Archive for the ‘Conflict of Interest’ Category

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Dear Nonprofiteer, How do we keep it all in the family?

November 5, 2009
Dear Nonprofiteer,

My wife and I started a small non-profit 3 years ago which has grown to have a budget of almost $200,000 per year.  When we started the organization she was made the Executive Director and the Chairman of the board and I was also a board member. She receives compensation in her full-time role as Executive Director and I volunteer my time (which is plenty). In addition to us, there are currently 3 other board members (Searching for 2 more).

This non-profit initially started as a for-profit enterprise to help women that struggle with addiction by providing transitional living services, case management, mentoring and so much more.  However, we quickly realized that if we were going to move into the treatment circles that these women belong to as well as be eligible for donations from individuals and companies, we would need to put aside our profit motivation and convert to a non-profit. After about a year of hard work we were able to make the transition.

However, it has been hard to find a number of good board members. The 3 that we have now (besides my wife and I) are great people and do sacrifice a number of hours each month for the ministry. However, I do not have any one board member that is willing to really spend a number of hours each week on the ministry.  Of course, one of the struggles we have is finding people that have a passion about recovery that do not have a lot of junk from their own past. Usually those that care the most about recovery, are in fact recovering addicts themselves.

SO…all this to say that we struggle with developing a strong board and then struggle with the idea of losing control of the Board and the organization that we have spent so much time developing.

My question is that with a recent grant award by a HUD funded city using CDBG funds, the fact of my wife being an Executive Director and a member of the board is being questioned as a conflict of interest.  Of course, if my wife resigns from the board due to conflict of interest, I will need to do so as well. In fact, we have been thinking about bringing me on board as a part time
COO of the organization to pick up the pieces where my wife is weak.  If I were to take on a day of work each week, I could handle policy development, accounting issues, maintenance and technology.

Do you have any links to official federal documentation that allows this type of scenario?

Signed,

Two Heads Are Better Than One

Dear Two Heads,

The Nonprofiteer can’t provide links to “official Federal documentation” approving your situation because there aren’t any such.  The Feds are right: if you and your wife sit on the Board that sets your wife’s salary, you are officially engaged in conflict of interest.  Especially with a tiny Board like yours (where the two of you constitute 40% of the voting power), the situation you’ve described holds far too much potential for abuse.

It appears that you still have the mindset with which you started this group as a for-profit: that you can reward yourselves for the work you do in any way that seems appropriate to you.  But as you’ve perceived, nonprofits belong not to their founders and not to their staffs but to their Boards, and those Boards are charged with making sure that, for instance, people aren’t allowed to determine their own rewards for the work they do.

(Best practice is not to put a couple on a Board of Directors together, let alone putting a couple on the Board where one [and potentially two] of them has a personal financial interest in the results of Board decisions.)

In short: you can run a family business and do as you please, or you can run a nonprofit and abide by its rules, which include Board oversight of staff appointments and salaries.  And if you’re running a nonprofit, the Executive Director should serve on the Board only ex officio (that is, as a non-voting member)–and her husband shouldn’t serve on the Board at all.

No doubt the work you’re doing is valuable and important and even in the public interest, but earning nonprofit status requires more than that.  You have to be willing to “los[e] control of . . . this organization that we have spent so much time developing.”  That’s the price for gaining access to tax-deductible donations.

You might investigate the new legal structures (currently being adopted or under consideration in many states) which permit a certain degree of profit while offering certain nonprofit-style benefits.  The Nonprofiteer knows little about these L3Cs (Low-Profit Limited Liability Companies), except that they’re designed to legitimize the profit motive in a public-interest context; but she’s sure that even in one of those, you won’t be allowed to dominate the staff and Board as you have heretofore.

Sit down and think about what you really want.  If this is your baby, organize it so it can stay that way–even if that means reversing your conversion to nonprofit status.  Gaining access to foundation grants is not reason enough to surrender control of something you love.

