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Info You Can Use: Outside Audits And You

July 31, 2012

by:

Joe Patti

During the summer many non profit boards of directors suspend their meetings due to the difficulty of scheduling meetings around members’ vacations. When meetings start up again in the fall, it may be a good time to think about revisiting organizational policies.

Using the Sarbanes-Oxley Act, which currently only applies to publicly traded companies, as a guide Independent Sector (IS) and BoardSource have drawn up a checklist of good governance practices to implement.

There is also a link to a more expansive discussion of the topics in the checklist you may wish to read.

While the act currently only applies to public companies, financial impropriety in the non-profit sector has lead many to explore how sections of the law might be applied to non-profits or to suggest the creations of similar rules for non-profits.

The bulk of the rules apply to auditing and financial disclosures though some deal with conflict of interest, record retention policies and whistler blower protections.

One of the biggest challenges in applying the recommendations from the law is that while publicly traded companies have to pass certain milestones in terms of size and assets before going public, non-profits come in all shapes and sizes. An outside audit is really only practical for some large non-profits (and required for those receiving more than $500,000 in federal funds.)

Most non-profits should at least have an independent audit committee, but as the article notes, many smaller non-profits will have difficulty finding a qualified people to be treasurer, finance committee and audit committee and good governance requires there not be significant overlap.

For those who do use an outside auditor, though the Act only requires the lead partner of the auditing company change every 5 years, IS suggests the company be changed every 5 years and that the company not provide any other services, except tax return preparation as pre-approved by the board, to minimize conflict of interest.

For those organizations using an audit committee, it is suggested none of the members of the committee have any financial/business interest with the non-profit.

The very bare bones, basic criteria for a board that IS suggests is that they all receive training to become literate enough to understand the organization’s financial documents. IS says it is important that when the organization signs off on their 990 that: 1- the 990 is actually completed comprehensively and accurately, something that is infrequently done; 2- that the signature actually reflects an understanding of the organization’s financial condition.

I have talked about conflicts of interest policies in the past and the IS document doesn’t really discuss this in as much detail as the financial disclosure.

One thing I was not aware of and wanted to share is the whistler blower protections. You may be aware that it is illegal to take any retributive actions against those who report misconduct: firing, demotion, harassment, passing them over for promotion. What you may not know is:

“Even if the claims are unfounded, the organization may not reprimand the employee. The law does not force the employee to demonstrate misconduct; a reasonable belief or suspicion that a fraud exists is enough to create a protected status for the employee.”

I wasn’t aware that the criteria to achieve whistle blower protection was based on a reasonable belief rather than requiring some sort of evidence. Perhaps I have been watching too many crime dramas–or perhaps not enough of the right types.

In any case, it is important to have good clear policies about employee conduct, financial and accounting practices, conflicts of interest, records retention (which includes email and voicemail) in place long before any of these things become issues.

Boards, Business Models, Info You Can Use, Leadership, Management Philosophy

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When Guilt Is Good

July 30, 2012

by:

Joe Patti

Research by the Stanford Graduate School of Business had some surprising results suggesting that even more than extroversion, a sense of guilt may be a strong indicator of leadership potential.

Although “guilt” and “shame” may seem quite similar to most people…psychologists recognize a crucial distinction between the two: Whereas someone who feels guilty feels bad about a specific mistake and wants to make amends, a person who’s ashamed of a mistake feels bad about himself or herself and shrinks away from the error. Everyone tends to respond to mistakes according to one or the other pattern…

The researchers administered a test to measure how guilt prone people were and then put these people into a variety of situations. When they asked the participants to rate each other’s leadership qualities, those who scored higher for guilt were ranked highest for leadership.

According to the research article, participants weren’t picking up on people’s guilt but rather the behaviors that manifested from those feelings “making more of an effort than others to ensure everyone’s voice was being heard, to lead the discussion, and generally to take charge.” Similar research was conducted outside the lab at businesses surveying employees, clients and coworkers and produced similar results.

The key thing to understand is that guilt prone people feel responsible for the group at their own expense in contrast with shame prone people who tend to feel responsible for protecting themselves.

It should be noted, however, that guilt prone people are also most likely to support layoffs. While they feel bad about firing people, their sense of responsibility for the company as a whole will lead them to seek ways to fix the problems the organization faces. And good leadership abilities doesn’t guarantee good decision making abilities.

These results made me wonder about the qualities of non-profit leaders. A streak of martyrdom always seemed to be a prerequisite to work long hours for little pay. I don’t think it takes any great leap in logic to think it is motivated by a sense of guilt and responsibility to insure the organization is successful in providing its services to the detriment of oneself.

If this is actually a good thing according to the Stanford research, do people drawn to non-profit service actually have the best leadership potential and simply lack the training and resources to more effectively fulfill this potential?

Leadership, Management Philosophy

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No Simple Solutions

July 25, 2012

by:

Joe Patti

While I was out in the middle of the Mongolian steppes gazing out from my yurt, I happened upon a copy of the Oxford Business Group’s report on Mongolia in the dining hall. I put aside the novel I was reading and devoured the report. It was intensely interesting to me to read about all the factors that contribute to the emergence of a developing nation. In many respects, I saw some parallels to the arts and culture sector.

