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Auditing the Work of the Strong Nonprofit Chief Executive
Is this familiar? A board becomes concerned about their nonprofit's high employee turnover. The executive director (ED) informs the board that yet another employee is being terminated. The board comments on turnover and asks for more information about the reasons for the termination. The executive director responds essentially with "I run the agency and staff/HR is my area. It's not the board's job to be involved in that." Even more surprising, the board moves on to the next item on the agenda. A strong-willed executive director can be a blessing as long as he or she is competent and working cooperatively with the board.
This article examines the challenges associated with a nonprofit board's supervision of the strong executive director who resists a review of their work and keeps the board at arm's length. There are wonderful strong and capable nonprofit executive directors throughout the country. My work involves nonprofit turnarounds which brings me in contact with nonprofits who have been victimized by irresponsible, strong EDs. This material is meant to support boards who need to become stronger and emboldened to live up to their fiduciary responsibility and to confront questionable ED performance.
The "Carver" model ®
Strong ED's sometimes use John Carver's Policy Governance ® model as the basis for warning the board off operational-level inquiries. The Carver model of nonprofit board governance does not support this arrogant posture. On the contrary, its foundation is the concept of "public trust." Volunteer board members represent the community as "shareholders" AND the organization is accountable to the community directly through the board's oversight. To responsibly delegate supervision of nonprofit operations to an executive director three things must be in place: a fully competent ED (in all areas of the job); a sound working relationship between the ED and the Board; and monitoring mechanisms in which the ED keeps the board informed of operational quality and integrity. Any time the board has concerns, a closer look is warranted.
How operational should a board get?
All things being equal, the board should keep its discussions at a strategic level and allow the ED to run program operations. But exactly how to maintain a strategic focus in board discussions depends on a number of factors:
- The history of organizational strengths and weaknesses
- The degree of confidence in the current ED and quality of the relationship
- The strong and weak performance areas of the current or exiting ED
- The tenure of the current or exiting ED (how many years of service)
When a nonprofit operates smoothly and the board is sufficiently informed in meetings their discussion should remain strategic, big-picture and future-oriented. From time to time however, the board receives clues that all is not smooth. Perhaps a new and experienced board member joins and points up organizational deficiencies. Other hints may come in the form of high employee turnover or community comments that employees are not happy. When the board has operational concerns members should inquire and offer the ED the opportunity to satisfy their concerns. In situations where a serious issue arises such as a letter from an employee's attorney, boards should delve as deeply as required to become satisfied in the ED approach; the soundness of HR policies and actual practices; the nature of the ongoing/underlying relationship between the ED and his/her staff; and finally, that the ED is providing accurate monthly reports on the kind of measures that can restore board confidence. If needed, an ad hoc board committee can be commissioned to investigate a matter, reporting findings back to the full board. Once these matters are satisfied, the board moves back to the proper strategic level of oversight with the ED. A good ED welcome's scrutiny, confident that it will reveal primarily strong and positive results. Communication, honesty and professionalism should guide all board – ED interactions.
Charismatic leaders (and not it a good way!)
I have seen strong and charismatic EDs use their "people" skills to convince boards not to bother with attention to his or her weak performance areas or to essentially bully the board into rubber stamp mode. If the ED is particularly strong in one area, let's say fundraising, board members may hesitate to rock the boat. Sometimes EDs offer repeated excuses for why something doesn't get done. I am still amazed to encounter nonprofits who have not insisted on sound financial statements each month. With QuickBooks and a few hours of accounting/bookkeeping each week there is no reason to live without this essential, basic financial service. In one extreme example years ago, a charming and charismatic ED explained away the lack of financial statements for two years along with the serial firing of three different bookkeepers. Personal expenses were running through the nonprofit bank account. It was only discovered after a third party consultant came in and recommended the ED be put on administrative leave. For the first time, an unimpeded investigation was allowed to proceed.
Sometimes board members are friends with the ED and hesitate to question him/her. Sometimes the board lacks sufficient financial expertise to follow up with the right questions or to know when what they're being told is wrong. In the absence of a board willing to confront the ED the problem can continue for years. It sometimes takes ED turnover or a crisis to shed light on these issues. The same charismatic tactics work on employees who may have concerns about operational decisions. Unfortunately employees do not generally go "above" the ED to the board – a risky strategy rarely successful as the board's primary relationship with the ED creates an opportunity to lay the ground work for such employees to be seen as questionable or disloyal, a significant barrier to the fair hearing of employee complaints.