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Posted in Boards of Directors, Conflict of Interest, Disease charities, Executive Directors, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Social Service Agencies | 7 Comments »

Dear Nonprofiteer, Here’s the new boss, same as the old boss

September 3, 2009

Gentle readers: The Nonprofiteer is in reactive mode. As long as you keep sending her these requests for advice, she’ll keep answering them.

Dear Nonprofiteer,

The “beloved” ED of our nonprofit agency is retiring for health reasons after 3 decades. As his longtime 2nd in command I felt quite qualified and planned to apply for his position. I met individually with other staff members to let them know my intentions and to listen to their thoughts about my trying to replace the only boss the agency has ever had.

The ED found out I had talked to other staff members. He was VERY angry with me and said he was recommending someone else from outside the agency (who I later found out was an old friend of his). He warned me not to attempt to politic with staff or Board for the position. Though I disagreed with him, I complied because I hoped for his blessing in my attempt to move up. I reminded him how the agency had grown threefold since he hired me, and said perhaps it had something to do with my leadership as well. He replied that I was as welcome to apply as anyone else, but left me feeling that it was futile.

He had been allowed to remain as CEO for the past several years despite being hospitalized for months at a time. He never chose, nor did the Board require him, to name an interim director. (He apparently convinced them he could manage just fine via email or phone.) In effect, he was being paid to be on medical leave, coming into work about 3 or 4 days each month, and some months not at all.

During the time he was out sick, I strongly considered leaving the agency over what I considered to be preferential treatment. Eventually I became so concerned about the impact of this CEO neglect that I contacted a Board member I trusted. I told her that the boss’s being absent and receiving full pay didn’t sit well with me and others in the agency. This Board member said she too had considered resigning over this. I said I wasn’t asking her to take any action but just to be aware that if the agency started crumbling, I shouldn’t be the fall guy (I expected the ED might try to make me that, as he is quite adept at assigning fault elsewhere).

To get to the point: I still applied for the position, and was selected for an interview along with two external candidates, one of whom was the ED’s recommended hire. I received a “polite” interview, without a single tough or probing question. During the interview I considered relating my concerns about bullying behavior, preferential treatment, and ethical issues, including whether the ED had made a deal with his friend for continued consulting fees and whether his plan to stay on as CEO of one of our subsidiaries would provide him with unnecessary compensation. I was concerned, though, that to bring this up would make me appear to be tearing him down to get his job. So I kept the interview positive, hoping my loyalty and commitment might still somehow still override the ED’s recommendation. But as I expected, I was not hired and the ED’s friend was.

I waited a week to get over my disappointment, but my ethical concerns just would not go away. The Board member I had spoken with earlier emailed me a note of support, but I could sense she was politically outnumbered. In addition, I fully realized the other candidate was also very qualified and had been politicked for months by the ED.

Nonetheless I replied to the Board member, sharing with her more details of my concerns, including what it had been like trying to keep the agency together with no real leadership during the CEO’s extended sick leave. I never accused the CEO or Board of doing anything illegal, just listed my ethical and behavioral concerns. I also stated that, despite my disappointment, I agreed to support the new CEO as long as I felt this person was indeed ethical. I passed this on more to clear my conscience than to attack anyone.

I also know that I have NEVER been insubordinate to the ED. I’ve done everything I’ve been asked and with a high degree of quality I might add and have received nothing but top notch performance evaluations in all my years.

The Board member was going to recommend that the Board president meet with me personally. That was 3 days ago, and I’ve yet to hear from anyone. I expect they are either afraid to talk to me, or they may be planning to fire me for all I know. The last thing I wanted was to appear I was bringing all this up out of bitterness for not being hired but I’m afraid that is how it might be perceived now.

Any advice about this situation? Did I act properly? Do I have legal protection against retaliation?

