The Nonprofit Ethicist | Summer 2009

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?Dear Nonprofit Ethicist,
After months of sleepless nights, I recently resigned from my position as the board chairman of a faith-based nonprofit. After being invited by a friend, I joined the board last year. I was elected without formal notice and was never invited to a board meeting or a meeting with the director. I am a former executive director of a nonprofit and the office manager of several organizations, so I know how the process should go. This organization is a faith-based crisis pregnancy center but is more along the lines of a pro-life organization.

I ended up being nominated for the position of secretary and treasurer, which I believed was easy enough for such a small agency. But what I uncovered blew me away. The nonprofit had not done an audit in 20 years, it owed the Internal Revenue Service money, and it had taken out a small line of credit—to meet payroll—that has never been paid off. A slew of past directors had mismanaged funds. The present director regularly used an ATM card to make withdrawals for petty cash, but no one had tracked the transactions.

Long story short, I was afraid. I informed my friend of the discrepancies and made a formal report for public record. My friend quit immediately. While I felt guilty because I had uncovered the wrongdoings, my husband advised me to stay on to try to fix the mess.

I did—and every step of the way met resistance. I encountered cheating on time logged, lying to donors, an inability to meet payroll, and staff members coming and going as they pleased. I tried to get the nonprofit free outside help, but it didn’t want to change. I ended up quitting.

Can you give advice on the dos and don’ts of joining a nonprofit organization’s board and explain the laws and rules that must be adhered to? Apparently, many faith-based nonprofit organizations intentionally break the law, contradicting the heavenly rules that they have chosen to abide by. Individuals who decide to participate in these kinds of activities are ultimately responsible for the executive director’s and the board’s decisions, and if they break the law, should know the penalties that lie ahead.

—Disillusioned

Dear Disillusioned,
First, these informal corner-cutting kinds of behavior are not uncommon among small nonprofits. And for your organization, a lack of systems was the modus operandi that worked—even if just barely. To put a good face on it, sometimes small groups are so focused on mission that they let the details of governance slide. But as you note, they sometimes justify their conduct citing a religious agenda, which is not ethically OK. They should know better.

You were the organization’s worst nightmare. You not only highlighted its gaps but were openly scandalized by them, so it’s not surprising that they circled the wagons. Your values were different.

Government oversight varies by state, but it tends to focus on criminally fraudulent activity, which is defined by a higher standard of malfeasance than you describe. This looks more like garden-variety negligence (except that the organization owed the IRS).

In an average case of mismanagement, the biggest risk is that board members could be held personally liable for their organization’s debts to the IRS. Also, federal law places board members at risk of fines for paying insiders—which include the executive director, his immediate family, board members, and others who exert organizational control—more than “reasonable compensation.” The law does not define “reasonable,” but it outlines procedures that are presumed to produce a reasonable result. Look up “intermediate sanctions” on Wikipedia. It includes a hot link to the Federal Register.

So what should you do before you join a board? Examine the organization’s culture concerning the issues that matter most to you. Before joining a board, do administrative “due diligence”: (1) Ask for an audit or, if an audit is not required in that state for an organization of that size, certified financial statements. (2) If a nonprofit’s gross receipts are in excess of $25,000, the organization should file a 990 Form with the IRS every year. Read the most recent filing, which will contain useful information about conflicts of interest and the like that do not appear in an audit. (3) Ask for copies of board minutes for the past two years. This documentation provides a wealth of insight. Incomplete or sloppy minutes suggest poor record keeping. (4) If an organization has paid staff, ask to see the most recent payroll tax deposit slip. If a nonprofit is not paying its taxes on time, ask for directions to the nearest exit.

Dear Nonprofit Ethicist,
I serve on the board of a nonprofit human-services organization that has a budget of $3.6 million. The current president and CEO wants to retire in 18 months, by which time she will have reached 20 years as head of the organization. During her tenure, the organization has been successful in its mission and fundraising. And she is well known and loved in the community. She has asked for a “retirement package” of more than $1 million. The organization has never encountered this kind of request. Is a retirement package of this size—or any size, for that matter—common in nonprofits? We are nervous about the possible public-relations implications.

—Confused Board Member

Dear Confused,
This is a jaw-dropper, alright. Although one can find examples of large retirement packages in mega-nonprofits, such as hospitals and universities, they always attract criticism. In an organization of your size, a $1 million retirement package is insane. No other word adequately describes it. Even if the board wants to give her a “golden handshake” for her years of service, it should keep in mind that federal law requires all compensation— including retirement packages—to be “reasonable,” which means that a board cannot pay more than similar organizations pay for similar service in similar circumstances. Your organization’s board should survey similar organizations, document its findings, and use the information to determine the size of the package. The full board should vote on the package, and no one with a conflict of interest should be allowed to participate. Failure to follow these steps could result in the IRS forcing restitution and imposing fines, called excess benefit taxes, on the individuals involved. The law also forbids indemnification (i.e., the organization cannot make the individuals whole). For further information about the law regarding nonprofit compensation, see my comments to Disillusioned above. You can tell your executive director, “We think you are worth $1 million, but our hands are tied.” If you feel bold, tell her that her request is insane.

Just one final comment: sometimes nonprofit boards back themselves into a corner when they neglect to establish a retirement savings arrangement for employees and are then faced with an impending retirement of a beloved leader—sometimes into near destitution. This should act as a warning to boards—in the case of retirements foresight is morality.

Woods Bowman is a professor of public service management at DePaul University.

To write to the Ethicist with your query, send an email to ethicist@npqmag.org.

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