Ask More of Business

Asking More Commentary: Perspectives from Mendoza College of Business

Commentary Post - Thomas Harvey

Ensure your board isn't asleep at the wheel

February 16, 2010

This article was published originally in the winter 2010 issue of the Alliance for Children and Families magazine, Nonprofit Director.

An old adage says, “If everyone is accountable, no one is.” This truism about individual accountability proves its truth again and again in informal settings, as well as in professional environments. Yet, boards of directors are an important exception, especially nonprofit boards.

In doing their work, all trustees are equally responsible for what gets done or does not get done. Even those who assume special roles on these boards, such as the chair or treasurer, do so to enhance the group’s ability to function in a more responsible and efficient way. They have no individual powers outside the context of the board’s corporate responsibility.

Perhaps it is the very reality of being responsible as a group that makes board work so messy. And, sometimes, everyone being responsible can lead to situations that are not just messy, but also illegal.

Arecently settled litigation in New York illustrates this point. In September of 2008, Brooklyn Care Works, a nonprofit mental health organization, declared bankruptcy after more than 100 years of service. In February of 2009, a group of vendors filed suit in bankruptcy court against the board, both “in their individual and representative capacities.”

The suit sought more than $1 million in compensation. The vendors alleged that the Brooklyn Care Works board was guilty of gross negligence and breaches in its fiduciary duties. The court documents list various examples, such as acting for more than two years without a quorum, not annually evaluating the executive director, even though he was accused of dipping into Federal Insurance Contributions Act tax money and other pension funds to pay bills.

Nov. 24, 2009, the New York Nonprofit Press reported that the former board settled the litigation by agreeing to pay $425,000. This litigation certainly will serve as a warning to all nonprofit board members that accountability is not to be taken lightly. In this column, we suggest resources that may be helpful to nonprofit trustees who want to ensure high quality decision making at the board level. (Decisions are the board’s essential product.)

What the Law Requires

First, accountability of boards means that all trustees should know what the law expects. The general duties of nonprofit directors are spelled out in state laws under three rubrics: Duty of Care, Duty of Loyalty, and Duty of Obedience. Duty of Care requires that directors act in good faith and use the degree of diligence, care, and skill that prudent people would use in similar circumstances. Duty of Care covers such responsibilities as attending and participating in board and committee meetings, reviewing materials, giving oversight to finances, and selecting and evaluating the CEO.

Duty of Loyalty requires that directors put the interests of the nonprofit above personal interests. In order to comply with the Duty of Loyalty, all nonprofit boards should have a written conflict of interest policy. In turn, annually, the board should ask all directors to sign a document that states clearly that they understand the policy and have no conflicts.

Having the “no conflict of interest form” signed annually helps the board regularly remind itself of the basic expectations of the law. Any nonprofit board can ask its general counsel to provide such a form or, as Alliance members, they can request a typical form from the Alliance’s Severson Center.

Duty of Obedience prohibits directors from performing acts that are contrary to public laws or to the organization’s own governing documents. Such documents include the certificate of  incorporation and the by-laws.

Study Shows Need for Diligence

We hope that the Brooklyn Care Works litigation was a highly exceptional case. Perhaps it is, at least in reaching such extreme legal exposure. However, there is strong evidence that indicates a real need for greater diligence to the Duties of Care, Loyalty, and Obedience by many nonprofit boards and even more scrutiny on the part of society.

For example, during the final quarter of 2009, the University of Notre Dame’s Mendoza College of Business conducted three Executive Education Seminars for more than 100 nonprofit CEOs and other senior managers. They represented 90 organizations in 20 different states. In preparation for the seminars, participants were surveyed about the quality of their boards. (Take this same survey at nd.alliance1.org.)

Without specifying any particular measurements, respondents were asked to rate the quality of their boards on a scale of 1 to 10, with 10 representing the highest quality. On average, they rated their boards at 6.5—basically a “D/F” grade. Other questions helped clarify where respondents felt the greatest deficiencies existed. When asked if the board had a policy for term length for directors and officers, virtually everyone responded affirmatively. Yet, when asked if the board always followed these policies, 20 percent indicated that they did not.

Similarly, all replied that their board has a policy and procedures for the annual evaluation of the CEO. However, 10 percent acknowledged that such evaluations are not done regularly. Other discrepancies included such fundamental expectations as attendance at meetings and financially contributing to the organization according to an agreed-upon formula. Anecdotal feedback shows that these survey replies accurately describe the current reality of too many boards.

Self-Assessment Tool

One tool we highly recommend to improve the situation involves the use of a self-assessment tool for trustees and directors to rate their individual and group performance. The self-assessment should be implemented on an annual basis. Such an instrument asks directors and trustees to rate their level of participation, their knowledge of policies and procedures, their overall satisfaction with the board’s functioning, and, perhaps most importantly, the quality of board decisions.

Among the more than 100 respondents in the Notre Dame survey, only 50 percent of the boards represented used a self-assessment tool. Though it was not a finding of the data analysis, there is a high probability that the boards with the most deficiencies would be among those that do not annually self-assess.

The value of using such a tool has impact on two levels. First, each director has a structured opportunity each year to be accountable for his or her participation in, and commitment to, the organization. Second, such instruments, when collated, give a pretty good picture of the entire board’s accomplishments or problem areas. They give a systemic way to encourage good behavior, compliance, and quality by all directors and by the board as a whole.

Letting best practices rely on good will and personal behavior is risky. An annual self-assessment process will strengthen the board’s effectiveness and offer directors a more rewarding experience. Such a practice will demonstrate that individuals who serve on nonprofit boards can equally share in the accountability and still be effective—despite the contrary truism.

Thomas J. Harvey, MSW, is director of the Master of Nonprofit Administration Program at the University of Notre Dame’s Mendoza College of Business. John Tropman, Ph.D., is professor and associate dean for faculty affairs at the University of Michigan School of Social Work. He’s also an adjunct professor at the university’s Ross School of Business. Harvey and Tropman are co-authors of Nonprofit Governance, a book published in 2009 that offers modern information and practical guidelines for the directors and executives of nonprofit organizations of all sizes.