What Role Should Nonprofit Board Members 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 board members whose median term of service is 4-6 years—hardly a lifetime commitment. Like for-profit board members 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.
Nonprofit Boardroom Elephants and the ‘Nice Guy’ Syndrome: An Evergreen Board Problem?
By: Eugene Fram Free Digital Image
At coffee a friend serving on a nonprofit board reported plans to resign from the board shortly. His complaints centered on the board’s unwillingness to take critical actions necessary to help the organization grow.
In specific, the board failed to take any action to remove a board member who wasn’t attending meetings, but he refused to resign. His three-year term had another 18 months to go, and the board had a bylaws obligation to summarily remove him from the board. However, a majority of directors decided such action would hurt the board member’s feelings. They were unwittingly accepting the “nice-guy” approach in place of taking professional action.
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.
The Nonprofit President/CEO–How Much Board Trust Is Involved
By: EugeneFram Free Digital Image
The title, full time president/CEO for the operating head of a nonprofit, clearly signals to the public who has the final authority in all operating matters and can speak for the organization.* It is not an ambiguous set of titles. However, the terms “manager” or “executive director” can be quite ambiguous and do not generate the same external understanding or respect. An executive director can be the administrator in a small church or the operational head of a large arts organization. The public and some corporate directors often view managers and executive directors (because of the organizational history of nonprofit) as “hired hands,” not as professionals who, with strategic vision, are able to manage all operational activities.
The full time president/CEO designation calls for a trusting relationship with the board based on mutual respect, drawing from the symbolism that he or she is the operating link between board and staff. It is a newer type of partnership culture. However, a solid partnership does not allow the board to vacate its fiduciary and overview obligations. The board has moral and legal obligations to “trust but verify” and to conduct a rigorous evaluation of outcomes and impacts of the CEO and organization annually.
Following are some of the behaviors that signify a trusting partnership is in place:
The president/CEO: • Has authority to initiate short-term loans from a bank for emergency funding. The board has established a limit on the amount to be borrowed. • Sees himself/her as an equal partner in fundraising efforts. Knows how to effectively interact with top managers in stakeholder organizations. • Is comfortable is interfacing with senior executives of other NFP organizations, especially those to which the organization wishes to emulate. • Is confident about his/h management experiences and expertise, understanding that nobody does a job perfectly. Occasional modest management missteps are viewed by the board in proper perspective. • Has good professional relationships with board members. • Does not view the job as being in jeopardy. • Feels comfortable in disagreeing with board members. • Feels comfortable with the processes the board uses to have executive sessions without management present. • Feels comfortable with a rigorous examination of CEO performance.
Board Members: • View CEO as a peer who deserves respect, not seen as a board servant. • Do not discuss the CEO’s professional limitations outside of the boardroom. • View the CEO as an effective staff leader. • Look to the CEO to be have state-of-art knowledge and vision for the areas in which the mission has been defined. • Expect the CEO to grow professorially and tries to support that growth within the financial means of the organization.
“In order for a trust-based governance system to work, …(nonprofits) must first develop a culture that discourages self-interest.”** In the nonprofit environment, many work to achieve a mission at the expense of self-interest. Consequently, a “high-trust” culture should be easier to establish at the senior levels. While the trust the board has in its chief operating officer can’t be described in exact quantitative terms, viewing it through the lens of a set of behaviors can give an idea of whether it is excellent, good or nonexistent.
* Note Well: In many states a volunteers who carry the title of president /CEO can accrue personal liabilities not incumbent on other board members. ** David F. Larcker and Brian Tayan (2013) “Trust: The Unwritten Contract in Corporate Governance,” Stanford Closer Look Series, July 31st.
Like many nonprofit CEOs, Tom Smith has held the position for 10 or more years. As he reported, and I agreed with his assessment, the association he heads was doing well. The membership has increased substantially, revenues exceed expenses each year, and through a series of development events, the reserve account now exceeds $5 million. But Tom was not satisfied. He said the job has become “boring.” In his words, it’s like turning on automatic at the beginning of each year—adjusting to a new board chair, developing a budget and being alert for “Black Swan” events that nobody can anticipate. He quietly said to himself at the beginning of each year, “I wonder what the big problem is going to be this year?”
Preplanning
Tom had a preplan: Several years ago, he had purchased an avocado farm in California, and had a partner-manager operating it successfully. He and his wife planned to move there, once he decided it was time to leave his CEO position.
Other potential preplanning actions he might have taken:.
Quietly investigate the potential to join a nonprofit consulting firm.
Assess whether or not he can be successful as a solo consultant.
Quietly interact with contacts in nearby education institutions to determine how his experiences and educational credentials might qualify him for teaching or administrative positions.
Review grant proposal requests from foundations and governments to assess how his expertise might match those of people needed to manage the grants. (Be certain none of this type of activity creates a conflict of interest with his current CEO position.)
Register with search firm to test his “marketability’ for a more interesting CEO position. (Beware of any firm that requires a fee from you.)
Be Proactive
Once preplanning is complete, discuss it carefully with your family, financial advisors and possibly with an attorney if a major relocation is going to be involved. Be sure that they view the change as you do. Make certain they don’t see a missed opportunity within the current position. Also be certain that the time frame is reasonable for the CEO and the organization. It would be a mistake for the CEO to leave when the CFO is planning to retire. Traditionally, a one to three year period is needed from first discussion to the time the CEO departs.
Inform the Board
This should be accomplished in several steps. First quietly inform the board chair. Then at intervals alert other members of the board, the management team and staff. The CEO msy have been around for a long time and has an obligation to prepare the organization for a major change. I recently watched a nonprofit executive group “tread water,” for 18 months from the rumors of the CEO’s departure through the selection of the new CEO and his arrival at the office. To develop a graceful exit, the incumbent needs to be aware of the situation and help provide s smooth transition.
Leaving With Dignity
Leave as scheduled. Any delay will extend the uncertainty that surrounds the transition. As noted above, nonprofit organizations have their own ways of remaining static during these transition periods. Your CEO nonprofit successor deserves better strong support.
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.
****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
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.
How Often Do Nonprofit Board Members Need to Question Strategic Norms?
By Eugene Fram Free Digital Image
A new nonprofit director has a lot to learn. Considering that his/h term of service will be relatively short (typically four to six years), he/s must quickly learn the “ropes” to participate in a meaningful way. In this process, colleagues and leadership will acquaint him/h with prevailing board systems and culture—often ignoring the depth of expertise she/h can employ. Example: An expert in financial strategies may be asked to assist the CFO with accounting details, far below the person’s skill level. Oftentimes the new board member also is greeted with a mantra that says, “We’ve always done it this way.” As the director moves in his path from novice to retiree, during a short tenure, there is little opportunity to suggest innovations that differ from the accepted fundamentals and to successfully advocate for change.
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.
Nonprofit Management 