In the nonprofit world, we measure success based on impact. Nothing impacts a nonprofit more than being blindsided by an accident or a lawsuit.
To create long-term sustainability, nonprofit leaders will do fine by avoiding FINE: Fraud, Inexperience, Negligence, and Ego.
F is for Fraud: Preventable through strong internal controls.
Fraud is not just someone stealing from the nonprofit. When the nonprofit is using funds incorrectly, not accounting for funds or failing to make required reports, that can also be considered fraud. Financial mismanagement can also threaten the nonprofit’s tax-exempt status.
The first step toward prevention is ensuring the nonprofit leaders know what constitutes fraud based on their funding sources — and the reporting obligations if fraud is suspected.
Creating a culture of transparency from the top down, including encouraging people to report wrongdoing, can prevent sloppy bookkeeping from becoming fraud.
This can help avoid incidents of intentional misuse of your nonprofit’s funds, such as use of the nonprofit’s credit card for personal expenses and travel unrelated to the nonprofit’s business.
Organizations that receive state or federal funding have additional obligations that the nonprofit leaders must understand in detail.
Having structures in place to prevent and detect fraud is critical.
A robust system of checks and balances is important for the finance department of any nonprofit to prevent misuse of funds. This includes an annual audit conducted by an independent expert and reviewed by the board.
“Robust internal controls are critical for ensuring the nonprofit’s operations are conducted in a safe, risk-averse manner,” according to Chris Reed, Chief Risk Officer and General Counsel of Nonprofits Insurance Alliance (NIA).
Fraud may occur when leaders don’t understand the compliance requirements or don’t recognize the red flags — often because of inexperience.
I is for Inexperience: New leaders need support.
An inexperienced leader may have all the good intentions in the world, but good intentions alone won’t help them understand their obligations with respect to compliance and internal controls.
They may also place too much trust in specific individuals, making them vulnerable to manipulation.
Similarly, inexperienced leaders using “common sense” to set up employment procedures can often be ignorant of specific requirements in this highly regulated area of the law.
Someone who was good in a management role and is propelled to the next level of leadership — especially as the leader of the nonprofit — needs the right support to overcome their lack of experience.
They can be provided with a coach who works directly with the new leader to develop their skills.
Also helpful is a mentor, especially a more experienced nonprofit leader they can go to with questions. A new leader may need help from these people — or the board — with things like strategic planning and resolving conflict.
When inexperience is left unchecked, it can result in negligence.
N is for Negligence: Minimize risk through oversight.
The term “negligence” generally refers to failure to act reasonably when performing a duty, with resulting harm.
Poor oversight of people and policies significantly contributes to this kind of harm, that in turn can lead to liability for the nonprofit in the form of fines, lawsuits, and financial mismanagement.
For example, residential facilities often have a policy that requires bed checks to be performed regularly. But what if no one is verifying that bed checks are being done?
There must be a process for ensuring that these requirements are being completed — don’t assume that people will do what is required.
Have procedures for ensuring that employees are trained on nonprofit policies and follow them, especially as these relate to things like safety.
A policy won’t protect the nonprofit if it isn’t enforced — it will only make the nonprofit look worse because its own policies were ignored.
Accessible reporting procedures come into play here as well. If employees can report concerns and believe they will be taken seriously, these problems will come to light quickly and efficiently so they can be addressed in the same way.
All employees should know how to report compliance problems such as problems with Medicaid/CMS billing, safety concerns, and internal financial problems.
Employees should also be trained on how to report internal employee misconduct, such as sexual harassment or threats of violence.
If the problem concerns the executive director, there should also be a mechanism for escalating the issue directly to the board.
To accomplish this, nonprofits may also consider using third-party reporting services. Reports from this hotline should go to more than one senior leader, as well as at least one board member, with regular reporting on the status and resolution of those reports.
By having the reporting go through a hotline to multiple parties, this helps prevent financial abuse from being covered up by an individual.
In addition, knowing that a third party is receiving and handling the calls provides an extra layer of protection for employees reporting anonymously.
E is for Ego: When leaders are serving their own interests over the nonprofit’s.
When the executive director treats the nonprofit as though it’s their own organization, then it becomes clear that ego is at the wheel.
If the board does nothing to rein them in, the nonprofit is exposed to significant risk.
NIA President and CEO Pamela Davis observes that running a nonprofit is inconsistent with the ego-driven mindset: “If you want your ego to be front and center, then start a for-profit business.”
Ego can be a strong basis of “founder syndrome.”
This typically refers to a long-serving leader who refuses to consider succession planning and micromanages the operations of the nonprofit. Their directives are based on an “I know best” mentality and disregard current best practices on compliance and corporate governance.
Other concerns are founders that create nonprofits to be their vanity projects and create an employment opportunity for themselves or their family members and do not understand that the organization and all of its assets belong to the public and that they are stewards of that public trust.
Any nonprofit executive who thinks they are the owner of a nonprofit is a huge red flag.
Compare that to nonprofits with a healthy organizational culture where the executive director understands her role as a steward of a mission driven organization which exists solely for the benefit of the community, where employees aren’t afraid to raise concerns.
They know not everything they ask for can be implemented, but they aren’t afraid to make suggestions.
As a result, problems are solved sooner, and employees feel valued, and everyone is working toward the goal of service to community.
Ego-driven leaders don’t want anyone telling them what to do: Not the board, not the funders, and certainly not the employees.
While dedication to mission and excellence in execution are laudable, a leader who is over-involved in every decision made at the nonprofit will become exhausted.
Over time, they can succumb to a “me against the world” mentality, which in turn can lead to cutting corners.
That temptation to cut corners is a sure sign it’s time for that leader to leave the position before their ego undermines the sustainability of the nonprofit.
To make sure they don’t have an ego-driven leader, boards must be independent of the executive director and challenge an executive director who is making decisions in a vacuum without regard to community benefit.
Board members who are afraid to ask questions are not fulfilling their duties as a board member.
Answers to the board’s questions should reflect an executive director’s commitment to mission and to excellence in execution to meet community needs.
Nonprofit leaders are stewards of the public trust and their leadership must reflect that role. They’ll do fine by avoiding FINE.
By avoiding the pitfalls of Fraud, Inexperience, Negligence, and Ego, nonprofit leaders can improve organizational outcomes and minimize risk by fostering a culture of productivity and accountability.
Nonprofits insured by Nonprofits Insurance Alliance enjoy special access to free or discounted resources that can help you reduce the risks and potential problems that can arise from FINE, including: