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Dear Nonprofiteer, Why didn’t I stay a volunteer?

February 22, 2012

Dear Nonprofiteer,

I need some advice.   I have been a paid employee of a non-profit for the last eight months. Before this I was an unpaid volunteer for several years. There are three of us in the office—the ED, the founder, and myself.

The Executive Director

For the last eight months I have been doing most of her job, and my own. As a result I am easily working sixty or more hours each week. Attempts to change this environment have been met with hostility. Despite repeated requests I still have no job description. My working relationship with the ED is close to breaking point. Simply put, I do not want to go into work tomorrow. I have my concerns about her integrity. At the start of the month I was told we were 20K above budget. Last week I overheard her tell the founder we were 40k under budget. I have no proof of mis-, mal- or nonfeasance, and to find that information would be extremely difficult. I would like to prepare a fact laden letter to the Board, but have very little proof.

The Board

I believe the Board has lost confidence in her ability. Their relationship with her appears strained. I also believe they have lost focus on what is best for the organization. A majority of the board are employees or board members of another organization, a non-profit in the same field. We take on the debt. They profit. The cynic in me wonders if there is an element of tax avoidance occurring. Despite repeated requests I am not shown Board minutes. There are open spaces on the Board, but only people friendly to this other organization are accepted. I have nominated two extremely qualified candidates to open positions. Emails inviting them to meetings have been “lost”.

The Numbers

We are a forty year old 501c3. There are three full time employees. During our busy periods we employ around 100 seasonal workers. Our turnover is approximately 300k a year. We provide a service to approximately 1400 children, teenagers and adults. We are four weeks away from the busiest time of our year.

The mission of the non-profit is very important to me. I want to do whatever is best for the long term health of the organization.

I have considered handing in my notice and writing an open letter to the Board explaining my decision. I love this organization though and don’t want to leave it. I have also considered raising my concerns with the state AG, but fear that could spell the end of the organization. Unfortunately I do not have the ear of anyone on the Board that I can speak to in confidence about this.

I am really torn as to what to do. Please advise.  Signed,

Concerned in Carolina

Dear Concerned,

You’ve laid out the central aspects of the situation very clearly: the organization has trouble in the staff, trouble on the Board, and at least the potential for trouble in its finances, which will make it difficult to continue serving this large number of clients and paying this large number of seasonal workers.  As you describe your own position, you are essentially powerless: the Executive Director doesn’t listen to you, the Board is unaware of your concerns, and you don’t want to damage an institution that you care about by involving the authorities.

But that leaves the Nonprofiteer with a question: what, exactly, do you love about an institution with an inept and/or dishonest Executive Director and a Board whose independence may be compromised by its relationship with another organization?  If what you mean is that you love the group’s mission, that’s all very well; but that’s like the Nonprofiteer’s saying she would love her boyfriend if only he were 6’10.”  This is a phenomenon therapists refer to as, “It would be so great, if only it were different.”  It’s not different, and if you have no power to make it so, your only realistic choice is to find another agency to work for: one whose mission you can believe in AND whose governance and management support that mission.

You are best off to find that organization and secure that new job before you leave this one, and certainly before you write any kind of letter to anyone about what you believe and suspect is going on.

It’s rarely worthwhile to burn bridges with that kind of valedictory note—all you get is a reputation as an arsonist, while the people on the other side of the river continue to do what they’ve been doing all along.  But if you feel you need to, you must do some more research to confirm or refute your suspicions.  The Nonprofiteer doesn’t quite grasp the relationship between your agency and the other one for which you think it may serve as a form of tax dodge, so she can’t suggest exactly what you need to find out.  But it would have to be something as clear as your Board members’ being paid by the other organization, which then reduces its own account of taxable profit, for it to be worth taking to the state’s Attorney General.  The very “mis-, mal- or nonfeasance” for which you don’t have evidence is what would be required to cause the authorities to step in.

If you feel you must speak up but don’t have this level of proof, simply write a post-resignation letter to the Board president (with copies to the rest of the Board) laying out only those facts of which you’re certain: that the Executive Director is in the office only 3 hours a week, that she’s using members of the staff to run her personal errands, or whatever the case may be.  If the Board is compromised, though, this won’t make any difference; and if the Board is honest and diligent, it will discover all this about the Executive Director as soon as you leave, because there will be no one available to cover for her by doing all her work.

