Category Archives: Governance

What to Do If Embezzlement Occurs at Your Nonprofit

Last time, we discussed how you can protect your organization from embezzlement or other misappropriation of funds. But what if the theft has already occurred?

Gathering Evidence of Theft

If you have funds or property that can’t be accounted for, it’s time to investigate what happened. You’ll want to make sure that you know 1) you want to make sure that embezzlement actually occurred, and 2) who committed the theft. The investigation should begin as soon as possible. Delays can invite additional theft and make recovery of stolen property harder.

If you suspect a particular person, limiting his or her access to funds and other property during the investigation is probably a good idea. Another approach would be to leave the person in the position and watch for continued theft, but I don’t like that idea much. It continues to put the organization’s property at risk, and if word gets around that an investigation is underway, it’s not likely to be all that helpful. Confronting the person at this stage might be premature; I’d wait until you have pretty clear evidence that the person is actually stealing.

Punishing the Thief

Once you have clear evidence of who committed the theft, now it’s time to deal with the thief. It’s difficult for me to imagine a situation where no punishment would be appropriate; generally, I consider embezzlement to be fireable offense. Surprisingly, it doesn’t always work out that way. The Chronicle of Philanthropy reports that in one study, only 72% of organizations fired employees that stole from them, and 7% did nothing at all.

Why do so many organizations do so little? According to the Chronicle of Philanthropy, there are a few reasons:

  • Thief’s Remorse. Sometimes the thief is sorry for what they’ve done. A person that shows genuine contrition and returns the stolen property may be able to remain in the organization. Even in those cases, however, I cannot see levying no punishment at all. At a minimum, the person should not be allowed to handle organizational property again.
  • Embarrassment to the organization. Sometimes, organizations are embarrassed to admit what happened. Often, embezzlement exploits a flaw in the organization’s internal controls.
  • Loss of donors. It’s possible that donors may stop giving to an organization***It’s better, I think, to admit what happened and explain how the organization is improving its controls than to try to cover up what happened.

Additionally, you may want to consider filing a police report, particularly for large thefts. The police report is helpful in any future employment actions that might be filed by the thief and in recovering any stolen funds. Additionally, if your organization carries insurance against embezzlement, you may need to file a police report before making a claim–of course, you should check your insurance policy to make sure.

Recovering Stolen Assets

Recovering stolen assets, particularly cash, is difficult. However, that’s not to say that it isn’t worth trying. In some cases, you may be able to work out repayment with the person, and in other cases, you may need to take legal action. Just like with the investigation, it’s important not to delay the process of recovery. This is especially true if you have to file suit, because your organization will have a limited amount of time to do so.

Doing Better

Next, use this as an opportunity to improve your controls. What vulnerabilities in your system did the thief exploit? How can this sort of thing be prevented in the future? Leaving a known vulnerability in place is absolutely unacceptable–the problem must be identified and solved.

Making these needed changes doesn’t just protect your organization, but it also helps to restore the confidence of your donors, clients, volunteers, an other employees. Handling embezzlement is an enormous drain on the organization–it takes time and energy to deal with, in addition to the financial damage. Creating solid internal controls and improving them if you ever (unfortunately) need to is vital to keeping your organization focused on accomplishing its mission.


Preventing Embezzlement from Your Organization

To most of us, stealing money from a charity is unthinkable. Even so, embezzlement from nonprofit organizations is a serious problem. The Chronicle of Philanthropy reports that according to a 2007 study, 13% of the donations collected by nonprofits each year are lost to fraud. Further, the Washington Post reported that in 2013, more than 1,000 non-profits reported losses of $250,000 or more as the result of embezzlement, theft, misappropriation of funds, or investment fraud.

Losing that kind of money would sink–or at least seriously damage–a lot of organizations. Worse yet, the organization can be hurt even after the money is lost. Embezzlement or misappropriation can also discourage donors from supporting the organization, making it even more difficult to recover.

And worse yet, I suspect that smaller organizations are actually at greater risk than large ones. Why? Mostly, because large organizations are more likely to have controls in place. Also, I think there’s more of an expectation that a large organization will have and enforce those controls. Continue reading

Selecting Board Size: How Big Should The Board Be?

It’s one of those questions that sometimes seems to sneak up on new organizations (and sometimes troubles existing organizations too): how many people should we have on our board? Board size can affect your organization’s effectiveness, so we need to get it right.

