For those following the nonprofit corporation industry, this has been an interesting year for governance news. It should not come as a surprise that management and the need for strong oversight and planning remain important issues for all of those working for a nonprofit corporation or serving on a board of directors. The reason is put eloquently and succinctly by Pamela E. Davis of the Nonprofits Insurance Alliance Group: “a 501(c)(3) nonprofit is held in trust for the public, and management is accountable to them.”
We take this time to highlight three of the most covered nonprofit management issues of 2015 that industry professionals should be aware of. Each story below highlights a different facet of these nonprofit management topics: oversight, financial transparency and review, and succession planning. You should consider whether your organization has controls in place to alert the board or management of these types of issues and bring them up for discussion or review at a board meeting in 2016.
In January 2015, the Third Circuit Court of Appeals affirmed a $2.25 million jury verdict against the directors of a Pittsburgh-area nonprofit nursing home, concluding a multi-year litigation. See In re Lemington Home for the Aged, 777 F.3d 620 (3d Cir. 2015). The Third Circuit pointed out several things regarding the nursing home’s board that supported the jury’s finding of personal liability. For example, the jury heard testimony that the board had knowledge that (1) the nursing home had “three times the deficiencies” of the average nursing home operating in Pennsylvania, (2) an independent review had concluded that the administrator at issue was performing poorly and recommended her being replaced but chose to continue employment, and (3) the CFO had not been maintaining proper financial records and also chose to continue employment. The Third Circuit also noted that the administrator diverted grant funds from a local community foundation, which were supposed to be used to find her replacement.
Although this case involves Pennsylvania law and the facts appear to be both egregious and unique, the lessons to be learned from the Lemington Home case are fairly straightforward and important for all members serving on a board, whether for a nonprofit or for profit organization. As a board member, you have a fiduciary responsibility to ensure that the management of the organization is performing their job and fulfilling their duties. Board members are expected to pay attention to the organization’s operations and finances and listen to independent experts and advisors. The Lemington Homes decision provides a strong reminder that the failure to observe these duties (such as the lack of oversight) can result in expensive, personal financial liability.
The case of Sweet Briar College illustrates the necessity of nonprofits having both a strong financial plan and long term financial support. In March 2015, Sweet Briar College, a 114-year-old women’s college, announced that “insurmountable financial challenges” had led to the decision to close the institution. Over the next few months, much ink was spilled as alumni, the board, and the Commonwealth of Virginia litigated over the future of Sweet Briar. One of the many issues involved the school’s endowment ($84 million), which the board of trustees had concluded would not be sufficient to save the school over the long term given that the majority of those funds (at least $56 million) was restricted and unavailable for operating costs. In the end, the alumni of the school rallied to raise at least $18.5 million in donations or pledges over the next five years, $16 million of restricted funds became unrestricted and payable for operations, and the parties agreed to a complete board and leadership turnover. Time will tell whether the new leadership and the additional and ongoing financial support will be sufficient to save the school over the long term.
The Sweet Briar case illustrates an interesting intersection of financials and board decisions and community impact. While the outcomes continue to evolve and hopefully will be enough to allow the institution to thrive for many years to come, the important takeaway from the Sweet Briar case can be viewed through a narrower lens. Finances are the lifeblood of any nonprofit organization. Board members should realize their role in paying attention to all streams of revenue, including whether they are coming in annually as part of a grant, a yearly campaign, a capital campaign, or for the endowment. As in the case of Lemington Homes, board members need to review and understand the organization’s long term financial and strategic plans and make sure they are viable and realistic. Equally important is what is evident from Sweet Briar College: financial leadership is paramount to help keep the doors open so that a nonprofit can fulfill its mission for years to come.
A subtle, but growing trend in stories we’ve read about nonprofits nationwide involve the issue of succession planning. While there is no standout 2015 case illustrating exactly the need for a succession plan, there has nonetheless been an increasing number of studies and articles calling for nonprofits to pay closer attention to succession planning. This applies for organizations whose boards turnover frequently as well as for organizations with a board who has been with the organization since inception. One report that was released earlier this year by Third Sector New England, “Leadership New England, Essential Shifts for a Thriving Nonprofit Sector,” studied 877 leaders (primarily executive directors) and 330 board members of nonprofit organizations in New England and made several interesting findings. In particular, nearly two-thirds of those responding said that they planned to leave their jobs within five years, and a 30% within two years, which is consistent with other similar studies. This is not entirely surprising given the age demographics of the board members surveyed (30% were 65 or older). Should a similar study be undertaken in Delaware, it would probably not be surprising to find comparable results.
The fact that the leadership of nonprofit organizations is getting older places an increased emphasis on boards examining their organization’s succession plans, or creating one if they do not have any in place. Succession planning should be viewed in the same context as a fundraising event or a capital campaign because in many ways it is just as important to the lifeblood of the organization. See Jennifer Chandler, From Enterprise Risk Management to Shared Leadership: A Different Look at Succession Planning (Nonprofit Quarterly, June 17, 2015). There are many aspects to succession planning that a board and nonprofit organization should consider, including how to identify potential new leaders who are both interested and willing to get involved. While not as sexy as fiduciary duty or financial leadership, succession planning is just as important a topic for the board to be discussing in 2016. The boards of most nonprofits are not getting any younger.
As the above cases show, oversight, financial transparency and review, and succession planning are all important nonprofit governance topics for board members and executive management to discuss. Best practices dictate that each of these topics should be discussed at the board level on at least an annually basis, or more frequently as advised by counsel.
Author: Charlie Vincent of innovincent.com with assistance from John L. Williams
Disclaimer: This article should not be construed as legal or tax advice or legal or tax opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer or tax advisor on any specific legal or tax questions you may have concerning your situation.
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