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Want Better Nonprofit Board Cultures? Look for Four Board Behaviors–Part I

Want Better Nonprofit Board Cultures? Look for Four Board Behaviors–Part I

By Eugene Fram                Free Digital Image

Board cultures can be difficult to modify or change in for-profit and nonprofits. A recent McKinsey study demonstrated the strength of the board culture in three different levels of board operations—ineffective, complacent and striving. * Differentiated achievement seems to be largely dependent on four behaviors. (See bold type.) Centered on my experiences, they can be applied to nonprofit boards. At the least, the behaviors can motivate considerations for board modifications.

• There is a culture of trust & respect in the boardroom: Study data showing respondents’ agreement with the statement: 39% of ineffective boards; 66% of complacent boards and 88% of striving boards.
Trust and respect are also critical for nonprofit boards, but they are probably more difficult to achieve for several reasons. First, nonprofits are often seen as lacking efficiently and effectiveness because they operate on smaller budgets and are often housed in marginal physical facilities. In addition, a long-standing nonprofit tradition is for board members to become directly involved with operations. This leads to external perceptions of nonprofits needing managerial support.

Boards will trust management to a higher degree when managers can demonstrate they have the necessary abilities to meet challenges with care and insight.

Finally, nonprofit boards are less homogeneous in terms of director backgrounds since they represent a much broader base of society.

• Board & management-team members constructively challenge each other in meetings: Study data showing respondents’ agreement with the statement: 44% of ineffective boards; 53% of complacent boards and 76% of striving boards.
Nonprofit board environments are not well known for being challenging, but the potential really stands out in the for-profit sector—striving boards are about 31points ahead of ineffective ones on this behavior. But with nonprofit directors being comprised of volunteers, this will require a huge cultural shift. “Going along to get along” is a common mantra in the nonprofit sector. Few nonprofit directors, through rigorous discussion, possibly leading to “no” votes, want to be the cause of internal conflict.

• The chair runs meetings efficiently and effectively: Study data showing respondents’ agreement with the statement: 37% of ineffective boards; 56% of complacent boards and 69% of striving boards. Among dozens of nonprofit boards with which I have interacted, the chairperson’s views receive a great deal of deference to avoid conflict. But note that there is value in choosing a chair who can lead meetings in an efficient and effective manner—69% of striving directors thought this a factor of success versus only 37% of those on ineffective boards.

• Board members seek out relevant information beyond what management provides, to deepen knowledge: Study data showing respondents’ agreement with the statement: 31% of ineffective boards; 59% of complacent boards and 62% of striving boards.
The tenor of the Sarbanes-Oxley Act (2002) called for for-profit directors to seek information beyond that which management provides. Again, note the wide data differences between ineffective and striving. In my experiences with nonprofit boards, the openness of management to having board members interact with staff below the C-Suite levels varies significantly. Some are open to it. Others who fear that such contact will lead to “end-runs”–staff will take grievances directly to board members. Since transparency and openness are board values in the 21st century, every nonprofit should have provisions for directors seek information below the C-Suite level.

* http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/toward-a-value-creating-board Note: The study does not list the criteria used to determine the three categories—ineffective, complacent, striving.

 

 

How Do Nonprofits Determine CEOs’ Productivity?

How Do Nonprofits Determine A CEOs’ Productivity?

By: Eugene Fram         Free Digital Image

Nonprofit organizations can’t have bottom line profits. If they did, CEO productivity determination could be less complicated. Determining a fair CEO 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 benefits needs 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 CEO benefits.

• Evaluation Failure: Some CEOs might receive high benefits 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.

• 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 have to compensate CEO at levels that are competitive with for-profit organizations. In my opinion, unusual CEO benefits 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 benefit 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 nonprofit environment, special benefits can be offered the 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 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. But 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 CEO benefits because of inherent challenges. Evaluating critical qualitative outcomes and impacts, like improving life quality and successful advocacy, can be daunting. But it can be done in a fair manner.*  CEO benefits must in line with market levels and professional qualifications, or the directors can have a personal liability if they provide a excess ones. In the face of these challenges, some nonprofit board members simply pay lip service to the task and then follow a decision of the board chair.

*https://nonprofitquarterly.org/2012/07/24/using-imperfect-metrics-well-tracking-progress-and-driving-change/

 

 

Nonprofit Policy Development & Operations Management – Crossing Boundaries?

Nonprofit Policy Development & Operations Management – Crossing Boundaries?

By: Eugene Fram

“Nose in- fingers out,” is the commonly used guide for nonprofit directors’ relationships to operations. Translated into terms of governance-management relations, it means that boards have an obligation to overview management impacts and outcomes, but they need to avoid micromanaging the operations of the nonprofit. This is a particular danger with nonprofits because micromanagement often seems to be in the DNAs of nonprofit boards.

