The control environment is the foundation for good internal controls for any organization,  whether for profit or not-for-profit.  You might call  the control environment the  “tone from the top.”  A control conscious executive management  will ensure proper internal controls are in place and are performing effectively.  Management that does not appreciate the need for internal controls or take  internal controls seriously courts serious trouble. The internal control system will not function as intended, no matter how good it looks on paper.  The result is a fertile breeding ground for financial fraud and irregularities.

Sadly, the lack of control consciousness is common  in the not-for-profit sector.  In the last blog, I looked at internal control breakdowns where malefactors were actively involved.  It is obvious to any onlooker what the problem is in such occurrences.   Unfortunately, organizations can end up in severe financial difficulty even when the executive management is well-meaning but has failed to implement adequate internal controls.

One example of this appears to be the Greek Orthodox Archdiocese in the United States.   The leader of the Archdiocese, Archbishop Demetrios is someone widely recognized for his erudition and his faithfulness.  He has been a mainstay on the American religious scene now for decades.   Yet, news began to filter out of the Archdiocese in 2017 of irregular financial transactions.

The genesis of the problem is a Greek Orthodox Church was destroyed during  the terror attacks in New York City in 2001.  Initially, the City refused to allow the Archdiocese to rebuild the church.  After taking the City to court, the Church was allowed to begin construction on the new church.   Funds were raised across the country for the new Church.  The estimated price tag of the new church was initially pegged at $30 million.

Unfortunately, the price of the church construction has soared to $80 million, a staggering $50 million above the original price.  Even more disturbing was the allegation $15 million was missing from the construction funds.  Federal authorities announced an investigation into the situation earlier in 2018. The results of the investigation are still pending.  Not surprisingly, many parishioners are up in arms. There have been demands the Archbishop step down and allow a new bishop to settle the entire matter.  Interviews with those familiar with the financial management of the archdiocese show the   chancery (office) of the archdiocese was  disorganized at best, and inept at worse.

While  the Archdiocese has many important things to do, such as looking out for the welfare of souls, it must also exercise stewardship over funds it has been given in trust. Sadly, if there had been rudimentary internal controls in place over cash, this entire  scandal may not have happened.  Professional managers do not claim to have any special knowledge about active ministry.  Perhaps it is time churches and other NFP organizations turn over financial management of their organization to professionals.

Sadly,  it is time to announce my nominees for the Not-For-Profit Hall of Shame.  These organizations or individuals have acted in harmful ways to  their members or extravagantly used their members’  funds to either enrich  management or for clearly inappropriate purposes.   There were many “worthwhile” nominees this year, such as the executive director who rigged the 50/50  fundraiser so she could win.  Unfortunately, there is a one organization standing out head and shoulders above the rest.

This year, the first nomination for the NFP Hall of Shame must go to the Catholic Church in the United States.  It pains me greatly to say such a thing since I am a loyal member of this church and part of its clergy.  Nevertheless, the facts are the facts. Any competent professional looking at the same facts would come to the same conclusions. There is something terribly wrong in the management of the Catholic Church of this country.  Again, I am not speaking about religious matters.  I am speaking purely as a student of management.

Let’s first look at the recent case of  former Cardinal, and now Archbishop Theodore McCarrick.  McCarrick served as a bishop in the Archdiocese of New York,  and then as Bishop of Metuchen, NJ,  Archbishop of Newark NJ,  and Archbishop of Washington D.C.  He was elevated to the “sacred purple”  (made a cardinal) when he was appointed Archbishop of Washington at the age of seventy.  McCarrick was a mover and shaker in not only the Catholic Church, but also on the national stage itself.  Recently, credible accusations surfaced he abused young men and children along the way.  It appears the statute of limitations has passed and the 88-year-old prelate can’t be criminally prosecuted.  Pope Francis recently accepted McCarrick’s resignation from the College of Cardinals, and from the active ministry.

