On January 29, 2013, from 2 – 3:30 pm I will present a webinar titled “Board Culture: How to Prevent a Shift in the Wrong Direction” in collaboration with BoardSource.
Using a “hypothetical” case study, this 90 minute low-cost webinar will offer an interactive format which invites the participants to consider legal, management, and ethical issues confronting their nonprofit’s board of directors.
Click here for more information and to register for the webinar.
“Bond—James Bond!”
Those words from the movie Dr. No introduced me to spies. (Dr. No also introduced Ursula Andress, but that’s another blog.) A summer visit to Washington, D.C.’s International Spy Museum provided a fascinating look at spies and their history, tools, and techniques. Their “Ground Truth Theater” discussed the 21st century challenge for spies to provide decision makers with unvarnished and objective facts.
The geospatial intelligence exhibit displayed satellite and high-tech intelligence gathering techniques then unavailable to James Bond and “Q”. But data gathered from spy satellites must be reconciled with what literally and simultaneously occurs at ground level to be credible. This factual and objective confirmation and reconciliation of multiple perspectives describes the concept of “ground truth”.
Wikipedia suggests the military’s slang definition migrated into current scientific usage. Military slang defines ground truth “to describe the reality of a tactical situation as opposed to what intelligence reports and mission plans assert the reality to be.” A foot soldier’s view differs markedly from a general’s. Both are needed!
Spies seek to secure early, objective, and actionable data for decision makers without direct access and far removed in time and place from a spy’s sources. Decision makers use this information to confirm, deny, test, and modify underlying assumption(s); learn; and, hopefully, make better informed decisions.
As deliberative bodies juries and boards require ground truth to work. Jurors decide based on relevant facts and conflicting interpretations about their significance. Successful trial lawyers learn to anchor their case on unquestioned and irrefutable objective facts. When facts are accepted as true, a jury evaluates the litigants’ conflicting interpretations for legal significance and meaning. When rendering their verdict, a jury establishes the case’s ground truth.
Boards of directors must determine their organization’s ground truth. They lack in-depth knowledge derived from daily operations compounded by the quality and timeliness of board information and members’ preparation for and substantive engagement at meetings. Designed with packed agendas, sole reliance on staff, and social functions members may be distracted by their personal concerns. Board members don’t run their own business or personal lives based on a few meetings lasting several hours a year. Yet this is how boards govern.
Ground truth should guide board decisions. With access to timely and unfiltered data members first form their assumptions based on ground truth as they understand it. But members must then test them openly and explicitly through a healthy board’s hallmark of give and take discussions.
Boards have implicit and explicit expectations. When ground truth conflicts with expectations, the gap between expected and actual results, whether positive or negative, should facilitate the nonprofit’s examining it underlying assumptions and theories of change. Failing to engage in this analysis or take timely action may have adverse effects.
Conflict often arises when challenging assumptions (“sacred cows”). A board’s social nature may seek to limit, if not eliminate, conflict engendered when members assert fundamental differences. Boards may ignore or, worse, affirmatively shut down or eliminate dissenting members, thereby creating a perilous “group think” phenomenon! Dissenting views often should be heeded, but particularly when based on ground truth.
Fostering a board culture designed to test assumptions establishes healthy dialog when board members’ differing views emerge. This is why boards meet. Through critical analysis and discussion, their decisions should seek to reflect ground truth. Otherwise, their ability to confront reality and implement change diminishes. As the saying goes, “denial” is not just a river in Egypt.
What if the Raleigh, North Carolina YWCA timely addressed multiple years of operating in the red instead of closing abruptly without notice and then filing for bankruptcy? What if Penn State University and the Second Mile boards addressed their painful ground truth earlier?
They are today’s headlines. Their legacy serves as a warning beacon for boards to seek ground truth no matter how painful and act accordingly.
Boards built on ground truth will persevere, survive, and ultimately thrive more readily than those built on the gossamer of opinion, feelings, and influence untested and unchallenged by ground truth.
