posted on: Tuesday, June 30, 2009

Gary Snyder


In the wake of the well-documented and well-publicized increase in corruption and malfeasance in numerous charities, too few are searching for tools to identify good governance, recognize poor management or dissuade dishonesty and fraud.

Many look to watchdog agencies to assist them in making thoughtful decisions regarding their donations by avoiding those charities with bad practices. However, some question if these agencies are misdirected and inconclusive in their efforts to address the current increase in private inurement and self-dealing in organizations with a one size fits all approach.

For-profit Sector

Prior to the economic meltdown, the public trusted credit-rating watchdogs to assist them in their investment choices. Services like Moody’s Investors betrayed their trust by giving triple-A grades to some of the cancerous derivatives and, as The New York Times stated, gave Countrywide Financial high grades. These gold seals of approval have encouraged the spending spree that left both investors with large losses and homeowners struggling with foreclosures. The imperceptible arms-length relationship between the watched and the watchdog led Moody’s profit margins to skyrocket, even surpassing Exxon’s. With no competition for the three big for-profit rating firms, the days ahead look even rosier.

Both for-profit and nonprofit watchdogs alike use proxy and unsubstantiated measures to evaluate the attributes of an organization. They are typically a reflection of the past and little forward-looking signs and structure. They seem so arbitrary.

One example serves to illustrate that point. Despite being under the sleepy eye of the for-profit watchdogs, The McKinsey Quarterly, in a study, suggested that investors paid a premium (about 18%) for good structural performance such as good governance. General Motors governance guidelines were the gold standard. Obviously they failed on a number of counts with the U.S. government unwilling to let the board fire its own CEO. Ultimately the government took-over the company and it was put into bankruptcy only to be saved by the U.S. taxpayers. So those investors with confidence in the watchdogs and their standards got hit twice.

All this, as Fortune Magazine noted, happened as the confidence in financial rating services crashed by 50%.

Charitable Sector

Several years prior to the economic implosion, there had been significant dwindling in charitable confidence. To put donor’s confidence in perspective we need only to look at a Brookings Institution study where only 11% of the public thought charities do a very good job of spending money wisely and only 19% feel that charities do a very good job of running their programs and services.

It is a generally accepted myth that the nonprofit rating services, such as Charity Navigator, BBB Wise Giving Alliance and American Institute of Philanthropy, are monitoring all nonprofits. The criterion that is used by watchdog groups is wanting. Because of different criteria, the rating agencies recommendations often conflict. One even sells its seal of approval on a sliding scale. Moreover, all fail to address in any substantive manner many of the issues that have gotten the nonprofit sector in trouble—scandals and inadequate governance.

Some ratings are anachronistic. For example, to sanction to automatic failure any group that has a certain number of years of expenses in reserves is preposterous. In these troubling times, who wouldn’t have wished that they had a huge amount of reserves? One could argue that not having any operating reserve may not suit all nonprofits and that could be lethal. That, for example, applies to 28 percent of the DC area charities, as the Washington Post cited. On the other hand, because the sector is so diverse, each organization needs to analyze its own cash flow and expenses and make decisions based on the strength of grants, the vicissitudes of fundraising, the potency of the economy and the revenue stream generated from all activities. To deny that the governing body is in the best position to make such a decision is shortsighted. Without sufficient funds (and that number is growing, I am confident), nonprofits will join the 16% failure rate of existing nonprofit groups in 2000 that either disappeared or became so small that they were no longer required to file tax returns by 2006, the Urban Institute study of DC area charities showed.

The quality of submissions to watchdogs is dubious. Charity evaluators, by their own admission, believe that the reporting from the nonprofits is often inconsistent, unclear and incorrect. Some point to large amounts of chicanery in the submissions they receive.

But is all of this bad and do these watchdogs perform a much-needed service? Some say that they raise the level of debate. Others challenge the simplistic checklists and metrics that may or may not be meaningful. Some have expressed concern that some may have crossed the line from being independent raters to becoming active consultants.