Another recent scandal has broken open in the Byzantine Catholic Archdiocese of Pittsburgh and its suffragan dioceses over the last year. The Byzantine Catholic Church is in union with the Roman Catholic Church, but uses an eastern (Greek) form of worship.  Last year, the Pope appointed a European bishop to shepherd the diocese of Parma, after apparent  financial mismanagement.  This year, the Byzantine Catholic Diocese of Phoenix took the unusual step of suing its health insurance agent and the Archbishop of Pittsburgh, who was the administrator of the insurance plan.  In its filing, the Diocese of Phoenix alleged the insurance agent refused to refund money to it after terminating participation in the plan  and transferred funds to an offshore account in Bermuda.   Using a biblical injunction not to sue another bishop,  the Vatican sadly gave another bishop jurisdiction over the Diocese of Phoenix in order to stop the lawsuit.  Amazingly,  the insurance agent is still servicing at least two of the Byzantine Catholic dioceses as well as other Catholic diocese..  Any competent business person looking at this situation would be shocked by the lack of internal controls over the insurance agent.  This is a complex situation, and is worthy of its own blog entry later on.

In the McCarrick case, a powerful leader was able to abuse people across decades.  He inflicted harm on his victims, and no-one within the church hierarchy had the courage to speak out against the abuse.  His scandalous actions were an open secret within the upper echelons of the Church. The Catholic hierarchy simply closed ranks around one of their most influential leaders to squash any investigation.  The argument was they were doing it for the “good of the church”.  Beware of this Friends! When someone is doing something for the “good”of the organization, they generally mean we have to  do this to protect someone or cover-up some less than savory situation. Any publicly traded corporation would have acted decisively to report criminal activities or inappropriate behavior decades ago.   Controls would be in place to make sure someone inflicting such pain on the corporation would be removed from its ranks.  Sadly, this is not what happened with McCarrick . In fact, the opposite happened.

The financial irregularities  of the Byzantine Catholic Archdiocese are yet another example of clergy closing ranks around actions  that need to be thoroughly investigated.  From an accounting point of view, the control environment in the Church is fatally flawed.  Compliance with law and ethics starts at the top of the organization.  Controls such as finance councils, who are supposed to advise the Bishop work only when the Bishop is committed to make them work.  Often they do not and there seems to be no recourse to these actions.

The “closing of ranks” behind a member of an organization is not unique.  Look at the “blue wall” misguided policemen will sometimes form. Nevertheless, the financial and moral harm the Catholic Church has allowed to occur in the last year definitely propels it to the top of my list for the NFP Hall of Shame.

The  contentious testimony of  the now disgraced FBI Agent Peter Strzok before the House of Representatives is now fading into memory.  Contentious testimony might be too kind of a description for the day.  A better description could be the “Strzok Spectacle.” In retrospect no-one accomplished what they were looking to do on that day.  The testimony more closely resembled  spectator sport  than a Congressional hearing.

What are the lessons  we can take away from this event? How can we apply them to everyday management?  I think there are several “take-aways:

1. Have a smaller group do the heavy lifting. Strzok testified before the House Oversight and  Judiciary Committees.  The combined membership of these two Committees is over seventy representatives.  At one point, the camera pulled back surveying  the entire room.  It seemed Strzok needed binoculars to find the person asking the questions he was so far away.  It is hard to keep order in such a large meeting, and it is no surprise the hearing degenerated to a rabble at various points. The chairman lost control of the meeting rather quickly.  Social scientists have different perspectives on the optimum task force size or  committee.  The range is about  five to twelve members, and not seventy. The House of Representatives appeared  to want  a media moment rather than trying to accomplish its stated goal of gathering information aiding in its constitutionally mandated oversight of FBI activities.  Contrast this to the Senate Watergate Committee (circa 1973) consisting of seven members.  The Watergate Committee was an extremely effective group that certainly delivered the goods during its hearings.
2. Complicated parliamentary rules can bog down a meeting.  During the hearing there were several shouts by the minority for a point of order, and even a request for an  adjournment.  These were all gaveled  out of order by the chairman.  The minority then asked for a vote to overturn the chairman’s ruling.  That ruling was summarily overruled.   One purpose of the Congressional Rules is protection of  the rights of the minority.  Yet, it seemed the Democrat minority wielded parliamentary procedure more as a sword rather than a shield.  The use of complex parliamentary rules is not appropriate for smaller not-for-profit organizations.  The Strzok hearing shows just how tough it can be to run a meeting using a complicated set of rules even when a parliamentarian is available.  NFP boards and committees should invest time and effort finding a set of rules that fosters accomplishing  their objectives, and not tieing up meetings.
3. Be civil.  It didn’t take long before civility broke down at the hearing.  By  eleven a.m. the chair threatened  Strzok with a contempt citation,  Democrats were crying for points of order,  and personal attacks from  members and the witness were flying across the room.  Let’s look once again at the Senate Watergate Committee. This committee operated in a super-heated political environment as well.  I remember very few personal attacks (the most famous being an ethnic slur launched at Senator Daniel Inouye of Hawaii by an attorney) and a dedication to finding the truth.  It seemed the object of many members of the joint committee was stating their own opinion rather than gathering testimony from a witness.  Grandstanding, spiking the football, and personal humiliation do not aide in gathering information.  Ad hominem attacks and taking things personally are the sign of an amateur.  Don’t do it.
4. Try to remain open-minded.   We all bring our preconceived notions to any task we attempt.  It is only human.  However, actually listening to the other side of the discussion or debate gives you additional information to either buttress or change our view of a problem.  It didn’t seem anyone was listening at the meeting.
5. Be prepared for the meeting.  It is the job of the  chair to do his level best  to ensure the meeting goes smoothly and accomplishes its goal. The chair did a very poor job of preparing for and organizing the hearing.  As objection after objection was being raised, the chairman seemed to flounder with his responses.  There seemed to be no anticipation of the Democrat motions.  The chair could have met previously with  FBI Counsel to come to an agreement about what types of questions could be asked.  Although there was little possibility of total agreement, at least some of the differences could have been narrowed prior to the hearing.  Similarly, the chairman (the leader of the majority party)  could have focused and coordinated the questioning of each of the majority members.

