Secrets and Lies at Silicon Valley Community Foundation

“A scandal at the Silicon Valley Community Foundation (SVCF) has roiled the world of philanthropy,” wrote philanthropy expert and consultant Alan Cantor on May 7, 2018.

Just two weeks earlier, a drama unfolded in the Northern California enclave of tech billionaires; “[a] blockbuster story with dramatic elements worthy of an HBO mini-series…. There were “[a]n imperious and (until now) impervious CEO, secretive billionaire donors, abusive treatment of employees, sexual harassment, operational dysfunction, intrepid investigative journalism, and, finally, rolling heads as the board of directors belatedly recognizes the scale of the problems and reasserts control.”

The shocking tale was published on April 18, 2018, in the Chronicle of Philanthropy: A Star Performer Created a ‘Toxic Culture’ at the Silicon Valley Community Foundation, Say Insiders by Marc Gunther along with the Chronicle’s news editor, Megan O’Neil. The next day, Mr. Gunther published a long blog post with many intriguing details not included in the main story: Transparency, accountability and a troubled workplace at the Silicon Valley Community Foundation.  

At first blush, the main focus of the unfolding scandal was a #MeToo problem: The foundation’s chief fundraiser, who was effectively second in command, routinely bullied and demeaned colleagues, made sexually and racially insensitive remarks and at times even threatened physical violence.” This description of her – yes, her! – actions, though factually accurate, is a bland understatement of the havoc she created and maintained at SVCF for a decade. She terrorized the workforce, causing many workers to leave, some without having secured new jobs.

Without a number of brave whistleblowers, whose stories were gathered and highlighted by the excellent journalistic work of Mr. Gunther and Ms. O’Neil, this serious problem at the Silicon Valley Community Foundation would not have been exposed.

But that wasn’t all that was revealed. While at first, it appeared that the story was the manager from hell and the toxic workplace, that was the tip of an iceberg of controversy and organization dysfunction.  

“It’s a cautionary tale for all nonprofits.” Discussing the many issues raised will take longer than a single blog post; this first one will set the stage: the history of SVCF leading just to the point that the scandal broke wide open on April 18, 2017.   

   Silicon Valley Community Foundation Takes Off

In 2007, the two community foundations in the vicinity of the nation’s premier tech hub decided to merge. The new entity, named the Silicon Valley Community Foundation, was positioned right out of the gate to do great work. Immediately following the merger, the new Silicon Valley Community Foundation held $1.5 billion in assets. There was no shortage of fundraising prospects – including billionaire entrepreneurial superstars like Mark Zuckerberg – right there in the neighborhood.

With potential donors like that ripe for the plucking, SVCF’s board of directors searched for a philanthropy superstar of its own – someone with just the right vision and drive to guide the foundation as its new chief executive officer. They successfully recruited Dr. Emmett D. Carson, formerly of the Ford Foundation and the Minneapolis Foundation. He had a “rising national profile” along with the “ambition to make the Silicon Valley Community Foundation a national powerhouse.” Dr. Carson had even “a grander mission”:  making the Silicon Valley Community Foundation “one of the nation’s biggest philanthropies, an institution that could rival the foundations created with Gilded Age wealth a century ago.”

To achieve this goal, newly appointed CEO Carson knew he needed an equally dynamic rainmaker. He selected Mari Ellen Reynolds Loijens as the SVCF’s “chief business, development and brand officer.” Ms. Loijens came from the Junior League of San Jose and other prior posts with an impressive fundraising record.

Over the next decade, Ms. Loijens more than distinguished herself as the chief fundraiser of the Silicon Valley Community Foundation and because of her great success “made herself indispensable” to Dr. Carson.

She successfully snagged the big fish: Mark Zuckerberg donated stock worth over $1.8 million and  Netflix’s founder, Reed Hastings, has contributed $100 million. Other huge donors include Twitter co-founder Jack Dorsey, Microsoft’s co-founder Paul Allen, and eBay pioneer Jeff Skoll.

In February 2018, SVCF stunned the philanthropic world by announcing it now manages assets worth some $13.5 billion, a jump of about $5 billion in the prior year alone. This now makes the Silicon Valley Community Foundation larger than the Ford Foundation and the Rockefeller Foundation. More than 90% of the money is in the form of donor-advised funds.

Dr. Carson pushed his team “to raise as much money as possible.”  No one at the Silicon Valley Community Foundation remained in doubt that the organizational focus was growth, growth, and more growth. He has been a strong and vocal  proponent of a model of community foundation that expands geographically and philosophically as well as financially. SVCF established offices in New York and other locations far away from Northern California, sought donors from far afield, and made grants to organizations and for purposes well beyond the local area.

According to one of the key whistleblowers (and notably someone who allowed her name to be used), former SVCF executive Rebecca Dupras, Ms. Loijens was fully on board with this vision and a good fit to advance his and the foundation’s agenda. “She brought in the money, made the place bigger, and he could go out and be a superstar.”  

   The Toxic Workplace

This outward, spectacular, growth was masking several huge problems including, most notably, a “toxic workplace culture” that “festered for years.” It was caused by Ms. Loijens and enabled by Mr. Carson. “He could have stopped this and reined her in, and he didn’t,” according to Ms. Dupras. There was an atmosphere of frustration and fear. Over and over, employees complained to the H.R. department but were brushed off. According to several whistleblowers, Dr. Carson didn’t want to hear or talk about it.

The employee turnover rate was much higher than normal – a fact that, alone, should raise alarm bells in any nonprofit boardroom. Also, there was evidence in plain sight. An online ratings site for nonprofit workplaces, GlassDoors, Inc. had some 50 or so highly negative, specific reviews in recent years.   

