Making nonprofits more accountable and transparent

Amanda Pullinger, CEO of 100 Women in Hedge Funds, and EY partner Natalie Deak Jaros discuss governance issues at nonprofit organizations.

Charities and not-for-profit groups are making a strong and long-lasting impact on the community in Cayman. Yet the organizations vary considerably in their transparency and professionalism in the way they are managed.

Repeated efforts to regulate charities in Cayman, mainly to prevent their use for money laundering and terrorism financing and to bring local laws up to speed with the international anti-money laundering regime, fizzled out.

Since 2010, a proposed Charities Bill was pulled twice before it could be debated by lawmakers, after charities and churches claimed they would not be able to afford the additional expense for record-keeping and annual external audits, and warned that the law would mark the end of charitable giving in the Cayman Islands.

Level of professionalism

The difficulty in implementing even the most basic accountability and transparency standards in domestic law underscores that nonprofit organizations are often not managed with the same level of professionalism as organizations in the private sector.

Pilar Bush, chair of mentoring charity Big Brothers Big Sisters, says more money is flowing into the nonprofit sector, there is a lot of corporate goodwill, and Cayman has an outstanding community that is generous with its time and money. “But something at the board level of nonprofit organizations is not working,” Bush says.

“One look at the international headlines and we can see that bankruptcy, fraud, mismanagement and other things that should be preventable are costing charities and, in that way, costing the populations that they are designed to serve.”

For this reason, Big Brothers Big Sisters teamed up with 100 Women in Hedge Funds, one of its major donors, and professional services firm Ernst & Young (EY) to host an event in April to examine what not-for-profit organizations can learn from the best-run charities and the private sector to raise the bar on accountability and transparency.

External pressure

Amanda Pullinger, CEO of 100 Women in Hedge Funds, says regardless of what the law requires, if an organization in Cayman aims to be well managed, it will have to provide audited accounts and match the level of transparency and best practice of charities elsewhere in the world.

This is largely because donors have the power to keep nonprofits accountable. “Donors have leverage,” Pullinger noted, and can ask any questions they would like to ask to ensure that their money is well spent.

In many ways, donors, who in Cayman often are sophisticated investors, should ask the same questions they would ask if they were investing their money.

Natalie Deak Jaros, a partner at EY who also serves on the board of Hedge Funds Care, says grantees will request on a regular basis certain information to monitor their “investment.”

“And if a charity does not provide us with that information, we would very likely not donate to them for that reason. We would not be comfortable,” she says.

Improving governance and executive management

Even without external pressure, trustees serving on the boards of nonprofits can do more to ensure that their organizations are well run. Trustees are custodians of their charities and responsible for seeing that funds are used properly. Strong internal and financial controls are essential and should be practiced with the same vigor as the charity’s programs and activities.

“As much as we look at the corporate sector and think about best practices and what we do in our professional lives, we need to start implementing the same best practices in the nonprofit world,” said Pullinger. This should extend to the governance of an organization.

Pullinger noted that the finances of an organization rightly receive a lot of attention, but she pointed out that many charities have failed, not because of their finances, but when the relationship between the board and the chief executive or executive director soured.

“The board is there to govern; they are not there to manage,” she said.

There is a tendency in the nonprofit world for board members to start interfering in the management of the organization when, for example, the chief executive is not quite as strong or experienced. This is a common situation as the vast majority of nonprofits are founded by somebody who has a passionate vision and a desire to further a particular cause and not necessarily the administrative and people management skills required to run a nonprofit organization.

While the desire of the board to get involved in the management of an organization is understandable, Pullinger said, it often raises difficult issues. The role of the CEO is to manage the organization to success, and to present to the board the budgets, the planning and the goals of the organization, she explained. And it is the role of the board to approve those plans and then let the CEO get on and manage the organization, manage the talent.

This does not mean that there is no room for a board member to support the CEO at times in moving a specific project along, but the responsibilities should be clearly defined, Pullinger said.

Deak noted that in crisis situations it may also be necessary for board members to get involved, but in order to keep the independence of the board from the business, there needs to be a plan on how the board is going to transition out of that role.

Challenges

One of the challenges for charities and nonprofits is to raise the funds to hire the right talent to manage the organization. Executive salaries at charities, particularly in competition with the private sector, typically cannot compete, and the talent pool is small.

Still, Pullinger said, “I believe the sector needs to pay up.”

“I am biased because my livelihood is with a nonprofit organization,” she added. “I feel very strongly that the CEO or the executive director should be a professional job. The difficulties often come when people are not professionals, don’t know how to institutionalize the charity, don’t understand managing people.”

At the same time, salaries at nonprofits will never be quite as high as in the private sector, and “There are a good number of people out there who are willing to take that discount,” Pullinger noted.

No hard and fast rules

The common media criticism of high salaries for charity executives in the U.K. reflects that charities and donors tend to have concerns about increasing the administrative expenditure, and there are certain thresholds of 25 percent to 30 percent of the total funds raised that, when exceeded, will raise the question of whether the money is still well spent. But there is no hard and fast rule on how high the administrative costs should reasonably be.

While programs are the end mission of the nonprofit, there is a danger that if insufficient money is spent on training and infrastructure to run an organization long term, ultimately the beneficiaries will not be served well, Pullinger said.

“Ask the question, how are the funds being used?” she said. “What is the return on investment? There is a portion of the administration when it comes to fundraising, for example, [when] you often have to put staff in place well before you are going to get a return.”

There are also many opportunities to keep overheads down, she added, by making use of volunteers, by sharing administrative services and combining fundraising resources between charities or even by merging two organizations that have a similar or related cause.

Ensuring board diversity

The growing pains of many nonprofits extend to their boards.

Typically, the founders ask friends, colleagues and acquaintances to serve on the board of a charity without regard for the skill set needed to be an effective board member for a specific organization.

“I am not saying that in the early days it should not be like that, but at some point there needs to be a reflection on what the skills are that we need at this particular nonprofit,” Pullinger said.

Selecting the board should therefore start with a skills and role analysis and an interview process designed to put together a diverse governance body with a wide range of experience.

Deak noted, “The composition of the board is very important. Having the right diverse skill sets and diversity in perspectives, you just make better decisions.”

Interviewing board members is also a valuable exercise for potential trustees to determine whether their expectations match the objectives of the nonprofit.

“I think that best practice would be to have an interview process for both incoming and sitting board members,” said Deak. “You can gain so much about how they solve problems. And the board member is also doing due diligence, how they would fit, what they can contribute. It really goes both ways.”

Pullinger said that nonprofits often lack a job description for their board members, a description that defines their role in relation to the executive management. In some instances, there are charities where even the CEO does not have a job description or defined goals.

Also, a performance review is not only critical for executives running a charity, it is also valuable for board members.

While it can be difficult to be critical of people who are donating their time and who are not paid for their work, a performance self-review can ensure that board members recognize where they have done well, where they can contribute more and when they are no longer a good fit, for example, because they do not have sufficient time, she said.

Moreover, Pullinger said it is important to have board term limits for trustees, and for the chair of the board to regularly refresh the ideas of the governing body.

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