Founding Board Members with Obvious Conflicts of Interest

QUESTION:
Hi – Can you help me? I am the founder of a nonprofit organization that is recruiting initial board members for this new organization. We don’t have employees and it will probably be quite a while before we do. I will serve as the organization’s Executive Director – and I will be on the board with no voting power.

One of the women interested in joining our board is a perfect candidate because she has so much experience in our industry. However, she is also in the process of opening up a “for profit” business that could become a supplier to our organization once we are up and running. Her business could volunteer a service to us, she could be a regular donor to our organization, but she would ultimately also profit from the referrals we send her. We’d really like her as a founding member on our board participating in all of our board meetings.

What do you think about this idea? Can we legally have her on our board and does this make a conflict of interest in any way? She would gladly take one of the board positions.

ALYSON’S ANSWER:

Thanks for this question. You have a complex situation here. My short answer is that you can have this woman on your board, but I wouldn’t.

As you know, a potential conflict of interest arises when a board member stands to gain (financially) from the decisions that are being made by the nonprofit. Your situation is exactly this. If this board (with this perfect candidate )is making decisions that could increase her profits, her decision-making as a board member could be compromised because she stands to gain from voting a certain way. She might not be making decisions in the nonprofit’s best interests – but instead she might be voting in a way that is in her own best interests.

Having said that, in most states, conflict of interest is not a problem as long as it’s foreclosed to other board members. If they are AWARE that she stands to gain by her decisions as your board member, AND she excuses herself from voting in instance where she stands to gain, then it is not a problem.

In your case, as your org is still new and young, I would worry not only about the actual legal issues here – but the APPEARANCE of what you are thinking about doing. How will the other board members be influenced by her presence – knowing that she stands to gain by certain decisions? How will other donors that you might want to attract feel if they know that she’s on your board and she’s starting her own business that will be working hand-in-hand with yours?

I hope this helps.

Also, at my web site at the page below, you can download a free copy of a conflict of interest statement and policy that might help you.

http://boardsthatexcel.com/7-steps/step-1-foundations/

Sincerely, Alyson

Nonprofit Board Recruitment – A Job for Board Members, Not the CEO

New board member recruitment is probably the most important responsibility of your board. Your new board members are the future of the organization – and will lead the organization when current members have cycled off the board.
Recently, when talking to a Board Vice Chair who was about to become the Board Chairman, she told me that she’d asked the CEO to recruit a new board member from a local accounting firm. The board was losing their Treasurer (because he had completed his two three-year terms) and the board lacked sufficient accounting and budgeting skill sets for a new Treasurer. So I was glad that they’d decided to approach one of the premiere accounting firms in town to inquire about potential board members.
What I wasn’t so happy about was the fact that this board member had turned to the CEO to ask him to make the connection with the accounting firm to solicit one or more new board members. By delegating the recruitment of new board members to the CEO, I don’t think this organization will be able to recruit the best candidates possible – and I think their board’s leadership and ability to govern will suffer.
Let’s turn for a moment and take a quick look at best practices for donor solicitation – which has some parallels with board recruitment. Exceptional development managers know that when you are soliciting donations from major donors, you have more success when you match the potential donor with an existing donor or board member. For example, if you are soliciting money from a bank president, then having a bank president ask for money increases your probability of success. When you are soliciting money from a college professor, send another college professor in to do the job. These “like-minded connections” will improve the success of your fundraising campaign.
Now imagine yourself as the potential, new board member. Would you rather that the CEO or a soon-to-be-fellow board member recruit you? Which option would make you feel more valuable, wanted, and welcome? Would you rather join a board of an organization that send the CEO or another board members to recruit you?
So when you are in the process of seeking new board members for your board – you need to have current board members do the soliciting and asking.
Here are a few more best practices for nonprofit board recruitment:
1. Establish a Board Development Committee that will spearhead your board’s recruitment efforts.
2. Your board VP (who will become the President at the beginning of next year) would be a good person to be the Chairperson of the Board Development Committee.
3. At the beginning of the year, ask the committee to develop a list of “skill gaps” – skills you need but don’t have and skills you will be losing as board members cycle off the board at the end of the year.
4. Have the Board Development Committee present a list of “skill gaps” and “recruitment priorities” at the very first board meeting of the year. This will focus the year’s annual recruitment efforts so that everyone can look for people with the passion for the organization and the skills you need.
5. Ask the Board Development Committee to present the potential new board member candidates and their qualifications at the beginning of the 4th quarter – and, per your by-laws, vote in new board members prior to the end of the year.
Because you are selecting future leaders of your organization, new member recruitment is one of the most important tasks of any board. It is essential that this function be handled by the board and not the CEO. Be sure that your board starts early and spends plenty of time recruiting exceptional board members.

These booklets can help you recruit exceptional board members: “Purposeful Board Recruitment” and “Board Development Committees.” To read more about these booklets, go to www.BoardsThatExcel.com/the-market/

4 Nonprofit Board Committees that all Well-Run Organizations Have

Regardless of the sector, maturity, or staff sophistication of the nonprofit organization, these four board committees are essential to the health of the organization and well-being of the board itself. Share this article with your board today and discuss how these four nonprofit board committees can help you do a better job providing oversight and support for your nonprofit. If your board lacks the expertise to support the activities outlined below, decide which board skills are needed, and start recruiting board members with these skills now.
Board Development Committee – This committee preserves the quality of your board’s future because it is responsible for determining what skills are required on the board, and for recruiting and orienting all new board members. While many boards have one-time orientation sessions, better boards continuously exposure their members to the work of the organization and the quality board governance they are trying to achieve. Along with the Board President, members of this committee communicate with your board members to ensure that they are making a productive contribution and they are satisfied with their board experience. The design, administration, and interpretation of your annual board self-evaluations is done by the Board Development Committee.