How willing is your board to seek “ground truth”?
The decision to close a nonprofit challenges a nonprofit’s board and stakeholders. What experience have you had in closing down a nonprofit?
Click to read my Philanthropy Journal article “Closing Down the Nonprofit” which outlines several ways by which a nonprofit may close its doors.
The IRS Advisory Committee on Tax Exempt and Government Entities (“ACT”) issued its eleventh “Report of Recommendations” at a public meeting recently held at the IRS headquarters in Washington, D.C. The ACT consists of legal practitioners, external stakeholders, and representatives who advise and work with employee retirement plans; tax-exempt organizations; tax-exempt bonds; federal, state, and local government; and Indian tribal governments. The IRS Tax Exempt and Government Entities Division (“TEGE”) oversees all of these areas. There are separate ACT subcommittees for each area. ACT members are appointed to serve on a subcommittee based upon their expertise. I serve on the Exempt Organization’s subcommittee (“EO”) which includes all nonprofit and tax exempt organizations.
The EO subcommittee reviewed the current IRS Form 1023 “Application for Recognition of Exemption Under Section 501 (c)(3)” form and application process. Titled “Form 1023-Updating It for the Future” the EO subcommittee’s report made six recommendations which are:
The EO subcommittee believes the IRS will undertake to address and implement each of these recommendations over time.
Nonprofit clients generally only want to know what they can or cannot do. They seldom ask about the history which often explains current nonprofit laws and practices. However, understanding the history of modern philanthropy is invaluable for providing context.
Philanthropy in America: A History provides the nonprofit practitioner with a history and framework for how American philanthropy evolved during the 20th century. Written by Olivier Zunz who is the Commonwealth Professor of History at the University of Virginia, the book covers many of the major themes, issues, and personalities shaping this sector as philanthropy emerged from its historical roots in religious and individually based philanthropy to encompass the sector’s now familiar corporate structure and related tax law.
Philanthropy and the nonprofit sector contribute daily to development of democratic ideals at home and abroad. Zunz’s book helps the reader to appreciate how the interaction among and the impact of personalities, policies, and practices affect modern philanthropy. The impact over time of competing philosophies and ideas provides a perspective for today’s evolving political and cultural discussions. While the book’s focus is on the emergence of the American philanthropic experience, Zunz also addresses how American practices have shaped philanthropy internationally.
For the practitioner interested in an easy to read history of modern philanthropy, Philanthropy in America: A History by Olivier Zunz provides a source to better understand the vibrant nonprofit sector and a useful reference for one’s library.
On April 22, 1970 the first Earth Day initiated significant awareness about environmental sustainability which encompasses a product’s full life cycle impact on the environment. Although Earth Day’s intial effect on business was minimal, this post describe how public and private companies are using sustainability and public benefit as a competitive advantage and requiring their boards to integrate these considerations into their board governance.
How Earth Day’s long term impact has changed! Walmart’s current Director of Sustainability recently discussed their company’s integration of sustainability for their global suppliers and supply chain and Sustainability Index. The grocer Whole Foods announced it will stop selling fish caught in ways that were not sustainable or by “ecologically damaging methods”on Earth Day 2012. Privately owned Patagonia converted to a public benefit corporation.
Historically financial cost/benefit analysis didn’t integrate the full cost of a product’s life cycle. Information about externalities may not be captured in accounting systems or integrated into a board’s understanding of their company’s impact which now often encompasses economic’s “tragedy of the commons”.
In Ecological Intelligence Daniel Goleman states “we are collectively enmeshed in activities that inexorably endanger the ecological niche that houses human life.” He describes “radical transparency” as the means that “converts the chains that link every product and its multiple impacts…into systematic forces that count in sales.” Though currently beyond business’ comfort zone or legal requirements, he argues it “offers a way to unleash the latent potential of the free market to drive the changes we must make, by mobilizing consumers and executives’ use of data to make more virtuous decisions.”