Inattentive boards
Another problem is disengaged boards -- members with busy full time jobs and families or members who don't take their responsibility seriously. When board members are not engaged in oversight board meetings are shorter and easier. In this scenario EDs can operate as they wish according to their personal preference. As long as nothing too troubling or public happens, this can go on for years.
Basic checks and balances
There is no good excuse for the lack of basic accounting checks and balances. In large nonprofits there may be sufficient funding for an accounting/bookkeeping employee. In small organizations, contracting with a local, external bookkeeper works nicely. An experienced CPA retained for independent audits or tax return preparation can offer external guidance to paid staff, external bookkeepers and board members. In both cases this ensures that at least one objective party is reviewing procedures or responding to board questions. An ED who is strong, professional and competent but weak in financial management should welcome the opportunity to increase their financial acumen through mentoring by a third party.
Another key area for ongoing review is human resource management. Employment has become complicated and litigious. There must be some internal human resource knowledge on the part of the ED and some HR benchmarks reported monthly to the board to prevent significant HR crises from developing. HR expertise is easy to find and need not be a full time employee. Part time contractors are available in the same way that bookkeepers work. A particularly bad combination is a strong ED who is weak in HR management, particularly if he or she does not understand and value professional human resource management. An experienced HR employee or contractor follows a code of ethical behavior and would offer a second set of eyes to alert the board to unscrupulous ED activities.
How to audit an ED's performance
There are three components to a comprehensive ED's performance evaluation conducted at least annually.
- First level: ED's self-evaluation report
- Second level: A performance evaluation by the board
- Third level: Annual audit of the ED office
In my experience, strong ED's tend to prefer simply the ED's self report of progress toward goals. While this is easier, it does not fulfill the board's oversight responsibility. At the next level, an ED performance evaluation according to a list of desired end results is better, but in my opinion this does not go far enough. In the last 10 years, I have come across three different executive director offices lacking the most basic operational files as well as workplace environments strained in a way that boards were completely unaware. The board – ED relationship is the same as other supervisory relationships in that the board must oversee, critique and develop the person in the executive director position. It is different in that the supervisor/board is not onsite and in some cases, never comes to the location where the ED works except for perhaps, a new board orientation session or board meetings after hours. To mitigate this lack of ongoing contact, I suggest a simple, annual and onsite audit of the ED's office be added as a third level of review. The optimum time for the audit is mid year or six months before the results-driven performance evaluation is completed.
An audit can include . . .
At least once per year, one or two board representatives with high professionalism and objectivity should spend an eight-hour day at the ED office location. During this time, board members will review operational files and interact with staff. This visit allows the board to see first hand how the office is run, the atmosphere and the basic documentation required to run a business in today's environment. Audit activities might include a review of the following minimum materials. The ED should know where these files are stored and how they are kept up-to-date.
Corporate governance files (must be secured from tampering and have limited access)
- Articles of Incorporation, all versions of organization bylaws, and original and updated IRS Letters of Tax Exemption
- Either paper or electronic copies of all Board minutes since incorporation
- ED performance records and salary documentation (may be kept by board chair)
Financial files (must be secured from tampering -- have limited access)
- Contract and funding agreements
- Accounts payable
- Accounts receivable
- Tax returns
- Audit materials
- Banking records along with at least monthly reconciliation
Operational files
- Equipment maintenance and service agreements
- Copier leases
- Plowing and sanding contracts
- Phone and communication contracts
- Grounds maintenance contracts
- Security company agreements
Human Resource files (must be locked and secured from unauthorized access)
- Personnel files (including the ED file in the same format)
- Employee medical folders
- Employee I-9 binder
- Other private employee material
In addition to ensuring the materials noted above are in place, board members can observe the office as staff arrive, work together, with the ED, and then exit for the day. Staff and management meetings can be observed. A report of the ED office strengths and areas for improvement can be developed after the audit and be used as input to the next formal ED performance evaluation. Some EDs will see this as an invasion of their operational territory but it is necessary to assure community funders that all is proper and according to modern business conventions. This type of audit would have prevented the most serious of the nonprofit management problems I've encountered and would have prevented one such nonprofit failure. This audit step allows the board to re-assure themselves and the community that public funds are being used responsibly and prevents a strong ED from isolating his or her practices from the board who is ultimately responsible for nonprofit mission stewardship.
About the Author
Suzanne V. Benoit, LCSW, SPHR is a nonprofit operations consultant and author promoting mission stewardship for publically funded groups. Ms. Benoit specializes in helping nonprofits strategize to avoid crises and when necessary, manage and recover from them. For more information about the author please visit www.benoitconsulting.com.
First African American Chief Warrant Officer Naval Engineer