This Organization’s Demise Has Lessons for All Nonprofits

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January 23, 2014; Fairbanks Daily News-Miner

The Fairbanks Community Behavioral Health Center may have gone under this past September with $1.2 million of debt, but lessons from a 45-page autopsy report performed by BDO Consulting may help others avoid its fate. We did not see the report ourselves, but the major problems were reported in the News-Miner as follows:

  • Numerous record-keeping problems, including “overall lack of desk procedures, closing schedules, and document retention.” Bank statements for regular checking and savings accounts couldn’t be located, along with two personnel files. Fifteen personnel files had inadequate financial documentation.
  • A “lack of transparency in financial reporting” and circumstances during the final six months at FCBHC that indicated “a lack of an adequate control environment.”
  • The study determined that “(questions) and concerns raised at the board level did not appear to result in organizational change, prompt resolution, or additional information to ensure board members concerns were addressed.”
  • Duties weren’t segregated among the staff, which the report said was insufficient to meet the needs of the organization.

The whole picture suggests an organization that was overwhelmed and struggling. Barbara Burch, who was chairwoman for the FCBHC board of directors, commented, “What I really felt in my heard and head was that people were getting into territory they were uncomfortable with and didn’t tell anyone about it.” The board said they knew nothing about the acuteness of the issues until four months before the center closed.

Auditors went out of their ways to identify fraud, but found none. They did forensic scans of the hard drives belonging to the former executive director, chief financial officer, and finance assistant and selected 10,450 documents for analysis. No conclusive evidence of fraud was apparent. The board had good reason, evidently, to trust staff at the level of honesty, but the study also observed that between 2009 and 2012, the organization’s revenues exceeded expenses only in 2010, and its net assets decreased in four of the five years between 2009 and 2013. These are, of course, trends that the board could have noted and actively put their shoulders to.

It is worth noting that there are times when boards do need to take a more activist role when they sense that the organization is floundering. We suggest that if anything in this situation resonates with you, you might wish to look at Kate Barr’s excellent “Improving Nonprofit Decision Making amid Economic Crisis.”

In it, she cautions:

Stop being comfortable. The organizational values of many nonprofits encourage trust and consensus. But over time, a positive atmosphere can evolve into a culture of conflict avoidance and ambivalence. Staff members stay focused on their own programs, and board members don’t like to ask too many questions. Today’s best leaders—among both staff and board—are those who ask the right questions. Meetings may be less comfortable, but they better serve an organization. And the questions that emerge from them will launch the necessary analysis and decisions.

—Ruth McCambridge

  • Miguel Alberto Novoa

    Ruth, thank you for providing us with an important lesson on why it is necessary for nonprofit organizations to maintain an interactive structure among its board and staff. It truly is interesting that the board’s lack of involvement in this organization was an inadvertent cause in its failure, especially when considering most failure examples I have come across often involve boards that are too involved in the nonprofit company.

    I agree with your conclusion. Perhaps a good way to have kept a suitable involvement from the board would have been to administer appropriate, consistent performance appraisals. I think this is pretty clear from the chairwoman that comments “people were getting into territory they were uncomfortable with and didn’t tell anyone about it.” If people were not telling anyone about their problems, it is likely that there also was not an adequate system in place to listen and address the workers’ grievances. In this case, I consider a simple self-assessment would have been good enough to at least provide everyone a chance to comment on their own situation within the company.

    The chairwoman’s comment, along with the lack of quick organizational change and resolutions, also highlights a breach in the psychological contract between the workers and management. This I learned from works I read from researchers Steven Farmer and Donald Fedor, who analyze the development of psychological contracts and mention some of the signs that occur when the contract is violated. Among the signs are those exhibited in this case with the Fairbanks Community Behavioral Health Center.

    Ultimately, it seems that the best way to manage a nonprofit organization is to strike a good balance on the level of involvement from the board in the management of the company. Kate Barr definitely makes a good case for organizations on the extreme of practically no involvement to become involved. If organizations find themselves on the other extreme, I recommend that they look into the work of Jeff Brudney and Mark Hager, who talk about management practices. Although their focus is on volunteer management, they make an explanation (based on their research data) on how too much involvement can also discourage worker involvement and disrupt the performance of the organization.