2014 Thoughts for Nonprofit Board Members
By Eugene Fram
Nonprofit board members and managers should be interested in two sections of the 2014 predictions from the Harvard Law School Forum on Corporate Governance, * which can be extended to nonprofit governance. <!–more–>
How A Nonprofit Board Director Can Initiate Positive Change
By: Eugene Fram
A nonprofit board member comes up with an idea that he thinks will do wonders for the organization. He is convinced that establishing a for-profit subsidiary will not only be compatible with the group’s mission but may even bring in new sources of revenue. It’s his ball–now what’s the best route to run with it? All too often in the nonprofit environment, initiating change can be as daunting as trying to get consensus in the US Congress! There are, however, certain interpersonal levers, which, if pushed, can accelerate the process–although one hopes that not all the levers will be needed in any specific situation. (more…)
Can the Deloitte® Governance Framework Be Applied to Nonprofits?
By Eugene Fram
I have been impressed with the Deloitte® Governance Framework (Copyright-Deloitte®), and following are my opinions on how nonprofits might benefit by understanding the model.
The lower four sectors of board governance chart are functions that can be delegated to management. The level of delegation should depend on the stage of the board’s development. However many boards unfortunately continue to micromanage the nonprofit, long after it has outgrown the start-up stage. (more…)
Following is a blog-post that I strongly suggest that you, your colleagues and friends associated with nonprofit or trustee organizations read carefully. As you read it, please keep the material below the link in mind.
http://www.mercadien.com/PDF/Volunteer_Chairman_Held_Liable_for_Nonprofits_unpaid_payroll_taxes.pdf
I think the situation presented above is more common than most directors/trustees think. As a layperson, I am surprised that the court did not spread the fine among all the directors.
The chairman was clearly trying to support a nonprofit in trouble. Perhaps he was so dedicated to the mission that he was trying to do everything possible to save it? Not Shown here is the fact that, “[T]he chairman is burdened with proving that they (the IRS) are not correct. … The law does not require the individual to have complete control over the finances, only what the court calls significant control.” (more…)
Nonprofit Alert: Follow the Government’s Regs!
By Eugene Fram
Stakeholders of every nonprofit want their board members and managers to be passionate about the organization’s mission. However, in the current century, directors and managers must navigate a regulatory environment that can lead to substantial personal liabilities and possibly impair their own reputations and that of the organization.
For example, I recently read about a director of a nonprofit who was fined $10,000 by the IRS for failure to vote “no” on a proposed $2 million building contract between the organization and his building firm. The logic behind the fine appears to be a violation of the Intermediate Sanctions Act, Section 4958 of the IRS Code. (more…)
Director Independence: a Nonprofit Board Issue?
By: Eugene Fram
In the best of all nonprofit worlds, every director is an independent agent whose ability to make critical decisions on behalf of the organization is regularly uncompromised by outside pressures. This, unfortunately, is not always the case. Based on field observation I have concluded that questionable practices can plague nonprofit boards when social or political pressures are brought to bear on a director. In governance terms nonprofit decision-makers should be “outside directors,” not overtly or covertly susceptible to management or board colleague personal pressures.
Discerning recruitment committees can screen candidates to be certain they are not subject to influences that might impair their judgment as board members. Lack of independence could easily divide and perhaps polarize the board as has happened in our country’s Congress. A candidate who is “sponsored” by a major donor and maintains personal ties with the donor can create a “hornet’s nest” for the recruitment group. There are no easy solutions to these problems. (more…)
Nonprofit CEOs and Board Directors: How Expert Is Your CFO? Updated/Revised
By: Eugene Fram
When hiring a chief financial officer (CFO), nonprofit organizations often find themselves with a major challenge, since many financial and accounting functions are identical with those of for-profit organizations. To compete, the nonprofits may need to offer higher salaries than typical for their types of organizations. Some trim the level of expertise required to fill the position. This is a dangerous move, especially if the organization is growing. Also the current CFO, if hired five or ten years ago, may not be up to date and 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.
*Keeping track of reports that are frequently 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 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.
For a current case of a board that evidently failed to adhere to such guidelines see:
A Nonprofit Paradox: Weak Leadership Pool, Positive Organization Outcomes?
It happens: one or both of the two nonprofit engines—governance and/or management — sputters out, yet the organization continues to meet its goals and deliver adequate service to its constituents. Some examples: a child
placement agency manages to maintain the quality of its oversight while struggling to deal with an admittedly inept board and CEO. Another example: An ineffective volunteer board at a youth center, meeting quarterly for a couple of hours, allows the CEO to really manage the board and to motivate the staff. The CEO realized he and the agency were in dangerous positions without an innovative board providing standard oversight, although client services were positive.
A staff, dedicated to its own professionalism, can on occasion compensate for a lackluster board and/or senior management team by continuing to provide reasonable value to the nonprofit’s clients. Another example involved the ED, simultaneously a deputy sheriff, and his law enforcement colleagues taking payments to refer wayward youths to ED’s shelter. However, the staff continued to provide valuable services. * In the end it’s about leadership and the ability to step up to the plate when dysfunction occurs. In the last case, the staff acted in a professional manner, although the management was entirely corrupt and the board evidently inept.
