Wednesday, July 15, 2009

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


Sara Leiste said...

This standard sounds like it will be hard to apply. I have a hard time imagining an organization that would not say it has done these things. At the same time, I can't imagine how to prove them.

The philosophy and standard seem to be almost interchangeable. The philosophy, if you are going to hve one, should connect the standard to some higher outcome or values. This one just restates the standard.

Also, at some point the standards switch from referencing "the nonprofit" to "a nonprofit."

mwera said...

Thanks for your comment, Sara. As a former staffer, I'm sure you can appreciate the challenge of applying the standards.

With this particular standard the Program Committee tried very hard to focus on the process a nonprofit board goes through and not be prescriptive about who should be on a board.

Like a lot of the governance standards, often we have to rely on board meeting minutes to determine compliance - this one will be no different - and the Wizard will have some helpful tools for boards to use in this process.