All in all, a shabby job by all involved.

Some lessons are learned the hard way.  Here are some common mistakes I have run across (and made myself!) in NFP board organization and management:

1. Don’t use Robert’s Rules of Order.  Many NFPs automatically enshrine Robert’s Rules in their bylaws.  Theoretically, all meetings are run according to these rules. In fact, I have never seen a small NFP board of directors conduct a meeting according to Robert’s Rules. They are far too unwieldy.  If you really want to tie up a board meeting, insist Robert’s Rules be used.  A book on a simplified version of Robert’s Rules can run over one hundred pages.  This is far in excess of what is needed. Small board meetings tend to be run on a much more informal basis.  A small board should investigate and adopt other more informal guidelines such as Martha’s Rules.  These are much easier to use, and avoids the later potential challenge by dissenting board members Roberts Rules were not used to guide the discussion or the ensuing vote.

 

2. This is NOT the School Board. I applaud all those who have volunteered at the local school board or larger volunteer organizations.  Their service is invaluable. However, these board members may be  used to more formal procedures and can come to a smaller NFP board with preconceived notions about how the board should be run.  They are used to endlessly long meetings stretching into the wee hours of the morning where the board scrutinizes virtually every expenditure.  In a smaller NFP organization, this can be destructive.  I am not suggesting in any way the board shouldn’t perform its oversight function.  I am suggesting there are much more efficient methods of performing that activity such as monthly reports, updates, etc.  Small NFP board members volunteer their scarce and limited time.  It shouldn’t be spent in largely unproductive meetings.

 

3. Consider a staggered board.  There is nothing more daunting than trying to come up with an election  slate for the entire board at the Annual Meeting.  I have seen small organizations attempt to find directors to fill the entire board in one election.  This is an almost impossible task. Finding three directors for a three year term seems to be much easier than finding nine directors for a one-year term every year.

 

4. Use advisory boards where possible. Advisory boards can provide important information about the NFP’s market area. Advisory boards can be set up in many different ways.  One example is to set up geographic advisory boards.  The NFP I am associated with serves clients in two NJ counties.  Setting up an advisory board for each county seems to be a natural organization.  Another way of organizing an advisory board is by service line.  No matter how the advisory boards are set up, they provide an excellent way to train potential directors and give them a “test-drive”.  An NFP could require advisory board service prior to board service. That being said, do not create an advisory  board as honorary positions.  Make sure the advisory board meets on a regular basis and has a charter.  It should have clearly defined functions and regular communication with management and the board of directors.