What got the ball rolling on bringing this disgraceful situation to light was an article written by Marc Gunther in the Stanford Social Innovation Review in the fall of 2017.  Titled The Charity That Big Tech Built, it was behind a paywall, but some current and former SVCF employees saw it. This article raised questions about the Foundation’s operations different than the problems created by Ms. Loijens, but it identified a sympathetic journalist that a whistleblower might be comfortable approaching.

Slowly but surely, one, two, and then others, made contact with Mr. Gunther. Many were so fearful they only stepped forward anonymously. Eventually, Rebecca Dupras and another former executive were willing to go public with their stories. Mr. Gunther’s April 19th blog post tells this fascinating story.

By the beginning of April 2018, Mr. Gunther and Ms. O’Neil were ready to go forward. Through a series of exchanges in the next few weeks, they approached Dr. Carson with their story – and their considerable supporting evidence – and offered him opportunities to respond before publication.

     Conclusion

As we’ll discuss in the next installment in this series, his reaction was a textbook example of how a responsible nonprofit CEO should not respond to a legitimate scandal about to break.

Governance: Invitation for Sector-Wide Discussion

The Nonprofit Quarterly, led by editor Ruth McCambridge, regularly takes the lead in sparking innovative thought and reflection in the nonprofit sector.

On April 16, 201, NPQ launched the newest topic for sector-wide discussion and consideration: Nonprofit Boards and Their Relevance in Governance: An Invitation to Engage.  “One of the most rapidly advancing topics in the sector right now centers on the shape and function of nonprofit governance. If you do not already know that, you need to take a moment to consider some of the more recent thinking on the subject.” Thought leaders in the last decade and a half have noted that ideas about nonprofit governance have “…broken free of some preconceived assumptions that kept producing and reproducing the same problems.

    Reframing of Governance Discussions

Case in point is scholarship by Bill Ryan, nonprofit consultant and lecturer at the Kennedy School of Government, dating back to 2003 and reprinted last year: Problem Boards or Board Problem? He and his co-authors explore the conundrum of so many “underperforming” boards “despite a boatload of consulting and normative literature.” They suggest that experts, in order to solve governance problems, perhaps ask the wrong questions in the first place – a process doomed to fail.

Ryan and his team prescribe a number of solutions including clarifying board roles and responsibilities and establishing and maintaining a better dividing line between questions of policy and questions of management. They also emphasize creating a board experience that is more “meaningful” and “satisfying.” Perhaps, they suggest, a “new sense of the problem of purpose may be more useful than still more solutions to the problem of performance. The right solution to the wrong problem rarely works.” Their goal – or at least a side effect of it – has been to disrupt the “comfortable assumptions” of consultants which they sometimes describe as the “nonprofit governance industrial complex.”

Editor McCambridge also refers to David Renz, director of the Midwest Center for Nonprofit Leadership, who “a few years later … took that thought to its next level by proposing that we had our terms of reference all wrong.” In his landmark NPQ article, Reframing Governance, he posited that the board is not the only source of “governance activities” because “[m]of the shaping decisions that determine a nonprofit’s future are made externally at levels where policy and practice standards are set.”  Renz has asserted that “[g]overnance is a function and a board is a structure—and, as it turns out, a decreasingly central structure in the issue of new or alternative forms of governance.” Nonprofit organizations “sometimes act as willing prisoners to hierarchical, control-oriented organizing,…”

   The Discussion Going Forward

These are “radical notions” from two highly respected experts in the field that has spurred important new thinking: “In our opinion, this is one of the most exciting and timely frontiers of practice, and a lens through which the sector may leverage great gains in its work.”

To encourage a sector-wide discussion along these innovative lines is why The Nonprofit Quarterly decided to be the catalyst now on this crucial topic. Beginning in mid-April and into May, the publication is offering a series of lengthy, scholarly articles from the publication’s spring 2018 edition, “Dynamics and Domains: Networked Governance in Civic Space.” The suggestion is to read – and then reread – them “even as the central notions being advanced sink and [are] put in place.”

These articles are a sample of what is now out in the literature, but NPQ hopes that they will be a springboard for readers to delve into and then add to the discussion.

They are lengthy and somewhat technical.  They could benefit from an abstract or summary of argument at the beginning; nevertheless, they are well worth the time.

Conclusion

These articles should be a useful starting point for exploring the breakthrough ideas that scholars in the field nonprofit governance have focused on in recent years.

Nonprofits: Adopt a Board Confidentiality Policy

There are certain types of formal written corporate policies that nonprofit organizations are well-advised to adopt and follow rigorously. Examples include a Conflict of Interest Policy and a Whistleblower Policy – two of the items that IRS revenue agents will ask to see during an audit.
There are other categories that are useful and recommended if they apply in the particular circumstances; for instance, an advisory board policy or a social media policy.
A third category is helpful as an educational device; that is, to spell out and remind people associated with the organization of duties and obligations. One such document is a board confidentiality policy.

   The Duty of Confidentiality

Members of a nonprofit board of directors have a fiduciary duty to keep private certain information learned in the course of board service. The legal obligation exists even in the absence of an express confidentiality policy written up and formally adopted.
Each state adopts its own specific corporations-code language spelling out the legal obligations of nonprofit corporate directors but, around the United States, the general standard follows a long-standing, common-law tradition: the twin duties of care and loyalty.
The description in the California Nonprofit Public Benefit Corporation Law is a bit longer; nevertheless, it boils down to these well-established fiduciary concepts:

5231(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner that director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

A duty of confidentiality is inherent in this standard:

Like their for-profit counterparts, board members of a non-profit corporation are in a fiduciary relationship with the corporation [and must] act honestly and in good faith….The obligation has many components, including a duty to avoid conflicts of interest and a duty to avoid abusing their position to gain personal benefit. One component of board members’ fiduciary obligation is a duty to maintain the confidentiality of information that they acquire by virtue of their position.