Finance Committee – The finance committee is often the most highly-functioning of all board committees. This committee supports the development of the annual expense budget, tracks the actual spending vs. budget, watches monthly cash flow, and interprets the overall financial health of the organization on behalf of the board. This committee supports the development of the longer-term strategic plan as well as next year’s annual plan. All of the financial policies of your organization should be reviewed by the finance committee prior to board approval. The Audit and Investment Subcommittees help round out the board’s involvement in the financial affairs of the organization.

Fundraising Committee – While the Executive Director is responsible for the organization’s fundraising, well-run organizations engage the support of the board in various part of their fundraising plan. This committee oversees the development of the Annual Fundraising Plan – and tracks the planned vs. actual results during the year. They encourage, train, and thank other board members for their involvement in the fundraising activities. They explore potential , new fundraising activities as part of the strategic planning process. Special Events Subcommittees can be established as part of this committee when appropriate.

Personnel Committee – Contrary to popular thinking, even small, young nonprofit organization need personnel (or human resource) expertise on their boards. Even if there is only one part-time employee working for your nonprofit, this committee helps make sure that all state and federal laws and regulations that affect employment are followed. This committee ensures that the wages you are paying are comparable to wages in other, similar organizations – and that each employee has a current job description, documented annual objectives, and yearly follow-up reviews that include training and career path planning. Employee Handbooks, Human Resource Policies, Staff Planning, Benefits Selection, Pension Considerations, and Vacation/Holiday Schedules for full-time and part-time employees are all within the responsibility of this committee.

Get the ball rolling by sharing this article with your fellow board members and your Executive Director.
If your board does not have a well-developed committee structure, start by assigning some board members to these committees now. If your board has committees but they’re not particularly effective, re-invigorate these four committees first. They are by far the most important to the effectiveness of your board and the success of your nonprofit.

Check out the booklets for each of these four committees at www.boardsthatexcel.com/the-market/

BoardMax – Software for Boards

I just got off the phone with Camille Beatty Falor from StreamLink. Camille gave me a tour of their software, BoardMax, which has been developed for nonprofit boards. This software could help your organization’s board manage board expectations (giving, meeting attendance, time), board meetings (agendas, packets, voting summaries), and board committee work (rosters, meetings, actions, etc). It provides tracking and trending statistics and can graph this data for you. This software looks especially interesting for larger boards facing complex decisions and governance issues. For more information, go to: http://streamlinksoftware.com/products/board-management

10 Questions Every MFI (Microfinance Institution) Board Should Ask and Every CEO should Know

Unfortunately, many definitions of MFI (Microfinance Institution) Governance involve “all stakeholders” including: the board, staff, donors, lenders, equity partners, shareholders, clients, elected officials and even regulatory personnel. Defining Governance this broadly avoids a critical question: Who is ultimately responsible for making sure that an MFI is ethically and profitably managed? It’s the Boards of Directors.
The board provides oversight in these five key areas: (1) financial stability, (2) strategy, (3) organizational policies, (4) CEO management, and (5) board sustainability. The board guides the organization while the CEO and his/her staff ensure that products are well-designed, clients are treated ethically and legally, employees are well-managed, investments are sound, risks are managed, and the organization has a strong foundation on which to grow in a purposeful, strategic direction.
Here are some simple, but powerful, questions that all MFI boards should be asking themselves and their CEOs as they provide guidance and oversight:
1. Are we more interested in the quantity or quality of our loans? How is this reflected in our managerial policies, procedures, and personnel reward systems?
2. Are we reasonably sure that our loans are invested in businesses that our clients own and manage? What are the benefits of knowing how our loans are used? What are the costs? What are the risks of not thoroughly understanding our client’s financial needs?
3. What are we doing to ensure that our clients are not borrowing from multiple lenders? (If we’re doing nothing, how could we manage this more effectively? What would this cost?)
4. How do we assess the credit worthiness of individual new and existing clients? What are our procedures for assessing new and existing client risks? What training do we provide our employees to assess the creditworthiness of our clients?
5. What is our organization’s public position on the development of a credit bureau? How are we supporting that position?
6. What are our pricing policies? How often does this board review our product line and management practices to ensure that we follow these pricing policies?
7. What client protection policies have we adopted? How do we communicate these policies with our employees and with our clients? How do we make sure that our employees adhere to these standards?
8. How do we assess the risk of our growth? What percent of our future growth will come from (a) increasing loans to existing clients or (b) loans to new clients or (c) new products? How do we compare the risk of these three sources of growth?
9. What financial or other risks are embedded in this business? Should we create policies and develop procedures to manage these risks?
10. What risks (legal, regulatory, and political) are inherent in the microfinance sector of this country? How are we insuring against and managing these risks?
Don’t shy away from these difficult and possibly daunting questions.
If you are the CEO of an MFI, work with your staff and board committees to develop a point of view about each topic. Write policies and create procedures to manage these areas of your business. Seek board approval for your conclusions.
If you are on the board of an MFI, forward this article to the CEO and the Chairperson of the Board. Offer to work with the CEO, staff, and appropriate board committees to discuss these topics and develop policies and procedures for the organization. Seek approval from the entire board. By approving organizational policies and procedures, the board takes responsibility for the MFI and governance of the organization is where it needs to be.

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