Nonprofit Boards, Chapter 1
Here’s some advice that you’ve heard before – the board of directors of nonprofit organizations must take responsibility for the organization’s financial health. More specifically, board members need to understand the organization’s financial information, evaluate and monitor progress compared to plans, participate actively in planning, and hold management accountable to the polices and goals that the board establishes. While this is nothing new, it seems that the lesson is missed over and over again as in the dismal situation at the Milwaukee Public Museum.
The current news relates to criminal charges filed against the museum’s CFO stemming for the financial troubles at the museum that surfaced in 2005. While the charges are against a former executive, the museum’s board was clearly not doing their job. When reading financial reports, one of the first questions a board member should ask is, “does this information make sense based on what I already know?” In the Milwaukee Museum’s case, several major expansion initiatives into retail stores, IMAX, and new exhibits were not meeting budget, but the museum’s financial reports were apparently indicating that cash flow and finances were fine. Does that make sense?
In every case, someone needs to ask the question - and that someone should be the board members.
The lesson that needs to be learned over and over is that each board member is responsible, not just the treasurer or the board members who appear to be “experts”. Sometimes it’s an unlikely member who can say that the emperor has no clothes. The only way that can happen, though, is for every member of the board to have a grounding in reading the financial reports and understanding the underlying financial structure of the organization. Even a sophisticated financial professional needs some training to understand how government reimbursement contracts and restricted grants work. Board members without a financial background certainly need to learn the basics such as how to identify red flags and ask questions.
This takes us back to the Milwaukee Museum – where the financial information doesn’t make common sense; an obvious red flag. When funding is going down and expenses are going up, cash has to come from somewhere. In the museum’s case it was from the endowment, other nonprofits rack up debt, delay payables, or fail to pay payroll taxes. In every case, someone needs to ask the question – and that someone should be the board members.
Good boards maintain a balance between supporting the organization’s management and governing the organization that is described well in the article Why Boards Don’t Govern by Jan Masaoka. Taking responsibility for finances is one of the cornerstones of governance.