  Developing a Confidentiality Policy

A breach of confidentiality can happen for a variety of reasons. During board service, members sometimes have access to personal information or sensitive material concerning fellow board members, donors and supporters, the membership of the organization generally, and charitable beneficiaries. This may come up in discussions involving health, employment, or finances of certain people, or in consideration of potential conflicts of interest.
While a board member’s general awareness of fiduciary responsibilities would – in a perfect world – be enough to prevent problems, there are several good reasons for taking the time and effort to create and adopt a separate, written policy document.
Considering an issue well in advance of the development of a problem is always a good idea. Many nonprofit boards give their attention to crafting a confidentiality policy only after a crisis occurs. When that happens, the board must manage a dangerous and delicate situation in the heat of the moment and without a reliable guide to follow. This type of event can also create a sense of urgency to draft a hasty and possibly incomplete or ineffective policy for the future.  
A confidentiality policy in place well ahead of time has multiple benefits: It educates the directors about their obligations and creates a clear standard of conduct. 

   Elements of a Confidentiality Policy

While, in a pinch, a short-form document may be useful – see for example samples suggested by the National Council of Nonprofits – this is the type of policy that should be thoughtfully developed with help from counsel. Each organization has unique features which should be addressed.
In crafting a written policy document, consider and include these items:

  • Identify the reasons a board confidentiality policy in your organization is needed or can be helpful.
  • List who the policy will cover. It may be advisable to cover not only board members, but also (in whole or in part) certain staff, committee members who are not on the board, and advisory board members. 
  • Explicitly state and define the directors’ (and others’) duty of confidentiality.
  • Define what constitutes confidential information. Since nonprofits vary substantially in their missions, activities, and structures, this content should be custom designed.
  • Specify which matters are not confidential, especially in terms of applicable open-meeting laws.
  • State whether audio or video recordings are or are not allowed.
  • Clarify if, and how, a board member can obtain written authorization to release confidential information.
  • Explain the consequences of unauthorized disclosures.

  Conclusion

Once the confidentiality policy is drafted, the board must formally approve it. It should be written into the bylaws and included in all board member handbooks. It should also be discussed as part of any new board member orientation, the new director should sign a statement indicating the policy has been read and understood. 
Fiduciary duties are the basic responsibilities of board members. It’s more likely that directors will meet their duties when there is a formal written policy or policies explaining them clearly. 

When Mission and Personal Philosophy Diverge

An intriguing story bubbled up in the third week of January 2018 to grab some space in the New York Times and other important news outlets. “Trouble [had] been brewing for over a year at New York’s venerable American Museum of Natural History (AMNH) and [finally erupted] in a bizarre dilemma that perhaps could only arise in today’s contentious political atmosphere.”
AMNH “is one of the world’s preeminent scientific and cultural institutions. Since 1869,

the Museum has advanced its global mission to discover, interpret, and disseminate information about human cultures, the natural world, and the universe through a wide-ranging program of scientific research, education, and exhibition….[I]t has long been on the front lines of the climate change discussion, as its scientists study the potential damage and its educators try to alert new generations to the dangers of global warming.

Its41 board seats are among the city gentry’s most coveted social prizes”; the trustee roster includes Tom Brokaw, Theodore Roosevelt IV, Jeff Bezos’s mother, and other familiar names.
But the reason there’s a news story here is that one particular name on that list seems conspicuously out of place among these environmentally friendly, climate-change-believing folks. That person is Rebekah Mercer, a billionaire many times over (along with her father, Robert) who loves fossil fuels and who bankrolls many conservative, climate-change-denying organizations. Her family also are key donors to the Republican Party as well as the latter stages of the candidacy of Donald Trump, who often characterizes climate change as a “hoax” and “fake news.”

   A Director in Conflict

Rebekah Mercer was elected to the Museum board in 2013, the year that her family made an enormous donation. The Mercers have kept a low public profile until recently, considering their vast wealth and active positions in GOP politics and conservative causes. The “secretive family rose to prominence in 2016 after funding and organizing Trump’s presidential campaign.”
“What was either unknown at the time – (that is, in 2013 when Rebekah Mercer was invited to join the Museum board) – or more likely just not discussed much was Ms. Mercer’s business ties and political activities that are diametrically opposed to everything that the museum stands for.”
In a story published in January 2017, the New York Times reported that “[t]he connection of Ms. Mercer, the museum and the Mercer Family Foundation’s donation history came to light during an analysis by  [the Times] –

of activities by cultural leaders who donated to Mr. Trump’s presidential campaign. Several of them are board members at New York City arts organizations, including John Paulson at the Metropolitan Museum of Art and Mercedes T. Bass at the Metropolitan Opera. But none are as unusual a fit as Ms. Mercer and the American Museum of Natural History.

As a result of this information, a group of 20 museum employees began discussing their dismay that Ms. Mercer was on the AMNH board; reportedly, some 10 employees filed complaints with the Museum’s human resources department.
While this effort did not succeed, it’s interesting to note that a few years earlier, in 2015, some climate scientists and environmental groups successfully pushed to oust another famous climate-change-denying oil billionaire, David H. Koch, from the Museum board.  “He stepped down, though the museum said the reasons were unrelated to the protest.”
This unease by AMNH scientists about the continued service of Rebekah Mercer on the board of trustees went on under the surface for a year.
In early January 2018, Jonah Busch, an environmental economist at the nonpartisan Center for Global Development, noticed something odd at one of the Museum’s exhibits in the David H. Koch Dinosaur Wing. On Twitter, he posted photos of a museum plaque “that minimized human influence on global warming. While the exhibit said greenhouse gas pollution ‘may also have an effect on the Earth’s climatic cycles,’ it said ‘there is no reason to think another ice age won’t come.’”
The Twitter post went viral. The Museum released a statement promising “a speedy review.”  Nevertheless, it “ignited a larger debate about the museum’s cozy relationship with those working to discredit the overwhelming scientific consensus on climate change.”  The Dinosaur Wing plaque had been “installed in the early 1990s, the so-called Exxon era of the museum, during which time the fossil fuel giant — whose “duplicitous efforts” to deny climate change were well-known by then — funded several permanent exhibitions.”
Of course, the controversy about Rebekah Mercer’s position on the Museum board also flared up.

  Director Removal Urged

Shortly after the Twitter incident, a group of more than 200 prominent scientists and academics published an open letter to the Museum, urging the board to remove Ms. Mercer from her trusteeship.  These people, including “climate science luminaries” criticized the Museum for accepting “donations from the Mercer family, which has funded several groups involved in climate denialism and opposition to government action on climate change.”
The open letter is part of a larger effort organized by a group that was key to the earlier ouster of David Koch.
Neither Ms. Mercer nor her spokespeople responded to any requests for comment. The Museum president issued a statement, affirming it “…deeply respects the works and views of scientists … at the museum and those from the broader community….[But] the museum … does not make appointment decisions confirming staff or trustees based on political views. The museum has long maintained that its funders do not shape its curatorial decisions.” It “cites past exhibitions on climate change, as well as the research work being conducted in-house, as evidence of a firewall between donors and decisions.”
Others, though, are skeptical about this so-called firewall. People “…with experience in the museum sector say that ultra-wealthy patrons have always had a say in institutional decisions, and warn that it’s especially naive to pretend otherwise when the donors have a vested interest in shaping the thing they’re helping to fund.” According to James Powell, former director of the Los Angeles County Museum of Natural History, “A museum board member who has the potential to give millions or tens of millions exerts influence merely by being in the room.” Other trustees are afraid to speak up “else the wealthy member may take his donations elsewhere.”  
Just after the open letter from the outside scientists had circulated, 28 of the Museum’s tenured curators took a stand, too, issuing a letter to the Museum’s senior vice president and provost of science. They “expressed their profound concern” concerning “Ms. Mercer’s alliances with and donations to organizations that they say challenge and politicize climate change science.”
A Museum spokeswoman said that the Museum’s president would have no further comment beyond the response already issued after the outside scientists’ open letter.

   Many Questions

The numerous news articles and analyses reporting and commenting on this story point out that there are many unanswered, but important, questions for follow-up.
First, how did Rebekah Mercer manage to snag a coveted spot on the board of one of the most prestigious charitable organizations in Manhattan? Yes, she is fabulously wealthy, but New York is not short of multi-millionaires and billionaires. While before the 2016 election cycle, she kept a relatively low profile, even a cursory examination of her interests and activities would have revealed a profound mismatch with the mission of the American Museum of Natural History.
Is there any kind of a vetting process other than the ability to write an enormous check? “About a dozen other trustees at the American Museum of Natural History contacted for comment declined or did not respond.”
Second, why – when “…more often than not, trustees champion the missions and philosophical underpinnings of their museums,” did Ms. Mercer choose to serve on this particular board?
Questions like these are “anything but academic at a moment when” the Museum leaders “are being asked to remove a wealthy, climate-change-denying, board member.”
Perhaps the key issue here is whether, under principles of good governance and in consideration of the fiduciary duties that a trustee owes to the charitable organization,  there any way that Rebekah Mercer should remain in her board position?

  Director Fiduciary Duties

“Is being a big donor sufficient,” asks Martin Levine in his analysis of this case in The Nonprofit Quarterly, “to serve on a nonprofit board? Does it trump sharing a common vision with the organization?”
When, as in this case, the board member is a financial asset but rejects core beliefs of the organization, who is to do the vetting, and how?
According to BoardSource, the board as a whole, in order “[t]o satisfy its fiduciary duties, … is responsible for …determining the mission and purposes of the organization, … strategic and organizational planning, ensuring strong fiduciary oversight and financial management, … approving and monitoring the organization’s programs and services, [and] enhancing the organization’s public image.” A board’s responsibilities are much more than just fundraising.
As to the duties of the individual board members, each one is responsible for knowing “the organization’s mission, policies, programs, and needs and…serving as active advocates and ambassadors for the organization and fully engaging in identifying and securing the financial resources and partnerships necessary for the organization to advance its mission.”
In the Museum case, not only does Rebekah Mercer lack an ideological commitment to the Museum’s understanding of climate science, she actively promotes – indeed, bankrolls – several anti-climate-science groups that work hard at shutting down efforts to protect against and prevent the ravages of climate change.
BoardSource makes a point of adding some additional duties of each board member that raise provocative issues in this case. Specifically, board members are expected to:

  • “sign an annual conflict-of-interest disclosure and update it during the year if necessary, as well as disclose potential conflicts before meetings and actual conflicts during meetings, and
  • maintain confidentiality about all internal matters of the organization”

While “conflicts of interest” generally arise in connection with personal or family private benefit or enrichment, isn’t an ideological conflict of the type present here a disqualifier for service on the board of American Museum of Natural History?