As I mentioned yesterday, one of Mongolia’s greatest assets is its land. The people are largely nomadic and their large herds of horses, sheep, goats and cows benefit from the grazing land. Tourists such as my friends and I come for the natural beauty. And the country has large mineral wealth.

There are many factors that must align for the country to be economically successful in each of these areas. The banks must have enough capital to support investment; insurance companies must have the resources to insure the industry; the government must be stable and generally unified in its vision; people must be confident that laws will be fairly applied and agreements honored; work force must be well trained and industrious; a quality transportation infrastructure must be in place.

This is no small task for a country that moved from Soviet style communism to a parliamentary republic in the early 1990s. The report mentioned that even countries like Canada which has a more mature and practiced economy and political system were challenged in trying to exploit their mineral wealth.

One of the things the report made clear is all these elements are interrelated. Success depends on addressing deficiencies in all theses areas and that balance is necessary. For example, there is a growing concern that the rise of the mining industry with its good salaries not develop to the detriment of other industries like manufacturing and tourism leaving the economy too dependent one segment. The impact of copper prices falling sharply a couple years ago is still fresh in people’s minds.

In the same respect, problems faced by the arts and culture sector in the U.S. and elsewhere won’t be simply fixed solely by achieving one of the following: more government funding, better cultural policy, more corporate donations, better board governance, changes in foundation policy, arts education in schools, new business model or marketing to younger audiences.

Its all of these and no one thing. We all generally know there are no simple answers, but it is difficult to remember when we are told the solutions to our problems can be achieved with a simple pill; in as little as 30 minutes a week; or just cutting/raising taxes.

Certainly when you are operating in perpetual crisis mode, or at least a low grade state of emergency as seems to be the case in the arts and culture sector, thinking the solution lies in achieving progress in one fairly significant goal provides the hope you need to carry on.

While it shows the reality of the situation to perhaps be more overwhelmingly complex, in the context of the factors necessary for developing the Mongolian economy, it is obvious that a more holistic and balanced approach to improving the operating environment is necessary.

It only makes sense that financing, infrastructure, law, education, etc are all important to a developing country. Progress won’t be made if one area is deficient. Trying to convince others to stop trying to advance conditions and policies in other areas and devote their time to what you think is important may ultimately be counter-productive.

Something to remember if you are making the rounds of conferences and such this summer and you are getting a lot of messages about what is absolutely the most important thing to do.

Business Models, General Musings, Government Relations, Leadership, State of the Arts

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Summer Vacation, Asia Edition, Part II

July 24, 2012

by:

Joe Patti

Okay, as promised a little bit on my view on the Mongolian stage of my vacation. Mongolia’s biggest asset is its wide open spaces of natural beauty. Only reason I can figure Genghis Khan even thought about leaving is because winters get down to -40 degrees (it is same on Celsius and Fahrenheit). My friends and I had the pleasure of sleeping in ger (yurts) and had a great time.

Inside the Ger–Note Candles Are Only Light Source

Mongolians take great pride in the accomplishments of Genghis Khan and his progeny. The Khan’s figure appears in many places. The statue below just appeared out of nowhere about an hour or so from the capital, Ulan Bator. Apparently it was the site of one of his great camps.

In the plaza across from our hotel was a government building with three different statues of the seated Khan. Below is the largest.

We were somewhat fortunate to be in Ulan Bator during the national holidays for the Nadaam Festival, the athletic event showcasing the three great Mongolian pursuits-wrestling, archery and horse back riding. I say somewhat because traffic in the captial increases greatly during this time and many shops were closed for the week. We didn’t go to the stadium, but everywhere you went a television was tuned into the festival.

While I am not really into sports, I have come to recognize the importance of communal bonding around cultural events. We left Mongolia the day after the athletic competitions concluded, but the festival continued with a huge gathering of people in traditional costume in the square across from our hotel. From what we understood, it was something of a fashion show/contest.

Finally, since a country’s money often provides insight into the things the country values, I thought I would show off some of the pocket change I had left over. As you might imagine, Genghis Kahn appears on many of the higher value tugriks. Many others have portraits of Damdin Sükhbaatar who was instrumental in gaining Mongolian independence from China in the 1920s. The backs have images of ger/yurts being moved or pictures of horses with various backgrounds.

Because of its close association with the Soviet Union after their independence, Mongolia has its own version of Cyrillic as well as an older script related to Uighur. Both types of text appear on the money.

mongolian front — Front of Mongolian tugriks

mongolian back — Back of Mongolian tugrik

While I am on the subject, the current series of the Chinese currency (ren min bi) almost exclusively features Mao Zedong. There is still some older currency in circulation like the half yuan notes below which feature pictures of the Miao and Zhuang ethnic minorities. Other notes had other minorities or the classic communist figures of an intellectual, a worker and a farmer.

In addition to Chinese characters and pinyin, since 1955 in something of an acknowledgement to the 50+ ethnic minorities in China each note includes the denomination written in Mongolian, Tibetan, Uyghur and Zhuang on the back. Newer notes (circa 1987) also have this information in Chinese Braille. Even though English isn’t the national language, just imagine trying to get addition languages written on currency in the United States.