Let’s look at conventional believes that have become baked into generally-accepted good practice:

• Financial board expertise needed: we have seen some of the premier charities get caught in fraud even though they had very sophisticated board members with impressive financial skills. An example: In spite of board and Congressional monitoring, the Smithsonian had hair raising abuses including virtually unlimited travel and noncompetitive contracts, little oversight in salaries and housing allowances. On its Board of Regents: Chief Justice of U.S. Supreme Court; Vice President of U.S.; an executive of Microsoft; two university presidents; prominent builder; a venture capitalist; congresspersons.

• Frequency of board of directors meetings: Over the years watchdog agencies have changed the number of board meetings that will make boards more successful. There apparently is no optimal number of meetings that puts an agency in good stead. The most important intangible is effectiveness of the deliberations of the members. On Board of United Ways: The Central Carolinas United Way had some of brightest minds but the frequency of meetings did not preclude it from making the some glowingly embarrassing mistakes. They gave the executive of a mid-sized agency the highest salary and benefits package in the entire United Way system. They tried to keep it a secret. When the press got a hold of it, they fired her and are currently being sued by her. Embarrassed, 3 board members resigned, but the agency is still withholding pertinent documents from the public. This shortsightedness has been replicated in several United Ways including Atlanta, Capital Area, and New York with many affiliates with ongoing malfeasance.

• Attendance, size, more: It is unclear that attendance, codes of conducts, board size and minimum number of board members have reasonable impact, but some watchdog agencies think that these are important. Studies in the for-profit sector are inconclusive that board size means better decision-making. Diversity, seldom considered, may prove to be a more important matrix.

• CEO importance: There are mixed reviews as to the importance of having the charities CEO on the board. We have seen the Smithsonian with its CEO on the board and the CEO at American Red Cross and United Way not on the board having similarly poor results. There is no argument as to the importance of the CEO. However, The Urban Institute study finds that a CEO serving on the board means that the board is weaker and less engaged. The CEO, coupled with board chair, is the public face of the organization. A poor face, as in the case of the Smithsonian, ended with his humiliating firing. Several poor showings at the Red Cross ended with very public dismissals. The compromised face of several of those at local United Ways cost the agency dearly with diminished contributions. One thing is clear, there needs to be a demarcation between the roles of the board (as the ultimate authority) and the CEO (carries out the boards mandates).

Some believe that watchdogs in both the for-profit and nonprofit sectors are seemingly propagating meaningless guidance. This is particularly important since in many instances there is no better outcome by adhering to the standards than not. Furthermore, the costs associated with adhering to such fungible determinants can be immense in terms of time and money, particularly for small agencies.

The strengthening of the matrices that produce organization integrity may lie in some of the intangibles. Such human dynamics such as leadership character (both board and staff), organizational values, how decisions are made, open communications --- both at board meetings as well as between staff and board---conflict management and strategic thinking (both long and short) may promise to be the difference between a successful and a compromised agency.

Such skepticism has lead to an effort currently underway---The Social Investing Rating Tool. It will try to assess the way donors evaluate whether a charity is worth their money as well as whether organizations have favorable outcomes. Some believe that is a good endeavor, but others will reserve judgment until its completion. One problem is that it is made up of prominent philanthropists and entrepreneurs some of whom have questionable issues residing within their own organizations.

All want both sectors to do well. In the future, maybe we should calculate how the watchdogs measure objective data that support board members and staff dedication and diligence to do good governance. Maybe more importantly, they should gauge how agencies are doing with empirical evidence or determine whether their work is even making any difference.


Gary Snyder, the managing director of Nonprofit Imperative in West Bloomfield, Mich., is author of Nonprofits On the Brink and publisher of a monthly e-newsletter—Nonprofit Imperative, which focuses on the major issues affecting the philanthropic community. He can be reached at gary.r.snyder@gmail.com or at 248.324.3700.

posted on: Thursday, November 20, 2008

Nonprofit Crisis-A Terrible Thing to Waste
Gary Snyder

The news seems to be all bad. There is much talk about an implosion of the charitable sector. Some prognosticators believe that the heady days of the $300 billion in donations are coming to an end. Then there is the daunting data, which the New York Times cited recently:
• the Center on Philanthropy that show that households with annual income of less that $50,000 are likely to stop giving as
a result of the downturn.
• charitable funds saw contributions fall by 43%.
• with a downturn in returns on their investments, foundations payouts will drop.
• corporate donations from the largest companies will diminish.