  Conclusion

Perhaps “[t]his is a time for all boards to think about how they will respond when an important board member and donor is challenged,” according to NPQ’s Martin Levine. He paraphrases Steve Dubb, a fellow NPQ contributor commenting on another difficult philanthropy situation last year: “The answers are not easy, but the questions are hard to avoid.”
 

Best Practices & Nonprofits

When experts in a field get together, they like to toss around the phrase “best practices.”

A best practice is a method or technique that has been generally accepted as superior to any alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things, e.g., a standard way of complying with legal or ethical requirements.

“Best practices” generally has a broader meaning than complying with specific laws and regulations. Meeting a legal requirement can be viewed as engaging in the minimum (and mandatory) acceptable behavior in a particular situation. Something more – including a consideration of ethical considerations, practical realities, and actual field experience – goes into decision-making that will lead to real results in accomplishing goals.  
The National Council of Nonprofits strongly encourages tax-exempt organizations to learn about and adopt time-tested “best practices.” There is no single definition or standard “for each and every nonprofit organization,” but “there are well-recognized ethical standards and accountability practices that every staff and board member of a charitable nonprofit should be aware of.”

    Best Practices: State Guides

There are differences by state, because of the varying legal obligations of each jurisdiction, “so many state associations of nonprofits share resources on state-specific legal requirements, as well as promote “best practices” to raise awareness about how ethical, accountable, and transparent practices make nonprofits more effective.”
The National Council of Nonprofits has a list of guides for 25 states and the District of Columbia; see Principles and Practices – Where Can You Find “Best Practices” for Nonprofits?
Some jurisdictions have their own standards; see, for example, Illinois’ Nonprofit Principles and Best Practices. Several other states, including Pennsylvania and Maryland use the Standards for Excellence Institute’s publication, An Ethics and Accountability Code for the Nonprofit Sector.
California has its own resource – (though not listed on NCN’s list). It is the California Attorney General’s Guide for Charities. “The Guide for Charities was published to give charities the tools they need to comply with our laws. The Guide seeks to promote best practices to help directors and officers of charities better understand their responsibilities.”

  More Best Practices Resources

In addition to these state-promoted guides, the National Council of Nonprofits touts a new guide titled Small but Mighty: The Performance Imperative for Small Nonprofits by Leap Ambassadors. Other suggestions include:   

   Conclusion

“Even the smallest nonprofits can benefit tremendously from incorporating best practices into everyday operations.” In addition, many organizations are required by state law to conform to certain conduct standards, and accrediting or grantmaking bodies may also require or recommend adopting them. Still others “seek voluntary accreditation as a way of demonstrating their commitment to excellence” or “find it helpful to know that trusted experts have identified benchmarks to guide” them.  
 

Donor Privacy Policy: Every Nonprofit Should Have One

Which documents should your organization have in that expensive, “gold-embossed,” three-ring binder you ordered back in the day when you first got started? There are dividers for your articles of incorporation, your bylaws, and the minutes of the first meeting. Of course, you should keep it up to date with the minutes of each board meeting, along with formal resolutions adopted, and any amendments to the bylaws. What else should be included in your official organizational records? 
In the “must-have” category are certain official corporate policy documents that the IRS strongly recommends you adopt and follow scrupulously. Check out our series When the Revenue Agent Comes Calling.  The government auditor will have in hand IRS Form 14114 , Governance Check Sheet, and will ask to see your written conflict of interest policy, your document-retention policy   and sometimes your whistleblower protection policy.
In the “should-have” category is a social media policy.  and an employee handbook. If there’s an advisory board, a policy about that is useful. A donor privacy policy is a good idea, too. 

  Donor Privacy Policy

The Association of Fundraising Professionals (AFP) recommends adoption of a privacy policy for any organization that gathers personal information including names, addresses, and credit card information from donors and attendees at special events. It is a formal, written statement explaining how you use and protect donors’ private data.
There are two types of donor privacy policies: explicit or opt-out.  An explicit policy tells donors you won’t sell or share their personal information without permission and gives donors the choice to let you use their data or not. An opt-out policy informs your supporters that you may use their information unless they specifically ask you not to do that.
The purpose of this policy is to engender trust and emphasize that the organization will not sell or share personal information without permission. “Having a donor privacy policy can allow the nonprofit to communicate to their donors the importance that they place on protecting their donor’s information.” Watchdog agencies and ratings groups check whether organizations have a donor privacy policy.  For instance, Charity Navigator takes this factor into account for its “accountability and transparency score.”

     Contents of Donor Privacy Policy

There is no prescribed length for a donor-privacy policy. It can be a simple paragraph. See, for instance, Charity Navigator’s policy which is posted on its website:

Our Commitment to Our Donors
We will not sell, share or trade our donors’ names or personal information with any other entity, nor send mailings to our donors on behalf of other organizations.
This policy applies to all information received by Charity Navigator, both online and offline, on any Platform (‘Platform’, includes the Charity Navigator website and mobile applications), as well as any electronic, written, or oral communications.
To the extent any donations are processed through a third-party service provider, our donors’ information will only be used for purposes necessary to process the donation.

Other organizations choose more detailed documents. For a longer policy, the Charities Review Council provides recommendations.  First, it should be available in one of a number of ways:  included in donor “giving envelopes” as well as on the group’s website, and printed out as a standalone document for any donor requesting one. 
Second, it should:

  • Describe, specifically, which information – including “personally identifiable matter” – the organization collects from donors and how it’s collected. 
  • Explain how the group uses donor information.
  • Give donors an “opt-out” choice or state that the charity doesn’t sell, trade, or share private data. Otherwise, explain which personally identifiable data the group may share with third parties, and why; and tell donors how they can access their data or change it.
  • List third-party websites and links on the organization’s website, and disclose if it uses “cookies.”
  • Describe security measures in place.

