February 08, 2011

Why State Officials Step In to Clean House at Nonprofits

One of an attorney general’s main responsibilities is to step in when a nonprofit’s leadership fails.

We do whatever is needed to preserve the organization’s ability to serve its community.  At times, we need to act aggressively to make sure an organization that is vital to its community continues to fulfill its mission. This happens more often than most nonprofit directors and executives probably realize.

What it often boils down to is this: Sometimes we need to clean house. My favorite example of what can happen involves a case I pursued awhile back against an animal shelter in Missouri.

This shelter was quite important to its community. It was the only shelter in town and one of only three in the four-county area it served. It also had a stunningly beautiful donated campus whose size was measured in acres. But a few years ago, it dissolved into chaos.

We first got complaints about the shelter’s extremely poor financial practices. The board had no financial controls. There was a fair amount of cash in the shelter that was never documented or put somewhere secure. The treasurer’s bimonthly report to the board was usually that day’s bank-account balance written on the back of a torn envelope. Audits and financial statements didn't exist. The predictable financial difficulties were jeopardizing the shelter’s operations and its beautiful campus.

The shelter’s animal care was even worse than its financial controls. The shelter suffered outbreaks of kennel cough and parvovirus at much higher rates than normal.

The high outbreak frequency was due to poor animal care including inadequate kennel cleaning and quarantines and a lack of frequent veterinarian visits. A few volunteers became so concerned with the shelter’s euthanasia rates, they staged what amounted to clandestine operations to save a few animals.

Then the most shocking allegation was proven true. The shelter’s executive director admitted on a local evening news show that he had put kittens in a freezer to euthanize them.

After our initial inquiries were rebuffed, the state sued every director and officer of the organization.

After some legal posturing, two colleagues and I sat down with the board to discuss the shelter. In the end, the executive director and two-thirds of the board resigned.

The remaining board appointed new members, found a very capable new executive director, and carried out a detailed overhaul plan both sides had drafted for a court to approve.

Through the efforts of its new board and executive director, the shelter is now the resource to its community that it is supposed to be.

What is important to recognize is that the real changes took place after the board met with the attorney general’s office.  Such meetings are much more common than most nonprofit executives and directors understand.

Except for the sensationalistic animal-care issues, this was not an unusual incident.

Charity regulators understand that if word of our investigation spreads, an organization’s fund raising could be harmed.  Thus, we prefer to handle these matters with little fanfare (although, if an executive director gives an interview to local TV news, there is little we can do).

Many nonprofit executives and directors have found themselves sitting across the table from a regulator who wants to know just why, exactly, the nonprofit they oversee has stopped serving its community.  And a few of those directors could have to resign, or worse.

To avoid these meetings (and the possible consequences), nonprofit board members and executives must abide by the easy-to-articulate but occasionally hard-to-follow principles of fiduciary duty:  Make sure your nonprofit is doing what it is supposed to do, and always make sure you have enough information to guarantee that. Always ask questions, demand answers, and never stop pushing your organization to excellence. Otherwise, you may get to meet with us.