Signed,

In It Up to My Eyeballs

Dear Eyeballs,

If you don’t consider it insubordinate to go to one of your boss’s bosses and describe him as an unethical waste of space on a crowded planet, we must have different definitions of the term. However, insubordination is often a useful characteristic in agencies where people are nice at the expense of being effective or ethical, and yours might be one of those.

Here’s the deal, though: you wanted his job and you didn’t get it. You’d badmouthed him a little bit before the interview, but you’ve badmouthed him a whole lot since things didn’t go your way. Of course this is going to look like sour grapes, whatever your motivation and however strong your evidence against the CEO. And given that the new CEO is a buddy of the old one, and that the old CEO will be staying around in another capacity, you’ve made your own position impossible no matter how fervent your protestations that you don’t have it in for these guys but just want the Board to know what’s happening.

Did you handle it correctly? Well, let’s take this one step at a time: talking to other staff members about your desire to succeed the current CEO was perfectly appropriate once the fact of succession was announced: it wasn’t like you were going around saying “They ought to fire that guy and replace him with me.” (Were you?) His anger in that situation most likely reflected the fact that his career was coming to an end for a reason not of his own choosing. Long-time and founding Executive Directors often have trouble letting go, even when they get to choose the timing, and being forced out by illness must be even more galling. It probably wasn’t realistic of you to expect his blessing once he’d reamed you out for taking steps in support of your own advancement, but it certainly didn’t do any harm to ask for it.

(It seems pretty ungenerous of you, by the way, to be so unsympathetic to his efforts to continue to work during his illness. Certainly the situation was far from ideal, and certainly the difficulties of that situation fell on you, but it would have been a bit much to expect to Board to fire a sick man who’d given 30 years to the agency. That’s not “preferential treatment” unless the Board refused sick leave to another person who’d contributed as much.)

Then you got the job interview and it didn’t include the questions you’d hoped for. Here you’re at fault for excess passivity: if you wanted them to ask you “tough questions” about the agency’s trajectory and future, you should have figured out a way to express your opinions on those subjects as responses to their softball questions. No one gets to be Big Chief by demonstrating what a loyal second-in-command he’s been–just ask Al Gore. You get to be Big Chief by demonstrating chiefly qualities, like the ability to make a conversation reflect your agenda. You probably wouldn’t have gotten the job in any case, but you would have presented your best case.

Well, you say, those “tough questions” would have made me touch on problems with the previous administration. Maybe so, but only obliquely, while you focused on what opportunities you saw for the agency that it hadn’t yet pursued, what challenges you saw that it hadn’t yet addressed, and so on. No need to get personal: what employers (especially Board members) want to hear is not What are the problems? but What are the solutions?

And then you didn’t get the job and very unwisely decided to blab your concerns about old ED all over the place. The Board probably won’t fire you: that’s really not its place, just as it wasn’t your place to go to the Board, whose only choices are to back the CEO or fire him. (It’s not really allowed to pick “conspire with subordinates” instead.) But I guarantee you that either old ED or his buddy new ED will find a way to show you the door, and soon.

So take all the energy you’re now expending worrying about conflicts of interest and evil cabals, and use it to find a new job. Then, once you’re actually leaving, if you feel the need to write a valedictory statement outlining all the things wrong with the agency and what you think the Board should do to correct them, knock yourself out. They’ll probably pay no attention, but it will free your mind.

And take this to heart: in any situation, even one much less fraught than yours, a second-in-command has a very poor chance of being promoted. Boards like to go outside for fresh leadership, especially if they’re faced with replacing someone who’s been there for years and years. It’s hard to persuade them both that you’ve been a dynamite sidekick for the way things have been going AND that you’d be a dynamic force in taking the agency in an entirely new direction.

The Nonprofiteer hasn’t practiced law since around the time your ED got his job, so she won’t opine about your legal protection from retaliation. She will, however, point out gently that the costs of vindicating yourself in the courts outweigh by a factor of at least 10 the benefits of pursuing your remedies there. Even where there’s whistleblower protection, it’s only worthwhile if the violating institution has assets from which you can receive compensation. Most social service agencies don’t qualify.