Many want to believe that the weakening trend line is solely a result of the poor economy. Unfortunately, there has been a movement toward smaller total contributions (in absolute dollars) for several years. There are a number of reasons that have put the sector in increasing low esteem.

Study after study has indicated that the trust in the sector has been plummeting. Only about 14% of those studied believe that the sector spends its money wisely. The perception that executives are getting paid extraordinary salaries further exacerbates a poor opinion.

The explosion in the amount of embezzlements, at all sizes and types of charities, has further intensified the public’s lack of confidence. A much-touted study estimates that theft could amount to tens of billions of dollars and at a rate higher than the for-profit sector.

And the leadership, as studies have shown, has lead the lapse in ethical standards---aside from fraud---with nearly 20% of employees said that their own organization had weak ethical controls.

The nonprofit sector that has so long enjoyed a better reputation with regard to its ethics, now exhibits many of the shortcomings in its companion surveys of the public and private sectors

The good news that this is an opportunity to fix that which was gone wrong, clear up the sector’s tainted reputation and protect the charitable sector’s return to its place as a credible and transparent American institution.

Over the decades, the leadership of the charitable sector has emanated from the inner sanctum of the largest foundations and nonprofits. Many of the practices that are currently under scrutiny are an outgrowth of those carried on behind closed doors. In recent years a cloud of suspicion has grown from some close viewers, including donors, taxpayers and small and medium charities. While the elite decision makers ply their trade to protect and benefit themselves, they do so at the peril of the charity sector’s tax-exemption and oversight by the IRS and Congress.

As the culture of the charitable sector is compromised, virtually all leaders have passively sat by with no intervention. They have exercised the power of denial. Some observers believe that they don’t have a handle on what the problems are. This has been effective in contributing to the uncertainty about the future of charities. With no organization that serves the needs of the small and medium charities, there is a lack any direction in confronting the fundamental elements of needed change. Still unanswered is how or if the leadership will step up… or even if they have thought about change.

These are challenging times in all sectors. Congress has historically encouraged bad behavior. They supported the bad behavior of AIG and numerous banks, brokerage firms, and Freddie Mac and Fannie Mae. The reason for the support…they are too large to fail. Every day the line to get the government’s largess is growing.

We see a similar scenario being played out in the charitable sector. Despite ongoing fraud, poor governance and a total indifference, the Congress has given the Smithsonian and the American Red Cross in excess of $100 million. The reason for the support…they are too large to fail. Others charities that evidence poor decision-making are now holding out their hands also.

These concessions set a poor example for the medium and small agencies (or corporations) that are, in large measure acting good, but struggling.

Should the Congress be in the nonprofit bailout business? Should the cash spigot be closed until there are accountability at all levels?

There is little evidence that the government subsidization has helped. After years of tremendous scrutiny and much contrition by the American Red Cross, the eighth CEO in just twelve years showed poor judgment and was fired. This stalwart organization is still under a cloud of controversy with a court order to improve the way it collects blood handling. This has been going on for more than a decade with millions of dollars in fines. Despite a yearlong inquiry and repentance, the Smithsonian bad news continues with one former director recently reimbursing the Institution for lavish spending and more allegations of no-bid deals.

It should be the leaders that show us out of this morass. The most important task is to restore the public’s flagging confidence in our nation’s charitable sector. They need to articulate to the American people the underlying strengths of the sector. Wishful thinking needs to stop and leaders must speak to the realities on the ground. Over the past decade, charity leaders have mishandled this issue.

We should be afraid of the indecisiveness and indifference of the past. Senator Grassley and his staff should be congratulated for focusing on the weaknesses as well as the strengths of the nonprofit sector. This, however, is too important an issue for one Congressman to carry. The regulators seem to be stumbling over the for-profit sector problems and failing to give a comprehensive look at the weakness of the nonprofit sector.

Politics have hardly caused the crisis, but Congressional priorities have certainly exacerbated them. The Congressional patchwork approach has certainly not instilled confidence.

Rebuilding confidence might seem like a small matter; it is not. The denial by the charitable sector’s leadership has compromised a wonderful and magnanimous history. This country is not used to feeling bad about charities. Steering away from the current quagmire with no one steering, leaves little likelihood that it will go in the right direction. Steering the sector necessitates facing the facts and facing down the fears.

