Posts Tagged ‘Governance’

Advice for Donors to Greg Mortenson and the Central Asia Institute

April 26, 2011

I’ve had a lot of people asking what I think about the recent allegations against Greg Mortenson about falsified stories in his best-selling books Three Cups of Tea and Stones Into Schools, and gross mismanagement of charitable funds donated to the Central Asia Institute. What follows is purely my own opinion, but so many people have focused on whether the allegations are true or not, and I thought I would contribute some thoughts on what to DO about it.

If you haven’t followed the controversy, I’d rather not get into it here. Feel free to

In short, there are clear management challenges, at the very least.

So what’s a donor to do?

If you believe in the work being done by the Central Asia Institute, I encourage you to be patient and wait for the dust to settle. A lot more ink will be spilled before this is over and it’s hard to say what will shake out. But in any case, before donating to the Central Asia Institute again, I would want to see the following steps taken by the organization:

  1. A new CEO hired that takes over the “business” of running a $20 million/year charity while Greg pursues the mission. This is for two reasons: one, Greg has admitted that he lacks organizational skills (and even his most ardent supporters agree) and he needs someone supporting him who demonstrates those skills; and two, it shows that the board is taking these allegations seriously and that they are trying to build an organization that is larger than any one man.
  2. Additional board members appointed who can provide greater oversight and accountability. Again, this would show that the organization is taking this seriously and is dedicated to good governance. Also, the existing board members seem to lack experience in some key areas of nonprofit management. Their response so far has been defending the mission but they need to do a “mea culpa” on some of these governance and management issues if they are going to retain any credibility.
  3. Audited financials every year. A charity this large should absolutely be getting an audit every year for sure.
  4. A clear travel expense policy put into place that would govern the use of charitable funds in the field. This seems to have been handled very casually, but needs to be tightened up.
  5. A copy of the attorney’s report showing they did not engage in “excess benefit” transactions with Greg. They apparently had their attorneys investigate this issue and the attorneys found no excess benefit. Great, let us see this report. I am especially curious about this one because the charity has made statements that there was no excess benefit because CAI benefits from the speaking/book tours more than Greg does. I believe this is an inaccurate explanation of excess benefit, which does not compare the benefits accrued to the individual versus the benefits accrued to the charity, but rather compares to benefits accrued to an individual versus what is considered “reasonable.” See this explanation of excess benefit transactions especially written for non-lawyers like me.
  6. If CAI feels that Greg’s speaking appearances are a critical part of fulfilling its mission and a fantastic fundraising tool, I can understand that position (I bet a lot of organizations that raise $20 million spend $1.7 million or more in fundraising costs). However, in that case they need to adopt a new policy that all speaking fees and proceeds from events surrounding Greg and CAI are paid directly to the CAI, and Greg’s compensation comes in the form of a salary from CAI. If they need to increase his salary to be more commensurate with his value to the organization, so be it.

In conclusion, I think it’s worth pointing out that all of these suggestions merely constitute good governance. They are nothing unusual, and most charities of any significant size would already have policies and practices like this in place. To all donors, I can only reiterate that before giving to a “good cause”, you should investigate whether the program or organization in question also represents good practice.

P.S. I can’t help but wonder if some of this book tour accounting nonsense was an attempt to keep his salary artificially low as an unintended consequence of watchdog and donor insistence on low salaries at nonprofits. I can imagine supporters thinking Greg deserved to earn more for all his contributions and deciding it would be “only fair” for him to keep more proceeds from his book tour which wouldn’t raise alarms as compensation on the charity’s tax return. This organization, after all, received a 4-star rating for its financials from Charity Navigator, which speaks volumes to the limitations of ratios and, if I’m right, the perverted incentives that this rating system sets up.

What Nonprofits Can Learn from a Girl Scout Manual

March 2, 2011

“A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves.” -Lao Tzu

Don’t laugh, but I’m the cookie mom for my daughter’s Daisy troop. There are still boxes of Thin Mints and Samoas in the corner of my living room, along with the yummy-but-not-enough-in-a-box-to-justify-four-bucks “Thank U Berry Much” variety introduced last year.

We have to get rid of those extra boxes, and so I read some of the material provided by the Girl Scouts about site sales. What caught my eye was an admonition for the adults not to take over the activity:

“Adults act as coaches who help girls develop leadership skills by using these three processes:

  • Girl-led: Girls play an active part in figuring out the what, where, when, how, and why of their activities. They lead the planning and decision-making as much as possible.
  • Learning by doing: Girls engage in continuous cycles of action and reflection that result in deeper understanding of concepts and mastery of practical skills.
  • Cooperative learning: Girls work together toward shared goals in an atmosphere of respect and collaboration that encourages the sharing of skills, knowledge and learning.”

It’s a fine line between coaching and doing, especially when we all know “if you want it done right, you have to do it yourself.” Adults certainly organize better, market better, craft better thank you notes. If you left the girls in charge, they might forget to put the cost per box on the sign. They might not pick the best location with adequate foot traffic. They might forget to bring enough change. And they certainly would not sell as many cookies as a group of adults would sell under the same circumstances.