Klaus Schwab, founder of the World Economic Forum, has some innovative thoughts on that subject. He identifies four key characteristics he believes are critical to strong innovative organizational leaders. ** I have listed them below, and the ways I think his ideas can be applied to nonprofit governance.
1. Systems Thinkers (Brains): Deep knowledge in their area of work. Our current economy and future opportunities will continue to value knowledge, expertise and ideas.
Nonprofit CEOs need not only cutting edge knowledge of their field—they must have a firm grasp of what nonprofit governance implies, particularly the shared leadership style demanded by accrediting agencies. Many CEOs also need to acquire the skills involved to interact well with higher-level executives from business and governmental organizations, in order to partner with them or to take an active role in fundraising.
Nonprofit directors should have a “strategic bent’ to their decision-making and an understanding of the serious downside of micromanagement. Since most directors’ everyday professional lives center on commercial endeavors, or the professions, they must adjust their board mindsets to focus on mission not profit. This is especially pertinent when applied to assessing nonprofit qualitative outcomes, e.g., community impacts. Using imperfect metrics – that are anecdotal, subjective, interpretative — outcomes or impacts can be roughly assessed. Also imperfect metrics can rely on small samples, uncontrolled situational factors and cannot be precisely replicated. Over time they can be highly useful in tracking progress and driving change. (See:http://bit.ly/OvF4ri)
2. Deep Collaborations (Soul): Even when a leader has unwavering commitment to his or her personal values; he or she cannot operate as an island…. Trust among collaborators from a variety of perspectives forms the foundations for deep and ongoing collaboration, which is essential for leading (organizational) change.
Nonprofit directors are part-time volunteers with very little opportunity to have contact with the staff. This lack of interaction can encourage mistrust on both sides. Some informal board/staff social events or board/staff working task forces can go a long way towards promoting a spirit of cooperation.
Although there exists a vast literature on the necessity to build a trusting relationship between volunteer chair and CEO, there is only modest mention of the trust required between nonprofit boards and staff. Many nonprofits are “flat” organizations, meaning there may only be one or two management layers between staff and board. Consequently, this relationship needs to work reasonably well to have operational success; few CEOs or boards can survive a staff “revolt.” Nonprofit CEOs and boards walk a difficult trail in maintaining a deep and trusting collaboration.
3. Empathetic Innovators (Heart): Passion is a key innovator, but to create social (and organizational) change empathy must plan a central role. Innovation must be rooted in deep empathy – a real understanding and sensitivity to the experience of another person –to be most appropriate and effective.
Nominating committees are often seduced by a display of passion for the mission in a board recruit. Passionate directors are driven but not always responsive to other governance interests and perspectives. But candidates who have low or moderate interest can make some surprising contributions because they can take their governance responsibilities seriously or lead in other areas. True board innovation is based on empathy with fellow board members and management. It is also a collegial effort towards fulfilling the mission.
Nonprofit innovators may become frustrated when they want to improve the performance of an established organization and find some of the staff, especially those in management positions, are unable or unwilling to change. In some cases, the answer may be well-planned terminations, showing an appreciation for what the person has contributed or moving the person to an individual contributor position, allowing him or her to be measured for a fulfilling a familiar operating service.
4. World Visionaries (Nerve): Social (and organization) innovators …must be skilled at integrative thinking — the ability to hold two opposing ideas in their minds at once and then reach a synthesis that improves each one. They must…. be comfortable navigating ambiguity and seeing possibilities in the fragmented, complex nature of our social reality as they envision a better future.
The word “nerve” usually conjures up aggression, risk taking or chutzpah! Klaus Schwab brings to it a more nuanced interpretation. My nonprofit “take “on it is a director’s ability to think critically, to weigh the risk of a proposed action with the possible outcome in thoughtful consideration of what is in the best interest of the organization. It is a standard to which nonprofit organizations must aspire if they are to survive and meet the needs of their community and professional clients in the 21st century.
It’s time to banish the old paradox in which productive staffs can compensate for incompetent volunteer boards or managements. Klaus Schwab expands the criteria for leadership in governance. In doing so, he raises the bar for the entire organization.
*For an example see: Ann Eigeman (2013) “Targeted Editorial Stands Out for Separating a Nonprofit’s Poor Management From Its Value,” NPQ Newswire, November 4th.
**Klaus Schwab (2013) “4 Leadership Traits to Drive Social Innovation,” Stanford Business Center for Social Innovation, October 31st.
Viewers Insights: Nonprofit Boardroom
Elephants and the “Nice Guy” Syndrome: A Complex Problem
By Eugene Fram
This blog-post has gone viral and has received nearly 1000 views, and still counting, in the last two weeks, plus about two-dozen comments. Although most were simply descriptive, following are abstracts that have significantly added to the discussion. (more…)
The Possibility Of Fraud – A nonprofit Board Alert
By: Eugene Fram
“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. And be certain that employees sign a conflict-of-interest statement.
• 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 directors argue boards can do little to prevent fraud. I argue that every director 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.
Nonprofit Management 