Bring this chapter of your life to a close and move on. And at your new job: try not to work for someone for whom you have utter contempt. It really wears a person down.

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Posted in Boards of Directors, Conflict of Interest, Evaluation, Executive Directors, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Social Service Agencies | 6 Comments »

As if nonprofit advocacy weren’t squelched enough . . .

April 22, 2009

it’s now being used as a reason for keeping knowledgeable nonprofit executives out of positions of influence with a friendly administration.

Advocacy is part of the business of being a nonprofit in a democracy–part of, you should pardon the expression, mission.  It shouldn’t be confused with the legalized bribery which passes for lobbying in the for-profit world.

The argument that the President’s anti-lobbying rule can’t be applied only to for-profit lobbying–that citizens wouldn’t understand the distinction being made–is nonsense.  And it’s shocking to hear it being made by the same people who, as campaign officials, operated on the assumption that the American people are smart enough to hear the truth and make decisions based on it.  Usually it’s a good thing when senior officials move from campaign mode to governing, but in this case–not so much.

——————

Addendum: The New York Times editorial board agrees.

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Posted in Advocacy, Advocacy groups, Conflict of Interest, Coverage of nonprofits, Current Affairs, International, Mission, Nonprofit management, Nonprofits--General | 3 Comments »

Dear Nonprofiteer, How can I restructure to be the nonprofit I was supposed to be to begin with?

April 16, 2009

Dear Nonprofiteer,

You’ve helped me in the past and your blog is invaluable. Thank you!

Here’s my question: In analyzing requirements for a recent grant application, I’ve determined that our music group was founded on a corporate rather than a nonprofit model. I assumed that the lawyer who helped us form the corporation (our first board chair) knew what he was doing since he was also chair of a successful major nonprofit in our area. Of course, when we started, I had no clue.

The articles of incorporation set up a board with a president and vice-president who manage the corporation. They are also voting members of the board. We had a huge upheaval last fall when my co-founder (the president) resigned without explanation, taking much of the original board with him. We ended up with a president who has (on paper) the qualifications we need but is only a figurehead. So the board made me CEO and created a COO, both voting board members.  At this point, I receive no salary and the COO is paid by contract for his teaching only.   As our funding increases, this will change.

Grantmakers don’t like paid staff on the board. We need to switch to a model with an executive director not on the board. How do we do that and what are the ramifications?  Thanks!

Signed, Wearing Too Many Hats

Dear Hats,

You’ve outlined not one but a cluster of difficulties:

  • You’re not properly formed as a nonprofit, which could jeopardize your status as a recipient of tax-deductible donations;
  • You’re not properly organized so the Board can decide what needs to be done and the staff can do it;
  • You have the wrong configuration of personnel to accomplish your goals; and
  • You don’t have any money.

A veritable quadri-fecta, if there can be such a thing.  For the moment, at least, the fact that “grantmakers don’t like paid staff on the Board” is the least of your problems.  Let’s take it one step at a time: first correct your bylaws, which involves reshaping the staff as well as the Board; then expand and strengthen your Board; then put the Board to work raising the money you need.

(You’ve demonstrated, by the way, the wisdom of one of the Nonprofiteer’s least-heeded pieces of advice: don’t put a lawyer on your Board with the idea that s/he’ll be able to handle your legal needs.  Law practice is so specialized now that the chances s/he’ll have the expertise for the particular problem you’re facing are very small.  Put lawyers on your Board if you want them for other reasons–we’re smart, we have money, we work hard–but take your legal problems to a lawyer whom you actually pay, or who will serve as your lawyer pro bono without expecting to be compensated in governing power.)

You need to rewrite your bylaws, and if you can’t at this moment pay a lawyer, try to get free or low-cost legal services from someone who’s NOT on your Board.  In some cities (Chicago is one) there are organizations of lawyers who provide such services to arts groups and other nonprofits.  If there’s no such organization near you, call the local bar association and explain your problem–they certainly have a lawyer-referral system and may have a committee that connects nonprofits with the pro-bono or low-cost legal help they need.