Make Sure You Have the Minimum For Your State

Most states require 3 directors minimum, and most of the others require just 1. This number is a minimum; your organization is welcome to have more directors. In fact, it probably should have more directors; 3 people will have difficulty managing all but the smallest organizations.

There are no maximums; some boards have memberships over 20 and even into the 30s. I think that’s probably too many for most organizations.

Goldilocks and Board Size

Just like Goldilocks found the three bears’ beds were too hard, too soft, and just right (and was awfully picky, seeing as she let herself in), I think there’s too big, too small, and just right when you set up your board. Both the bare minimum size and the 20-30 member board are probably not the right choice for most organizations. Something in between those extremes, somewhere between 7 and 15, is probably best in most cases.

A board that’s too small can cause problems. The value of having numerous board members is that different board members have different perspectives. Board members with varying perspectives see problems and come up with solutions in different ways, and that’s not something you want to miss out on. Small boards make it more difficult for a quorum to be present, and can lead to more tied votes if you have an even number present.

Small boards may also have trouble staffing committees within the organization. Committees are not required, but they can help organizations address specific issues in the organization. Committees, whether permanent or temporary, often work on finances, fundraising, membership, and other issues.

Boards that are too large can quickly become unwieldy. When a proposed action comes up, board members may want to debate the matter, and if ever board member wants to speak on an issue, and you have a large board…well, your meetings could get really long, really fast. In such a large group, it’s also easier for board members to become disengaged with their duties, figuring someone else will bring up or deal with important topics.

Odds or Evens?

I usually advise organizations to have an odd number of members on the board. The obvious reason for this is to avoid ties. Of course, this is not a foolproof method of avoiding a tie; someone could abstain from a vote or not be able to attend a meeting. Still, I can’t see planning a situation to foster tied votes, like boards with even numbers of members.

What If I Have More People Interested in Serving Than I Have Board Positions?

First, be grateful to have so many people interested in leading your organization! Many organizations, especially in the startup phase, would love to have this problem.

Second, I don’t recommend expanding the board to add everyone that’s interested. People get burned out on board service, move away, have other things come up in their lives…and they may need some time away from board service. Also, your by-laws may require board members to take time off after a certain time on the board. In those cases, you could wind up with more positions than board members very quickly.

Instead, I suggest having those interested people serve in other capacities–committees, volunteers, that sort of thing. You want to keep them engaged in the organization. As you need new board members, you can start with these folks.

Board size is one of the first big decisions a new organization makes, and for most organizations, using Goldilocks as our guide–not too big, not too small, but just right–is what we want to strive for when it comes to board size.

Should Non-Profit Boards Get Paid?

A couple of weeks ago, the board of the Tampa General Hospital voted to take compensation for their board service, between $15,000 and $30,000 per year. Because nonprofit board positions are frequently unpaid, this raised a number of eyebrows and got a number of people talking and thinking about the issue (this article, by Monica Oss, was among my favorites). One board member resigned over the decision, and the board has since rescinded their decision.

But I think it’s still a question worth answering. There is some case to be made for compensation: as Ms. Oss points out, for-profit board members are compensated, often quite handsomely. And there’s certainly a time commitment involved with being a board member–in the Tampa General Hospital example, 6 meetings per year, plus committee meetings and retreats with hospital staff. Further, board members are expected to give their expertise, and as you can imagine, hospitals require a lot of specialized knowledge. If that knowledge has value (it does), isn’t it worth paying for?

Even with those arguments in mind, I’d still say that generally speaking, compensating board members is probably a bad idea.

First, compensating board members is a drain on resources. Not to pick on Tampa General Hospital, but to use them as an example, there are 15 board members, and each could have taken somewhere between $15,000 and $30,000. There were some board members who planned to decline the compensation, but assuming each board member took $15,000, that’s $225,000 being paid out in board compensation each year. I don’t know the hospital’s budget (it’s probably pretty big), but that’s quite a bit of money that could go to other projects in the organization.

Second, it may damage your relationship with the public. As a 501(c)(3) organization, your financials are available to the public through your tax returns. The public is generally wary and suspicious of nonprofits–if they’re going to give, they want to know that it’s going to help somebody. It doesn’t seem to please the media either; look at the first Tampa Bay Times article I linked above–in those first few paragraphs, it’s pretty clear the reporter does not approve. When you’re paying the board, that increases overhead and that can damage your relationship with the public.

