January 09, 2011

Every Board’s Guide to Strong Organizational Leadership in 2011

The sluggish economic recovery has led to growing competition for funds, while the government is raising new questions about how charitable contributions are used and which tax breaks should continue. Financial embezzlement and other scandals seem to be on the rise at nonprofits, and the public has shown revulsion toward high salaries and perks awarded to some nonprofit leaders.

Such challenges mean that nonprofit trustees need to be more active than ever in their oversight. They don’t mean that the board should abandon its focus on advancing a charity’s mission or should assume the mantle of management. But here is what a savvy board will do as part of its 2011 agenda:

Focus on the long view. Besides satisfying basic fiduciary requirements and attending to critical issues of the day, boards must devote a lot of time to dealing with principal strategic challenges and opportunities.

Proper board stewardship requires a balance between dealing with near-term issues and preserving long-term organizational viability. This means avoiding the temptation to micromanage. Board attention must not be diverted by urgent tactical and daily issues from the need to apply a “big picture” perspective.

Follow the competition. Strategic planning must acknowledge the increasingly competitive environment for nonprofits.

Board members should be aware of a nonprofit’s principal competitors and work to protect an organization’s intellectual property, such as its logo, donor lists, and brand slogan.

Employment contracts with key executives should contain clauses that prevent officials from disclosing information that competitors could use to harm an organization.

When affiliates seek to disrupt operations, it’s important to deal with the issues before they fester. The board should work actively to preserve the organization’s “brand.” Basic organizational and operational data should be readily available to donors and constituents.

Keep an eye on potential risks. The board as a whole (not solely a committee) must commit to a practice of identifying, evaluating, and managing risks of all kinds.

That is particularly important given the volatile economic environment and the uncertain future of tax breaks for charitable contributions. Organizations should figure out what their appetite for risk is, especially in light of their legal duty to be prudent stewards of funds provided by the public.

Avoid conflicts of interest. Regulators, the news media, and the public are increasingly less tolerant of ethical lapses at charities, or even the perception of missteps.

Boards should place greater emphasis on seeing that their members, as well as a charity’s top officials, are making adequate and timely disclosures of potential conflicts of interest and that no inappropriate conflicts arise from relationships between board members or from nonfinancial arrangements involving trustees and the charity.

The appropriateness of arrangements in which board members provide services—such as accounting help or legal counsel—should be re-evaluated.

It’s not just legal rules that need to be considered but also the appearance of conflicts that could harm an organization’s reputation. Boards need to make sure their decision-making process is insulated from any inappropriate partiality.

Consider term limits for board members. Trustees should conduct a thoughtful discussion about the appropriateness of term limits and mandatory retirement. In an extraordinarily challenging environment for nonprofits, the advantages of preserving experience, effectiveness, and seasoned perspectives must be balanced against the risks of entrenchment, stagnation, and excessive familiarity with an organization’s managers. Even in sensitive circumstances, don’t be afraid to offend board members who are not up the task.

Review board structure and size. Boards must examine whether the new economic challenges mean they should change the size of their boards, their composition, or the use of committees.

In particular, they should avoid delegating too much to the executive committee; everyone on the board has a duty to protect the organization’s interests. Members should also challenge traditional assumptions about governance structure and consider alternatives that offer increased oversight, efficient processes, and diversity of perspective. Screening processes to nominate new members should concentrate on candidate qualifications, time commitment, independence, and fitness to serve.

Scrutinize executive compensation. Boards should anticipate the potential for the news media, regulators, and supporters to become concerned when they learn about retirement and deferred-compensation arrangements that were approved before the recession. These will become public in the coming year because they must be disclosed on the informational tax forms many organizations are now submitting to the Internal Revenue Service.

Some arrangements that may have made sense before the economy soured may now seem excessive. Board committees in charge of compensation issues should be aggressive in their re-evaluation of these arrangements and shape the organization’s response.

Trustees should check that compensation deals were reviewed by people who showed no favoritism to particular employees. They must also have followed federal regulations that require charities to look at what comparable organizations pay their top executives.

Examine fund-raising practices. Board members must increasingly play a role in making sure their organizations are good stewards of donations. That means complying with both a contributor’s demands and the law.

In some cases, charities may be able to modify a donor’s restrictions, given the changing circumstances caused by the economy, but in general board members must make sure that supporters’ intentions are carefully followed.

Trustees should also make sure their organizations follow state and local solicitation laws. Because of heightened competition for charitable contributions, and increased attention by regulators and others to how endowments are used, boards should make sure they are complying with the key laws, especially the Uniform Prudent Management of Institutional Funds Act.

Make sure audit committees are doing their jobs. The transitional economy, plus new regulations and increasing incidents of fraud against nonprofits mean that audit committees have far more serious duties than they did in the past.

Boards should ask if the audit committee has too much on its plate. Special care should be taken to protect the audit committee from becoming a “dumping ground” of duties and tasks. The board should work with leaders of the audit committee to evaluate the need for change in the best interest of the board’s audit oversight function.

Quantify how much of a difference your organization makes. Given the looming national discussion about deficit reduction, charities will be under pressure to justify their tax subsidies. As a result, the board should lead internal efforts to quantify just how much of a difference the organization makes to society. Does it truly relieve the burdens of government?

Boards should be sure everyone is following the same strategic goals and working toward the same mission. It’s wise for boards to periodically make sure they are not accepting gifts from donors that would be inappropriate given the organization’s mission (health charities might want to avoid gifts from alcohol companies, for example) and that they understand how dollars are spent to advance the organization’s mission.

Such steps will make it easier to argue that an organization—and those like it—deserves charity tax status and all the benefits that come with that designation.

What this all means is that board members need to watch out not just for red flags but for the yellow ones, too.

The subtler warning signs of trouble abound at any large and complicated nonprofit, no matter how well run.

And while most board members are passionate about focusing on the cause their organizations promote, they must recognize that their aggressive role in oversight will help to preserve and expand the ability of their nonprofits to serve the public interest.


Michael W. Peregrine is a lawyer at McDermott Will & Emery, in Chicago, where he advises many nonprofit organizations.