For an example of a longer donor-privacy policy, take a look at the one adopted by the National Council of Nonprofits.

  Conclusion

By the way, that lavish corporate binder you felt pressured to buy isn’t needed; a simple, drugstore version is adequate. It’s a racket by the nation’s incorporation-service businesses from which they make gobs of money. (We admit: The nonprofit binders we supply to our clients are purchased through Amazon.)
Anyhow, it’s the twenty-first century; corporate records should be digitized and key documents posted on the website for the sake of transparency for your supporters and the general public.
 

What Should a Nonprofit Know About a Forensic Audit?

In Conflicts of Interest Can Lead to Big Problems, we discussed the significant troubles that have plagued the University of Louisville Foundation for several years.
“It’s not uncommon,” we explained, “for a major nonprofit institution like a university health care center to form a foundation to help raise funds and support the important work of the main organization. Many of these relationships proceed for decades with harmony and success, but there are sad exceptions.”
The University of Louisville and its related Foundation is one of those exceptions, not least because of the ill-advised overlap of key members of the senior staff of the University and the Foundation. Finally, the University ordered a costly forensic audit and, in June 2017, released the resulting 269-page report. “The ‘specific findings … are a simple statement of transactions and issues resulting in a complex and destructive situation.’”

  Audit: What Does it Mean?

The term “audit” may be a fuzzy concept for many nonprofit board members and staff.
One meaning of the word refers to the situation where a government agency – the IRS, in particular – requests the honor of your presence at an official examination of your books and records, operations, and documents.
“Audit” also refers to the type of services provided by an accountant. A “normal audit” typically refers to a “financial audit, which seeks to offer assurance that the financial statements of an entity are materially accurate and in compliance with Generally Accepted Accounting Principles (GAAP).”  In certain circumstances, a nonprofit organization may be required to arrange for a certified audit by an independent accountant.
A “forensic audit, sometimes also called a “forensic accounting” or a “fraud audit” is different both in purpose and procedure: One has the goal of determining the material correctness of the financial statements, and the other has the goal of uncovering fraudulent activity.

  What is a Forensic Audit?

A forensic audit is “specifically targeted at reviewing records for evidence of fraudulent activity.

A fraud audit is a separate engagement from a financial statement audit. In a fraud audit, there typically is an allegation of fraud or a fraud has already been discovered; the accountant is called in to gather evidence or to act as an expert witness in connection with legal proceedings relating to the fraud. He or she is not asked to give an opinion on the financial statements as a whole.

A forensic audit may be done to uncover a variety of types of fraud including, for instance: corruption, asset misappropriation, or financial statement fraud – or a combination of some or all.

  • Corruption: While conducting the fraud investigation, the auditor would look for evidence of conflicts of interest, bribery, extortion, or similar unlawful or unethical behavior
  • Asset Misappropriation: The auditor would investigate to uncover instances of theft of cash or property, directly or through devices like creating false invoices or making payments to nonexistent vendors, employees, or others.
  • Financial Statement Fraud: The auditor would try to check financial statements to see if there are inaccuracies or changes made to cover up poor performance, including – for instance – “intentional forgery of accounting records; omitting transactions …; nondisclosures of relevant details from the financial statements; or not applying the requisite financial reporting standards.”

  How is a forensic audit conducted?

A forensic auditor must have specialist training combining accounting expertise with knowledge of legal and evidence issues.
The techniques used for evidence collection range from the ordinary review of documents to applying computer-aided audit techniques to interviews of suspected wrongdoers.  
At the end of this process, a report is generated to present findings to the client. Since the investigation may result in either civil or criminal court proceedings, the auditor may have a role in that phase as well.

  Conclusion

Most nonprofits will never need a forensic audit. There are – unfortunately – enough reports of wrongdoing in the philanthropy sector that directors and staff should know about this particular investigative technique. See, for instance: “Charities in the Courtroom, Part 6: Audacious Embezzlement”; “Charities and Embezzlement”; and “Charity Fraud: Secret Billing Schemes.”
 
 

Berkshire Museum Drama Heats Up

Recently, in Controversial Decision for Berkshire Museum (10/11/17), we reported on an uproar last summer in the art world. The trustees of this 100-year-old institution in  Pittsfield, Massachusetts, had announced a decision to sell some 40 valuable and cherished works of art at a Sotheby’s auction set for November 2017.
The board explained this plan was based on the Museum’s perilous financial situation: an “existential threat” requiring the organization to “adapt, migrate or go extinct.” Many in the Pittsfield community were surprised and shocked at the news; they questioned the board’s claim that the matter had been carefully studied for some two years before the drastic recommendation was proposed and approved.  Opposition in the local community erupted immediately and has strengthened over several months.
There has been criticism as well from outside the Pittsfield area; around the nation, the art world had a collective apoplectic fit at the news of the proposed sell-off. Well-known art journalist and lecturer Lee Rosenbaum, aka @CultureGrrl, has helpfully provided a blow-by-blow account of each and every twist and turn in this saga – albeit from her standpoint as an ardent opponent of this deaccessioning plan. “Deaccessioning” an art collection violatesa cardinal rule of museums: Don’t sell stuff to pay the bills.” Generally, “works of art are sold only to fund further acquisitions.” The announced objective for the Berkshire sale is different; the trustees intend to create an endowment and to generate funds to chart a new path forward.
In the conclusion to our October 11th Berkshire post, we posed the question: “Who gets a say in a decision like this? …. Are there any other possible stakeholders? Are there overriding considerations that can be raised by colleagues and community members….?

