Dr. Eugene Fram
Can Nonprofit Boards Learn from the Mistakes of Others?
An old Chinese proverb states: “A wise man learns from his own mistakes, the wiser man learns from the mistakes of others.” Since nonprofit boards of directors are continually changing, volunteer directors typically serving three to six year terms, it seems that board members should immediately want to learn from the experiences of others.
Example: A recent report in the NFP Quarterly newswire describes sad experiences encountered by the board of The American Academy of Arts & Sciences. Its membership includes 250 Nobel laureates and 65 Pulitzer Prize laureates. The board apparently approved of the CEO's fundraising, budget balancing, and raising of the nonprofit’s profile. But it missed the following:
- She was provided with an “excess benefit” salary without properly investigating comparable salaries, relying on what the CEO said were comparable salaries. This reliance is a clear violation of the Federal Intermediate Sanctions Act.
- The CEO provided herself with excessive perks (e.g., first class air travel, catered dinners at the Academy) without questions or oversight from the board.
- The board never conducted a due diligence process when they hired the CEO. She listed her academic background as including a PhD from NYU. She only had been a candidate for the degree.
- Board members ignored both staff and newspaper reports about her heavy-handed management style.
- She was reported to be very deferential to the board “and was quick to offer board members perks of one kind or another.”
Other nonprofit board members can use this case to become wiser!
- Nonprofit directors should have some familiarity with federal Intermediate Sanctions—covered by Section 4958 of the Internal Revenue Code. Directors who approve an excess benefit and those who receive one can pay substantial IRS penalties. At the least, a nonprofit board should invite competent legal counsel to occasionally review it, its current cases, and other board legal obligations.
- A traditional question that an audit committee needs to ask external auditors every year is: “Have you noticed any unusual payments?” The committee should expect the auditors to have reviewed travel and entertainment expenses. In this instance, that action should have highlighted the unusual flight and catered dinner costs.
- The lack of a rigorous due diligence during a CEO search process is inexcusable. It is a simple matter of asking for official transcripts that show degrees.
- Every leader will have people on staff who are supporters and iconoclasts, so some staff dissatisfaction is not unusual. But any serious report of heavy-handed management, let alone newspaper reports, requires board investigative actions. It is a significant red flag that there is more at stake than a couple of staffers unhappy with the CEO or changes taking place.
- Nonprofit managers and staff tend to be deferential to board members because they don’t have frequent contacts with them and can fear the power of an ever-changing board. Consequently, board members have to be certain that their egos are in check. They also need to use all the available tools (financial reports, audit committees, external or internal auditors, imperfect qualitative metrics) to “trust but verify” in a robust manner.