The Nonprofiteer’s best advice: find a new job, send a one-sentence letter of resignation to the Executive Director, and write an intemperate five-page screed blasting the entire agency, which screed you will then put in your desk drawer or the fireplace.  You’ll have the release of having said everything that needs saying without putting yourself at risk—one of life’s rarest pleasures!

Write again so we know what you do and how it goes.

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Posted in Boards of Directors, Conflict of Interest, Executive Directors, Management Advice Day tip, Mission, Nonprofit management, Nonprofits--General, Personnel Issues, Social Service Agencies | Leave a Comment »

Dear Nonprofiteer, Should I look before I leap, or not leap at all?

January 25, 2012

Dear Nonprofiteer:

I recently joined the board of directors of a small nonprofit (4 staff, $200k budget). Within a month of my joining, our executive director announced she would be leaving as her partner has a new job in another state. In addition, while she won’t move for a couple of months, presumably giving the board plenty of time to find a successor, she wants to study for the bar exam in the new state and requested to work half-time until she leaves.

There are a couple of complications (aren’t there always). I was approached by two board members about taking the ED position. I initially said no, but reconsidered and have let the board know of my interest. I have recused myself from any discussions of the search and said I would resign from the board if selected.

The current ED has said that one staff member is interested in the position as well. Since going part-time, the ED also said this same employee is fulfilling many of her duties, and requested a bonus for the employee equivalent to the 20 hours a week the ED is not working. She said he is, in effect, an interim executive director, and should be compensated. I and other board members doubt that the current person is actually doing the extra 20 hours a week, and/or doubt he can sustain it. (I was present for this discussion, but said nothing and abstained from the vote on his compensation).

I feel I cannot make many obvious suggestions to the board (like that we hire an outside interim ED, either full or part-time) without it appearing that I’m trying to better position myself for the job. It could appear that I don’t want a competitor to have the interim job for fear that it would give him an advantage. There is also the matter of whether I take the interim position. I can’t bring it up, of course, but what if someone else does?

I guess the big question is that having even expressed an interest in the ED job, should I resign until the search is complete and a new ED hired? That means I would stop all my board work for a period that could be months. And if I’m not selected, do I come back on the Board and pick up where things left off? Obviously I’m concerned about all the lost time on major initiatives. Having a half-time ED is bad enough. We don’t need to lose board members, too.

Signed, Conflicted

Dear Conflicted:

The short answer is “Yes.” If you’re going to be a candidate for Executive Director, you must resign from the Board of Directors–not if and when you’re selected, but right now. There is no other way the Board’s search committee can consider you without favoritism, or at least the appearance of it. And in a circumstance like the one you’ve described, in which a current member of the staff is interested in the Executive Director position himself, the appearance of fairness in the process is absolutely essential to the continued functioning of the organization.

Imagine the staff member’s spending the couple-three months minimum required for a search grumbling to his two remaining fellow employees about how unfair it is for you to compete with him for the favor of a group of your peers.  The effect on morale would be disastrous. And if you got the job under those circumstances, you would walk into a hornet’s nest: hostile employees, shame-faced Board members, and thus a host of troubles you don’t need while the agency is working on the new initiatives you mentioned.

You’re already experiencing the extent to which your Board duties and your hoped-for staff duties embroil you in conflict of interest, and it will only get worse. Either withdraw your name from consideration or submit your resignation to the Board chair–-today.

If you don’t get the job, the question of whether you can return to the Board of Directors is one to be decided by the Board of Directors, not including you. That is, you are rolling the dice that your erstwhile colleagues will want you to return after you’ve failed to impress them sufficiently to get the job. And even if they do, won’t you feel awkward under those circumstances? Won’t you be looking around the Board room wondering who voted against you, and why?

So the question becomes whether you in fact wish to become Executive Director enough to make a do-or-die fight for it, knowing that your relationship with the organization will most likely be at an end if you lose the fight. That’s up to you–you haven’t told the Nonprofiteer anything about your current professional situation but it’s presumably unsatisfying if the Executive Director post beckons so strongly–but consider the costs to the agency no matter what the outcome, and maybe think better of it.