If all else fails, search “model nonprofit bylaws” on Google and you’ll find half a dozen examples from which you can pick and choose appropriate provisions.  The only essential provisions, in the Nonprofiteer’s judgment, are that the boilerplate tax language be included; that the Board be self-perpetuating with staggered terms; and that the organization be operated by an Executive Director who sits on the Board purely ex officio (that is, in his/her official capacity only and without a vote); but you may find other provisions essential to your particular circumstances.

(You should, for instance, sit down with your COO and figure out what his job actually is.  Is he the Artistic Director, responsible for music programming, while you’re the Managing Director, responsible for all non-musical aspects of the agency’s operations?  If so, you’ll report jointly to the Board.  Or is he the Program Director, responsible for music programming, while you’re the Executive Director, responsible for leading the entire agency?  If so, he’ll report to you and you’ll report to the Board.  Incorporate whatever decision you make into the bylaws you’re drafting.)

Take a proposed revision of the bylaws to your Board and explain that the original bylaws don’t actually conform to what the Internal Revenue Code requires to enable you to keep your 501(c)(3) designation, and that loss of that designation would cost you all your donated revenue.   That should produce instant obedience.  Explain further to the Board that it’s not considered good practice for staff to serve on the Board: it blurs the lines between governors and managers.  The Board has to be able to see the good of the whole agency, while inevitably a staff member will see the good of the agency through his/her personal lens.

Based on these arguments, get the Board to adopt a new set of bylaws for the agency (and have the Board Secretary find out what State office has to be notified of this fact).  Then resign from the Board along with your erstwhile COO, asking that the Board make one or both of you welcome at Board meetings in your official capacities.

Ramifications: as soon as you’re off the Board, you can be excluded from Board meetings if someone decides they should take place “in executive session;” but I doubt your current figurehead  Board president would be able, let alone willing, to operate without you.

Step 2, as aforementioned, is to look at your current Board (now that it’s been reduced by you and the COO) and figure out what’s missing: energetic fundraisers, people who know about human resources, people who know about marketing the arts, people who are connected to the wider music and educational communities.  Any model set of bylaws will require the Board to have a Nominating Committee, so urge the President to appoint three Board members to this new committee and to instruct them to identify and recruit at least two new Board members immediately, to take your place, and as many others as you think you need.  (Make sure the new bylaws call for a Board significantly bigger than you have now, to give yourselves room to grow.)

Once the new Board members are in place, conduct an orientation session with all Board members–new and veteran alike–with heavy emphasis on asking for individual gifts.  (Remind Board members: they don’t have to ask their own friends for money.  They just have to ask each other’s friends for money!)  Soon you’ll have the money to pay lawyers when you need them–and to pay yourself and the Artistic/Program Director the salaries you deserve, or at least a small fraction thereof.

Ramifications: again, you’re creating a strong Board.  That always produces the risk of conflict, and even the risk that your Executive Directorial decisions will be overruled.  But trust me: it’s a price worth paying to have a properly organized agency with a functioning Board and staff.

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Posted in Arts Organizations, Boards of Directors, Conflict of Interest, Executive Directors, legal services, Management Advice Day tip, Nonprofit management, Nonprofits--General, Personnel Issues, Relations with funders, Volunteers/Volunteerism | 3 Comments »

Dear Nonprofiteer, How can we protect the Executive Director and mission from the Board?

January 29, 2009

Dear Nonprofiteer,

I have a delicate question. I am on the board of a very small social services non-profit. We operate a special trust that helps people get government benefits. Our non-profit has the potential to be abused for profit. There is another non-profit that does what we do, but for a less than charitable cause.

Our Problem:

The person who started this non-profit is the Executive Director and not a board member. He set up the non-profit to have as few conflicts as possible and chose to be an employee in effect and in actuality. He could eventually lose his job if the board so decided. Our board to this point has been little more than a Garden Club.