Its not just the charitable sector’s future on the line, it’s the millions of people’s lives that it serves. The objective is to have a sector that functions well for all sized charities as well as those that they serve.

Cheer up. This is a great opportunity to right the wronged ship.



Gary R. Snyder is the author of Nonprofits: On the Brink. He is a frequent lecturer and author of articles in numerous publications and blogs. His email is gary.r.snyder@gmail.com; website: www.garyrsnyder.com, phone: 248.324.3700.

posted on: Tuesday, June 17, 2008

by Gary Snyder


In a rare pleading, the American Red Cross has asked the U.S. Congress for $7 million to fulfill its obligations to main staff to coordinate state and federal disaster resources. While I am not sure of the merits of such a request, I find it chilling that the nonprofit sector is getting tight…. maybe too tight, with the government as its banker.

This request is made in the face of a similar request from the Smithsonian Institution for a $34 million bailout. Both have similar issues.

Both are well known for having poor governance. This has lead to on-going scandals, turnover in leadership and a total lack of transparency. The Red Cross has had 10 CEOs in just 12 years…several of which have left with significant golden parachutes. At the Smithsonian, nearly half dozen secretaries or deputy secretaries (CEOs of museums) have terminated employment in just the last year.

Both groups are noted for poor fiscal management with the American Red Cross admitting recently to a $200 million deficit. They are laying off (35%) staff and reevaluating office space. The Smithsonian, according to the Inspector General, failed to report expenditures and underreported millions of dollars income to favorable employees. For example, the director spent $1.15 million of donor and government money on housekeeping services. Despite paying excessive benefits and salaries, they are still in need of $2.5 billion to fix its facilities.

Both have been under the scrutiny of congress with many investigations. Because of the close relationship with the federal government (the Smithsonian gets 70% of it budget from the federal government and the Red Cross was stripped of its national first responder status and is a congressionally chartered organization), I wonder if the Congress has the wherewithal to punish these two stalwart organizations by not acquiescing to their funding requests.

Seventy percent of the charitable world is made up of small, struggling organizations. Is it good practice to indulge the two formidable organizations when they have evidenced decades of misdeeds and when the others are unable to tap similar resources to meet their important missions?

Gary Snyder is the author of Nonprofits: On the Brink (iUniverse, February, 2006) and articles in numerous publications. He is also a member of NCRP's board of directors. His email: gary.r.snyder@gmail.com; website: www.garyrsnyder.com; phone: 248.324.3700.

posted on: Wednesday, November 28, 2007

We have heard it time and time again…”I resign my position as CEO of the American Red Cross”. We’ve heard it four times in the last 7 or so years. We’ve seen hundreds of thousands of dollars in severance pay approved by the ARC board.

 

On November 27, 2007, Mark W. Everson, CEO of the Red Cross and former head of the Internal Revenue Service just 6 months ago, resigned “for personal and family reasons”.  The ousted president took personal liberties with a subordinate.

 

To its credit, the board of governors acted promptly when it found out that Everson had engaged in a “personal relationship”. However, the board should be well rehearsed in terminating CEOs. The departure continues a trend of rapid turnovers at the top. To be fair, personalities and performance were the initiators in the previous three. Bernadette Healy, a physician, after mishandling September 11 attack response. Marsha Evans left in 2005 after the Katrina fiasco. Interim president, Jack McGuire served between Evan’s departure and Everson’s appointment.  There was apparent friction between the board of governors and some of the former executives.

 

As with the last three executives, the board tried to cover its tracks by saying that this departure “is disappointing…but the work of the American Red Cross will go forward”. Not a ringing endorsement of the Red Cross’ future.

 

This is a serious blow to the organization as it started to gain some momentum in wiping out its dilapidated image. The September 11 and Katrina responses were a hit to the already tenuous organization. It had bureaucracy and accountability problems. Many of the local and regional executives were at wits edge in dealing with the national organization. The organization lost its coveted designation as the first responder, the go-to agency, to FEMA. Recently there was criticism of the Red Cross over its aid program for victims of Hurricane Katrina, Means to Recovery.   The agency was, however, gaining some praise for its role during the recent Southern California wildfires.  