 

5. Use emeritus board members. Small organization board members will often commit to a term of service and then move on to other endeavors. Sometimes there will be a change in circumstance in their lives such as a job loss or they will face pressures from other volunteer work they do.  They may be forced to relinquish their board seat.  It is a shame to lose the expertise these members have acquired over the years.   Consider creating emeritus board positions.  Emeritus board members have auditing rights (they attend meetings when convenient), the right to be heard at the meeting, and perhaps to cast an advisory vote.  They do not count toward the quorum, and their votes are simply advisory, as the title suggests.  Nevertheless, I have found this is an excellent way to keep retiring board members participating in the organization.  Emeritus members also appreciate the honor and recognition they are being given.

 

6. Ask board officers to “go through the chairs.” Many well-run organizations ask potential board officers to “go through the chairs.”  The first year the member serves as treasurer.  The following year he serves as secretary, the year after as vice-chairman, and then finally as chairman.  Going through the chairs provides excellent training for the board officer. It provides the board member accepting an officer position with some assurance he will not be required to hold that position for his entire board tenure. Doing the same work over and over again year after year can be demotivating and demoralizing for someone.  The downside to the “chairs” is its multi-year commitment by the board member.  The long-term commitment can deter many board members from serving as a board officer.  Nevertheless, a board can ask for voluntary compliance by making this a recommended step to holding office.

 

7. Set performance expectations.  In New Jersey, it is possible for a board member to be elected and then never be seen again.  As strange as that seems, a board member can be elected and there is no way to remove that person.  This is a potentially disastrous event, as the board seat must still be counted for quorum purposes and unanimous consent resolutions.  A great deal of flexibility in board operations is taken out of the hands of the board if this situation were to occur.  One method of dealing with this situation is to adopt a “three meeting” rule.  If a board member misses three meetings he or she may be asked to resign from the board.

 

8. Use technology to its fullest. There is no question face-to-face board meetings are required from time to time.   Board members are volunteers though.  Traveling to and from board meetings can be time-consuming, especially if the board meetings are during the day.  Board members will often need to sacrifice vacation days to come to board meetings.   The use of technology can partially alleviate the situation.  Conference calls and survey software can be used for many board or committee matters.  Board members will appreciate the time savings.  It is critical board minutes reflect the manner in which the board minute was held.

 

 

 

Mergers in the NFP World

By:  Mark Koscinski and Susan Hornak

Business combinations often cause a big splash.   They are reported on television and in the press. A merger of two small not-for-profit (“NFP”) organizations will never reach such glorious heights of journalistic coverage.   There are no easily accessible statistics on this subject, but anecdotal evidence indicates mergers of NFP organizations are relatively rare compared to business mergers.  Nevertheless, opportunities are out there.

Over  the last two years our  organization had at least two opportunities to combine with another NFP.  For various reasons these mergers did not work out.  Analyzing the circumstances around the potential combinations and why they never came to be  can be instructive.

The first opportunity was the direct result of complimentary mission, territory, and proximity of both organizations.  Another small NFP was headquartered one story above us in our  building.  That small NFP,  which we will refer to as “Target” (not the retailer of course!) had a small number of employees (just as we did),  trouble finding adequate talent (just as we did) and struggled to find funding (just as we did.)  Target performed services for the public we did not, but these services fell within our organizational vision.

The first reason we considered this opportunity was  Target had difficulty securing executive management. It had gone through several interim executive directors in a short period.  Our executive director was strong enough to manage the additional workload and certainly had the time and “band-width.”  We had  “hired-up”  when we offered her the job, hoping opportunities like this would appear. An obvious advantage of any merger was the fixed cost of our executive director would have been split over two similarly-sized organizations at a substantial savings to both. Common functions such as payroll, accounting,  and IT also could have been easily consolidated. There were other intangible benefits as  well. The staff would  have opportunities to be cross-trained, adding to their skill set and job satisfaction.  A combined organization would have been financially stronger, better able to attract funding.

The second merger opportunity was to consolidate into our operations a new line of business one of our directors had become expert in.  This fee-for-service line was something we had previously become interested in going into, but we had a much slower start than our director in her business. This was of course due to the lack of financial resources and available talent.  We looked at a proposed merger  as a chance to jump into the service line quickly, avoiding the pain and expense the learning curve always brings.   As we write,  the director’s  organization now has about twice the case load (and twice the billing) as our organization.  The combination of our organizations would have produced a powerhouse in the fee-for-service field, ensuring sufficient cash flow for our organization.

Why did both mergers fail?

