved with the nonprofit internally and externally must perceive the organization is lead by a capable executive.
Creating impact: In the 21st century, funders, board members and other nonprofit leaders are attracted to organizations that create impacts as opposed to outcomes. A nonprofit can have great program outcomes with little long-term impacts on clients. Impact is often hard to measure, but it can be done, only if started with imperfect measures that are improved over time. ** For example, one local human services organization, with which I am acquainted, operates groups of apartments offering social services that allow elderly clients to live independently for years on their own, rather than in an assisted living facility. The impact in this instance is well-defined and an impetus to attracting board members and donors that find the impact meaningful.
Building relationships externally and internally: Board candidates who have broad contact networks are sought by search committees to enhance community or industry relationships or to strengthen the organization’s fund development efforts. Little effort is directed to fostering closer relationships among current board members who often don’t get to know each other personally because of crowded board and committee agendas. Example: I consulted with one board where some board members complained that they might not recognize their board peers when they meet them in outside social situations.
To solve the problem, both the Board Chair & CEO must acknowledge that it exists—in the above example; it took an extensive personal interview board survey to highlight the problem. Then creative tactics like the following can be employed.
One CEO has a weekly one-hour conference call with the board chair to discuss current issues. Other board members are invited to join the calls if they wish. This is an excellent way for new board members to quickly become attuned to the nonprofit.
Another CEO, each Sunday, sends a one-page e-mail summary of major events to board members. He reports that his high school English teacher would never approve of his grammar or format, but he knows emails are reviewed. They are reflected in the level of discussions at meetings
Low-key self-funded social events for board members and significant others can help board members to become better acquainted and work together.
Another classical approach is to allow 10 minutes each meeting to allow board members to briefly report changes in their personal or professional lives.
Assuming an organization is successful in developing a cohesive board, what can be done to retain these efforts once they have termed-out? The answer is to ask them to join the organization’s “Alumni Association.” The process can be found here: (https://onlinelibrary.wiley.com/doi/epdf/10.1002/ltl.20305)
Organizational stability: Unstable nonprofits have common telltale signs—rapid employees or management turnover, excessive bank borrowing, reserve depletion, late report filings, etc. It’s difficult to provide meaningful board experiences under these conditions. However it is not unusual to find board members who will accept responsibility when the nonprofit is unstable, if they are dedicated to its mission. Some may even “enjoy” the turnaround challenge.
While no nonprofit will be perfect, those with the best opportunity to provide meaningful board experiences will have a well formulated strategic plan that allows it to be stable operationally and financially.
Questions For Nonprofit Board Meetings—And Why They Are Needed
My greatest strength as a consultant is to be ignorant and ask a few questions. – Peter Drucker
By: Eugene Fram
Knowing the right questions to ask at a nonprofit board meeting is a critical part of a board member’s responsibility. Following is a list that, as a nonprofit director, I want to keep handy at meetings. * I also will suggest why I think each is important in the nonprofit environment. Compliance and overviewing management alone do not guarantee success.
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.
Nonprofit Management 