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From the April 2003 Watchdog Report

Are Charity Boards Asleep at the Wheel?
Nonprofit Governance Problems

Confidence in nonprofit organizations is at the lowest level in two decades and one-third of Americans who are 57 or older have less confidence in nonprofit organizations over the last 2 years, according to a September 2002 survey by Epsilon, a major fundraising company. The study cited a lack of trust in nonprofits, fueled only in part by recent high-profile scandals, such as those at the United Way and the American Red Cross, as reasons for the public downturn in confidence. A similar study by Brookings Institution found 15% of Americans had no confidence in charities.

Too many nonprofit governing boards are not taking their positions seriously and shirking their oversight responsibilities. The American Institute of Philanthropy is calling on all nonprofit board members who are more focused on social or networking opportunities for themselves than on overseeing and governing their organization to resign. Responsibility for the numerous recent mishaps of nonprofit groups lies with the governing board. The road to regaining the public trust must begin with charity boards because they are in the best position to improve the integrity of their organization.

The nonprofit world needs its own version of the Sarbanes-Oxley Act of 2002 that was created to clean up corporate accounting after numerous scandals at publicly traded companies. Just as we need honest and fair financial disclosures and accounting practices in the business world to help us make intelligent investment decisions, we need the same level of integrity in the financial reporting of the charity world to help us make smart giving decisions. New York Attorney General Eliot Spitzer is seeking legislation that would require nonprofits to follow some of the new reforms put in place last year for businesses. He is calling for CEO’s of large nonprofits to certify the reasonableness of their financial statements and that groups have an audit committee and an adequate number of board members. He is also seeking legislation to protect whistleblowers in New York.

Nonprofit organizations should have a minimum of five independent governing board members that meet at least three times a year. A three-person board, such as PETA’s (People for the Ethical Treatment of Animals), is too small and allows for a block of only two members to make crucial decisions regarding the governance and oversight of a large organization. For a board member to be independent, she must not be a family member of other board members or have business or other interests that could conflict with those of the organization. Nonprofit board members, other than the CEO, should be volunteers and not receive payments from the organization, except for reimbursement of board-related expenses. If board members do not even believe strongly enough in a charity to work without pay, one has to wonder why anyone else should.

Bigger is not necessarily better when it comes to nonprofit boards. If a board is too large it will be difficult and expensive for it to meet and efficiently guide the organization. Last December the YMCA of the United States wisely chose to reduce its board from 50 to approximately 25 or 30. The United States Olympic Committee, with a 123-member board and an array of management problems, would be well advised to take the YMCA’s lead and also reduce the size of its board. AIP encourages nonprofits that have an unwieldy board to reduce it by placing people on an honorary or advisory committee that does not have governing powers but does offer a way for individuals to participate without the responsibility of being a full-fledged board member. An honorary committee is also an excellent place to stick celebrity and/or deep-pocket members, who do not make it to meetings or do not actively participate in the organization.

While nonprofit board members do not ordinarily need to get involved in the day-to-day operation and management of an organization, it is important that each member has the knowledge and breadth of experience to guide the organization, set policies and provide periodic oversight. All nonprofit boards should contain at least one accountant or financial person who has the background to make sure that the group is audited, has adequate internal controls and is following ethical accounting policies and providing full disclosure to its board and donors. Many charities are not taking seriously their public disclosure obligations on IRS Form 990.

Because a charity must concern itself with actual as well as potential conflicts of interests, it is essential for it to have a formal, board-approved conflict of interest policy or ethics code. The policy should require that board members or officers disclose any direct or indirect interest that they or their family have in a business that a charity is currently or is considering transacting business with. Unfortunately, the CEO of the United States Olympic Committee (USOC), Lloyd Ward, did not do this when, as was recently reported in The New York Times, he failed to disclose that his brother was the president of a firm that was seeking a large contract with the USOC. Decisions on whether or not a charity should conduct business with a firm related to a board member should be made in the absence of the interested board member. All board decisions should be made in the best interest of the charity. There will be occasions when it is in the best interest of a charity to transact with a firm that is tied to a board member. For example, if a dairy owned by a board member is willing to charge a school half-price for milk then it would be in the best interest to buy the milk from the board member’s dairy as long as adequate safeguards are taken, such as regular competitive bidding and quality testing.

