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:
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 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.
Nonprofit Board Members Have The Potential To Become Great Ambassadors!
By: Eugene Fram Free Digital Image
There is no shortage of able communicators on most nonprofit boards. Board members usually bring a degree of passion, purpose and special abilities to their term of service. Many come from business or professional environments that require at least a measure of experience in advocacy, often referred to as “selling” an idea or product!
But rarely do Board Chairs and CEOs avail themselves of the opportunity to develop nonprofit board members as fully functioning ambassadors for the organization. With a constantly rotating board and emerging crises, it becomes difficult to find the time and energy to coach board members in the art of putting the organization’s public face on view. In some cases the CEO simply doesn’t encourage contact between the board and staff. At other times, they fail to include selected board members in important conversations with key public figures and/or major donors or foundation executives. Such omissions represent a major talent loss in the advocacy process.
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.
The Bridgespan Group, supported by The Rockefeller Foundation, completed an exciting research study. The results identified “six elements common to nonprofits with a high capacity to innovate” * Following are some suggestion how to implement these elements.
Must Nonprofits Develop Employee Benefits That Substitute For Annual Raises?
By: Eugene Fram Free Digital Image
An analysis in the Washington Post reports that a tsunami-style change has been taking place in the manner in which United States employees are being paid—benefits are being offered in place of annual salary increases. (http://wapo.st/1MwoIBZ) Driving the change are the needs of a substantial portion of millennials who appreciate immediate gratifications in terms of bonuses and perks, such as extra time off and tuition reimbursement. Employers like the arrangement because they can immediately reward their best performers without increasing compensation costs. Example: One sales employee spent weeks reviewing dull paperwork, was very diligent in the process and was given three extra days of paid leave. She said, “I think everybody would like to make more, but what I liked about it was the flexibility.”
Micromanaging is the DNA of many nonprofit boards. It all starts with the community model culture of start-up periods. Board members have to assume staff roles to drive the nonprofit operations. But it often continues long after an adequate staff is in place. By habit, the board still focuses on operational details—also known as “reviewing the weeds.” I recently observed a board that was making a policy decision about the change in timing of an annual development event. Once the decision was made, the directors continued a “weed type” discussion about about table locations, invitations and other issues that were in the job of management to implement. The nonprofit is about 50 years old and has a budget of $10 Million with a 100 person staff.
The Outside Advisory Board: Boon or Bother to Nonprofit CEOs?
By: Eugene Fram. Free Digital Image
I have established or served on a number of nonprofit outside advisory boards. As a result I strongly recommend their usefulness to nonprofit CEOs. The counsel provided by a group of unaffiliated members of the community or industry will, in my opinion, complement the existing board, helping to deliver services or products to clients with greater effect. The objective of assembling such a body would be to seek advice and expertise regarding a current major project or issue and/or to provide ongoing support and guidance to the CEO. Advisory board members have no legal responsibilities, nor have authority to require the elected board or staff to act on its advice. However, when advice is not followed, the CEO has a professional responsibility to show how the suggestions were seriously considered and to carefully report on what had transpired in making the decision process. Too many useful volunteers become disillusioned with advisory committees when this step is omitted.
Does A New Nonprofit Board Member Really Understand Your Organization? The New Board Member Nurturing Challenge!
By: Eugene Fram Free Digital Image
The careful nurturing of a new board member, whether for-profit or nonprofit, is critical. The pay-off of a robust orientation process is an informed and fully participating board director. The following are very similar occurrences in both for-profit and nonprofit boards:
The CEO of a transportation firm agrees to become a board director of a firm developing computer programs. He has risen through the transportation ranks with a financial background, but he knows little about the dynamics of the computer industry.
A finance professor is asked to serve on the board of a nonprofit school serving handicapped children. She has no children of her own and has never had any contact with handicapped children, social workers or teachers serving handicapped children.
In these similar cases, the new board member needs to become reasonably conversant with a new industry or a new human service field in order to be able to better apply policy development skills, strategic planning skills and to allow generative thinking.
On nonprofit boards, the problem is exacerbated when the new director often is asked to immediately join a specific board committee without being able to understand the board perspectives and the organization’s mission vision and values. Following are ways in which the nonprofit board can resolve this problem:
Don’t appoint the new board member to a committee until she/h has completed a board orientation program including a review of board procedures, attending several board meetings, has had visits with the staff, as they normally operate, and becomes alert to the major trends in the field. This ideally should take about six months assuming the board member is employed full-time elsewhere.
During this time, the chief executive and board president should be available to visit with the new director as frequently as she/h wants in order to respond to questions.
Hopefully, the chief executive would informally meet the new director (and each established director) quarterly to review current issues and opportunities. In addition to the information presented at the board meetings, this will provide a better perspective of the board’s mission, vision and values.
Ideally, the board volunteer should attend one staff meeting and one outside professional meeting to acquire a feeling for the topics reviewed at these gatherings and the field terminology.
During the first year, a senior board member needs be seated next to the new person at meetings to act as a “host” for the new director
If most of these actions can be accomplished within a six-month period, major blind spots are removed, and the new board member can then join a standing board committee. Now, reasonably understanding the organization and her/h own participation on the board, she/h has a background to make a substantial contribution for years to come.