Over the last few weeks two rather well-known organizations in Israel have been in the news over possible misappropriation of charitable funds. It is not unusual for organizations to be investigated and to have their fiscal policies and practices questioned by the Office of the Registrar of Nonprofit Organizations. However, if an organization does not have the proper structure for ensuring their being accountable for the use of public and charitable funds then this should not be a surprise. However, these situations can be avoided through the building of a proper organizational structure that provides fiscal accountability.
Several years ago the media covered a disturbing side effect of the global economic crisis: with poverty rising in Israel, more children were going without enough nutritious food. At the time I was employed by a large philanthropic organization that was responsible for the allocation of millions of dollars to various programs sponsored by nonprofit organizations in Israel. One of the criteria for awarding grants was the assessment of the involvement of the board of directors in the decision-making process and fiscal management.
Unfortunately, it was not unusual to find voluntary organizations that did not have functioning volunteer boards and did not have the proper oversight of the implementation of the agencies’ budgets. In fact, I was accused by a well know Israel nonprofit of standing in the way of its receiving funds from my employer. I was accused of preventing families and children from receiving needed services and denying them a way to deal with nutritional deficiency.
I was very straightforward with the founding director of the organization and I made it very clear that I could not recommend the awarding of a grant to an agency that did not have a functioning and involved board of directors. He retorted that his organization was officially registered with the Israeli Government and, as such, they had a board composed of seven people as required by law. The fact that the board members were his friends and relatives and there was no way they represented people who would guarantee the integrity of the programmatic and fiscal operation of the organization did not make an impression on him.
In spite of my assessment of the governance structure and the lack of proper oversight there were many other American Jewish organizations that were prepared to fund this organization because of the charismatic personality of the founding director. Often the most sophisticated funding bodies and foundations can be swayed by demonstrated needs of a specific client population and the development of creative responses to their needs. In this situation, the foundation board members and the volunteer leadership may exert pressure to sway the professionals to be flexible and not try to stand in the way of the allocation of funds.
After the Second Lebanon War in 2006, a very innovative and creative person began a nonprofit organization to assist businesses in dealing with the impact of the war on the economic situation in the North of Israel. The organizing principle of this effort was to engage businesses in a strategic planning process so they would be able to restructure themselves and move forward after the war. The agency’s focus was on assisting the business in a comprehensive planning process instead of relying on banks for additional loans. The terms of the loans and the interest rates would be too much of a burden and would ultimately place the businesses in jeopardy.
There was a great deal of excitement about this approach and it seemed so logical to assist the small businesses in examining all aspects of their functioning from cash flow to marketing. It was sold to donors and funding organizations as a win-win. The business would get on its feet by proper planning and financial management and the North of Israel would benefit as businesses were able to stand on their feet and provide employment opportunities for the residents of surrounding communities.
A number of significant contributors to the organization where I was working were very enthusiastic about this creative approach to strengthening business and not bailing out the businesses through loaning the needed cash. However, due to the enthusiasm charitable funds were allocated to this nonprofit without the proper oversight. The fact that influential people were interested in backing the effort swayed the funding body to suspend its usual thorough and thoughtful assessing of the organization’s sustainability.
The professionals running the organization were not accountable to an involved and knowledgeable board of directors and within a very short time the agency fell victim to the same problem its clients were experiencing. They did not have the cash flow necessary to continue providing a much needed service. Within a very short time the nonprofit sank into oblivion and there was very little in the way of holding the existing board accountable for the several million dollars that had been expended in a very short time. Under other circumstances the organization might have been accused of mismanagement of charitable funds.
Thus, a basic principle of all nonprofits must be the building of a functioning board of directors composed of people who will hold the organization accountable for the implementation of its programs and the use of its financial resources. The overwhelming majority of nonprofit organizations depend on voluntary contributions and the allocation of public funds to support their programs. The instituting of proper checks and balances to oversee the use of these funds help ensure there are fewer incidents like the ones I have discussed in this posting. When there is a strong, functioning board of directors holding the agency accountable then donors and funding organizations will be more confident when funding an organizations and it will strengthen the public’s belief in nonprofit organizations.
Stephen G. Donshik, D.S.W., is a lecturer at Hebrew University’s International Nonprofit Management and Leadership Program and has a consulting firm focused on strengthening non-profit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.