Boards need to have the power to hire, fire and set the compensation rate of the executive director or chief staff head and other key employees. The 1986 bylaws (most recently available) of Girls and Boys Town, also known as Father Flanagan’s Boys’ Home, do not allow for its governing board to select who they want for the two most important officers at the charity: the President, who has the power to chair all board meetings, and the Executive Vice President, who serves as the executive director or CEO and resides over the board in the President’s absence. According to the bylaws, the board must appoint as President whoever is the Archbishop of the Catholic Archdiocese of Omaha. The bylaws give the President, not the board, the power to choose who will be the CEO of the charity.

More and more boards are agreeing to multiyear contracts with their chief staff head. AIP discourages this practice because it “locks in” a poorly performing executive and takes away the board’s right to find a better successor or obligates a charity to keep paying a former employee. The United Way of the National Capitol Area, which has had a number of serious management and financial problems (see November 2002 AIP Guide), feels that it is contractually obligated to continue to pay its former CEO, Norman O. Taylor, his $225,000 salary through Feb 1, 2004 even though he resigned last February, according to the Washington Post. The American Institute of Cancer Research states in its 2001 audit that it has locked itself into five-year long contracts with key personnel.

Sometimes it appears that the CEO controls the board rather than the other way around. The Albert Einstein Healthcare Network, a struggling hospital system in Philadelphia, awarded in July 2001 its CEO, Martin H. Goldsmith, with a $2.5 million payment, in addition to his $768,000 salary, months before 200 employees were laid off, according to the Philadelphia Inquirer. An Einstein spokesperson told the Inquirer that “Goldsmith deserved the bonus because he had engineered 14 years of positive results before 2002’s loss.”

Many board members limit their communications with only the very top-level staff of a charity. This is a mistake because board members have an obligation to have a basic understanding of what is occurring in all levels of an organization and should periodically check-in with a variety of staff. It is also risky for board members to depend solely on the chief staff head (CEO) or his top lieutenants for intelligence on the organization. The CEO may be tempted to hide problems from the board if he knows that the board is too dependent on him for information about what is going on in the organization. Individual staff members should have an open line to communicate with board members on serious and pressing matters that are not being adequately handled by the CEO. The New York Times reported last year that the Markle Foundation, which helped to start the children’s TV program Sesame Street, tells staff to not speak to board members without first speaking with the CEO’s deputy. The Foundation also requires, according to the Times, that if an employee has “inadvertent contact” with a board member outside of the office, the employee must send the CEO an e-mail “describing your encounter.” Peter Kerr, spokesman for the Foundation, said it was true that an email had been sent to staff that instructed employees to inform management of any contact with Board members. But he said the intent was to keep management apprised, not to discourage contact.

While communication should be encouraged between board and staff, the CEO should be the only paid employee at a charity to serve on the board and have the power to vote at official meetings. Otherwise, a non-CEO staff member serving on the board may be more concerned with his department or project than the good of the entire organization and might attempt to undercut the CEO’s authority.

In recent years AIP has seen nonprofits increasingly attempt to silence their employees. We believe that nonprofit groups should discontinue employee contracts or severance agreements that contractually disallow employees or former employees to speak to outsiders about serious organizational problems. This serves to stop most employees or potential whistleblowers, who could warn the public of mismanagement or serious ethical breaches that charity executives may be attempting to cover up. At Feed the Children (FTC) employees are required to sign a confidentiality agreement as a condition of employment. The agreement requires that employees not disseminate any information about FTC outside of the charity without prior written approval. Employees who violate this agreement face “disciplinary action, up to and including termination of employment and legal action, even if they do not actually benefit from the disclosed information,” according to the agreement. While it is a common practice in the nonprofit field for employees to respect the privacy of donors and clients and not to reveal the trade secrets of any for-profit subsidiaries, FTC’s confidentiality agreement is exceptionally broad, and it may deter the scrutiny that every charity needs.

Year after year many charities sign contracts with professional fundraisers that allow the fundraiser to keep by far most of the contributions collected. Sometimes charities also even allow the fundraiser to keep and control the names of the donors so that the charity is locked into an unfavorable arrangement. AIP believes that the board of directors should be required to approve all fundraising contracts. Hopefully, savvy board members will be able to keep well-intentioned charities from getting taken advantage of and keep them from continuing to violate the intentions of their donors.

AIP encourages the governing boards of all nonprofit organizations to recognize the serious responsibility of serving on a board and awaken to the fact that they are ultimately responsible for safeguarding our charitable contributions and regaining America’s trust in the nonprofit sector.

 
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