On the operations side, strong experienced nonprofit CEOs can tend to be overly impatient and can easily make strategic or policy decisions that are the responsibilities of the board. In fact, I have seen a few CEOs step over the boundary and develop and execute board style policies. (more…)

Better Board Governance. Is it the same for both business & nonprofit organizations?

Better Board Governance. Is it the same for both business & nonprofit organizations?

Both BoardSource in 2012 and the Charted Global Management Accountant (CGMA) in 2012 have issued reports on improving board governance. The former group focuses on nonprofit boards and the latter focuses on business boards globally.* Both the nonprofit and business organization reports listed the following prime areas for board improvement or focus:The CGMA report called for improved strategy development & risk analysis; better boardroom behaviors; better relationships between board & management. The BoardSource report asked for improved focus on strategy, with much less emphasis on operations; more board commitment, engagement, & attendance; better self-assessment, recruitment & development. (more…)

What’s in a Name? Benefits of the president/CEO title — Revised & Updated

What’s in a Name? Benefits of the president/CEO title Is it time to change your organizational title?

By Eugene Fram

Over the last 100 years, senior managers of nonprofits typically have held the title of “executive director.” During the past 30 years, many nonprofits have changed the title to “president/CEO,” following a common business practice. Many more nonprofits need to consider the same change to obtain some subtle but useful organizational benefits.

A wide range of nonprofits use the executive director title: churches, human service agencies, trade associations, and medical facilities. An executive director can be organizations; hospitals became regional healthcare systems;the only manager in a church with an annual budget of $200,000, or be the head of a medical facility with a $10 million annual budget and 200 employees. These significant differences in responsibility levels can:

•demean the contributions of many executive directors in the eyes of some important audiences
•minimize people’s perceptions of the organizations’ contributions.

The Executive Director in Nonprofit Organizations

According to Wikipedia, nonprofit senior managers are called executive directors instead of chief executive officers “to avoid the business connotation which the latter name evokes.” It also distinguishes them from “members of the (volunteer) board of directors and from non-executive directors, who are not actively involved in running the corporation.” (Non-executive directors are volunteers who mentor or advise an operating division within the nonprofit, such as the development office.)

Using the title of executive director made sense during the early part of the 20th century when nonprofit organizations were modest ones with a handful of employees, and volunteers regularly filled managerial or service roles. As late as the 1960s, one occasionally witnessed volunteer board members having internal operational roles.Those who advocate the continued us of the executive director title argue that the title’s use is empirical evidence of the board’s involvement in the organization’s activities. However, the negative side of the argument is that continued use of the title leads to board micromanagement of operations, which stunts organizational growth.

Nonprofit organizations became larger and more complex in the latter part of the 20th century. Local professional societies became regional organizations; hospitals became regional healthcare systems; and so on. The proportion of volunteers involved in management operations and staff work declined. Consequently the trend to use the president/CEO title became more appealing to focus operational responsibility on management and staff. If properly structured, the title requires the chair and CEO to develop a more trusting professional relationship that assures stakeholders of higher levels of performance. Organization results become focused on outcomes, not process.

The president/CEO in Nonprofit Organizations

In the latter part of the 20th century, businesses began to add CEO to the title of either their president position or board chair position.* The objective was to clearly designate which of the two had final operational authority, except for those actions reserved by the firm’s bylaws for the board (usually acquisitions, pension plans, and long-term contracts). In the business environment, as contrasted to the nonprofit environment, both the chair and the president can be corporation employees.

In the 1980s, nonprofit organizations began to mirror business organizations managerially. Many developed marketing departments and installed complex information technology. A few hired experienced business executives to head their organizations. The older philosophy of “avoiding the businesses connotation” was quickly eroded. When hiring new senior managers, nonprofit boards offered titles of president/CEO and made bylaw provisions for others in the senior management teams to become vice presidents.**

Some president/CEOs even became voting members of their boards, if permitted by their state laws. It wasn’t unusual for some incumbent executive directors to seek the new title if it was politically expedient. However, many conservative boards still look upon the change as a managerial power grab, which has slowed the change process.
Three decades have passed since early adopters made the first changes. Yet thousands of complex nonprofits are still headed by managers holding the executive director title, although they may have substantial, complex operational duties.

Changing the title of the chief staff officer to president/CEO can positively influence three things:

1. PERCEPTIONS OF THE ORGANIZATION

There’s little public understanding of the robust responsibilities of executive directors. Most people holding the title can relate stories of having to describe their jobs to those unfamiliar with nonprofits. But most people recognize that the president/CEO is the head of the organization with authority to lead its employees and to direct operations.

The senior manager from time to time may have opportunities to be interviewed by the media. This can be a critical responsibility when a rapid response to a crisis is needed or an unusual public relations opportunity arises. The president/CEO title enables the senior manager to move quickly and authoritatively; there is no ambiguity related to the leader’s authority.