1. Lack of bandwidth of our board and management.  We are a small NFP, where there is not much time to spare for strategic thinking.  Management sometimes has all it can do to keep daily operations ongoing.  It was not committed to an acquisition because it could not see how it could accomplish the  acquisition.
2. Lack of articulation of the benefits of a merger.  At key times we could not articulate the benefits of such a merger to the satisfaction of management.   When preparing for something like this in the future, it is critical the person championing the merger be able to clearly define what its advantages are.  A clear answer to  “What’s In It for Me?” can go a long way to accomplishing  the merger.
3. Lack of perseverance by the deal champions.  At the end of the day, we judged it was not worth the effort to push this through management.  We respected management’s position.  Yet, sometimes it is worth the effort as a board member to respectfully push back on management.

Board members, remember your management team can often be stressed by the lack of resources in running the day to day operations of the organization. They need your help with strategic operations such as a merger.  Be prepared to explain its benefits, and ready to roll up your sleeves to help.  We are hoping more opportunities will come our way in the near future.

 

Grant Writing: A Modest Proposal

By Mark Koscinski CPA D.Litt. and Susan Hornak MBA

Many small not-for-profit organizations (“NFP”) struggle with funding their activities. They have limited manpower and resources to accomplish their objectives. Major grant writing requires the sustained attention of a management  often fighting to stay on top of the day-to-day work.

This is our modest proposal. There are other, smaller grants  that can be tackled with only minimal management input. Financial institutions maintain charitable foundations to help  communities the banks operate in.  Community banks are particularly interested in assisting local NFP organizations  by making grants available. Many of these grants range from $2,500 to $5,000.  While not enormous sums of money, they are certainly appreciated by the NFP.  In short, a small amount of effort can bring an out-sized reward.

Fund raising is a major responsibility of all NFP boards, and our board decided to lend a hand in a unique way.  Board members, in conjunction with management developed an initiative called “Ten Grants in Ten Weeks”.  They  contributed their time and talent by writing grant applications to the community banks in the area.  The applications were generally not too complex, and are perfect for small NFP board members to work on.

Here is how the process worked.

Step One:  Management and the Board agreed on priorities for the grant applications.  Ideally, this step should take into account the overall plans of the NFP for the year.  An underlying premise is foundations are more likely to fund specific projects rather than operating expenses. We attempted to emphasize projects or programs where we had already made financial commitment, demonstrating  “skin in the game.”

Step Two:  One of the board members searched for community banks in our area of operation.  This  was relatively simple to do.  Our organization is responsible for assisting the disabled in Monmouth and Ocean Counties, New Jersey. A simple internet search yielded a list of all banks operating in these counties.  We narrowed down this target list further to those community banks with a significant presence in our market area.

Step Three:  Management set up a database  containing vital information the grant writers could use in the applications. The database included things such as a description of the organization, tax  determination letter,  IRS Form 990, Department of Education Form 704 (Annual Report for a Center of Independent Living), audited financial statements etc. This step  standardized information being used on the applications, as well as being a time-saver. Grant writers did not need to search for critical information. Management wisely kept in mind board members are volunteers and wished to economize on their time and limit their frustration in finding information.

Step Four: Board members were assigned target banks. They researched the application requirements of each foundation, and prepared their assigned grant.

Step Five: A short weekly conference call was held where board members could ask management questions about their applications and ask advice from other board members on how to proceed. Board members felt this was an invaluable step in completing their project as this too minimized their work.

The board achieved its objective, and filed ten grant applications in a ten week window. Several awards were made by bank foundations.  Here is what we learned:

1. Be persistent.  By time we began some banks had already allocated funding for the year.  Even though we did not obtain funding  from them for this year, we were able to get on their radar for upcoming years. The bank foundations now know we are here and will consider us in following years.  The applications we filed for the current year will need to be modified for future use, but they provide a solid basis for future grant applications to these foundations.
2. Board members are willing to devote limited time to this project.  We set up a time line with an end-date so board members did not feel they were entering into an open-ended commitment.  We all know someone who volunteers at a local charity and believes “the only way I can leave this job is to die”.  We did not want board members to feel this was a “job” they needed to eventually get out of.
3. Board members spend time with the documents provided.  They get an in-depth look at the documents, and it increases their understanding of the organization.
4. Documents filed with the government, such as the Form 990, can be used as an effective marketing tool.  Management should look for opportunities to present information about the good work the NFP is doing when it prepares these documents
5. Local bankers are an excellent source for board members.  Grant applications introduces the organization to bankers who wish to be actively involved in the community.