 Lawsuits Filed in Museum Dispute

A week or so after our post, @CultureGrrl wrote in her column that “the only realistic hope to stop Berkshire Museum’s misguided course would be legal action, either by the Massachusetts Attorney General’s Office (which is reviewing the case but has not yet announced whether it will act) or by opponents to the sale.” With the auction set for the week of November 13th, opponents and government regulators had no time to lose.  
Events moved quickly.  Several plaintiffs, including the sons of the late artist Norman Rockwell, filed a lawsuit in Massachusetts Superior Court on October 20, 2017, seeking injunctive relief. The board’s proposed sell-off plan includes two multi-million-dollar Rockwell paintings donated to the Museum by the artist himself who was an honored member of Berkshire for many years. 
In the Complaint, Plaintiffs allege that the board and its members: (1) breached their fiduciary duties; (2) made a decision violating the Massachusetts statute that created the Museum and imposed a requirement that it maintain any gifts “for the people of Berkshire County and the general public”; and (3) made overblown claims of financial necessary to support the board vote to sell off many works of art. 
Several days later, a separate group of plaintiffs filed another – distinct – lawsuit. At that time, the Massachusetts Attorney General’s office finally took steps to join the litigation proceedings.

  Plaintiffs Lose First Round

Among certain law and accounting professors who regularly tweet about developments in the exempt-organizations world, there were discussions about the possible outcome of at least the first phases of these lawsuits.  On October 21, 2017, (in response to @CultureGrrl’s tweet referencing the just-filed lawsuits) University of Kentucky law professor Brian Frye tweeted: “The plaintiffs lack standing & the complaint fails to state a viable cause of action. No written gift condition & ‘public trust’ is pure BS.”
On Tuesday, November 7, 2017, Judge John A. Agostini issued a 25-page decision, declining plaintiffs’ request to halt the imminent Sotheby’s auction. It’s an interesting read because of the detailed discussion of the facts and background of this case along with an exhaustive, thoughtful legal analysis. Later in the day, Brian Frye sent out another tweet: “Called this one. No standing for plaintiffs, no violation of the duty of care.”
The museum trustees were happy. The folks at Sotheby’s were, too. Art Law Blogger Donn Zaretsky reacted in an entertaining rant approving the win against what he terms “the Deaccession Police.”  
But not everyone was pleased; the plaintiffs certainly were not. And the officials at the Attorney General’s office were not; Judge Agostini slammed them hard for dithering around about getting involved.  The state agency – unlike the plaintiffs – generally has standing in such matters, and should have acted faster. Also miffed about this development was the aforementioned @CultureGrrl who quickly blogged and tweeted her displeasure.  

  Plaintiffs Get Temporary Reprieve

Time was running out; the Sotheby’s auction was set to go on Monday, November 13th. At the eleventh hour, on Friday, November 10th, the only party with standing took action. The Massachusetts Attorney General’s office filed an appeal of Judge Agostini’s ruling.

Late Friday night, a Massachusetts Appeals Court judge granted a preliminary injunction to block the Berkshire Museum from selling art from its collection at Sotheby’s on Monday, 13 November. Justice Joseph Trainor found that ‘the risk of irreparable harm’ weighed in the favour of the petitioners, including Rockwell’s sons, Berkshire Museum members and the Attorney General’s Office (AGO), which recently asked to be added as a plaintiff to the cases. The injunction expires on 11 December, but the judge has given the AGO the option to extend the injunction until its investigation into the deaccessioning can be completed.

The Art Law Blogger reacted to the temporary stay: “I guess the appellate court wasn’t as impressed with Judge Agostini’s decision as I was.”

   Conclusion

This drama in the Massachusetts hills showcases an emerging trend in 501(c)(3) governance: A wide variety of “stakeholders” are challenging the decisions of the boards of their important community institutions. Philanthropy experts are homing in on this facet of the case: see, for instance, Proposed Pittsfield Museum Art Sale Raises Core Questions Regarding Nonprofit Stewardship and Boards Should Heed This Multi-Stakeholder Revolt in Western Mass,  both by editor Ruth McCambridge of The Nonprofit Quarterly.
Similarly, in 2015, we wrote about two important – successful – stakeholder revolts; one at the San Diego Opera, the other at Virginia’s Sweet Briar College.
 

Evaluating Nonprofit Board Practices

Engaging in the useful self-reflection that has marked the philanthropy community especially in recent years, leaders of the sector have been taking a good look at varied aspects of governance.
Earlier this year, we highlighted one study by Stanford University, relying on a 2015 survey, in “Nonprofit Boards: How Effective Are They?” This report suggests that “considerable improvement” is needed for more successful board performance, based on the opinions of nonprofit directors, themselves, about whether they are doing well enough, as well as on the conclusions of expert evaluations of “overall quality and performance.” There were nine recommendations arising from this Stanford report, all with the objectives of “ensuring the organization’s mission is focused and its skills and resources are well aligned, establishing explicit goals and strategies tied to achieving the mission, and developing rigorous performance metrics that reflect those goals.”
Now we turn to a more recent survey published by BoardSource. “Leading with Intent: 2017 National Index of Nonprofit Board Practices” is based on survey data collected in the summer of 2016.

