6 Warning Signs for a Nonprofit Board to Take Action

What might be indicators that a nonprofit board of directors should sit up, take notice and act? I believe there are six signs or indicators that pose as a call to action for a nonprofit board — with the first step usually involving a discussion with the executive director or CEO:

1. Regulators raise yellow or red flags
2. Clients express dissatisfaction with or cease using services
3. Funders and donors introduce conditions or stop giving
4. Staff turnover is high and/or they frequently complain to the board
5. Rocky board/CEO relationship (where trust is on the decline or absent)
6. Professional advisors identify concerns

The remainder of this article describes these signs in more details. The article concludes with some observations about what steps a board might take.

1. Regulators Raise Flags

Regulators and raters are the body of institutions that set rules, regulations and standards for nonprofits. Failure to observe these can lead to major results, like loss of the tax-exempt status or donors turning away from giving or wanting to give. Regulators include local, state and national governments in addition to national and state bodies. There are also rating groups whose findings get attention by donors. Some state and national associations have standards that, while not formally enforceable, can, through group pressure and public embarrassment, become the equivalent of providing warning signs that an organization’s behavior is not acceptable.

Finally, there are associations that do not have certifying authority but promote rating standards for nonprofits. While there are no enforceable consequences for failure to meet these standards, there can still be consequences, including public embarrassment, donor reluctance to make gifts and loss of confidence by consumers. Standards are an important source of informing behavior.

When any of these regulators and rating bodies say something is not right, they can often impose consequences. It is up to the board to ensure that policies and oversight practices are in place to reduce the risk of failing to meet both the formal and informal obligations that come from the regulatory sources.

2. Beneficiaries or Consumers Express Dissatisfaction

Perhaps the most important warning sign is when a nonprofit's customers or clients start regularly complaining to the board and staff about service
quality or availability.

Several consumer researchers have found one-third of unhappy consumers do nothing about their complaints while up to 50% tell someone, but not the offending party. The tip-of-the-iceberg theory proposes that the consumers who do complain are a representative sample of the number of individuals who really are unhappy. As the number of complaints rise, an organization should begin to recognize patterns that suggest there are way more unhappy consumers than have been heard from. And as the number of complaints rise, an organization should put themselves on warning that more serious problems exist with a product or service.

3. Funders Introduce Conditions or Stop Giving

Generally, funders do not call board members individually and say, “Hey, your nonprofit’s got problems.” This has, however, been known to happen, particularly from a community foundation or a major donor/family foundation member.

Effectively, four patterns involving funders should raise board concerns: 1) applications for funding are rarely accepted; 2) renewals of funding rarely occur; 3) written critiques, conditions for receipt of a grant or even warnings are specified; and 4) conversations with board members who have relationships with funders are full of negative
content.

4. Staff Turnover Is High

Another clear sign that problems may be present is when nonprofit board members, the volunteer leaders, begin to hear from staff members that life at the nonprofit isn’t great. When conditions are perceived as bad, and the executive is not perceived as responsive, there may only be one place to go, and that is the board.

And what are the conditions that drive staff to go straight to the board? Conditions include a negative work environment (e.g., hours, physical challenges, not enough training); layoffs that do not seem warranted or occur with the least infraction; favoritism and unjustly applied rewards (e.g., raises or bonuses) or punishments; inconsistent application of policy; bad or inadequate treatment to customers; and more, to name a few. All of these conditions are enough to drive staff to unionize or quit (creating shortages of staff) and making big headaches for management and questioning the nonprofit’s ability to deliver quality services.

5. The Board and CEO Have an Uncomfortable Relationship

A rocky board/CEO relationship in which, at worse, there is outright contentiousness or hostility by the board to the CEO or vice versa is another indicator that all is not right.

Behaviors that raise questions as to the nature of the relationship include the CEO’s narrative reports, financial reports and/or budgets are vague, incomplete, erroneous or just plain late; the CEO consistently presents "problems" or challenges without solutions; and a failure to observe policies set by the board or pursue board-established priorities.

6. Advisors Identify Concerns

Because of their technical and field knowledge and vast array of experience, professional advisors, including accountants, attorneys, governance specialists and development consultants, among others, can provide objective study and advice that might otherwise be available internally. And through their time within the organization, these advisors may come to recognize characteristics, behaviors or other yellow and red flags that can at minimum generate conversation and possible calls to action.

Conclusion

Governing a nonprofit, no matter the size or stage of development is challenging. A board should consider these six signs as indicators that attention and possible action is required.

Remember, these are warning signs that something may not be right. To fulfill its duty of care, a nonprofit board must heed the call and question when any of these signs appear. Ahead of the signs and central to its duty of care, boards should employ all the essential tools including dashboards, a strong executive committee to provide oversight, an annual performance review and regularly scheduled executive sessions following board meetings.

Editor's Note: This "Leading the Board" column was originally published in the January/February 2021 print edition of NonProfit PRO.