Third, because paying directors is unusual, board members generally aren’t expecting, much less demanding, to be paid. Most directors understand that board service is a volunteer arrangement–and in some organizations, even an arrangement that requires the board member to give to the organization. In the Tampa example, one board member quit over the compensation arrangement, and others declined to take any compensation. Making board service more like a part-time job rather than a volunteer service opportunity might even turn some people off from the position.

And then there’s the legal stuff. Paying your board runs the risk of creating “inurement” to the directors. As it’s said in the regulations, the net earnings of the organization may not “inure in whole or in part to the benefit of private individuals.” By the way, don’t get too hung up on “net earnings,” as the Tax Court has said, any “unjust enrichment” counts (even a really small amount), whether its from the gross earnings or net earnings or whatever. If there is inurement, the organization’s tax-exemption can be revoked. Additionally, an insider that receives such a benefit gets hit with a 25% tax, and if the organization is not made whole, the insider gets hit with another 200% tax on the transaction. Additionally, any board member that approves such a transaction gets hit with a 10% tax. To sum up, this is a big deal.

Of course, often organizations will provide private benefits to individuals, and it’s not a problem. For instance, a food pantry provides food to people. A library lets people check out its books and CDs and whatnot. That’s not an unjust benefit, that’s just serving your charitable class as part of your exempt purpose. Using Tampa General Hospital as an example, a board member could be admitted to the hospital just like anyone else.

So what’s actually a problem? When you’re dealing with insiders of the organization (and board members are definitely insiders), those insiders cannot get the better of a transaction with the organization. It’s perfectly okay for an organization to do business with its insiders, but the terms have to be fair–if anyone is to be favored, it’s the organization. Also, any transactions between the organization and an insider are best done “at arm’s length,” meaning that the insider doesn’t have any special influence over the organization. Often, nonprofits have conflict of interest policies that require board members who stand to benefit from a transaction to disclose their interest and possibly recuse themselves from the discussion and decision. By the way, conflict of interest policies are a good idea.

Would this be private inurement? It’s hard to say (this is all very case-by-case), but here are the questions we need to ask:

First, is the compensation fair and reasonable? What are the skills the board members are providing? How much time do the board members spend on their duties? I’d suggest that an organization that compensated its directors get crystal clear on the time spent and the value provided by the directors. Also, the fact that other boards are usually uncompensated is a problem, although in the Tampa case, the board suggested a growing trend of paying directors a stipend. Again, this is all going to be largely determined by the facts of a particular case.

Second, is the compensation negotiated at arm’s length? Probably not. The problem is that there’s going to be a conflict of interest–the board members are voting on their own compensation. That’s a real problem with board compensation. One way to deal with that might be a “27th Amendment” solution–the 27th Amendment to the U.S. Constitution requires that no law changing the pay for a representative or a senator can take effect until the next Congress, so all the representatives and one-third of the senators have to survive an election to experience the change in pay. Perhaps something like that–where no board compensation changes could take effect until after the next board election–would make board compensation more palatable from a conflict-of-interest perspective. To my knowledge, that theory is untested.

Because paying directors is an unusual practice, an organization that decides to do it can expect to be scrutinized thoroughly–from the IRS, the media, and the public. Between the risks of the IRS finding inurement, the potential for public relations damage, and the possible better uses for the funds, I’d generally advise against paying board members.

Questions to Ask Prospective Board Members

Last time, we talked about what you should be asking an organization if you’re thinking of serving on their board. Today, we’re going to do the same thing for the other side. As this Forbes article says, you’re looking for 1) the ability to handle the job, 2) their interest in doing the job, and 3) whether they’ll fit in. So, with that in mind, what should you be asking prospective board members?

1. Are you excited about our mission?

An excited, engaged board is a valuable thing to have. I don’t mean to dismiss the value of skill and experience, but an enthusiastic board member can gain skills and experience, but a skilled, experienced board member that isn’t energized may not be contributing what they do have. Ideally, you can have all of those things, but if someone isn’t really that excited about the mission of the organization, you’re probably doing both prospective board members and the organization a favor by not putting him or her on the board.