  Board Practices: Four Categories of Data

BoardSource’s mission “is to inspire and support excellence in nonprofit governance and board and staff leadership.” The organization has been “tracking and analyzing trends in nonprofit board leadership since” launching a first national study in 1994.  Leading with Intent: 2017 National Index of Nonprofit Board Practices is the latest report in this series.
Respondents – including board chairs and executives – from over 1,300 nonprofits answered this 2016 survey. They were asked to submit “data and insights about their boards’ composition, practices, performance, and culture.”
The Leading with Intent survey and resulting report are organized into four broad categories. In the real world, the four are “deeply intertwined and difficult to isolate.” Nevertheless, the separate sections are useful in providing a “framework for exploring the relationship between who serves on a board, how it is structured, the culture it cultivates, and the way that it does its work.”
The distinct sections are:

  • People: Board Composition and Structure. Having the right people on a board makes higher performance — in both the board’s internal and external functions — more likely. This report therefore begins with who serves on the board and how they are composed and organized as a collective body.”
  • Culture: Leadership Culture and Dynamics. How the board conducts its work — from group dynamics to its relationship with the chief executive — can help or hinder the board’s ability to carry out its work. Likewise, board culture and dynamics are also affected by who serves on the board and the nature of the work that the board undertakes.”
  • Work: Board Responsibilities. Boards are charged with many important responsibilities. This section explores how well boards are fulfilling their basic, strategic and adaptive, and external and ambassadorial leadership roles.”
  • Impact: Perceptions of the Board’s Impact on Organizational Performance. Ultimately, the most important measure of board performance is the impact that the board has on organizational performance.”

  Board Practices: Further Discussion

The editors note that Leading with Intent is not a report with objective, definitive answers on “organizational effectiveness and the board’s impact on them.” Instead, it includes “descriptive” data and perceptions by the respondents of the “board’s impact on organizational performance, and board  characteristics that seem to be positively linked to these perceptions.”  
It is a “starting point for conversation,” rather than “necessarily a recommendation for board practice.” Along those lines, the report’s final section is on “Opportunities for Board Reflection and Action which provides guidance on how boards can leverage Leading with Intent’s findings as a part of their own organization’s ongoing board development work.”
The Nonprofit Quarterly has taken the initiative in starting discussions on some of these topics.
For example, on September 14, 2017, the NPQ Editors opened a conversation with a stark assessment and challenge about board culture in The Declining Diversity of Nonprofit Boards and What to Do about It.

With all the talk in recent years about diversity on nonprofit boards, you would think that nonprofits across the country might be prioritizing this issue, and by now we might see boards that are more representative of the populations they serve.
In fact, BoardSource’s Leading With Intent report shows that diversity has actually declined on nonprofit boards. But the way the research was done provides clear clues to what may be standing in the way of progress. Join us for this important discussion, and please let us know if you want to remain a part of the conversation moving forward.

Conclusion

This topic – along with the others raised in the 2017  Leading with Intent report – is too important to let slide without vigorous participation from within the ranks of the philanthropy community.
 

Conflicts of Interest Can Lead to Big Problems

“The last shoe may have dropped,” according to The Nonprofit Quarterly in late July, which has been following the tumultuous tale of troubles from conflicts of interest at Kentucky’s University of Louisville Foundation.
It’s not uncommon for major nonprofit institutions like universities and healthcare facilities to form foundations to help raise funds and support the important work of the main organization. Many of these relationships proceed for decades with harmony and success, but there are sad exceptions.

   Conflicts from Overlapping Boards 

As far back as 2009, there have been problems. Since that time,

the U of L Foundation has been overspending. Their expenses were higher than revenue each year, steadily eating at their endowment. It is a mystery why the financial officer was the last to be let go when the financial woes of the organization were so pronounced.

“Any year with expenses over income is an anomaly,” observes Marian Conway of NPQ, “that a nonprofit should address. Seven years of fiscal imbalance is irresponsibility equally shared by staff and board.”
Because of the extensive and highly damaging problems, the University of Kentucky commissioned an independent forensic audit that was released to the board in early June 2017 as well as the general public. The audit was restricted to the years 2014-2016, but it describes earlier relevant events.
An independent forensic audit is “significantly different than a typical financial audit.” The report is some 269 pages; the “specific findings … are a simple statement of transactions and issues resulting in a complex and destructive situation.”
A critical problem was that James Ramsey was president of the university as well as of the foundation at the same time. There were additional overlaps of senior staff. The situation was rife with “conflicts of interest” yet “[d]espite this coziness, there was a “lack of communication and transparency.” Many board members were left out in the cold and remained unaware of key decisions, commitments, and transfers of assets.
Eventually, there were wholesale changes of personnel, but these actions dragged out over a period of time. In September 2016, President Ramsey was forced out; later his top aide was also removed. There was a full-board turnover along with the addition of some 12 new members. Many months later, the chief financial officer of the foundation was finally terminated.
Over this troubled period of time, there were significant losses in the foundation’s endowment “but the true value of the endowment was concealed by the foundation’s accounting practices, which included reporting gifts by the foundation to the university as loans on the foundation’s financial records.”
As a result of this turmoil, donations plunged also, threatening the long-term stability of foundation.

  Lessons to be Learned

The Nonprofit Quarterly’s Michael Wyland makes the important point that publicly rehashing the sordid details, while unpleasant, has value not only to the institutions directly involved but to others. “As always, a tale of abuses like those that occurred at the University of Louisville and its foundation can be educational—and cautionary—for similar public and nonprofit organizations.”

   Conclusion

The ultimate lesson to be learned from this situation is that “[w]hat is convenient for management may become tempting to management, and overreliance on an individual leader, coupled with neglect of group accountability and oversight, can be seriously damaging to an institution.”