Archive for the ‘Not-for-Profit Board of Directors’ Category

20 Questions For New Directors Asked to Join a Not-for-Profit Board

A female bank vice president was asked to join a not-for-profit (NFP) board and asked me what questions she should ask, before she joined. I shared what follows with her, and I reproduced it below and amended it.

Here are the questions I would ask before joining a NFP board. Some or many of them can apply to other types of boards. It is important to scrutinize the organization for professionalism and fit, particularly for NFPs where resources can be stretched, as your reputation and even financial assets may be at risk. Many directors I interview, when I ask for their greatest regret, they say not firing the CEO earlier, and joining the wrong board.

These questions try to address the downside of joining the wrong board. Here they are:

1. Do you have an inner passion for what the organization does and stands for (its vision, mission and values), and whom it serves? Can you make a solid contribution to the strategy of the organization and its performance?

2. For Director & Officer insurance, ask to see the policy and have it independently reviewed, including scope and depth of coverage, exclusions and indemnities. Assume the worst-case scenario, such as fraud, accidents, harm to a beneficiary of the NFP (e.g., student, children, patients, etc.), property destruction, harassment, or a completely unanticipated risk, including injury or death.?? Make sure you are appropriately covered, including advancement of legal expenses.

3. Ask about donor stewardship assurance, conflicts of interest, internal policies governing self-dealing, asset treatment, ethical compliance, expense reports for staff, gift policy, and reputational risk.?? Specifically, ask to see these policies and reporting as part of your “ask” binder of materials.

4. Ask to see all important reporting (financial, budgets, by-laws, strategic, risk, operations, resource allocation for programs and administration, beneficiaries / stakeholders, governance) as part of your consideration.?? Be prepared to sign a confidentiality agreement if you are asked.

5. Talk to current and past directors if possible (including CEO/Executive Director).?? Talk especially to former directors, if you can. Look at the tenure of management, staff and directors too. Prolonged tenure can indicate entrenchment and undue influence. Take a tour of key facilities as talks progress, to see the culture.

6. Who chairs the board and the audit committee? What is his or her leadership style, commitment to effective governance?

7. What are the board dynamics and board-staff relations like? Are there factions or control, by a particular donor, management or other stakeholder for example??? Ask to see a board meeting in action if or when it comes close to the “ask” stage.

8. What are your roles, responsibilities and expectations, both generally (as a director), but specifically you? Are donations or fundraising expected? If so, what are expectations, so you know what you are signing on to.?? Be as explicit as possible here, tactfully and diplomatically. But don’t not ask.

9. What competencies, skills and contacts do you possess that would contribute to your effectiveness as a director, that this NFP board is looking to you for?  What contribution to you think you could make?

10. Do you understand fully, or have a capacity to understand fully within short order, the revenue model and the financial accounting and measurement issues involved in this NFP? Staff will make choices on accounting policies for making estimates, and you need to understand how and why, and to detect potential manipulation. (Assume fraud may occur.)

11. Is your directorship tied to your professional employment at your home firm??? Do you have consent from your home firm on your end, if it is needed? You should obtain this if need be, as a case can be made for your professional development and relational enhancement. Tell your firm the name of the prospective NFP, as your identify and firm name (and its reputation) may be involved. Consent however should not unreasonably be withheld. Make the case for professional development, networking, learning, brand and reputation.

12. How many board and committee meetings are there? Length? Location? Frequency? What is the tenure? What are the conditions for reappointment or resignation, if any??? The average board position, even in a NFP, is 200+ hours a year, particularly if you are not from the sector, so don’t take a board position lightly. (Also, you are likely not being paid, although you will receive non-financial benefit from doing so, including satisfaction, networking, fun, and making a difference.)

13. Are there any pending or past litigation? Tax arrears? Wages? Infractions? Staff difficulties? Red flags? Problems or issues??? (I would even do a search of the NFP and its executives, and even fellow directors, as a precaution. Many of these searches can be done online, but if you have red flags, there are several professionals who can help you with this due diligence. I can recommend some.)

14. What are the quality and ethics of the Executive Director and the management team (including CFO, and internal audit if it exists)?? This question is very important.? Is there a code of conduct and it is effective and enforced? If it a large NFP, you may want to speak to the external auditor and even the internal audit function.

15. How is the Executive Director assessed?  By whom?  How is compensation for him/her and staff established?  Does the full board consent? Is compensation transparent, including to external stakeholders? (There have been past weaknesses on the issue of compensation, setting of it, approval and disclosure. Assume self-interest on the part of executives, and know what the role and power is of the board.)

16. Are there conflicts of interest between volunteers or operational roles and director/governance roles?

17. Does the organization have a whistle-blowing procedure? Is it effective? What are the ethical reporting procedures to, and oversight by, the board?