If you do think better of it, and decide to remain on the Board, you could do two things that would strengthen the agency immeasurably: first, persuade your colleagues to hire an actual interim Executive Director, preferably someone who’s been trained in the particular tasks of that very difficult role and certainly someone who is not under any circumstances a candidate for the permanent job. A trained interim ED can make sure necessary initiatives move ahead, clear up any personnel issues that may have been festering under the ex-ED (such as, why is she so concerned about his getting a bonus? More favoritism, perhaps?), and relieve the time pressure the Board would otherwise feel while filling such an important spot. In most major cities the Executive Service Corps operates an interim ED training program and will be glad to provide you with the names of candidates. Choose one to spend between six months and a year guiding the agency while you and your Board colleagues figure out what you want in a new leader and how to go about finding it.

Second, whether or not you hire such an interim ED, persuade your Board colleagues not to confer that title on the candidate-staff member. The title makes him heir-presumptive, which if true means you won’t be conducting a thorough and genuine search and if false means you’ll have a justly disappointed employee in a position to do a lot of damage.

If you decide to pay the current ED only half her salary for working only half-time, fine; that has nothing to do with whether any- or everyone else on staff deserves extra compensation. It may be that their burdens are lightened rather than increased by having a less-engaged ED.  That may be why you distrust the ED’s claim about how hard this guy is working.

The Nonprofiteer doesn’t understand at all the concept of bonuses in the nonprofit world. If your Executive Director does a great job, reward her with a raise. If she does a lousy job, don’t. But bonuses are based on outcome metrics, and those are rarely a direct reflection of an ED’s skill. If you tell an ED you’ll give her a bonus if she puts on five concerts this year, she’ll make sure to do so–-whether or not they’re any good. Or if she expects a bonus for serving x number of clients, you can be sure that x clients will go through the agency’s doors; but whether they’ve been served is a whole ‘nother question. A Board which gives bonuses to nonprofit executives is mistaking what’s measurable for what’s valuable.

So, to recap: if you want to work for the agency, quit its Board to level the job-hunting playing field. Be prepared for the likelihood that you won’t be able to return. Consider whether you’d all be better off if instead you withdrew your name from contention and focused on helping to find someone else to provide the able leadership, both interim and permanent, the group requires and deserves.

Posted in Boards of Directors, Conflict of Interest, Evaluation, Executive Directors, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Succession planning | Leave a Comment »

Dear Nonprofiteer, Should I face the music, or dance?

December 16, 2011

Dear Nonprofiteer,

If you could stand one more letter asking about Boards of non-profit arts organizations — or even point me in the right direction — I’d be very grateful!  I’ve been the school director for a small non-profit music organization for several months. The organization has two parts — there are performance choirs and then there’s the school.

But maybe it would be more accurate to say that there are two organizations, because I’ve been told that the school is “technically” for profit, meaning that only the performance choirs can receive grant money.  I’m not sure why, or even if, this is so, though I understand that we make more money charging for music lessons than we do sending out the performance choirs, whose members are paid a pittance that nonetheless exceeds the amount companies and civic organizations are willing to pay for being entertained by them.

The main problem: the performance-choir conductor is also Artistic Director of the entire organization, AND is Chair of the Board of Directors.  He is paid $20,000 a year for what’s supposed to be a 12-hour-a-week job, but in fact he doesn’t work nearly that much.  He lives a couple of hours away, so he only comes in once a week to rehearse, and not even that during the summer (or the Christmas holidays, or the Easter holidays, or St. Swithens’ Day!).  And whenever he can he schedules performances near his home rather than near the school, which means we’re not really serving our community.

Meanwhile, I work full-time (theoretically 40 hours a week but actually closer to 90, what with teaching as well as administrative work).  This huge job pays me $34,000 with no benefits.  The Board sees itself as my “BOSS” and reminds me of that often. In addition to the Chair, the Board members are 1.) one of the school’s teachers, who’s also the Board treasurer; 2.) a member of one of the performance choirs who writes the grant applications; 3.) the mother of a former student, who is paid to be secretary; 4.) the mother of a current student, who is paid to be DIrector of Development; 5.) another one of our teachers; and 6.) a lawyer who takes voice lessons from the treasurer.  In other words, NOBODY is without connections to the school and thus a personal agenda.

The school went downhill financially during my predecessor’s tenure, to the point where we’ll probably have to give up half of our space.  But when I say I need help with fundraising, I get, “Sallie Jo managed it.”   I’m expected to do everything Sallie Jo did but with more “Board oversight,” which means micromanagement and no actual help.  That’s not their role, apparently—their role is being my superiors, scrutinizing me, complaining to each other about me, and occasionally sending me a condescending note giving me reprimands and further orders.

