CONTAINING NONPROFIT FRAUD: The Board Problem

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)