Securing and Ensuring Ethical Behaviors in a Nonprofit Organization

ethical behaviorIt has been a turbulent week for the organized Jewish community in New York. One of its key communal agencies was under the spotlight following allegations of financial misdealing on the part of its CEO. This highlights the responsibility of the board of directors to ensure that funds are not used inappropriately or allocated for purposes that would reflect negatively on the staff or board of the nonprofit organization. The most important asset a voluntary agency has is its name; a black mark will make it very difficult for the agency to market its services, attract clients, and secure public and voluntary support for its services.

The major responsibilities of a board of directors are establishing policies that guide the organization and putting in place safeguards to demonstrate fiscal responsibility to the community in general and to those who support the agency in particular. Agencies can fulfill these responsibilities if, and only if, they have structured the governance process that enables the leadership to implement their role in this area. Once the structure is in place, then the board members have to have an understanding of what is expected of them and how they should be implementing their responsibilities. The two most important venues in which the board exercises its responsibilities are the full board meetings and the committee meetings where the members have an opportunity to demonstrate their understanding of their governance role.

The clearest example of the importance of the board’s role in being accountable for the agency’s functioning is in the area of receipts and disbursements. Every nonprofit must have a committee that oversees its finances. In addition to approving the annual budget and reviewing the income and expenses, this committee reviews the agency’s budget on a monthly basis. It examines the specific lines in the budget, giving each member an understanding of how the budget was built and the rationale for the figures that are on each line. If there are unusual increases or decreases in individual lines, then an explanation should be provided. Through this process the professional and volunteer leaders responsible for the building of the budget exercise their fiduciary responsibility as the organization’s leaders.

After the budget is built and then reviewed by the finance committee, it is presented to the board of directors for discussion. At this board meeting there should be ample opportunity for the members to raise questions and to discuss any issues that may arise. The question-and-answer portion of the meeting should be viewed as a way to establish the board’s credibility and accountability for its management of the organization’s resources.

Sometimes the board member who knows the least about budgets will ask the most pointed questions because he or she is not familiar with the detailed workings of budgets and figures. When this happens the CEO or the finance professional should respond with patience and be thankful that there are committed volunteer leaders who are invested in wanting to know more about the workings of the organization. It is precisely this kind of process that guarantees fiscal transparency and keeps the agency honest.

The board’s discussion of the budget is a valuable process that builds on each volunteer’s commitment to the organization. When the individual volunteers come to understand the fiscal workings of the organization and the relationship between income and expenses, they will be more motivated to ensure that the necessary funds – whether from voluntary contributions, allocated public funds, or fees for services – are available to meet the community’s needs. Although it is time consuming and sometimes onerous to build in transparency, this process is well worth it.

During the course of the year the finance committee should review the budget and actual receipts and disbursements on a monthly basis. The details of the cash flow are an important indication both of how the agency is functioning fiscally and a way of detecting any irregularities. If funds are being misallocated or used fraudulently, a careful monthly review of the budget lines and amounts will generally reveal these unethical practices.

Some board meetings and committee meetings are held in private and are not open to all members. Although this practice is often justified as protecting people’s privacy in terms of salaries, benefits, and reputations, it can have a deleterious effect on the culture of the organization. Recently a seminal article appeared online in the Nonprofit Quarterly on this issue: “In Camera Board Sessions: Securing Confidentiality or Cultivating a Culture of Secrecy.” There are times when confidentiality is necessary, but for the most part it is not worth sacrificing the board’s ability to be accountable for policies, decisions, and allocations of funds by having meetings behind closed doors.

When an organization is suspected and accused of unethical behavior, it loses standing with the community’s leadership, as well as its own leadership. The more an organization can demonstrate its commitment to ensuring its ethical behavior in developing policies and implementing practices, the more it will be an example both to its own professional and volunteer leadership and to donors and prospective supporters. It is better to develop strong ethical policies and practices before questions are raised, rather than having to defend the organization after an actual or suspected incident has occurred.

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 nonprofit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.