My Fear:

Our non-profit could be the manager of millions of trust fund dollars and is growing monthly. This sort of money can cause many bad things to happen. The one I fear is rogue board members’ collusion (I’m sure you’ve not heard of that) on taking out the ED (and Founder) and replacing him with a less mission oriented person who will do their bidding.

Is  their a way to assure this does not happen? Is it inappropriate for the ED to be on the board and have a vote? Is there another board structure we could adopt that would keep this from happening?

Thanks,

Fretful in Florida

Dear Fretful:

If you’re concerned that people will try to steal the nonprofit’s money for non-mission uses, that suggests the nonprofit doesn’t have appropriate financial safeguards in place.  The Nonprofiteer is not an accountant, but she knows a few basic rules of forensic accounting, like every check over a minimal amount should require two signatures.  If your agency doesn’t have a bookkeeper, accountant or  CFO who’s implementing these rules, you should hire one.

But it appears that your concern is actually that the Board of Directors has the power to fire the Executive Director.  That’s absolutely true, and there’s nothing whatsoever you can do about it: from a legal standpoint, the agency belongs to the Board of Directors and the Board gets to hire and fire staff pretty much at will (though not, of course, for legally proscribed reasons like race or gender).

It’s not totally inappropriate for the ED to be on the Board and have a vote, though the Nonprofiteer prefers a bright line between governors (Board) and executives (staff).  But the simple addition of the ED to the Board roster won’t prevent the scenario you fear.

So what’s to prevent the Board from firing the Executive Director so it can loot the agency’s resources?  Well, the Board has a legal responsibility not to loot the agency, regardless of what the Executive Director says/does/doesn’t say/doesn’t do.  Assuming your agency is a 501(c)(3) charity, this responsibility is laid out in the bylaws and enforceable by the Internal Revenue Service.  So the members of the Board who don’t want to end up making little rocks out of big rocks in a Federal prison will be sure to keep their hands out of the till.

Nothing, however, will prevent the Board from firing the Executive Director for some other purpose, unless you and the Executive Director and any other current Board members committed to the agency’s mission get off your collective duff and recruit additional Board members who will be more than “a Garden Club.”

This is a common problem in nonprofits: people who lament that their Board “won’t do anything” or “isn’t really committed” but who neither train nor replace the current Board members.  No one is born knowing how to be a nonprofit Board member–knowing what the responsibilities are and/or how to discharge them.  Is there really some reason to think that your current Board is dishonest and opposed to the mission, or has it merely not responded to generalized requests for its help, e.g. “You people should be raising money”?

So try the following:

  • Create or activate a Board nominating committee to summarize the agency’s mission and the Board’s role in a piece of paper suitable for use in recruiting new Board members.
  • Decide how many new Board members you want and have the nominating committee go find that many people who are committed to the mission and willing to work on its behalf.
  • Once they’re recruited, schedule a Board orientation for veteran and new Board members alike, including a presentation by the Executive Director about the mission and discussions by you and other active members of the Board about the Board’s role in implementing that mission.

Or, to put it more briefly: the best defense is a good offense.  Don’t wait for the current Board to come after the Executive Director and change the mission; pack the Board yourself with mission-loving newcomers.

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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, Poverty, Public private partnerships, Social Service Agencies, Volunteers/Volunteerism | 3 Comments »

Clout Street in Charityville, and how Illinois’ Senator-designate may be involved

January 8, 2009

It’s probably too late to keep Harry Reid and the rest of the forelock-tuggers masquerading as Democrats in the U.S. Senate from caving to Rod Blagojevich and seating Roland Burris; but here’s a nugget from the Nonprofiteer’s world for them to chew on (H/T Tim Novak and Carol Marin):

As the Chicago Sun-Times reports, a couple of developer pals of the Mayor’s got hold of some prime land near Chicago’s downtown by helping to arrange a new home for its  inconvenient preexisting resident, the Chicago Christian Industrial League, a charity serving homeless men.  And when the move to a new building left the charity in financial trouble–for, like many shiny daydreams before it, the scheme turned out to be a money pit–the group did what any right-thinking Chicago institution would do: it hired the Governor’s wife as a highly-paid fundraiser.  Yes, that would be the same Governor caught on tape trying to sell the President-elect’s Senate seat to the highest bidder.

