CONTAINING NONPROFIT FRAUD: The Board Problem
by Gary
Snyder
I am initiating a series of articles about possible solutions for the
epidemic in nonprofit fraud. It may serve as a kick-off for further
discussion. This is the initial take:
The problem: The Internal Revenue Service, academics, public officials,
charity watchdogs acknowledge that nonprofit fraud is a snag in the
trustworthiness of the sector. The story of malfeasance has been central
to recent American charity history. With no well-defined owners or overseers
there has been no interest in developing counter measures to abuse. Because of
so few outside constraints, charities tend to believe that they are only
accountable to themselves. This has proven to be a recipe for disaster.
___________________________
We are in a
major crisis in philanthropic leadership and the board is at the center. Boards
have the legal duties of care, loyalty, and obedience. They are required to be
responsible stewards of the charitable assets. Typically by law, they have the
legal duty to represent the best interests of the stakeholders. Everything is
ultimately the board’s responsibility.
Boards in most instances are
well- intentioned, but have done little to prevent ongoing scandals that have
cost the sector of billions of dollars and considerable trust. Because boards are typically
self-perpetuating, change does not easily take place. Boards must begin to take
a more active role in decision-making, ensure that the organization’s resources
are used wisely, and see that the mission is fulfilled.
Lack of effective board
leadership is systemic. The BBB Wise Giving, a watchdog organization, listed
inadequate board activity at the top of its list of standards that charities
most commonly fail.
People in leadership roles solely
want consensus and to avoid making waves. It is a perfect model that makes it
impossible to lead in any environment.
Nonprofit boards
are moving from a minimum standard of what they should do to one in which the
major criteria is the embarrassment that it can tolerate when they see an
investigative reporter writing an article about their agency.
One of the
primary qualifications of board members is to fit in, according to a 2002 Texas
University study. The major reason for staying on a board seems to be to
maintain linkages for social or economic reasons and lastly to give back.
Agencies at the
local, state and national level have boards that have a certain kinship to the
mission of the agency. Although some of those that are most affected by their
decisions are sitting at the table making the decisions, those most affected
are the beneficiaries of the mission of the agency are not.
Retention and
recruitment are both significant problems and significantly problematic. In his
article, Serving Time…on Foundation
Boards, John Barkhamer notes that in the mid-2000s there were numerous
foundations that retained board members who have been accused or convicted of
committing corporate fraud. These selections point to personal relationships
superseding objective decision-making and accountability.
Recruiting board
members is truly a problem. An Urban Institute study showed that seventy
percent of nonprofits are having difficulty recruiting and 20% are finding it
very difficult. With collegiality and passivity prevailing, attempts at change
and thoughtful decision-making are almost nonexistent.
Collegiality
also trumps independence on boards. Those that exercise independence are often
ostracized and isolated. They are the very directors that a charity needs
most---they are strong, experienced and diligent and will often ask tough
questions and represent the stakeholders’ interests. Unfortunately, these
marginalized independent thinkers typically will resign, fail to be
re-nominated or become frustrated.
Dysfunctional
organizations are not helped because a quitting director leaves the problem in
place. A climate has often developed where the board members that do not rock
the boat have an advantage. The truth is that a board member has more to lose
than gain by bucking the system. Board members are there to bring fresh, new
ideas or challenge old ones, but they are embarrassed or afraid.
To exacerbate
the problem of quality boards, members are exiting because of legal exposure. Many
do not want to be involved with legal entanglements such as the ten directors
at Enron and the members at WorldCom. The directors at Enron agreed to pay a
total of $13 million and at WorldCom the directors were forced to pay $24.75
million. In the charitable sector a few federal cases (Doulgeris v. United States, Verret
v. United States) held board members and executives liable for misuse of
money that should have been remitted to the government. These cases raised the antennae of some attorneys
whose firms have stopped participation on charity boards.
Boards are
blatantly ignorant and do not the set the ethical tone necessary for a sound
organization. In a study by the Ethics
Resource Center, only about 13% of nonprofit employees believe that their board
of directors set an ethical tone. They are inattentive and woefully
short on relevant financial background and are not up on the new nonprofit
rules.
Board members
know little about the charitable industry.
The deficit of knowledge is staggering: according to a Philanthropy
Awareness Initiative survey, 62 percent can not even name a foundation on their
first try. They lack initiative, diligence or independent thought and fail to
even question the most basic elements in making a decision.
With the job of
a board member increasingly unattractive to many capable people, the resulting
membership is weaker, less informed and less committed. As a consequence, the
board is stocked with fainthearted, acquiescent and uninvolved members.
Boards are
elected to monitor, advise and direct the managers who run the agency. They
have the fiduciary duty to protect the interests of stakeholders. Few do so, so
as to not antagonize the executive.
Boards are asleep
at the switch. Some have said that the switch has been turned off by lax
enforcement as well of lack of information provided by the executive. Being on
multiple boards may tire them, as well. This
raises questions about whether there is a commitment to oversee the complex
charities to which they were entrusted to lead.
(next: Board Solutions)
Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however.
Cites in various media:
Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more
Nonprofits: On the Brink (2006)
Silence: The Impending Threat to the Charitable Sector (2011)
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