2. What skills do you bring to the organization?

Ideally, you’ll want to have a variety of skills on the board: fundraising, planning, management, and governance, for instance. It’s probably too much to expect one person–or even a few people–to contribute all the skills you need. If you know you’re missing a particular skill, obviously you’ll want to bring someone on with the skills you need, if possible.

3. What have your previous board experiences been like?

You want to get a sense of not just the technical abilities of the candidate, but also a sense of how he or she works as part of a board. Do they generally work together with other board members? Do they handle conflict well? How’s their communication style? Are they willing to present a dissenting opinion, even if that opinion is theirs alone? Can they handle being on the “losing end” of an argument? You’ll want to consider whether the personality fit is right.

If you have prospective board members who have never served on a board before (which is fine–every board member who ever served had a first time), how do they work in other teams, maybe in their work or in some other organization?

4. Can you make the commitment we ask of our board members?

When I’ve worked with organizations, occasionally I have needed to find out what the expected time commitment for a board member is. I’ve found that sometimes the organization really doesn’t know! I suppose Question 3.5, then, is what sort of time commitment is necessary? Think about all the things a board member does:

  • Attending board meetings
  • Preparing for board meetings (and yes, board members should be preparing for board meetings)
  • Attending committee meetings
  • Preparing for committee meetings
  • Attending organization fundraisers and other events
  • Asking for contributions
  • In some cases, doing the work of the organization

And by all means, be upfront about the time involved! If you tell a prospective board member that it’s a 5 hour per month commitment, and it’s really 10, you haven’t done the candidate nor the organization any favors.

5. Can you handle the fundraising commitment?

Likewise, be upfront about the fundraising or contribution expectations. Some potential board members may not be as good at raising funds–are you willing to live with that in exchange for other abilities that person might have? Is it a skill that can be built?

6. What do you expect of the organization?

This is another opportunity to gauge how well the candidate will fit into your organization. There aren’t any right answers here–but what does this person expect match up with what the experience is likely to be? Also, I’d be a little leery of someone who doesn’t have any expectations. If you get that answer, I’d press a little before moving on–after all, we want to assess fit, and that’s good for the candidate and the organization both.

7. What do you think makes for an effective board member?

I start from the assumption that everyone wants to do a good job (and in my experience, this is usually, but not always, the case). Assuming that’s the case, the answer to this question can give you a look into the standards that the candidate holds himself or herself to. Additionally, it can provide you with some insight into the standards the prospective board member will hold his or her fellow board members to, which can help you assess fit.

8. Why are you interested in board service?

There are a bunch of other ways to get involved in the community: you could join a service organization, you could do other types of volunteer work, or you could simply donate to various causes. What is it about board service specifically that’s interesting to them? This can help you determine what motivates them and how they see their skills.

9. Is it important to you to interact socially with your fellow board members?

This is not a question that had occurred to me; however, I noticed it in some other possible lists of questions (see here and here for examples, as well as some suggested questions I didn’t cover). For some people, joining a board is a social experience, and they expect to interact socially with their fellow board members. At the other end of the spectrum are people who don’t see board service as a social outlet (this is where I’m at, not that I mind social interaction). Again, this is an issue of fit: someone who wants social interaction might not enjoy a “do the work and go home” kind of board–and the opposite is probably true as well.

10. What questions do you have for the organization?

A potential board member ought to have some questions (maybe even some of the ones we talked about last time) for the organization. If prospective board members have no questions, and they haven’t already been doing something in the organization, I’d suspect that they weren’t interested or weren’t taking the commitment very seriously.

Ultimately, you want to figure out if prospective board members can bring the skills or connections you need, the enthusiasm for doing the board’s work, and a personality that will fit into your board. If someone isn’t a good fit, there’s no need to force it; trying to make someone fit will probably be bad for that person and your organization.

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Questions to Ask Before Joining a Board

If you’re active in the community–or you’d like to be–one of the things you might have considered is the possibility of joining the board of a nonprofit organization. Joining a board can be a tremendous opportunity: you can develop leadership and management skills, serve a cause you care about, and build your professional network.

That said, board service is not for everyone. Even if board service is for you, not every organization and every potential board member are going to be a good fit. And if it isn’t a good fit, it’s a lot better not to join that board in the first place.

What do you need to know? Let’s start here:

1. Why do you want to join this board?

Board service has a lot of personal benefits. Board members can meet people and expand their professional and social networks, add valuable experience to their resumes, and develop skills. But if you’re primarily joining for personal benefit, you probably aren’t going to be that great a board member–you’ve got to care about the cause or about helping whomever the organization is helping, or you probably won’t be effective.

