7 Red Flags Board Members Should Watch For

Each time the media exposes a nonprofit organization for some ill deed, either accidental or by design, people often react with, “Why didn’t the board stop this?” or, “How could the board not know what was happening?”

I’ve touched on the idea of excessive spending in nonprofit organizations before, and you can find plenty of incidents of excess with no more effort than a Google search. Wounded Warrior Project is one high-profile example that has gotten significant attention in recent years. The New York Times reported that former Wounded Warrior Project executives built the behemoth organization, which raised $372 million in 2015, using a business model based on for-profit companies, like Starbucks.

That sounds reasonable. I often spotlight the necessity for nonprofits to do exactly that—run their finances and programs with as much strategic planning and fiduciary oversight as a public, for-profit company. There is a big difference, however, between investing in marketing that will spread the word about your mission and flying across the country for a short meeting with your own boss, who you could have talked to by Skype for free. In an industry where funding for your actions comes from philanthropic gifts, showing some restraint in spending decisions is advised.

Not all incidents of mismanagement or accidental mistakes in oversight are as egregious or on as large a scale as Wounded Warrior Project’s alleged improprieties. We'll focus on smaller nonprofits and less-noticeable potential breaches here.

According to National Council of Nonprofits, when people join a nonprofit board of directors, they agree to conduct prudent use of assets, make decisions in the best interest of the organization, and ensure that the organization abides by applicable laws and acts ethically.

It can often be difficult for board members to do this, however, because in most instances they must rely upon staff reports for information. See the catch-22 in that? Board members trying to keep an eye out for financial mistakes or potential misuse of funds on the part of staff must rely on reports from staff to glean the information.

Let me say here that the majority of nonprofit professionals are just that, professional. They strive to ensure that the organization delivers upon its mission and properly stewards donor investments. But staff are often overworked and underfunded, and may not seek out education that would keep them up to date on changes in regulations.

It's up to the board to partner with executive staff to make sure a plan is in place for continuing education. Not paying for training may result in thousands of dollars in fines, or the loss of 501(c)(3) status simply because the staff didn’t know about a certain regulation. Federal and state governments, and nonprofit watchdogs, don’t take ignorance of a regulation as an excuse for not following it. It is up to each nonprofit to stay informed.

So, what red flags can board members look for to help spot areas in need of attention? There are many, but here are a few things that can have a big impact:

1. Policies and procedures. Do board members know them, and have they read and approved them? These include personnel, emergency planning, social-media use, gift acceptance, Sarbanes-Oxley compliance, etc. If the board doesn't know the policies, why not? Is it because the policies don’t exist? Or is it because they just have not been shared recently with the board? For example, is the organization ready for the new overtime regulations that are scheduled to begin in December?

2. Board makeup. Are the appropriate people on the board? Is it the right number? Are there any conflicts of interest?

3. Board meetings. Are board meetings held in a way that is compliant with by-laws? Do executive staff (or management staff, if there is not an executive layer under the executive director) attend the board meeting? If not, why not—and how does the board receive information from the functional areas those staff executives or managers represent? Is the board consistently getting information from only one source?

4. Financials:

• Are the appropriate financial reports sent in a timely fashion, and are they reviewed so that everyone understands them during board meetings? (Many community foundations offer classes on reading nonprofit financials, if there are members who could benefit from such education.) Are there any accounting processes that only the person in the finance department understands? Are any financial reports consistently missing, late or inaccurate? Is there an audit committee of the board of directors?
• Does the organization have both organizational and departmental budgets, and can board members request and receive reports on those budgets in a timely way? Are there more than or fewer than three months of operating reserves?
• Are there appropriate processes for check or purchase requests and authorization? Is the organization sending the appropriate financials to necessary funders and regulators by deadlines?

5. Program. Are there required delivery, tracking or reporting guidelines based on what vertical market the organization is in (e.g., health care, children’s services, domestic abuse aid)?

6. Staff turnover. Is staff turnover higher than or lower than the industry average for comparable positions? If higher, is the organization conducting exit interviews and acting upon that information, if possible?

7. Fundraising solicitation:

• Is the organization current on its 501(c)(3) registration with the IRS, registered with the state in which the organization is based, and in compliance with appropriate regulations?
• Does the organization solicit nationally, even if it is online? If so, is the organization registered to solicit funds in each state it touches?
• Does the organization adhere to the Donor Bill of Rights and Code of Ethical Standards, including areas such as donor privacy?
• Are appropriate steps in place to ensure that a single person is not in charge of opening mail, processing gifts, doing the bank deposit and creating acknowledgement letters?

The list could continue. Keep in mind, there are numerous functional aspects to a board of directors, and there are many more areas to evaluate regarding a board’s success and effectiveness than those outlined above. The list discussed here focuses solely on areas that could be hiding red flags, large or small, that are ready to unfurl and cause problems.

I'm not suggesting the board of directors act as a managing board, focusing on day-to-day detail—a good governing board will simply ensure and monitor efficient, compliant actions on the organization's behalf. If the list of things to keep tabs on seems daunting, don’t worry! Boards typically have 12 to 15 members to keep decision-making and division of labor equable.

If you are a board member, nonprofit executive or staff member, I hope the information provided here gets you thinking about the types of areas you should monitor regularly or evaluate periodically. A bit of work on the front-end to ensure excellence in oversight and delivery is better than later becoming the subject of an exposé on poorly run nonprofits.

Many board members are or were business leaders. In providing nonprofit oversight and strategy, they are simply using the same skills they use in business to ensure their nonprofit delivers on its mission in a forthright and transparent way. By doing so, they make the process of running, giving to or using the services of their nonprofit a truly positive experience.