As a seasoned professional who is keeping the place together single-handedly, I consider these missives insulting at best. But there is no one I can appeal to. Do you have any suggestions? Advice? Articles you could point me to? (Templates of letters of resignation?)   I’m near the end of my rope.  Signed,

Hanging on By a Thread

Dear Hanging:

This is like one of those children’s puzzles, “Can you spot what’s wrong with this picture?”  There are so many things wrong that even the youngest child can detect some of the problems, while others are so subtle that older children will be challenged.  Or, in other words: what a mess!

Once you’ve said that the Artistic Director is the chair of the Board, you’ve already described an organization in trouble.  One function of an arts Board is, indeed, to support the vision of the Artistic Director, but the other is to counter-balance that vision with business acumen and an awareness of what a nonprofit arts organization owes the community.  Even if every single member of the Board weren’t compromised in the way you’ve described, the organization itself would be hopelessly compromised by having a single person leading both the Board and the staff.

If the Board were independent, the fact that you and the Artistic Director both report directly to it would provide a healthy balance: he would say “I want to do blah-blah-blah” and you would say “blah-blah-blah costs three times as much money as we’ve raised in any year in the history of the organization” and the Board would weigh these competing points of view and make a decision.  In those circumstances, it would be a good thing that the Board knows it’s your boss—that would mean the Board knew that you and the Artistic Director were co-equals reporting to a common authority rather than an inferior (you) reporting to a superior (him).

But with a Board that’s essentially an extension of the Artistic Director’s personality, you have the worst of both worlds: multiple superiors and no equal colleagues.  No wonder you’re feeling besieged and insulted: you were hired with the title of a director and the status of a secretary.

That’s what the salary situation means: they’ll pay you less than half (on a per-hour basis) of what the Artistic Director makes, because he has more than twice your power.  The fact that you’re also earning less than the singing lawyer’s administrative assistant is just icing on the cake.

And now we get into the subtle stuff: what, exactly, is this nonsense about the school’s being “technically” for profit?  It either is, or it isn’t; it either files a Form 990 informational return with the IRS, or pays taxes on its profits like any other business.  It’s hardly unusual for an arts organization to run a school whose earnings help sustain the actual performances: most likely that’s the real function of the School of the American Ballet.  It’s a prestige training program for the New York City Ballet, and as a result it’s also a cash cow for the company.  But the Nonprofiteer strongly doubts there’s any ambiguity in the status of either the ballet company or the school, whether they’re independent or intertwined.  All the hair goes up on the back of her neck when she hears the word “technically;” in the nonprofit sector it almost always means some corner is being cut that shouldn’t be.

So let’s review: you’re overworked and underpaid in an organization where your input is ignored but your grunt labor is expected and taken for granted.  This may also be an organization with a dodgy relationship to the laws of your state concerning nonprofits and community benefit, and the laws of the United States concerning nonprofits and taxation.  Given all this—surprise!  You’re having a terrible time.

The Nonprofiteer ran a small nonprofit herself—a choir, as it happens—back before the glaciers melted.  It was a complete debacle, though it did provide one of the world’s fastest educations in nonprofit management.  It took her nine months to realize that she was on a dead-end path, and to quit.  She urges you to be more expeditious.

It’s a terrible economy and no doubt you want to work in the music world that you love.  But you’d be better off working as a temp and looking for a job with a functional school or music group than staying where you are and having your spirit ground down by fighting against impossible odds.

The Nonprofiteer’s advice: give two weeks’ notice and start the New Year off fresh.  As for templates of resignation letters, the simplest are the best.  Justifiably angry as you are, don’t burn any bridges.  Just write, “Ladies and Gentlemen: I’m sorry that I will be unable to continue as the director of [Name] School.  My last day will be [date].  Thank you for having given me the opportunity to work with you.  Sincerely, [you].”  If you just can’t stand the thought of writing something so polite, write a letter that expresses how you really feel—and then put it under the chestnuts and roast away.

Submit your letter today, and you’ll have yourself a merry little Christmas.  You deserve no less.

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Posted in Arts Organizations, Boards of Directors, Conflict of Interest, Executive Directors, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues | Leave a Comment »

A remarkably clear statement of what’s wrong with L3Cs. . .

