Nonprofit Board Members Must Ask Questions

“We don’t get true financial statements,” said my good friend who serves on the executive committee of a major nonprofit with a budget approaching $100 million; a nonprofit that, a few years ago, hit deep financial trouble, including closing several of its facilities. While my friend, who is well versed in finances, continues to push for increased transparency—including the status of the organization’s debt—there has been progress and there has been resistance.

The truth is that every member of the executive committee—all nonprofit board members—has a fiduciary responsibility to follow my friend’s example and call for full disclosure to the board. It is unreal, given this organization’s past financial (and leadership) woes, that they haven’t.

Those woes have at their core a longstanding failure of transparency and therefore demand that board members ask questions and dig deeper. This is the board’s legal responsibility.

Going back 15 years ago, the then CEO of this organization was relatively new. He followed a CEO who led dramatic growth in the scope of the organization, its facilities and its debt.

When the new CEO was hired, the board charged him with slowing the capital growth and absorbing and fine-tuning what had built and grown. Sadly, they did not hold him accountable.

The new CEO was eager to continue this growth and was positioning for the board to approve millions of dollars in reserves being allocated for two new capital projects. The CEO didn’t take the correct steps toward campaign success, but he wanted the projects to happen. The truth was, the communities that these facilities would serve hadn’t really stepped up—in part because of his inept leadership.

A key staff member approached this CEO and suggested that instead of using millions of reserves for these new projects, he consider two things: ask the board for a standard policy on the use of reserves for capital projects and what fundraising must be done.

In other words: to be equitable.

This organization allocated debt interest to a facility, if debt was incurred—when capital reserves were invested there was no debt attributed to a facility. At the time there were a few facilities that couldn’t get a positive cash flow due to their debt allocation and a change in the organization’s overhead charges. These facilities were in communities that raised millions of dollars to see these facilities come to fruition, in each case more than the organization had asked. While volunteers and donors stepped up and even overachieved, the formula the organization used had not worked.

To address this apparent inequity, the second recommendation of this senior staff member was for the CEO to consider instead of jumpstarting new projects that had not been implemented properly, that reserves be used to reduce the debt burden of the facilities—resulting in a positive cash flow for them and stronger finances for the overall organization. The CEO ignored the request because his ego and compensation would benefit from budget and facility growth—regardless of the debt level.

A few years earlier, the organization had used over $5 million in reserves to purchase a facility and then another $5 million to improve it. Use of reserves did not lead to allocated debt—it was “free” money. That facility also had a $1 million loss for many years before finally seeing a positive cash flow—with more than $15 million in reserves and covered losses.

Fast forward to the final days of this CEO’s tenure. The organization was in a cultural/ethical implosion that finally hit its revenue and fundraising. Culture always eventually impacts a bottom line—positive or negative. The CEO announced closing one of the branches that suffered from this debt allocation. Then, after a new CEO was on board, another facility was closed—also drowning from this inconsistent distribution of debt and allocation of reserves.

However, the truth is that the losses of both these two closed facilities (others were closed as well) were far less than the $15 million in reserves and covered losses for a facility in a more “prominent” location. The organization had no standard plan for financing new projects, and the board should have demanded this.

The fact is that staff leadership was not transparent with the board and the board did not ask an obvious question: What is our standard policy for use of reserves, allocation of debt and capital fundraising requirements from local communities? The board allowed poor leadership to choose winners and losers. (And would you believe that the CEO who nearly destroyed this once successful organization is now a consultant?)

Communities lost. Donor dollars were squandered. The board failed its fiduciary responsibility.

If you serve on a nonprofit board, you need to see full financial reports each month. You need to be aware of the organization’s debt. You need to be aware of CEO compensation as well as other top employee compensation and, as stated on the 990, the top contractors employed by the organization.

Don’t shortchange your legal, fiduciary role and your public trust. Don’t settle for anything less than full disclosure and climate that allows a healthy and open discussion.