By Lynn O'Shaughnessy
The executive who used to prepare the financial reports for Meet the Composer, a nonprofit arts organization in
New York, always crammed the documents with data. The avalanche of numbers, however, wasn't particularly helpful to the group's Board of Directors.
The executive was "a complex financial thinker," recalls Heather Hitchens, the charity's president. But, she adds, the reports' excessive detail was confusing to the board. "They were very complex spreadsheets that didn't convey a message."
A grant of $1.25-million from the Ford Foundation in 2001 prompted Meet the Composer to change some of the ways it conducted business.
Ms. Hitchens and the board hired a consultant to act as a part-time chief financial officer. The financial reports became far more readable and helped the board focus on one of the organization's biggest weaknesses. With access to clearer financial information, the board was able to develop a plan to generate more donations from individuals rather than rely on a small number of foundations.
In the mid-1990s, for instance, Meet the Composer received just $2,500 from individuals, but last year individuals gave $400,000 to the organization, which operated on a budget of $2.2-million. "Certainly, clearer financial reports paint a picture in a powerful way that helps," Ms. Hitchens says.
Making sense of financial statements is just one of the fiduciary duties with which charitable boards often struggle. Board members can feel overwhelmed because their enthusiasm for a good cause, whether it is homeless children or endangered animals, is often not backed up by knowledge of how a nonprofit organization needs to be run.
"So many people get involved because of a mission that they are attracted to, but they don't understand that there are responsibilities that go with it," says Kris Eiden, the chief deputy attorney general of Minnesota, who oversees the state's charity division.
In fact, quite often trustees aren't even sure what their legal responsibilities are. A board member's fiduciary duties fall into three broad legal categories: care, loyalty, and obedience. These categories cover a broad range of duties, including requiring board members to actively participate in an organization's management, to avoid conflicts of interest, and to obey state and federal statutes. But generalities only go so far, which is why many people need help in understanding how they can become better at carrying out their fiduciary duties. Ms. Eiden says many problems she encounters among charities can be traced to one major flaw.
"If I could identify one thing that gets board members in the most trouble, it is they are not sufficiently engaged," she says. "It's not a problem that they don't believe in the mission of the organization or they aren't committed. I just don't think they recognize what their responsibilities are.
Board members can become better fiduciaries, Ms. Eiden says, if they familiarize themselves with what their specific duties are to their organization. It is also wise to take advantage of fiduciary training sessions. In Minnesota, for instance, the attorney general's office has held fiduciary workshops for charities in different parts of the state.
Here are some ways that nonprofit trustees can become more hands-on — and better informed — as they tackle their fiduciary oversight chores:
Make sure the group's money is invested properly. Marla J. Bobowick, vice president of products at BoardSource, a group in Washington that is devoted to helping nonprofit trustees perform more effectively, ran across a board once that had sunk $500,000 into a non-interest-bearing account.
The reason for the poor choice? Board members mistakenly thought a charity's assets couldn't earn interest. Months after that misunderstanding was cleared up, Ms. Bobowick checked back with the board and discovered that its members had swung the opposite way and were now talking about investing in small-capitalization stock picks — generally considered a risky financial strategy if relied upon exclusively.
Few charities understand how their investment portfolios should be managed, observes Sandra Champion, principal of Champion Partners, in Savannah, Ga., which advises nonprofit boards throughout the country on their financial obligations.
One underlying cause of this problem is that the nonprofit world and the financial industry speak different languages. Board members often don't want to acknowledge that they don't understand financial jargon, and the investment experts don't know how to talk any other way. Ms. Champion witnessed a blowup over this very issue in a Midwestern nonprofit boardroom. During one financial session, she says, "a board member got so angry that he turned red in the face and stood up and pounded the table at the jargon the adviser was using."
To bridge these divides, a board may want to consider hiring an outsider to provide financial-literacy training. At Inwood House, a New York City charity that provides social services to young people, trustees sat through a crash course so they could understood how to read the organization's financial reports.
"There was a moment when the light bulb went on," recalls Gladys Carrion, Inwood's former executive director and now a senior vice president at the United Way of New York City. "They got a real understanding of the whole budget process and how important it is to raise private dollars."