November 29, 2011

for which the Nonprofiteer can take no credit.  Rather, thanks to her friend, Baltimore tax lawyer Stuart Levine, for laying out so clearly the problem with low-profit limited-liability companies, the latest fad in efforts to do well by doing good.  Stuart’s argument appears in response to, among other things, a recent New York Times report that foundations have increased the proportion of their “grants” which are actually program-related investments, that is, grants for which repayment is expected to a greater or lesser degree.

Words from the wise:

Look, there are numerous “good cases” where one can see that infusion of capital that doesn’t really have to be repaid at market rates makes good sense.  (Actually, government loan guarantees of, say, solar power start-ups falls into this category.)  The problem with allowing 501(c)(3)’s to make these sorts of investments is that the process is subject to abuse.

Say that I want to create “Stuart Levine’s Good Works Foundation.”  The Foundation attracts $10M in tax deductible contributions.  The Foundation uses the cash to “invest” in projects operated either by me or my Aunt Minnie.  While Minnie and I invest our own funds in these businesses, our capital position is ahead of the Foundation’s and gets a higher return, so that the first profit out goes to pay us and, if the deal craters, the biggest part of the hit will fall on the foundation.  (Did I mention the $250K a year consulting fee paid to me by the investment entity?)

I don’t for a minute believe that the Bill and Melinda Gates Foundation is engaged in double-dealing of the sort that I described.  I have less faith in the “Stuart Levine’s Good Works Foundation.”   Has everyone forgotten the Pallottine Fathers?  See here:

http://tvnews.vanderbilt.edu/program.pl?ID=254962

Or, as one might say, everything old is new again.

The burden of proof rests on those who believe L3Cs are essential.  They must demonstrate that the entities’ potential for abuse is outweighed by their capacity to meet needs that are otherwise unmet.  But all that’s unmet so far is that burden of proof.

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Posted in Conflict of Interest, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Investment, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Relations with funders, Social enterprise | 3 Comments »

The Joyce Foundation, the Independent Sector and the facts

November 2, 2011

Ellen Alberding’s interview with the Chicago Tribune in advance of the Independent Sector‘s meeting in Chicago earlier this week pressed nearly every one of the Nonprofiteer’s buttons.  Ms. Alberding, head of the Joyce Foundation, described the Foundation’s approach to what even she characterizes as a perfect storm of increased need and reduced resources in the nonprofit sector:

We do what any good business person would do when faced with reduced resources. We have become very focused on first maintaining support of our core grantees. Foundations are required to spend a minimum amount — 5 percent of our assets. On occasion, we will overspend that in order to keep our grantees whole.

In other words, business as usual.  Most likely the Joyce Foundation’s governing documents prevent its Board from spending its assets down to zero, but there’s no reason why the Foundation shouldn’t use more than the statutory minimum 5% of its $800 million in assets to sustain the work it exists to support.  Foundations are NOT businesses; they exist to give their money away, and only in some vague theoretical sense is an institution with $800 million facing constraints preventing it from giving away more than $40 million.

If Joyce gave only 6% instead, that would be another $8 million available to nonprofits in its areas of concern—a not-insubstantial 20% increase.   What is stopping the Foundation from doing this, other than a misguided sense that preserving its capital is more important than doing its job?

And then the cherry on the sundae:

It’s the position of the Independent Sector that a cap [on charitable deductions] will reduce charitable contributions across the board and diminish support for nonprofit organizations. I believe it’s the administration’s view that the 28 percent cap might have some impact, but it wouldn’t have a dire impact. (But) I think we have to listen to the organizations themselves, who feel otherwise.

In other words, notwithstanding reality, the prejudices of self-interested parties will dictate the organization’s behavior.    Their minds are made up—don’t confuse them with the facts.  But as President of the organization, doesn’t it behoove Ms. Alberding to make sure her members don’t make their decisions based on fantasy?

Grrrr.

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Posted in Boards of Directors, Conflict of Interest, Coverage of nonprofits, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Investment, Mission, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Relations with funders | Leave a Comment »

What a difference a syllable makes

November 19, 2010

More about the troubles of the do-well-by-doing-good gang, this time in the financial services sector.

Which raises the question: when does “profiting” turn into “profiteering”?

