Nonprofit "Overhead"--Much ado about nothing or a legitimate measure of efficiency? – Use of Funds standard

The following post was written by Rich Cowles, Executive Director of the Charities Review Council.

For a long time the Charities Review Council has been known for its Use of Funds standard - that 70% of expenses should go toward program and no more than 30% should be expended on administration and fundraising combined. Aware of the limitations of this measure, the Council has tried to discourage donors from ranking or rating charities based on just their overhead ratios. But we are a society that likes quick, measurable answers, and the standard has taken a life of its own.

As the Council approached revising this standard, with the assistance of a number of sector experts, there were a few core beliefs that we took into account:

1. Well-managed nonprofits strengthen their ability to further their missions over the long term by investing in their infrastructure;
2. There's no uniformity in how organizations categorize expenses, and;
3. There’s no ideal program expense ratio for all organizations in all situations.

For these reasons, we shifted the Use of Funds standard slightly to reflect these realities and to help foster a better understanding of how effective nonprofits operate. We developed a range, starting at 60% program expenses, and asked charities on the low and high ends of the range to provide information to donors to help them decide if they want to support the charity.

Despite the short-comings of overhead ratios and a growing interest in WHAT a nonprofit accomplishes (including a recent blog by Kate Barr at the Nonprofits Assistance Fund), this ratio does provide some insight about HOW the nonprofit gets there.

We invite people’s comments about this standard. Do you think that the public and the media have put too much emphasis on overhead ratios? Or given that there’s a finite amount of money to be donated, if two nonprofits achieved similar results, but one required twice as many contributions to do so, is it important for a donor to know?

Next post: Whistleblower Policy & Document Retention Policy standards

Where Are We Going - Part 2? - Governing Document Review standard

Along with the previous standard, Monitoring Mission and Strategy, the Governing Document Review standard deals with the unfortunately all-too-common occurrence of nonprofit leadership not really knowing the key documents that ought to help guide the nonprofit organization. I wish I could say I’m exaggerating, but it’s happened where we’ve reviewed a nonprofit whose board members are in the midst of a 5 year term when the bylaws call for re-election every year.

Now, a lot of times these are honest mistakes with no ill intentions. But it serves up a sobering point, if the leadership of a nonprofit isn’t at least somewhat familiar with the organizational bylaws, it may be time to pause for a moment, dust them off, and take a look. The point of this standard is not about forcing board members to read page for page the nonprofit bylaws every three years, as it is about taking time to revisit the relevance of the governing documents and make adjustments as needed. The assumption in this standard is that if a board takes time to make sure that not only the governance practices are being followed, but makes sense for the nonprofit, then this will lead to a more engaged board and effective organization.

We’d be interested in hearing from others on this. Does your organization regularly revisit its governing documents? If so, how often? Is this standard just making more busy work for board members or does it add value?

Next post: Whistelblower & Document Retention Policy standards

Where Are We Going? - Monitoring Mission & Strategy standard

The following post was written by Mac Ryerse, who was the Project Manager for the Charities Review Council Standards Revision project and is a member of the Charities Review Council Board Development Committee.

Many nonprofits spend countless hours and dedicate resources to develop thoughtful and poignant mission statements and related strategies. Why, then, do these important guiding documents sometimes languish on bookshelves until a crisis compels their review?

This standard encourages nonprofits to annually review their mission and the strategies developed to accomplish the mission. Together with the Impact on the Community standard, both support regular monitoring of community impact and program effectiveness in the context of organizational strategies and overall mission.

The Independent Sector Principles for Good Governance and Ethical Practice notes that effective nonprofit boards should extend beyond routine monitoring of program activities and instead focus on a “more rigorous periodic evaluation of the organization’s overall impact and effectiveness in light of goals and objectives.” This activity also helps assure that donor resources are being used in ways consistent with the organization’s mission.

How often does your organization critically review its mission and strategy? How do you determine program effectiveness and your organization’s impact on the community?