Could Patti Blagojevich possibly have been recommended for this lucrative gig by Christian Industrial League board member Fred G. Lebed of Burris & Lebed Consulting, when yes, in fact, that IS “Burris” as in “Senator-Designate Roland Burris”?  And could Fred’s doing a favor for Rod’s wife Patti possibly have redounded to partner Roland’s benefit?

Inquiring minds . . .

N.B.:  The Nonprofiteer feels terrible being so suspicious of the people who are running charities and governments in her city and state.  Shame on that wicked Patrick Fitzgerald for making her feel that way.

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Posted in Boards of Directors, Charity scandals, Conflict of Interest, Coverage of nonprofits, Current Affairs, Fundraising, Housing, Nonprofit management, Nonprofits--General, Public private partnerships, Real Estate, Social Service Agencies | 1 Comment »

Funders’ Friday: Now here’s an actual scandal . . .

July 18, 2008

instead of manufactured ones like whether ballet companies are promoting smoking by accepting tobacco money. If the American Psychiatric Association receives funds from manufacturers of psychoactive drugs, might it have an incentive to suggest that those drugs are effective against mental illness? Even when they’re not? So Congress is asking the question.

And before people have apoplexy about government interference in the professions, let’s remember the cardinal rule: Those Who Do Not Police Themselves Will Find Others Doing It For Them.

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Posted in Charity scandals, Conflict of Interest, Coverage of nonprofits, Current Affairs, Disease charities, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Health care, Nonprofits--General, Private Philanthropy, Relations with funders, Uncategorized | Leave a Comment »

Conflicts, whistles and records–oh, my!

May 21, 2008

Once again, Kathryn Vanden Berk reminds us of an important change in the law affecting nonprofits:

In Part VI, the new Form 990 asks if you have adopted three key policies: (1) conflict of interest, (2) whistleblower and (3) record retention and destruction.

The latest issue of her newsletter contains a sample whistleblower policy. An earlier post of the Nonprofiteer’s directs you to a sample conflict of interest policy. Recommendations for a records-retention policy eagerly solicited.


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Posted in Conflict of Interest, Nonprofit management, Personnel Issues, Uncategorized | Leave a Comment »

Dear Nonprofiteer, Should I lend, give or go with the flow?

May 15, 2008

Dear Nonprofiteer,

Have you ever heard of funding nonprofits which have cash flow problems by setting up a line of credit guaranteed by deposits made by the group’s supporters? The supporters put their money into a pool, the equivalent of a CD, and can state the terms (i.e.., 1 year, 3 years, etc.). They get a below-market return on their money, but it remains their money and they can take it out at the end of the term. Meanwhile, the nonprofit has a line of credit to get through the fiscal crunch periods.

It’s a system written about by a husband and wife (Linzer by name). I’m skeptical about the plan. I lose on the interest since it’s below what I get in other similar investments, and I don’t get to write off any charitable donation since it isn’t really a donation. Of course, there’s the possibility of losing the money if the nonprofit goes belly up, but that’s unlikely. I just went on a board and made a donation to the group and now am being encouraged by one board member to do this too. It’s not a plan used by any of the groups I’ve ever worked with. Your thoughts?

Signed, Not Clear Where Credit Is Due

Dear Not Clear:

The Nonprofiteer has just become acquainted with the Linzers’ work, which features skepticism about asset acquisition by nonprofits and a corresponding enthusiasm for their use of credit. Though she agrees with the Linzers that many large nonprofits become overly preoccupied with building endowment–wouldn’t it be better to use those funds to accomplish mission?–she doesn’t share their view that nonprofits should operate without any reserve whatsoever, instead using credit to respond to unexpected demands for cash.