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Posted in Charity scandals, Conflict of Interest, Coverage of nonprofits, Current Affairs, Earned income, Finances, Fundraising, International, Investment, Mission, Nonprofit management, Nonprofits--General, Poverty, Relations with funders, Social enterprise | Leave a Comment »

Dear Nonprofiteer, How many roles does it take to screw up an organization?

October 21, 2010

Dear Nonprofiteer,

Several friends and I have started a new musical arts ensemble and are seeking to incorporate as a non-profit.  There are 8 artists in the ensemble, so we are a very small organization.  Since starting the ensemble was my idea, I have been serving as “Artistic Director,” choosing music, organizing rehearsals and performances, etc., as well as being an Artist in the ensemble.

We are currently working on our Bylaws and so have been thinking about how to structure our Board.  We have decided to have all the usual positions (President, VP, Secy, Treas) plus an Artist Representative, and a variable number of at-large Board members (no more than 5).  We have a provision in our (in-process-of-being-written) Bylaws where the Board can only select or remove the Artistic Director with a 2/3 consensus of the Artists.

At this point, all of our Artists will serve on the Board in some capacity (either as Officers or as at-large members), though we want to allow for a future time when the Artists get to be just Artists and let other people run the business side of things.  The other Artists want me to have a say-so in the running of the organization since the group was formed by my “vision”.

So my question is this:  Is it legal, ethical, practical, etc., for me to serve as both President AND Artistic Director (and an Artist in the ensemble)?  Or should one of the other Artists serve as President and I (as Art Dir) be only ex-officio with no vote?

I should also mention that my husband is also an Artist in the Ensemble, and so would also sit on the Board (for now).

Thank you very much for any advice you can give.  Signed,

Wearing Many Hats

Dear Hats:

Last issue first: it is never a good idea to have a married couple on the Board of a nonprofit, nor is it a good idea for one-half of the couple to serve on the Board while the other is employed by the agency.  (I gather you’re not getting paid as Artistic Director, but if you can be selected or fired by the Board, you’re an employee.)  A husband and wife on the Board stacks the voting since more often than not they will vote together, and the more important the issue the more likely they will march in lockstep.  Majority or not, they constitute a bloc, and blocs or factions create trouble on any Board.

And if your husband’s on the Board and you’re the Artistic Director, you’ve stacked the deck in your own favor on every issue while at the same time guaranteeing the maximum damage to the Board (your husband’s resignation) in case of any disagreement.  Don’t start out your nonprofit life with a built-in conflict of interest.

Further, as you seem to realize, no staff member (including the Artistic Director) should serve on the Board at all (whether President or not) except in an ex officio, non-voting capacity.

But let me suggest that you pause here to consider why you want to create a nonprofit structure at all.  Don’t become a nonprofit because “all arts groups are nonprofit;” the Nonprofiteer did that for a client once and it was a disaster.  As soon as there’s any money involved, you’ll find yourself fighting with the Board over whether those dollars should go directly to you, as Artistic Director; to the artists, in some proportionate way; or back into the institution.  So imagine yourself confronting that question now, and build the structure that will get you the answer that you want.

It’s fine to fill your Board with ensemble members and thus guarantee complete artistic and financial control of the agency by its artists.  But if you do, an “ensemble representative” would be redundant and should be omitted from your bylaws.

You might further consider that if you’re entirely ensemble-governed, you’re missing the opportunity to use the Board for its central purpose, which is to connect the group to the wider community (and, yes, raise money from that wider community to support the work you do).   You do your art for people; perhaps some of them should be represented on the Board—not just to do “the business stuff” but to help you maintain perspective about the relationship of your work to its audience.

In other words, as the Nonprofiteer has said in other contexts: nonprofit and 501c3 status are not mere legal trivialities to permit you to collect donations tax-free.  They’re statements about the kind of organization you are, namely, one answerable to the community through its Board.  You’re trading a certain amount of freedom for a certain amount of stability.  If you’re not ready to do that, skip nonprofit status and live hand-to-mouth til you’re ready to be a full-blown community institution–or until you figure out how to support your art entirely at the box office.

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Posted in Arts Organizations, Boards of Directors, Conflict of Interest, Earned income, Executive Directors, Fundraising, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Volunteers/Volunteerism, Women's Issues | 8 Comments »

Dear Nonprofiteer, Can I borrow working capital from a Board member?

