An Ounce of Prevention

Posted by Laura Otten, Ph.D., Director on November 15th, 2013 in Thoughts & Commentary

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Recently I was asked by an attorney to be an expert witness in a case for his client, a nonprofit’s board of directors that was being sued by a former board member.  This ex-board member accused the board of neglecting its financial oversight responsibilities thereby allowing an employee to embezzle almost three-quarters of a million dollars.  Additional claims also were related to the board’s failure to do its job.

This was not my first introduction to this organization.  Seven years ago, a now former board member called asking for our help in building a stronger board and a board that understood its roles and responsibilities.

At that time, the organization was being run like a mom and pop shop.   Bylaws were not being adhered to, policies were non-existent, finances were totally staff driven and “overseen” and fundraising was virtually non-existent.

This one board member recognized that both the board and the organization needed help.  Despite repeated efforts—we wrote a contract, the organization signed, meetings were held, some progress was made, but then the work just stopped.  The organization just lost interest.  Three years later, they were back, asking for our “best practices in board governance” specialized board training.  Their willingness to do this seemed like real progress.

The board membership was basically the same and its functioning hadn’t improved.  We did the board training, submitted our suggested list of recommendations that required attention. Several times in the ensuing years, the now former board member would reach out to me with a question, a statement of her dissatisfaction with board activities and concerns.  As the saying goes, “you can lead a horse to water…”

After not having heard from them in a while, I get the lawyer’s call.   He explains the situation, asking if  if he really needs an expert witness.  After all, he says, this isn’t a “professional board” so what can they be expected to know or do; they are only there a couple of hours every month.  It’s not as if they get paid to be board members like some big nonprofits do.  So, what could they really be expected to do?  And is it really that bad that they didn’t do an audit for three years?

Something told me this attorney didn’t have a lot of nonprofit expertise.  So I explained that Pennsylvania law requires that nonprofits with annual contributions of $300,000 or more must file audited financial statements with the state.* The attorney hired to defend this board against alleged wrongdoing didn’t know about that state law!  He assumed that what was expected of a board depended upon how large the nonprofit was and whether the board members got paid or not.  Then I proceeded to tell him that he didn’t really want me as his expert witness as I would absolutely say that the board failed to exercise its fiduciary responsibilities, and then some.  There went my budding career as an expert witness.

Unfortunately, much of this story isn’t new to me, although not all end in the devastation of an organization and its mission.    A board member, or even several, is concerned that things aren’t quite right, the board isn’t doing what it should.  Maybe they convince the rest of the board to bring in an expert and learn what should be happening.  But to make the needed changes is a lot of work, … and is it really that wrong,  … and nothing get done.  Until something hits the fan in the form of a leak to the media, or a disgruntled staff member or, horrors of all horrors, one of our own—a fellow board member.  And by then it is too late.

There are lessons to be learned from this that any and every nonprofit should heed.

  • When one person says there is a problem—persistently, over time—there probably is a problem.  It may not be as bad as the person claims, and it may be worse; but to ignore this alarm is to risk great harm to your organization.
  • Board members, executive directors, staff of nonprofits:  you aren’t putting on a backyard play; you are engaging in a serious business.  Take that responsibility earnestly, regardless of whether you are making a competitive salary, earning nothing or something in between; or, get out of the way and let those who will take it seriously do so.
  • Individual board member, you have an obligation to know what is expected of you and of your organization. When you agreed to join a board, you agreed to undertake this volunteer job, albeit, an oxymoron.  You must treat it with the care and seriousness you would any paying job.
  • Boards, you have a responsibility to educate new board members to both the organization and the job of being a board member.  Additionally, you must provide on-going education and professional development to the full board.
  • Yes, there are laws and regulations that govern nonprofits:  how its board is supposed to comport itself; when you must do compilations, reviews or audits; when you must register if you wish to fundraise; when you must file an annual report, and on and on.  Nowhere in the United States is ignorance of the law ever a defense.  It is our responsibility to know.
  • When you hire professionals – lawyers, accountants, marketers, etc. – to help you achieve your goals, hire those who know and understand the nonprofit sector.  If your dog is sick, you don’t go to take the dog to a veterinarian who specializes in horses.  Why, then, would you hire a lawyer to defend you who doesn’t understand your business.  Contrary to what the lawyer who called me thinks, all nonprofit boards have the same job to do and are expected to do it with the same exactitude and accountability.

Knowing how essential it is for a board to know its true roles, responsibilities and liabilities, we offer our best practices in board governance program for free to MemberPlus members of The Nonprofit Center.

It’s no surprise that I am deeply saddened when I learn about such egregious betrayals of trust as that alleged against this former employee.  But to know that her crime was preventable by having a board that did its job – a board that was clearly informed of its legal and ethical responsibilities but chose to ignore them – adds to the tragedy.

*Twenty-five other states and the District of Columbia also have similar requirements, though the dollar threshold varies state to state.  Here’s a state-by-state list of requirements.  

The opinions expressed in Nonprofit University Blog are those of writer and do not necessarily reflect the opinion of La Salle University or any other institution or individual.