Next standard: Governing Document Review

How Much Is Too Much? - Chief Executive Assessment & Compensation standards

The following post was written by Mac Ryerse, who was the Project Manager for the Charities Review Council Standards Revision project and is a member of the Charities Review Council Board Development Committee.

We have all read sensational headlines about compensation packages paid to big company CEOs and wondered aloud (or shouted) “WHY?” Sometimes we even have that response regarding nonprofit CEO compensation. In either case, boards typically struggle to justify the link between the executive’s performance and their compensation.

The new IRS Form 990 includes questions for nonprofits about their compensation practices and procedures and encourages boards to take what I call a “3-D” approach to determining CEO compensation:

• Data-driven……(use compensation survey data or retain a qualified consultant)
  
• Disciplined……(establish procedures to review data; directors are not conflicted)
  
• Documented…..(memorialize and retain compensation deliberations)
  

The Council’s Compensation standard follows the principles outlined in the new IRS Form 990 and encourages nonprofit boards to adopt a similar “3-D” approach.

In addition, the Council’s Chief Executive Assessment standard supports nonprofit boards establishing performance goals and expectations for the CEO and annually assessing the CEO’s performance against those goals and expectations. Such an assessment identifies areas of strength and opportunities for improvement, as well as provides data that supports the board’s compensation decision. (For more information on this, Boardsource has a great topic paper on things to know about chief executive assessment.)

Does your organization conduct a performance review of the CEO? Can your organization affirmatively answer the new IRS Form 990 compensation questions?

Coming up: Monitoring Mission & Strategy

Would You Pass the Board Pop Quiz? - Board Orientation, Education and Assessment

The following post was written by Mac Ryerse, who was the Project Manager for the Charities Review Council Standards Revision project and is a member of the Charities Review Council Board Development Committee.

Take the following quiz on the attributes of effective and engaged members of nonprofit boards of directors (think of your organization; check all that apply)

My organization’s directors…..
□ believe in and support’s the organization’s mission;
□ prepare for and regularly attend board meetings;
□ draw on their professional and personal experiences to guide their decision-making
□ are not afraid to challenge assumptions and plans when warranted
□ possess a sound knowledge and understanding of the organization’s operations and finances
□ desire feedback on their collective performance and seek to improve

While this list is neither exhaustive nor authoritative, many organizations are discovering that the last two items (sound knowledge of the organization and a process to gather performance feedback) may contribute more to board effectiveness than all the others.

The Independent Sector Principles for Good Governance and Ethical Practice suggests nonprofit boards adopt systematic processes for orienting new directors to the organization and for providing regular “education” to all directors on topics that enhance their knowledge of the organization. Further, a regular process of self-assessment helps boards identify strengths and weaknesses that may have an impact on overall organizational and mission effectiveness.

This standard is intended to encourage nonprofits to provide orientation to directors within one year of their commencement of board service, to provide ongoing education on important organization- or mission-specific topics to all directors at least annually, and to provide a survey instrument to their boards for purposes of their self-assessment at least annually. The Council will provide sample documents and technical assistance to nonprofits seeking to adopt these practices.

Would your organization benefit from adopting a board orientation and education program? Would a self-assessment of the board be viewed as “intrusive”? Besides a time burden, do you see any drawbacks to adopting these practices?

Next post: Chief Executive Assessment & Compensation

How Long is Too Long? - Board Length of Service

This post was written by Shelley Heil, who has been interning at the Charities Review Council this summer. Shelley is pursuing degrees in Sociology and Spanish at Wheaton College in Illinois.

Individual board members can be passionate and effective, everything your organization needs, or they can be focused on one, limited objective and a source of frustration. How can nonprofits make sure there is some turnover of leadership (but not too much) and a fresh flow of ideas, without losing long-term vision and consistency?

