The Arizona Republic newspaper and the AZCentral website recently published the article “Serving on a non-profit board could be riskier than you think.” Read it online here. It contains some important information for MNO board members and points of which we should all be aware. Here are MNO’s responses to two checklists given in the article, giving our status on each question or point.
Evaluating and minimizing the risks
If legal and reputational risks were present in every situation, only a valiant few would choose to serve on a non-profit board. Fortunately, the risks of board service can be mitigated. Before agreeing to serve, a certain amount of due diligence is appropriate. Questions that might be investigated include:
1. Is the organization well-run? Does it have sufficient (and well-trained) staff? Is the financial staff of the organization competent?
MNO is well enough run to have survived and grown over 13 seasons, from 2003-04 to 2016-17, including some periods of windfall and significant artistic and financial challenge. There is no “staff” per se; all operational management roles are performed by board members with some outside consultant support in publicity and accounting. Financial management is largely performed by the Treasurer and CEO, with the recent addition of a CPA firm to provide specific functions.
2. Does the organization have audited financial statements? Who are the auditors? Is it a well-respected firm? Does it have experience in auditing non-profit organizations?
MNO does not have audited financial statements, which cost thousands to conduct, but under our new agreement with Stacy Schneider and Associates, CPA, a well-respected frim with considerable non-profit experience, will get “consolidated statements” that attest to the fact that we have records maintained in our QuickBooks Online (QBO) system.
3. Does the organization have a relationship with a lawyer familiar with the special needs of non-profit organizations?
John Friedeman, Esq., has provided us with occasional on-request legal review of contracts and other items pro bono. We expect to continue this relationship into the future.
4. What information can be learned from the organization’s Federal Form 990 filing, which describes the organization’s financial condition and contains a variety of other relevant information?
MNO’s annual IRS 990ez and AZ 99 forms are publicly available for view by anyone. The forms report revenue and expenses for the last five years, volunteer hours donated, compensation paid to staff, principal donors, and other relevant financial info.
5. What is the organization’s cash position? How many months of operating cash does it have on hand?
MNO’s cash position is reported at every board meeting in the Treasurer’s Report, and is available for board members to see via access to QBO. It should surprise few that we have enough on hand for month-to-month operating expenses, but generally don’t have sufficient funds in reserve to pay for the next orchestra concert without (sometimes heroic) major donations,
6. Is the organization reliant on a few principal donors? What is the commitment of those donors to continue to fund the organization? How reliant is the organization on funding from other organizations such as the United Way?
MNO is indeed reliant on a few donors, principally board members, who can be counted on for significant contributions – though no single donor gives more than about 15% of the annual budget. There is no formal commitment from these donors, but we expect their donations to continue for the foreseeable future. We have seen increases in funding from government grants (Phoenix and Tempe), but have not yet won any significant foundation grants with competitive applications.
7. What percentage of the organization’s funds come from special events? How efficient are those special events in terms of the percentage of funds raised being available to fund the organization’s activities?
Until the last couple of seasons we had few special or fundraising events that produced significant revenue. A couple of Salon Concerts have gotten significant donations, but often from board members. Contracted Services to the AZ Science Center in FY16 ($3,500 gross, $2,000 net to MNO) and Cirque Musica in FY17 ($14,460 gross, about $2,250 net) have had significant impact. Cirque Musica amounts to about 20% to 25% of our FY17 budget.
Principles of good practice for non-profit boards
While there is no “one size fits all” set of rules for overseeing a non-profit organization, the following factors are indications that a board of directors has adopted good policies and practices that will hold the organization (and its board members) in good stead:
1. The board has adopted a clear statement of the institution’s mission, vision, and strategic goals and establishes policies and plans consistent with this statement.
MNO has a clear statement of mission and vision, and strategic goals stated in 2013 need to be updated. Our few policies and specific event plans are consistent with them.
2. The board takes affirmative steps to assure that the institution operates in compliance with applicable laws and regulations. This includes compliance with wage and hour laws that draw appropriate lines between paid employees and volunteers.
MNO has asserted intent to comply with applicable laws and regulations, and has recently proposed an accounting manual that identifies specific compliance practices. We have reviewed and clearly understand that our musicians are contractors, not employees, under appropriate IRS guidelines. There are some remaining questions about musician engagement and payment that need resolution.
3. The board has written by-laws and policies and a conflict-of-interest policy that is reviewed with, and signed by, individual trustees annually.
MNO has published by-laws, most recently reviewed and updated at the start of the 2016-17 season. A conflict of interest policy exists, but at this time it is not rigorously reviewed and annually signed by all directors.
4. The board accepts accountability for both the financial stability and future of the institution, engages in strategic financial planning, assumes primary responsibility for the preservation of capital assets and endowments, oversees operating budgets, and participates actively in fundraising.
Board members nominally accept their fiduciary duty, including requirements for cash gives and gets, attendance at meetings and MNO concert events, working on MNO activities, and participating in strategic and financial planning, budget oversight, and fundraising. However, much of the planning and oversight, and the majority of MNO-related work, is done by just a few board members. Delegation of responsibility is limited at present and could be performed to a greater degree in several areas. Do current directors feel “It’s being taken care of, I’m not needed for that” too much?
5. The board selects, supports, nurtures, evaluates, and sets appropriate compensation for the CEO. The board conducts annual written evaluations for the institution and its CEO.
MNO has no paid staff in any position. A limited annual review is conduced of achievement of Key Performance Indicators identified in the Strategic Plan, but there is no formal analysis of the results or development of specific action plans to improve performance. No formal annual performance review is conducted by the board of any officer, or self-evaluation of board members’ own performance.
6. The board periodically undertakes formal strategic planning, sets annual goals related to the plan, and recognizes that its primary focus is long-range and strategic and is not too far “into the weeds”
Directors generally understand MNO’s mission and vision, and operations are consistent with them. The Strategic Plan is reviewed annually, at least cursorily, and is currently pending revision for seasons through 2019-2020. As noted above, achievement of KPIs from the Plan are reviewed annually, though not in depth or with formal follow-up.
7, Board composition reflects the strategic expertise, resources and perspectives (past, present, future) needed to achieve the mission and strategic objectives of the institution. The board works to ensure all its members are actively involved in the work of the board and its committees.
The board is comprised entirely of “MNO insiders,” that is, persons who have performed with MNO or had a close relationship with performers, and is strong on planning and managing the artistic aspects of the organization. However, many directors’ strategic expertise and tactical skills in the operational aspects of the organization (e.g., business planning, production planning, financial budgeting and tracking, marketing and publicity, development and fundraising, technology, etc.) are limited. Some directors have demonstrated skill and made significant contributions in specific areas but in general most of the work in the operational and business tasks is done by a couple of people.
8. The board assists the CEO in cultivating and maintaining good relations with the institution’s constituents as well as the broader community.
The board generally works to support MNO’s relations in the greater Valley of the Sun community, and assists the CEO and individual board members in specific community relations activities.
9. The board is committed to a program of professional development that includes annual new trustee orientation, ongoing trustee education and evaluation, and board leadership succession planning.
The need for professional development for board members to better perform their roles as directors is understood and described in the MNO by-laws, but is not performed consistently (an ad hoc retreat and workshop on building a better board was held in August 2015). Recruiting, evaluation, and on-boarding of new directors has been discussed and practices defined, but is not active at present. Leadership succession planning has not been done.