Both companies engage in his radical transparency. Using simple color coded ratings (e.g., red, yellow, and green) they help customers make an informed decision at the point of purchase. Based on continuous substantive data measurement and analysis for a product’s life cycle impact, the coding also integrates a product’s cost structure to use markets to address sustainability and global problems.
These initiatives reflect their potential and power as competitive business strategies. They incorporate data with an understanding among their ecosystem and network relationships and link an individual’s choices to business’ social responsibilities extending beyond just shareholders. Businesses function as a knowledge based intermediary with responsibility for their impact more clearly defined and accessible to the community.
Both companies enhance their own competitive advantage by altering the competitive landscape for others to be successful. Walmart’s experience suggests this model creates a virtuous cycle providing social benefit to the community and financial returns to stakeholders As Walmart’s director succinctly stated “their mission is to save people money so they can live better.” Doing well now means doing good.
This paradigm presents a significant competitive challenge and opportunity for leadership and management. Their decisions shouuld be based on integrity and ethical behavior throughout their systems. Transparency serves as a self reinforcing loop for continuous learning among boards, management, and consumers. It also serves as an enforcement mechanism. Unethical decisions and shortcuts increasingly should not be rewarded in a global marketplace.
Benefit corporations and L3Cs require their board of directors and management explicitly to define their public benefits as integral component of board governance. They require public benefit officers and annual public benefit reports as a legal requirement. Currently, these are voluntary practices for a board of directors.
But what if publicly traded corporations with Walmart’s or Whole Foods’ scale also converted to become a benefit corporation like Patagonia recently did? Public benefit with measurable outcomes reported in their annual benefit reports becomes a core competency required for a board of directors. This may result in positive outcomes for communities and companies, as well as influence how boards of directors govern and manage their organizations.
During a discussion on nonprofit “mission statements” toward the end of the day’s presentations, a conference attendee stood up to leave early in order to prepare for the group’s evening social hour. She announced there will be “beer and beads on the balcony” at their New Orleans’ hotel on Bourbon Street. Her comments were instantly understood and readily approved by the group including this speaker. The group’s proposed social activities were consistent with New Orleans’ culture and traditions. Though unintended, her off handed statement clearly expressed the power of a nonprofit’s well crafted mission statement.
“Beer and beads on the balcony.” Her phrase
All in six words! Can your organization similarly express its mission in just six words?
In Leadership on the Line, the authors Ron Heifetz and Marty Linsky use the metaphor of the balcony to argue “the only way you can gain both a clearer view of reality and some perspective on the bigger picture is by distancing yourself from the fray.” For them the critical point is “When you observe from the balcony you must see yourself as well as the other participants. Perhaps this is the hardest task of all–to see yourself objectively.”
Too often boards are mired in their organization’s details. They miss the big picture implications for their organization. The latter requires them to take time to “go to the balcony”. This view enables them to observe and comprehend the players and their patterns of activities occurring around them. But then they can’t just stay on the balcony. They must then reenter the fray to be effective. Alternating between these two perspectives often challenge leaders and boards.
While I don’t know whether a Bourbon Street balcony inspired the authors’ metaphor, leaning over the rail and tossing beads to those passing below brought to mind their counsel. Effective leaders and boards must simultaneously be part of what occurs on the street and objectively understand the larger context in which their organizations operate.
How capable is your board of alternating between the balcony and the street?
Pick a nonprofit scandal. Generally a lawyer served on the board of directors. When reading about nonprofit scandals, my question is “Where was the lawyer?” It often appears they were absent as a board member and a lawyer.
During a recent CLE program, I spoke on lawyer’s legal and professional responsibilities using the example of a troubled “hypothetical” nonprofit. While lawyers have legal training and experiences, they should understand their responsibilities and limitations serving as a board member.
Lawyers typically are recruited to a nonprofit’s board for two reasons. They are expected to provide free legal services and to raise funds.