2. Are you interested in this cause?

There are a ton of great causes out there, but not everyone cares about everything equally. You might agree that literacy and protecting animals and sheltering homeless people are all worthy things to be doing, but you probably care more about some things than others. That’s okay! Different people will have different priorities. If you’re not particularly interested in the cause of a particular organization, do them and yourself a favor and don’t join. Instead, wait for an opportunity with a organization that does something you are really interested in.

3. Have you read the organization’s key documents?

I know that an organization’s bylaws and financial reports are not usually very exciting reading. However, before you commit to the organization, you should make sure that you understand what’s going on in that organization. At a minimum, you should read the organization’s articles and bylaws (would you play a game without learning the rules first?) and the organization’s latest financial statement; you can find a good list of materials (and some other good questions) here.

4. What is expected of you?

Different organizations require different commitments from their board members. Can you make most (if not all) of the meetings? Are the board members expected to do additional fundraising activities or other work beyond the board meetings? Are there committees that you’ll be serving on as well? If you don’t have the time, it’s better to know that before you join.

5. Is the organization ethical and compliant?

This may be harder to determine from the outside, but does the organization follow the rules? Those rules include federal and state law as well as the organization’s own by-laws (yet another reason you should read them). If an organization isn’t compliant with federal and state law, or if they can’t seem to follow their own rules as set forth in the by-laws, run. Now.

6. How are the relationships in the organization?

You certainly don’t need everyone in the organization to be the best of friends, but the board, volunteers, and staff should be treating each other respectfully and professionally. If the board and the staff are stepping on each other’s toes or are unable to deal with each other appropriately, this may not be the organization for you. I’d also suggest looking out for a lot of turnover in board and staff, difficulty keeping volunteers, and donor attrition as well.

7. Does the organization carry directors and officers (“D&O”) insurance?

It is possible that directors and officers of an organization may make mistakes running the organization. In some cases, this might lead to lawsuits. Organizations can take out D&O insurance in order to indemnify their directors and officers against defending those lawsuits and paying judgments. Generally, these insurance policies will cover errors, but not intentional wrongdoing. If an organization is leaving its directors and officers uncovered, I’d probably stay away.

8. Are the organization’s finances in good shape?

Remember the financial statement you looked at up in Question 3? Well, how does the organization’s financial health look? Here are some of the issues I’d look for:

  • Is the organization following appropriate accounting procedures, and does the organization get independent audits?
  • Does the organization carry adequate cash reserves?
  • How well does the organization meet its budget? If there are major differences, what happened?
  • Is the organization susceptible to cash flow troubles? Is there a way to resolve those problems?
  • Is the organization carrying debt? If so, is the debt load manageable?
  • Does the organization depend heavily on a few donors or major grants, or does it receive broad-based support?

If an organization’s finances aren’t perfect, that might not be a deal breaker. However, the organization should be aware of any problems and committed to resolving those issues.

9. What’s expected of you?

You’ve probably already considered the time commitment needed for board meetings, but the organization may have additional expectations. In addition to board meetings, an organization may have additional committees that you may be assigned to, and in some cases, board members also do some of the work of the organization (often known as a “working board”).

Also, board members are often expected to make some sort of financial impact on the organization. Sometimes, this is a direct donation. Other times, it might be a commitment to raise a particular amount of money from others. Can you afford the amount involved, or do you have the skills and drive to raise it?

10. What is the organization’s strategic plan?

Nonprofit organizations often engage in strategic planning, which is how the organization identifies its strengths, weaknesses, opportunities, and threats (the “SWOT analysis”), it’s mission, and all of the parts needed to achieve that mission. Strategic planning is more of a process than a task; organizations often make the mistake of doing the strategic plan–and then sticking it in a file cabinet somewhere. Not only should the organization be involved in strategic planning, but that planning should be regularly reviewed, and should actually be used to guide the organization.

If you’re interested in joining a board, don’t go in blind; make sure you know what you’re getting into and what you can expect from the experience. And beware the organization that isn’t interested in answering your questions–board membership is a serious commitment, and an organization should be happy to make sure that you understand that commitment.

Photo credit: Negative Space, via, licensed under CC0