August 30, 2010

Dear Nonprofiteer,

One of our current issues is lack of short-term working capital. As with many organizations, our expenses always precede our revenue by weeks, sometimes months. We were carrying some debt into the recession, which worsened as the economy imploded. We’ve grown fairly organically through the recession and thankfully we have paid the debt down; however, that has left us without much in the way of cash reserves. Which leads us to a short-term crunch on working capital to bridge the gap between the time frames for our expenses and for our revenue.

With the current banking climate credit can be tough to come by so one of our Board members has offered to lend our organization some money to help smooth out our short-term working capital issues. We want to make sure, though, that we are not skirting any legal issues before we proceed. Should an organization accept a short-term loan from a Board member?

Also s/he had a secondary question about interest if we were to accept the loan:

One question I did have is regarding the IRS interpretation of not profiting from board activities.  I should be able to do that as a no interest loan; though, would I still be able to do it as a below market rate loan?  (Not that there is much of a distinction at the moment with interest rates pretty close to 0.5%)  My thinking is that I could lend something around $3-5000 for no more than one year, and I would certainly want fund raising to continue in the meantime, but what would the IRS’s rules direct for this?

What would you advise?

Signed, Board-rich but Cash-poor

Dear Cash-poor:

It would be hard to provide a better summary of the pluses and minuses of borrowing from Board members than the one on Blue Avocado last year; it lays out all possible iterations of such borrowings, along with pros and cons of each type.

As you’ll see, there’s no legal obstacle to your accepting a loan from a Board member (see also this legal guidance, which makes explicit that what’s prohibited is Board members borrowing from nonprofits, not the other way around).  But doing so may alter the dynamics of your Board in a way you don’t particularly want.  S/he who has the gold makes the rules, of course, and a lender is apt to feel that s/he has a greater stake in the financial success of the organization than other Board members.  This may lead to conflicts about whether, e.g., to do something artistically daring or commercially safe, with the creditor putting a heavy thumb on the “safe” side of the scales.  The borrowing doesn’t create a conflict of interest, exactly, but it creates the potential for one.

Given the relatively small sum involved, it might actually be better to have a Board member, or members, co-sign a line of credit at a bank or credit union.  Many reluctant lenders are willing to lend with personal co-signers, and this keeps the day-to-day financial decisions where they belong—with the staff—while keeping Board members in their proper fiduciary role.

As to the interest-rate issue, Nonprofits for Dummies notes that loans from Board members are only legitimate if they are at or below market rates.  The goal is to prevent Board members from looting their agencies by charging exorbitant interest.  To be sure that there’s no question about the validity of the interest rate, the full Board should approve the loan by a vote from which the lending Board member recuses him/herself.  Under those circumstances, the IRS will not question the transaction—though it must be reported on the agency’s 990 form, and of course any interest income must be reported on the lender’s own tax returns.

Again, your difficulties are not legal, but managerial: if there’s truly no other way, you may borrow from a Board member.  But the less you let Board members serve as your creditors, the better governors they will be.

Also—though there’s nothing wrong with borrowing for a defined short-term need like the one you’ve described—if there’s a chronic delay between expenses and revenues, you probably want a longer-term solution (like the credit line) instead of a Board member’s temporary willingness to tide you over.

And please make sure the lending Board member knows that, in the unlikely possibility that you go bankrupt, his/her loan will be the last paid.  As an “insider,” his/her loan will be subordinated to everyone else’s, almost as though s/he were a stockholder.  In short, make sure everyone on both sides of this transaction understands the risk.

None of these gymnastics would be necessary if there were a Nonprofit Business Administration which would lend to nonprofits the way the Small Business Administration lends to small businesses.  But this hobby-horse of the Nonprofiteer’s doesn’t seem to be making any more headway in the Obama Administration than in any previous White House.  Maybe there’s a reason—but she can’t imagine what it is.

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Posted in Boards of Directors, Conflict of Interest, Executive Directors, Finances, Management Advice Day tip, Nonprofit management, Nonprofits--General, Private Philanthropy, Relations with funders | 1 Comment »

Dear Nonprofiteer, Can a Board member become interim Executive Director?