How leaders and organizations are perceived by stakeholders are realities with which leaders must deal, whether or not the perceptions are accurate. Providing the chief staff officer with the president/ CEO title can help develop more desirable internal and external perceptions of an organization’s strength and the responsibilities of the person leading it.

2. ORGANIZATIONAL CULTURE

When organizations change the title, they often do so in connection with developing a structure that brings more formality and managerial professionalism to the culture. In the past, years of volunteer involvement in operations often developed a more family culture, which is a positive force when the nonprofit is in its early stages. But it’s hard to maintain a family environment as the number of employees grows. A new formality, brought about with the senior manager’s title change, along with a group of former managers now titled vice presidents, may be seen by older members of the staff as making the operation “uncaring” towards staff and clients.

As time progresses, with the president/CEO being the communications nexus between the board and staff, there will be less personal contact between the two groups. This requires the CEO to be concerned that a mistrusting atmosphere may develop. Under the CEO’s guidance, contact between board and staff can take place on ad hoc committees, on strategic planning projects, at various board orientations, and at organization celebrations. In these ways, the board can seek the participation and advice of all staff in establishing the major programs involved with missions, visions, and values.

The change in top titles and the greater formality it can bring may raise some trust issues with older staff. Management needs to convey a message to the staff that the change is a result of the board placing more trust for operations in the hands of management and staff.

3. FINANCIAL GROWTH

Some nonprofits take the position that fund development is the board’s responsibility, since board members have the broadest range of community and other outside contacts. With a president/CEO in the top management position, fund development becomes the joint responsibility of the president/CEO, the development person — if one is employed — and board members capable of fundraising. The new title gives the senior manager the immediate recognition necessary to credibly approach donors and, with the consent of the board, to make commitments on the organization’s behalf.

To involve the board more directly, the president/CEO can work collaboratively with board members to develop contacts opened by the board. (As one nonprofit executive person explained the situation, “Top people readily communicate with persons in similar positions.”) In seeking support funds, the new title can open doors and communications that might not be available to one holding an executive director title (which conveys such an unspecified range of responsibility). It might even raise an unarticulated question in the minds of some donors as to why the person hasn’t been given the title of president/CEO.

Which title Will Work Best for you?

Compared to the duties of a president/CEO, the duties of an executive director range much more widely on a management activity scale. Some executive directors are simply clericals while others are sophisticated senior executives. Any organization that ignores this fact can leave a psychological gap in public perceptions relating to the group’s strategic posture and the senior manager as a substantial leader. Where warranted by higher responsibility levels, changing a senior manager’s title to president/CEO can help present a better public posture for the senior executive and a better strategic posture for an organization.

Eugene Fram, Ed.D. (frameugene@gmail.com, blog site: http:// bit.ly/yfRZpz), is professor emeritus at the Saunders College of Business, Rochester Institute of Technology. In 2008, Fram was awarded the university’s Presidential Medallion for Outstanding Service. In 2012, a former student gifted Rochester Institute of Technology $3 million to establish the Eugene H. Fram Chair in Applied Critical Thinking. Fram’s book Policy vs. Paper Clips (available in new edition at http://amzn.to/eu7nQl) has been used by thousands of nonprofits to model their board structures.

*In the nonprofit corporation, the board chair is usually an unpaid volunteer who also might hold the CEO title, indicating that person has final operational authority. A volunteer holding the CEO title may be subject to more personal liability than other board members.

**This also assumes that those directly reporting to the president/CEO are concurrently given vice president titles.

Reprinted from the 2014 January/February/March issue of Nonprofit World Volume 32, number 1

Nonprofit Boards 2014 – Two Recurring Concerns of Directors & Managers

Nonprofit Boards 2014 – Two Recurring Concerns of Directors & Managers

Viewing responses to my blog-site over the past year has provided me with a window to topics that obviously interest nonprofit directors and managers. An unusually strong surge of viewing responses to the following two blog-posts convinced me that both issues were universal to the nonprofit governance environment. (more…)

Civil and Honest Discourse Needed for Nonprofit Boards

Civil and Honest Discourse Needed for Nonprofit Boards
Huffington Post Impact Section – Posted: 01/03/2014 9:31 pm http://huff.to/1lIWFNM

By:Eugene Fram

In recent years, I have noted some nonprofit board meeting environments have been developing into two distinctly different types: (1) a board consensus resulting from directors’ desires not to develop conflicts with peers, or (2) uncivil discourses based on political beliefs, especially when the CEO and board chair subscribe to different political parties. (more…)

A Nonprofit Paradox: Weak Leadership Pool, Positive Organization Outcomes?

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.

The Possibility Of Fraud – A nonprofit Board Alert

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 Boardroom Elephants and the “Nice Guy” Syndrome: A Complex Problem

Nonprofit Boardroom Elephants and the “Nice Guy” Syndrome: A Complex Problem

By: Eugene Fram

At coffee recently 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. (more…)