This Standard is one that has received some of the most responses so far. Unfortunately, it’s not uncommon for organizations to face Founder's Syndrome. At the Council, we have interacted with nonprofits that are led by charismatic founders who are so strongly tied to the organization that donors think of themselves as giving to the individual, rather than the nonprofit. Some founders become so attached to their project that they become resistant to change and other’s input. They do not allow the organization to develop away from their original ideas and when they finally do leave, the organization is left to flounder.

The main idea behind the Standard is that organizations can avoid Founder’s Syndrome by bringing on new board members with fresh insights. Re-election appears to be the best way to determine who goes and stays while retaining the most effective contributors and not enabling others to stay on needlessly. According to the Standard, the number of consecutive board terms is not limited, thus, it is possible for a director to serve on the board for three, even four, decades. Such long-standing board membership has the potential to bring both good and bad results. It can be especially helpful in rural communities where recruiting a new batch of committed board members every few years can be a heavy burden. We hope that re-election prevents the board from becoming stagnant and allows the most valuable members to stay on as long as possible.

Do you think there is good reason to cut off the amount of time even really great and effective board members can serve? In other words, do you think there is a risk in making the number of terms that an individual can serve unlimited?

Next at bat: Board Orientation

Link Between Board Composition and Madoff Scandal? - Board Composition standard

Recently the Bernard Madoff scandal has gotten a lot of press across the country for obvious reasons. The scale and the sheer audacity of the crimes not only affected individuals across the country, but had an enormous impact in the nonprofit and philanthropic sectors as well. 105 of the nonprofits caught in the Ponzi scheme lost 30% to 100% of their assets.

So what does this have to do with board composition? An interesting report by the National Committee for Responsive Philanthropy (which was later picked up by the New York Times and the Chronicle of Philanthropy in this article) showed the majority of the nonprofits and foundations hit hardest in this scandal lacked adequate board size or diverse board leadership.

“The major lesson is pretty clear,” said Aaron Dorfman, the committee’s
executive director. “Small, homogeneous boards were much more likely to fall
prey to Madoff’s Ponzi scheme.”

In other words, to paraphrase from the Philosophy statement, these boards didn’t have the needed diverse expertise gained through professional or personal experiences to effectively govern the organization.

Now, this Standard is not telling a nonprofit who should sit on its board. Rather it is setting out a process by which a board of directors can assess how it represents its constituency, identify gaps in terms of expertise or experience, and evaluate its capacity to achieve the mission.

We’d be interested in hearing from folks in nonprofits or on boards how (or if) the board of directors looks at itself. How does your organization ensure that it has the varied experience and expertise to govern effectively? How do you go about identifying the constituents you serve and how the board of directors can best reach the community?

Next post: Board Length of Service

Checks and Balances - Separation of Roles standard

This post was written by Shelley Heil, who has been interning at the Charities Review Council this summer. Shelley is pursuing degrees in Sociology and Spanish at Wheaton College in Illinois.

At the core of this standard are checks and balances as a means of accountability. A conflict of interest is avoided when a staff member is prevented from acting as a board chair or treasurer. It also assures that key board positions are filled by individuals outside of the organization; thus bringing in valuable perspective, insight, and a unique network. The difficulty comes when this standard is applied to small or new organizations. Minnesota law requires that nonprofits have a minimum of three board members, if a board of three individuals includes one paid employee that translates to 33%. Members of focus groups that met in the spring voiced concern to the Council that this may be too high of a proportion.

What are the dangers or risks that you see if too many paid staff serve on a board or in key board positions? Do you think one out of three is too large of a proportion? If so, how do we account for smaller nonprofits?

Explored Next: Board Length of Service

It is Better to Give Than to Receive - Voluntary Board Service standard

This post was written by Shelley Heil, who has been interning at the Charities Review Council this summer. Shelley is pursuing degrees in Sociology and Spanish at Wheaton College in Illinois.

Nonprofits, as the name implies, are by nature meant to serve the community that their mission statement highlights. Resources (financial and otherwise) should go towards supporting that mission, not towards enriching the lives of its leaders. As the philosophy states, donors expect that “board members serve without compensation.” Thus, board membership is a voluntary position where members give of their time and share their insights as a gift to the organization.

