Knowledge and Insights

While not much these days shocks me, I am greatly disappointed when I learn that seemingly good organizations have gone off the rails.  As co-leader of Mercadien’s Nonprofit Services Group, I often remind our clients and associates who serve on boards of the importance of good governance.  I happen to sit on the governance committee of a board that just finished documenting our board member nominating process, orientation, class and term structures, and all of the elements that one would expect to see (on paper at least) as part of a charity’s governance policy and practice manual.  I want to remind everyone that this is just the tip of the iceberg.

Wounded Warrior Project is the latest public charity scandal to make news headlines.  It seems that three things are at the heart of their problems: improper spending, a low percentage of the budget benefiting the constituents they serve; and private inurement.

The issue of spending, and any related improprieties, starts with the officers (CEO and CFO) of the organization, who create the annual budget for approval by the board of trustees.  How does the board know what to look for in the budget?  They don’t, unless they’ve received training.

What about a low level of expenditures going to constituents, in this case wounded veterans?  This is not only at issue in the current scandal, but also a larger concern of nonprofits that has been termed the overhead myth.  Advocates like the NJ Center for Non-Profits and other resource groups are focusing on “real costs.”  What is the real cost to provide a service or benefit to a wounded warrior or their family?  Funders don’t like to fund overhead and donors, whether they come in the form of corporations, private individuals or others, continue to focus on the percentage of a charity’s expenses that go to programming.  The reality is everything is part of programming, overhead and all.  For example, when you go to the dry cleaner, you can’t just pay for the chemicals used to clean your clothes.  Your payment covers rent, salaries, cost of equipment and maintenance, as well as other business expenses that may or may not relate directly to the cleaning of clothing.  It’s the same for public charities.  There is simply a certain amount of infrastructure that goes into providing a program, which is running a business.

However, this is where private inurement or excess benefits to the board, or those with influence within the organization, come into play.   In the Wounded Warrior scandal, the top two officers were fired partly because of their lavish spending.  How does your board know if your officers are taking advantage of the organization, i.e., whether or not a benefit is lavish?  I call the answer to that question benchmarking.  You can benchmark your organization against other similar organizations in a variety of ways.

• Look at your functional expenses as percentages (program, administrative and fundraising)
• Have a compensation or employee benefit study performed to see if these items are in line with similar organizations
• Evaluate the cost to raise a dollar and compare it to other organizations
• Understand the budget of the organization and monitor actual performance versus budget
• Understand historical trends in your organization

I can go on with a laundry list from here.  The bottom line is, at the end of the day, the buck stops with the board of trustees.  Good governance and lots of training are necessary to ensure that your organization does not wind up in the news with a negative headline!  Our associate, Ms.  Lovepreet Buttar, CPA, MBA, will address good governance and board training in our next e-newsletter.  In the meantime, I jump off my soapbox hoping I have given you some good food for thought. Please contact me at [email protected] or 609-689-9700 if you have questions or would like to discuss.