May 4, 2010

Dear Nonprofiteer:

Our small organization recently terminated our Executive Director.  There is one board member, Martha, who has been working long-term in the office to review books, grant applications, etc, who was instrumental in documenting our previous ED’s administrative mismanagement.  Now that the ED is gone, the organization is in dire need of someone who can fill in, and Martha is offering to work in the capacity of Interim Executive Director for a monthly stipend.

I feel like this is a potential conflict of interest. Even if Martha resigns from the board in order to take this interim position, she was instrumental in the ED’s termination and will now benefit personally by taking money to fill the position, no matter the financial amount or length of the term.

Is it legal for a board member to take an interim staff role?  Is it ethical?

Signed, Is Something Rotten in Denmark?

Dear Denmark:

It’s certainly legal for a Board member to take on an interim staff role, and in fact it’s quite common, because so few agencies have access to trained assistance at the very instant they need it.  But your sense of the situation seems to me absolutely correct: neither Martha nor anyone else on the Board should benefit personally from actions taken as a Board member, and in this case she would be profiting from having blackened (however justly) the reputation of someone holding the job she apparently wanted for herself.

Your colleagues on the Board will doubtless say that there’s no one better qualified–maybe no one else qualified at all–to take on the Executive Director role; but that’s why Boards should have clear conflict-of-interest policies in place in advance: because there’s always a good reason to look the other way about a conflict of interest.

And Martha’s leaving the Board now wouldn’t cure the conflict, any more than her recusing herself from the decision to appoint her.  It would simply make it more likely that she’d ask next to be appointed permanent Executive Director, thus magnifying the conflict to impossible levels.

What is to be done?  If she’s really the best-qualified person to do the work of Executive Director temporarily, ask her to do it as a volunteer, in which case it’s just a natural extension of the volunteer time she’s already putting in as a Board member.  This is, of course, a huge thing to ask of any Board member–making it likely that Martha and the rest of the Board will move expeditiously to find a permanent replacement, which is what this company needs if it’s going to survive the kind of trauma you’ve described.

Or–even better–if your city, like Chicago, has a program to train Interim Executive Directors, contact the agency that provides the training and ask for the names of program graduates who might be available to take on this task.  The real benefit of having an interim ED at any nonprofit is not to have the day-to-day tasks taken care of but to have old problems and dead wood swept away by someone who isn’t a candidate for the permanent position and therefore needn’t fear offending any person or clique.  Even if Martha is willing to become ED for free, she will inevitably carry with her some baggage from the organization’s past, which is just what it doesn’t need right now.

Don’t let convenience–”She’s right here, and she already knows the books!”–trump either ethics or the opportunity to set a troubled company on a new healthy path.  Stick by your guns and keep Martha on the Board where she belongs.

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Posted in Boards of Directors, Conflict of Interest, Executive Directors, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Volunteers/Volunteerism | 6 Comments »

Dear Nonprofiteer, Does a staff member get a seat on the Board?

January 19, 2010

Dear Nonprofiteer,

Can you please clarify for me about a paid Program Director having voting rights on the executive board? I am currently on a non-profit board that will be modifying the by-laws. The Program Director (paid position) insists that he should be a voting member of the board. I feel this is a conflict of interest. Do you have any guidelines etc that I can present to the board? I appreciate your help on this. Do you have any books etc to purchase that could serve as good training tools?

Signed, Conflicted

Dear Conflicted,

The Nonprofiteer doesn’t have any books or pamphlets or anything (though she’s thinking maybe she ought to try writing one), but please feel free to refer staff and Board members alike to earlier postings here, as the issue has come up more than once. See, for instance, “How do we keep it all in the family?” and  also the first paragraph of the Nonprofiteer’s reply to “How to reconcile Board and ensemble.”

Your view that the Program Director doesn’t belong on the Board is absolutely correct: a nonprofit Board of Directors consists of volunteers, who supervise paid staff.  I presume you have an Executive Director over and above your Program Director, in which case this holds doubly true: no member of the staff except the Executive Director should even report directly to the Board.  The Board supervises the ED, the ED supervises the staff, and if there’s some staff-ED conflict the Board’s only choice is to back the ED or fire him/her.

If your Program Director is what would be called the Executive Director at another agency–that is, he reports directly to the Board and the whole rest of the staff reports to him–he serves on the Board ex officio only–that is, only in his capacity as a member of the staff, and without voting rights.

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Posted in Boards of Directors, Conflict of Interest, Executive Directors, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Volunteers/Volunteerism | Leave a Comment »

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