There is no doubt however that serving on a nonprofit board is a time-consuming commitment that can be draining and even a sacrifice. And recently there was an interesting blog post, with an international perspective, that even questioned whether a volunteer board is of value to a nonprofit.

Is it too much to ask skilled individuals to provide leadership on a board without monetary compensation? If this is a general rule, do you think there are any reasonable exceptions? Furthermore, does offering compensation allow an organization to recruit a more diverse group of board members?

Up Next: Separation of Roles

"Regularly and consistently..." - Conflict of Interest standard

As nonprofits that have filled out the new 990 have found out, the IRS has started asking about a number of governance policies – a conflict of interest policy being one of them. Just having a conflict of interest policy isn’t enough, though, as the Form 990 also asks whether:

1. Officers, directors or trustees, and key employees annually disclose interests, and;


2. An organization regularly and consistently monitors and enforces compliance with the policy.

Now, it’s important to state that the IRS isn’t requiring a conflict of interest policy that meets these two points – they’re just asking about it. However, the new Accountability Standard around conflict of interest policies has been tweaked to reflect both of these points. To meet the new standard an organization would have to have an annual disclosure and consistently enforce the policy.

This, of course, begs the question, what does “regularly and consistently monitor and enforce compliance” mean? This is something we’re wrangling with and thought it might be interesting to get other people’s opinions on. Comments?

Next post: Voluntary Board Service

Engaged or Distant Leaders - Board Meetings standard

This post was written by Shelley Heil, who has been interning at the Charities Review Council this summer. Shelley is pursuing degrees in Sociology and Spanish at Wheaton College in Illinois.

This blog post marks the start of the Governance section of the Charities Review Council’s Accountability Standards; up to this point all standards have been part of the Public Disclosure section. Governance standards aim to provide a framework and accountability for an organization’s leaders: its Board of Directors, officers, and key employees.

This standard is a modification of the Council’s current Board Meetings standard. The primary change in the current draft of the new standards is that boards are required to meet four times per year, instead of three. Thus far, feedback on this standard has been varied. The goal is for boards to remain engaged and active with their organization. (For more about good governance and the importance of an engaged board, see Nonprofit Governance – The View from the IRS, remarks by Sara Hall Ingram, IRS TE/GE Commissioner) Only meeting every 6 months has the potential to create a distance between board members and the interworking of the nonprofit and the community it serves. On the other hand, some claim that requiring boards to convene four times a year is too prescriptive and doesn’t take into account how cultural differences may affect the number of annual board meetings for organizations. An earlier draft of the Standards stated that meetings needed to be “evenly spaced.” Negative responses to the phrase resulted in its removal.

What do you think? There’s no magic number of how many times an “engaged” board meets, so is 4 meetings a year too much, not enough? Additionally, is physical presence valuable? Should the standard require that meetings occur face-to-face?

Up Next: Conflict of Interest

Do Audits Help Build Public Trust? - Financial Transparency standard

We’ve made it to the last standard of the Public Disclosure section, the Financial Transparency standard.

At the Council we often talk about the importance of public trust. Without trust in a nonprofit, donors are much more unlikely to support it with time or money. This isn’t just common-sense, but has been supported by empirical analysis, including a study done by the Independent Sector that showed donors who have high confidence in charities give approximately 50% more annually than do donors who express low confidence. A key tool in building this public trust is yearly audited financials or, for smaller organizations, a board-approved Form 990, hence the focus on these two documents in the standard.

While we were testing the preliminary Accountability Standards in the focus groups, we heard a need to include education for smaller nonprofits about the value of an audit. We’re committed to building some resource into the Accountability Wizard to help with this, but we’d be curious to hear from smaller nonprofits about whether or not they choose to have a yearly audit, even if it isn’t required.

Next up: Board Meetings