18. Does the board assess its own performance? ??Including the chair?

19. What are the professional development and learning opportunities on this board? What is the orientation program?

20. Lastly, why do you want to serve as a director of this NFP board? Does this board and sector align with your long-term career and director profile and trajectory? This may be your first board, and your first board likely is a NFP or governmental board, so plan for the future. If you are not entirely confident in the above and have any red flags, say “no thanks.” More directorships will come along and remember, your subsequent directorships are based on your first one, so be careful in joining the “right” board for you. Then your directorial career can flourish.

Even if you get answers to many or most of the above questions, you will be in good shape as an incoming director. Good firms and people should have no hesitation whatsoever in answering fully these questions. (I have seen all of them answered in my own experience.) They know that their own reputation and that of the NFP are involved and they want the best directors they can find. You also establish your diligence but do so in a nice and professional way.

Hope this all helps!

Governance at the Salvation Army

The Salvation Army recently dismissed Mr. David Rennie, its executive director of its toy warehouse in Toronto, where there was an alleged “massive” theft of $2M in children’s toys. This amount of toys, which were recently located, along with Mr. Rennie surrendering to police, cannot be carried out under one’s arm. It likely involved inadequate internal controls over the segregation of duties, over the safeguarding of assets, and over restricted areas. Perhaps paper rather than IT controls were being used (still not uncommon), which is more capable of manual override.

A qualified audit opinion was offered by the Salvation Army’s external auditors, KPMG, over the last three years (see here and here). According to Stanford researchers, the external audit process (see slide 10) should include fraud evaluation, a review of opportunities for fraud, and an examination of incentives for fraud. Auditors should use “professional skepticism,” but it is not the explicit objective of the audit to identify fraud (slide 9).

It is unclear, judging from the Salvation Army website, whether the Governing Council of the Salvation Army has adequate independence from management or financial expertise (see page 31 here), where independence or financial background is not mentioned). There is an advisory board, but there is no indication that the Salvation Army has a proper, functioning board of directors, that oversees risk and controls. Advisory committees advise, but cannot direct.

Theft happens when there is opportunity, incentives and lack of internal controls. A board, or lack thereof, controls and approves all of these factors – and in particular, controls. I was in Calgary after the XL Foods crisis, lecturing to a room full of directors on beef association boards in Alberta. “Do you approve the internal controls over food safety?” I asked? Not many hands went up. “Do you take tours of the plant, seeing the line, and talking to workers? Do you have an internal audit function that tests the design and effectiveness of internal controls, and reports directly to you?” Again, not many hands went up.

A proper board will want to see validation over the internal controls over all material risks – in the form of real time risk registers with individual accountability and mitigating actions. Material risks are not just financial, but non-financial. This includes operational controls, such as the line in a meat plant, or the warehouse with toys in it. I did a review of a diverse, complex NFP operation last week where documented risk management and operational control oversight by the board was inadequate. I am recommending 45 governance enhancements including a compliance committee of the board and proper risk oversight. I am designing a not for profit and governmental governance accountability course within York University’s Masters of Financial Accountability (MFAc) degree program this January given the importance of not for profit organizations to the economy, and the presence of governmental corruption.

Internal controls basically constrain management. No one likes to be controlled and there is an obvious aversion to management controlling itself or dedicating resources for this. In not-for-profits and charities especially, there are stretched resources, volunteers, and a tendency to trust people. However, fraudsters exploit these areas of vulnerabilities. Controls need to be person-proofed and require a diligent board with authority and competency to require adequate reporting, controls and follow up. Sadly, this was not the case at the Salvation Army and the board (or lack thereof) is at fault. Donations may suffer but more importantly, so may children at this time of year.

The Penn State Report and 8 Must Dos for University Boards

The Penn State board of trustees did not escape blame in Louis Freeh’s 162 page report released this week. See the PDF summary here and pages 97-103 of the full report here on findings for the Board of Trustees.

The board had inadequate reporting procedures and committee structure, a poor tone at the top, was criticized for being a “rubber stamp,” and did not independently inquire and investigate.

What can university boards learn from this failure? A few things.