But as the Girl Scouts manual so delicately points out, the larger goal isn’t to sell a bunch of cookies. The larger goal is to teach the girls critical leadership and entrepreneurial skills that they can apply elsewhere. And to accomplish that goal, there is no more important step than putting the girls in charge of cookie sales with adults coaching them.

Among our nonprofit community, I think there is a tendency to forget that the point of our efforts is to accomplish some mission, not perpetuate our organization. In much the same way as well-meaning adults take over cookie sales for their kids, increasing sales when sales aren’t the point, nonprofits have a tendency to cultivate donors as “theirs,” and claim a cause as “theirs,” when owning the cause isn’t the point. Accomplishing the mission is the point.

Instead of cultivating loyal donors to our organization, we should be cultivating passionate advocates for our cause. We don’t own them, we empower them. We are not the end, we are the means.

How many of our strategic plans focus on the infrastructure and financial growth of our organizations, and how many focus on how we’re going to accomplish our mission? How many of our board meetings focus on leadership around our causes and how our efforts are or aren’t getting the results we want, and how many focus on fiscal responsibility and budgets and fundraising?

I have yet to hear about a board that spends too much time focused on the organization’s impact and not enough reviewing its financial report. If your board is interested in becoming more mission-driven (rather than duty-driven), I highly recommend the work of Hildy Gottlieb, whose YouTube videos provide only a glimpse of the passion and wisdom she brings to community benefit organizations.

And next year, my daughter may only sell 5 boxes of Girl Scout Cookies. But she will have personally sold every one of them herself.

My One Prediction for 2009: Trustee Accountability Re: Investments

December 23, 2008

Bernard Madoff  and his $50 billion ponzi scheme have so far taken down a number of charities and private foundations, the almost $1 billion Picower Foundation among them.

It was immediately evident to me that foundation board members would find themselves held accountable for these problems with the investment of their endowment funds.  As soon as I saw those articles, I sent this update to my Twitter network:

Major warning to all foundation board members: your fiduciary duty extends beyond spending to the investments: http://is.gd/bMjT

Last week, a wealth management firm wrote me a letter to let me know that none of its clients were affected by the newly discovered scandal. This “manager of managers” said that when they checked in with their chosen managers, a few had done preliminary due diligence on Madoff’s fund but quickly opted not to invest based on the murky findings.

Real-world Consequences Starting to Appear

Now we’re seeing the first hints that my warning will be backed up with some serious consequences.  Thanks to the Chronicle of Philanthropy for this article on how the Connecticut Attorney General Richard Blumenthal is going to look into whether the trustees of the charities who were taken in acted appropriately as “prudent investors” protecting the foundation’s endowment funds.  Mr. Blumenthal said “The standard is that the director or fiduciary at any nonprofit has to exercise due diligence and the care and caution of any ordinary prudent investor.”

The Picowers may have been thrilled with the growth of their endowment in the seemingly capable hands of Mr. Madoff, but if it turns out that they didn’t do appropriate due diligence and trusted the foundation’s many hundreds of millions of dollars to “a friend” based on word of mouth–millions for which they already received a huge tax deduction when they donated to the foundation–the government could easily penalize them (maybe even imposing  personal finacial penalties) for being careless with charitable-use funds entrusted to their care.

Balancing the Equation

There are two sides to the financial equation for any organization: money in and money out.  For private  foundations, the income comes from donations or from investments–interest, dividends and realized capital gains.  But most boards pay far more attention to the money going out: grants and administrative expenses. 

So here’s my single prediction for 2009: Charity boards and trustees, especially those at private foundations who rely on the endowment to produce income for grantmaking, are going to suddenly take the income side of their fiduciary duty very seriously.  To play this trend out, I think smart foundations will take at least some of the following steps:

  • More grantmakers will decline to have their investment advisor sit on the board, or to say the same thing in reverse they’ll decline to pay a board member to provide investment advice. 
  • More foundations will hire firms to review their choice of financial advisors and their adherence to the investment policy.
  • More foundations will revisit their investment and conflict of interest policies and make sure they are in compliance with their own policies.
  • Foundations may also trend more conservatively in their investment decisions so  as not to appear to be prioritizing short-term gain over the conservation of principle.

If you’re on the board of a private foundation or a public charity with some investable assets, I highly recommend that you use your next board meeting to make sure you aren’t going to be taken down by the next Bernie Madoff.  For example, you should be familiar with the Prudent Investor Rule. 

For many nonprofit boards, financial committee reports may be limited to reporting on the investment returns and as long as the returns seem reasonable for the market conditions, there aren’t a lot of questions about where those returns come from.  If you and your board need guidance, you may consider whether to hire an independent firm to review your investment policy, make sure your policy is being followed, and to provide some educational sessions so that your board is well-informed and comfortable with the investment management. 

In 99% of cases, you’ll be comfortable with what you find and everything will be fine.  But it’s the process that matters–and your documentation of that process.  Jack Siegel, a Chicago lawyer who advises charities, was quoted in the Chronicle article as saying “It’s all about process. The question is, did they do what normally would be done in selecting investment managers?”

So in the end, your litmus test should be whether you, as a board member, would feel confident answering the questions of an IRS agent or your state’s Attorney General about how your investment process works.  If you’re not, get professional help.

All opinions expressed in this article are mine alone, and do not represent those  of my employer or any other nonprofit, foundation or organization with which I may be affiliated.

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