During my presentation I asked: “Who liked to provide ‘free’ legal services?”
Few lawyers raised their hands. Not surprising since most practice law for their livelihood. Yet charging for their services during or after serving on the board may be problematic.
When asked “How many liked fund raising?”, none raised their hands. Few board members do!
Writing this blog raised a third unasked question: “How many marketed their services to the nonprofit’s board members and stakeholders?”
Likely many would have raised their hand including me. That’s what I sought joining my first board. I didn’t foresee how my experiences might lead to my current practice and this blog. But I digress.
Boards are responsible for managing the corporation’s affairs. Board members function as leaders and managers with specific legal duties to the corporation and its stakeholders. They are a political participant in the board’s decisions. Other board members generally consider their advice as if a client in the lawyer client relationship despite the lawyer’s disclaimer if given. Yet this professional relationship does not exist in the board context.
Further, the lawyer/board member may lack the requisite competency or knowledge; professional independence; or ability to fulfill ethical responsibilities to a lawyer’s detriment. Many seminar participants did not realize neither their malpractice insurance nor their D&O liability coverage may insure them for advice rendered while on a board.
Today’s nonprofits require professional expertise specific to the nonprofit sector which many lawyers lack. Few lawyers have nonprofit training nor even fewer have an MPA degree with a concentration in managing nonprofits.
Nonprofits should use and budget for legal services with nonprofits as a core competency. As a proactive advisor, legal services are always less expensive than “after the fact” damage control!
There is a simple solution for a lawyer. Choose your role!
If a lawyer wants to provide legal counsel, don’t serve on the board. If they want to serve on the board, then don’t provide legal advice. A simple choice, but one which a lawyer should make.
Donors and others often want to know whether an organization:
Recently, the IRS established a new webpage called “Select Check”. “Select Check” provides the user the ability to obtain this information about an organization’s current status.
Public Funds Bring Increased North Carolina Nonprofit Transparency
Effective October 1, 2012, North Carolina nonprofit corporations receiving more than five thousand dollars ($5,000.00) of public funding within a fiscal year from any local, state, or Federal government shall disclose their latest annual financial statements upon written demand from any member of the public. Public funds include grants, loans, and the value of in-kind donations from these government entities.
The information to be disclosed include:
Corporations may comply by:
(a) posting the report on their website along with copy of the most recent IRS Form 990, 990 EZ, or 990N;
(b) having materials posted on a third party website (e.g. Guidestar) which does not charge a fee to access the website if the North Carolina corporation provides a link on its public website to this third party website.
Corporations excepted from this filing include those required to file reports with the North Carolina Medical Care Commission, Local Government Commission of the Department of State Treasurer, and private colleges as defined by North Carolina law and required to report to the State.
A problem with a third party website compliance is these websites may not list the most current 990 form on the website. Many in the public still do not know about or regularly use these public third party websites. Further, advanced analysis or historical date may require a paid subscription.
The IRS requires a tax exempt entity upon request to make available to the public its current and preceding two IRS Form 990 for examination. A nonprofit complies when the 990 are posted on its public website.
Missing from this legislation is the requirement that nonprofits post their financial reports on the public websites when they don’t receive public funding. Nor are there any substantive consequences if a nonprofit does not comply in a timely manner or at all to a written request. Both issues can easily be remedied by amending the statute.
Increased transparency can also be improved if private funding entities (e.g. foundations or large donors) require a nonprofit to post this information on their website as a condition to receive their funding.
Nonprofit boards of directors and their senior management engaging in best practices will create and maintain a current “Governance Page” on their public website. This page will include current and historical financial information, as well as other relevant information about their nonprofit’s operations to enable the public make better informed decisions about them.
Transparency for nonprofit organizations is no longer optional.
If nonprofits aren’t transparent, donors, investors, the public, and government funding entities may be well justified in their concerns and skepticism about the nonprofit’s operation and how their funds are managed by a nonprofit’s board of directors and senior management.
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