Make no mistake, writing small grant applications will never be a substitute for a sustained program of  writing applications for larger grants. Nevertheless,  our modest proposal provided an opportunity for our board members to contribute, learn more about our organization, and produce funding.  All-in-all, not a bad result.

 

 

 

My  term as Chairman of the Board of a not-for-profit (“NFP”) organization recently expired.   The new Chairman  asked me to serve on the Finance Committee. What are the responsibilities of such a committee, and how should it go about doing its job?

Many commentators claim the most important function of a board member is fund-raising.  While there is no doubt this is a critical activity for any board member, there are two responsibilities that supercede the fund raising function in importance. These  are driven largely by the fiduciary responsibility a board member has under state law. They are:  (a)  electing executive management and monitoring that management and (b) ensuring the organization has an effective system of internal controls in place. Lets take a look at each of these.

The finance committee members as board members are responsible for selecting the executive management of the NFP.  They also hold a special responsibility since the annual budget falls under their purview.  Budgets fulfill many functions, but in this context the most important are making sure the organization is adequately funded, and the performance of management is being properly supervised and monitored.  A good budget makes this objective much easier to accomplish, as financial results can be compared to management’s projections. Running out of funding is disastrous for any organization, but it is a virtual death sentence for an NFP.

Budgets are also useful in determining the compensation of executive management.  Every NFP should consider an incentive plan for management and employees where possible. Bonus objectives can be quantified and placed into the budget, giving the board and its finance committee more objective criteria for granting bonuses and salary increases.

As with all organization wide budgets the starting point is a good revenue forecast. It is the responsibility of the finance committee not to pick at the revenue budget but to make sure the budget is built on sound assumptions.  If the budget calls for revenue growth, can management explain how that growth will be achieved?  Example questions include: Will the organization charge more for services?   Will it provide additional services during the upcoming year?  If so, to whom?

Another responsibility of the finance committee is monitoring the audit process.  Any NFP  receiving government funding or wishing to access funding sources such as Charitynavigator needs to have audited financial statements.  The finance committee  should select the independent auditor and  approve the fee after receiving input from management.   Not only must the  committee make sure there are no scope limitations, in the audit but it should press management  to provide assistance to the audit process. whenever possible.  This is one way of ensuring a proper audit scope, minimization of audit fees, and training the financial staff.

The committee must stay in contact with the independent auditor to ensure the audit process goes smoothly and with as little disruption to the organization as possible. The committee should ask the independent auditor for its recommendations on internal control (“management letter”).  The auditor has a duty to report significant weaknesses in internal control to the board. Obviously, the committee will need to make sure management addresses these potential weaknesses.  Governmental agencies  and private funders will often ask to see the management letter before approving the NFP for additional programs or an extension of the current programs.  The committee needs to have two separate confidential discussions:  one with management concerning the auditor without the auditor being present, and one with the auditor  present and management not.

Sadly, the amount of work a finance committee member must do can be a deterrent to finding good committee members.   Since most NFP boards are volunteer boards, it is even harder to attract qualified members.  However,  finance committee members can take some solace in knowing they are doing necessary and meaningful work advancing the cause of their organization.

 

Earlier this month I relinquished my role of Chairman of the Board of Directors of a not-for-profit (“NFP”) organization.  The organizational by-laws require a new chairman be elected every three years. I completed three years of service in that position and it was time for someone new to take the reins.  My service began as an interim appointment to the Board of Directors and I subsequently went on to win three successive terms to the Board.

Our current chairman is new to the Board.  While he has experience with other non-profits this is his first engagement with a Center For Independent Living.  The laws and regulations for this type of organization are somewhat bewildering. More than one-half of our board must be disabled in order to maintain our standing under federal and state law.  Should we miss this requirement, we run afoul of the law, and our funding could simply disappear. Some of the rules are not even written.  For instance, the State of New Jersey has an unwritten rule the executive director of an organization receiving funds from the state may not sit on the board.  Obviously, this is the opposite of the corporate world, where a limited number of “inside” directors is permissible.