 

The American Red Cross should have seen a problem brewing when Everson, cognizant that the organization was bloated at the top, brought in several of his associates from the IRS. While that shouldn’t be an indictment in itself, he chose one of his closest former employees, his chief of staff, as the Red Cross’ ombudsman…the organization’s chief critic. Congress created the position after a lengthy investigation.

 

The selection process for the CEO is taking place under cloudy circumstances. To trim expenses, Everson indicated that he was going to have to lay off 3,000 employees at the national headquarters. The Board is in the midst of a newly revised charter which clarifies the roles of the executive and board and eliminates over half of the board seats in a couple of years.

 

Times are a changing! The leadership of one of America’s stalwart agencies has a challenge as it has never had before. Hopefully the decision-making will result in better results.

 

A lot of people are watching.

 

 

Gary Snyder is the author of Nonprofits: On the Brink and articles in numerous publications. His website: www.garyrsnyder.com. He can be reached at 248.324.3700

 

posted on: Friday, June 01, 2007

There have been significant attempts by the American Red Cross to boost its image after numerous pratfalls by its leadership (both at the board and staff level). But the future course of the agency ended up in the hands of an outsider--- the Senate Finance Committee. This is, in part, because the Red Cross operates under a congressional charter. But once again one of the nation’s leading nonprofits continues to be the poster boy for poor decision-making.

For the past few years, the Red Cross dug in and produced a vision document that addressed many of the nonprofits weaknesses, The American Red Cross Governance for the 21st Century, This was an attempt for the organization to make independent and meaningful changes that would ingratiate it with the public.

The lengthy document was a good start in identifying problems and making suggestions as to how to improve the nonprofit on a multitude of fronts. But, unfortunately insiders were unable to adequately address the omnipresent problems plaguing the organization.
Resolution: It took outsiders to strengthening the agency’s governance structure in a comprehensive manner by passing the Red Cross Modernization Act of 2007. It relieved the organization of some of the constraints posed by the 1947 congressional charter.

Understanding roles and responsibilities of the board and staff has been an enduring problem at the Red Cross. The conflict centered around who was the principal officer—the President or the Chairman ---and what their respective roles were. With each new executive, a conflict ensued with the board. These conflicts resulted in short-lived tenures of some of the most senior staff. Huge golden parachutes followed and the public got restive as to who was running the nonprofit and how its contributions were spent.
Resolution: It, again, took outsiders to bring a clear demarcation between board governance and executive management and hopefully avoiding the ever-present clashes between board members and management.

Perhaps the single topic that has received most of the attention from commentators was the size of the Board. The 1947 Bylaws called for a board of 50 members, including eight Presidentially-appointed members, who were seldom present for Board deliberations.
Resolution: Despite empirical studies that supports the notion that small boards are more effective and more efficient, the Red Cross will not fully comply with this matter until 2012.

There have been conflicts of interest with FDA blood program-related requirements with the Secretary of the Department of Health and Human Services in which there is a consent decree that has forced the Federal Drug Administration to fine the Red Cross almost $10 million.
Resolution: This has not been resolved even after a decade of contentiousness and as the fines continue.

Other conflicts involve the responsibilities of FEMA and the Red Cross under the National Response Plan and the Secretary of Homeland Security.
Resolution: This may have been resolved by the recent stripping of the Red Cross of its designation as the nation’s first responder

The Red Cross study suggested that it should consider establishing an ombudsman position, which would provide an additional avenue for independent review of significant issues within the organization. The Red Cross Modernization Act of 2007 cemented that concept and created the new position of ombudsman, who will have total access to all Red Cross operations and will provide annual reports to Congress.
Resolution: One of the first acts of the new CEO was to appoint his former Chief of Staff and close administrator from his former job. This position should have been filled by someone independent of the CEO and the organization. She, of course, is not independent. This is inconsistent with the concept of ombudsperson and her selection may be perceived with a bias that may prevent her from being effective and objective.

In an article that I wrote upon the selection of the new CEO Mark Everson, I had hoped that things would change at the Red Cross. With a clean slate for all concerned, everyone was hoping for the best. With his most recent appointment it seems like it continues to be more of the same.

Gary Snyder is the author of Nonprofits: On the Brink.

Email: gary.r.snyder@gmail.com, 248/324-3700
Website: http://www.garyrsnyder.com/