  1. Reduce your board size to 15, maximum. Penn State’s board was 32 members. Even the largest company boards have 12 directors on average. Larger boards tend to provide worst oversight when company size is held constant, the research shows. If you have a board this large, debate and decisions cannot occur – the board becomes ‘rubber stamp’ like Penn State’s was.
  2. Disestablish the executive committee. Executive committees dominated by university executives and a few directors creates a board within a board, which obviates the very need for the board and creates two classes of directors. It is a red flag for management control over the board. Executive committees have been disbanded in the corporate sector for this very reason.
  3. Have a rigorous code of conduct and compliance oversight, with reporting directly to a board committee. Have every university employee and key supplier sign the code and receive training on it. Have an independent and anonymous whistle blowing procedure. All good companies have these now and universities need to follow suit. Press on despite faculty associations’ allegations of breach of academic freedom.
  4. Have authority within board and committee charters to compel independent assurance and investigations, when the board or committee deems it appropriate. All good companies have this and universities do not. Penn State should have as the report states.
  5. Test tone in the middle and watch for pockets of undue influence. Tenure of 20-30 years in any position (coach, dean, director etc.) should be a red flag for improper succession planning. Insist on vacations, sabbaticals, term limits and regular leadership rotation and development for all positions.
  6. Select trustees on the basis of competencies and skills, not donations or favoritism. Restrict busy directors (3 or more directorships) as companies with busy boards tend to have worse long term performance and oversight, the research shows.
  7. Ask yourself whether all material risks (including compliance and reputation) of the university are reported and assured by the board and committee structure. Meet in executive session without management to discuss. Retain independent advisors to assist you if necessary. Insist that management implement full enterprise risk management.
  8. Lastly, insist on executive sessions where management leaves the room at every board and committee meeting. Pay particular attention to internal audit. This person should have adequate staff, resources, mandate and report directly to the board and audit committee, not management.

There are many shoes left to drop in the Penn State tragedy, including ensuing civil litigation. The vast majority of universities in my experience have not adopted the above recommendations for best practice. Many or most corporations, however, have. Universities and all educational institutions should not be immune from proper governance practices.

Shaping a Not-for-Profit Board of Directors

Should not-for-profit governance be short-changed because of scarce resources and directors being unpaid? Are directors’ fiduciary duties less because it is a volunteer position? Are directors less at risk?

The answer is “no” to all of the above questions. Not for profit organizations are some of the most important in our economy, including hospitals, schools, universities, charities, religious organizations, community organizations and more. Many are large, complex organizations with multiple moving parts and interdependent stakeholders. They are tough to lead and govern but must be as effectively led and governed as for-profits are. They require CEOs, directors and staff who are at the top of their game and will make the commitment necessary.

Beneficiaries such as patients, students, children, congregations, artists, the disabled, military veterans and the vulnerable all depend on a well-governed organization to survive and thrive. Without proper governance, donors are less inclined to give, directors are less inclined to serve, and the mission of the organization less likely be achieved. Not-for-profits can also be the first board a director serves on, so it’s important to learn the right habits at the outset.

I gave a speech in Dallas this week to 160 not-for-profit directors on shaping effective boards, for the University of Texas at Dallas. My slides are here (PDF) and the not-for-profit booklet that I co-authored and was published by the Canadian Institute of Chartered Accountants is here (PPT).

Here are some suggestions coming out of my speech and subsequent roundtables for improving Not-for-Profit boards, and based on my work with leading NFP boards, CEOs and directors. They can all be done with limited budgets and resources, whether you are large or small.

  1. Formalize board roles. When I asked for a show of hands, most of the room did not do this. Have charters for the board, the committees, the Chair, the Executive Director, and committee chairs if you have committees. Samples of these are in my guidebook if you need them, and are also publicly available on the Internet. Tailor them and draft them yourself. This gets everybody on the same page and establishes standards and the right tone at the top.
  2. Your board mandate should address vision, mission, strategy and operational plans; program delivery and operations; risk identification and management; finances (budgets, investments, use of donations, etc.); government filings and reporting; values, ethics, reputation and integrity; key policies and procedures; and communication and accountability to members and stakeholders.
  3. Consider gradual terms of two years and three renewals; or three years and two renewals, contingent on performance, whenever possible, to promote renewal and diversity and allow fit and interest determination. Confirm a succession planning process.
  4. Mentor and recruit younger directors. Have them serve on a committee but not become board members until they gain a few years experience. Pay attention to needed skills that older directors may not possess such as social media and its impact on fundraising. Have a board talent pipeline.
  5. Have tight board and conflict of interest guidelines that addresses directors who are also volunteers; directors who are also stakeholders; and donors who sit on boards who need governance training.
  6. Recruit properly and limit the size of the board. Use a director skills matrix that is aligned with the strategy and mission of the organization. Limit the size of the board so it’s effective at decision-making.
  7. Adopt an evaluation process – annual and perhaps per meeting.
  8. Be explicit and up front about donation and solicitation expectations, but be flexible for different capacities. Notify the board about average gift amounts to encourage giving.
  9. Always say “thank you,” seven times. (Yes, thank a donor or volunteer or other stakeholder who gives a total of seven times.)
  10. Lastly, have fun and be passionate. NFP directors are some of the most passionate, generous and fun people in the governance space. They serve because they genuinely believe in the cause of the organization.


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