At the same time, one of the experienced board members helped to structure the financial reports into more readable documents.
One way to assess whether a board is following the necessary investment standards of care, Ms. Champion says, is to read Prudent Investment Practices, A Handbook for Investment Fiduciaries(Foundation for Fiduciary Studies, $30). The handbook covers 27 practices that define a prudent investment process.
One of the critical steps in overseeing a portfolio is developing an investment-policy statement. However, many nonprofit organizations haven't taken this step. For example, nearly half of foundations polled recently by the Association of Small Foundations said they don't have one. In the association's 2005-6 survey, 48 percent of the foundations surveyed didn't possess a written policy statement, but that is an improvement over the 57 percent of foundations that reported they didn't have one in a survey by the same organization five years ago.
Develop sound cash-management control. Carolyn Sechler, a certified public accountant in Phoenix who specializes in nonprofit finances, says she is sickened by the charity embezzlement cases she runs across every year.
With 130 charities as clients, Ms. Sechler's firm typically encounters embezzlement a couple of times a year. In 2004, for instance, an executive was caught after she had stolen $150,000 from her charity. The woman used the charity's debit card to pay for such things as groceries, her daughter's ballet lessons, and a Disneyland vacation. In another case, an executive director forged the board president's signature to pay her monthly mortgage. She was caught after the board president spotted the forgeries when he was looking at canceled checks in the charity's bank account online.
Good internal controls will prohibit one person from handling all the cash transactions, says Ms. Sechler. The person retrieving checks from the mail should not be the one who endorses and deposits the checks, handles the bank statements, and reconciles the account. With a smaller operation, the board treasurer should take a more active role in the accounting process and at least open the bank statements to see if anything looks suspicious.
Use outside auditors. Potential abuses are one big reason why many financial experts suggest hiring an independent auditor to check the financial records. When the Panel on the Nonprofit Sector — a committee created in 2004 at the urging of the Senate Finance Committee by Independent Sector, a Washington coalition of nonprofit groups and foundations — held hearings in cities across the country last year, what the panel members heard repeatedly from small charities was the need for independent audits, says Diana Aviv, president of Independent Sector. The organizations urged the panel to encourage all charities to obtain these audits. Ms. Aviv said the charities that hire independent auditors as consultants tend to have boards that are more knowledgeable on fiduciary matters.
Develop written policies, including a conflict-of-interest code. UMOM New Day Centers, in Phoenix, used to rely too heavily on what its chief operating officer calls "tribal knowledge" instead of concrete rules and procedures. The executive, Daniel Gottry, sums up this "knowledge" as, "I know something because I heard it or someone said it or we put out a memo six years ago. But people change, positions change, and soon nobody knows it."
So the charity, which runs a food pantry and a shelter for homeless families, began a concerted effort to codify its rules when it sought credentials with the Council on Accreditation, a nonprofit entity that bestows accreditation on human-service organizations.
Conflicts of interest should be spelled out as a part of any written policy. Barbara Krasne, who is a principal at KrasnePlows, in New York, which provides consulting services to nonprofit groups, acknowledges that many charities have trouble understanding just what constitutes a conflict of interest.
Ms. Krasne, who is a board member of the Parent-Child Home Program, a literacy group in Port Washington, N.Y., faced the situation when fellow trustees asked if she would be willing to work as a consultant on a strategic-planning project. "I laughed and said, 'I'm flattered, but this is a complete conflict of interest.'" Board members argued that the arrangement would be acceptable if it was simply disclosed. Ms. Krasne disagreed, and instead offered to help recruit someone else to do the job.
Do research. It's not hard to understand why so many board members don't comprehend their fiduciary responsibilities. "What often happens in small organizations," Ms. Aviv says, "is they get created by dynamic leaders and they bring friends on board and people they know and these folks don't necessarily understand that their responsibilities are and they feel uncomfortable."
Board members can be more active in spotting problems and steering a charity's future course, she says, if they understand what their fiduciary duties entail.
Do you think most board members are sufficiently prepared to handle charities' financial and governance duties? Sound off in the Building a Better Board online forum.