Why? Because credit isn’t free, but it is easy. Even with the below-market-rate interest you describe, it costs money to borrow money. Wouldn’t it be better to use those funds to accomplish mission? At the same time, the availability of credit encourages nonprofits to put off the hard work of matching resources with needs–that is, either reducing costs or increasing revenue. Show the Nonprofiteer a Board able to borrow freely and routinely, and she’ll show you a Board that evades necessary fundraising until the debts are nearly overwhelming.

If the agency absolutely positively knows that the money it’s borrowing will reappear in its account three months from now–say, it has a signed grant award letter, but disbursement won’t occur til September–then it makes sense to use a line of credit to cover expenses, repaying as soon as the grant comes in. But it makes even more sense for the agency to redouble its fundraising efforts so it has sufficient income to operate between grants. Asking people to guarantee a line of credit is NOT a substitute for asking them to donate to your cause. If they care about the institution enough to give it money, they should receive the tax advantage that accrues to such generosity; and if they don’t, there’s no reason for them to make a below-market-rate investment.

Again, borrowing money isn’t free. It has a cash cost and an opportunity cost, namely, the opportunity to ask a prospective donor for a gift–because once you’ve asked him for a low-interest loan he’s not going to give you a gift, too. So while judicious use of credit (to take advantage of opportunities that will lapse if not seized immediately) is something every nonprofit should consider, the Nonprofiteer strongly cautions charities to remember that credit is not a substitute for income. Cash flow is all very well; but unless the cash actually belongs to the nonprofit, in fairly short order it’s going to flow in precisely the wrong direction.

In addition, in the Nonprofiteer’s view members of the Board of Directors should donate money and raise money in support of the agency they govern. They should not become its creditors, because that creates a conflict of interest: what’s good for them as creditors (having the agency devote all its energy to repaying the debt) is not what’s good for the agency, which is all they as governors should be concerned about.

So no, don’t make this investment, and don’t encourage the agency to keep borrowing money. Instead of treating the symptom (temporary cash-flow shortage), work with your colleagues on the Board to treat the cause (insufficient income or excessive expenses)–otherwise the agency will never return to financial health.

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Posted in Boards of Directors, Conflict of Interest, Endowment, Fundraising, Investment, Management Advice Day tip, Mission, Nonprofit management, Philanthropy and Taxation, Private Philanthropy, Uncategorized, Volunteers/Volunteerism | Leave a Comment »

Foundation Friday: “Who pays?” isn’t always the relevant question

April 4, 2008

The story about the lung cancer study paid for by cigarette manufacturers seems to be a familiar one about undue influence by funders, with a familiar moral: "Don’t take money from those wicked tobacco companies!"  But in fact, as our brother blogger (and actual brother) at The Reality-Based Community points out, the real scandal lies in the fact that the author holds a patent on the machine whose virtues the study claims to prove, a fact she failed to disclose and one which would raise questions about the results even if they’d been paid for by Saint Peter.

Often the debate among charities about whose money is acceptable suggests the exchange in Gone With The Wind between Scarlett and Melanie when bordello madam Belle Watling offers a generous contribution to the Confederate hospital: "Oh, we don’t want her money," says Scarlett.  The Nonprofiteer, though otherwise a Scarlett partisan, sides with Melanie on this one: accept the donation and honor the donor, whether or not you approve of how he made his fortune.  She doesn’t notice anyone disdaining Gates Foundation money just because a big chunk of it came from violating the antitrust laws.  As Belle herself says, "You might as well take my money, Miz Wilkes. It’s good money even if it is mine."

Posted in Charity scandals, Conflict of Interest, Coverage of nonprofits, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Health care, Nonprofits--General, Private Philanthropy, Relations with funders | Leave a Comment »

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