Currently, I am not assigned to any new committees and do not hold any other board positions.  How can a former chairman of a small NFP help the new board management? Suppose you were to find yourself in a similar situation. What are the roles of a “Chairman Emeritus?”  While there are many, I believe the four most prominent are:

1. Advisor.   It may be tough to realize but his is no longer your show.  All of the glory and agony belong to the new Chair. The learning curve can be steep for the new board officers.  Suggestions about how to administer the organization are important as they help cut down this learning curve.  How many times have we encountered new managers who have said let’s look at a problem in a certain way?   We may have looked at this problem before, and communicating that knowledge reduces wasted time.
2.  Senior Statesman.  Many board members may still look to you as the former chairman for leadership.  There is now a fine balancing act between speaking your mind and potentially upsetting the new board chair.   My opinion is you need to act in a respectable and ethical manner.  Ethics always trumps all though. If you need to speak up, you should speak up.  You are a fiduciary to the organization.  The organization and the board need your best insight.  Sometimes the new board officers just need to talk through problems.  Being available to help in such a situation is extremely helpful.
3.  Historian.  You have critical knowledge that may not exist on the record.  There are various methods of taking board minutes.  Some are sparser than others.  You were there.  You can fill in the blank spots for the new chairman.  You can also provide back history for him as well.
4. Knowledge Authority.   Human Resources and Organizational Development theorists point to different power bases.   One example is formal power.  Another is knowledge power.  In my time as board chairman, I have developed a very strong understanding of New Jersey NFP law and regulations.   You probably developed skills extremely useful to the organization.  It would be a shame for this knowledge to disappear from the organization.

My time as Board Chairman was personally rewarding, but I am entering another, perhaps more mature relationship with the board of my organization. I think it will be challenging and just as rewarding!

 

The Sarbanes Oxley Act (“SOX”) has brought a great deal of attention to internal controls in public companies.  SOX was passed in 2002 after corporate scandals such as Enron and Tyco.  The heart of SOX provides protection to investors’ funds by mandating a system of  internal controls for public companies. SOX places the responsibility of maintaining a system of internal controls squarely on the shoulders of the Board of Directors and its Audit Committee. Over the intervening years, most astute observers of the accounting and finance arenas would say SOX helped plug a large hole in corporate responsibility.

Unfortunately, this same level of attention to internal controls is often not seen at not-for-profit (“NFP”) entities.  Boards of directors or trustees are  not as diligent as they are when serving on  a public company board. There are many reasons for this.  Some of these are:

1. There are no investors per se and no personal investments in a NFP.  A donor often makes a charitable donation and often does not even think about the NFP until the next time a donation is required.
2. Some NFP organizations have members that elect a board of directors.  Some do not.  When there are no members, the directors nominate replacements for themselves. A level of organizational oversight is eliminated of necessity in NFPs without members.
3. Board members in NFPs are usually not paid, so their NFP board service becomes less of a priority.  They are usually very part-time directors at best.
4. State law can exacerbate the lack of director oversight. Many corporate bylaws provide a corporate director can be forced to give up their seat if they continually miss meeting. The board has a “hammer” to force participation. That is not always the case in a NFP. For instance, in New Jersey, a director of a charitable organization cannot be removed for missing meetings.  A person elected to a NFP board may never show up to another meeting for the rest of his term and face no real consequence for their lack of participation. A board member who is derelict in their fiduciary duty is bad enough in itself.  He also creates havoc with board quorums and unanimous consent resolutions, further weakening board oversight.
5. Smaller organizations may have difficulty attracting high caliber board members.

The list could go on and on but I think you already have the idea.

Good internal controls start at the top of the organization and should permeate down through the entire organization. A board attentive to internal controls sets the tone from the top.  This is called the control environment. The control environment is the foundation on which all internal control can be built   A good control environment makes the entire organization sensitive to the need for internal controls. Employees of the NFP will adhere to the required internal controls instead of ignoring them or finding work-arounds.  It is extremely difficult to establish a good control environment in an organization with very part time directors.  The lack of a good control environment is often compounded by a lack of segregation of duties in small organizations and the attention of the executive director to other, seemingly more pressing matters.  Nevertheless, it is a critical part of the board of directors function to make sure there is a functioning system of internal controls at their organization. A small investment of time by the directors can prevent embarrassing news such as embezzlements further down the line.