Mind The Gap ...

It's sometimes said that trustees of nonprofits check their brains at the boardroom door. Otherwise sophisticated men and women - people who are successful in business, or who can manage money or who bring critical skills to an organization don't apply the same rigor to nonprofit governance as they do to their own business affairs.

There may be occasional good reason to place that charge on board members. I have seen dereliction from both the perspective of the consultant advising boards as well as from the vantage point of a person with long experience serving on nonprofit boards. One reason board members may act casually is because they trust management to do the real work and they rely heavily on the information management gives them - or doesn't.

This brings me to ACORN, the national association of community organizers. On its web site - but only after national press attention apparently forced it - Maud Hurd ACORN's president issued this statement:

“ACORN now begins a new chapter as its founder and chief organizer, Wade Rathke, is moving on from the organization he founded in 1970. The ACORN Board recently learned that Wade’s brother, Dale, misappropriated organization funds eight years ago, and as a result, the Board decided it was in the best interests of ACORN for Wade Rathke to step down as Chief Organizer. Eight years ago an enforceable restitution plan was obtained. Regular payments have been made over the intervening years, and arrangements are now in place to return the rest of the misappropriated funds."

The operative phrase here is of course "recently heard." How could it be that the board members just learned of an eight-year old crime? One answer is management did not tell them. A second answer is that in relying on management's good faith nobody asked any questions. But even when questions are asked there is no guarantee that the truth will out.

Having recently gone through a financial crisis as treasurer of a nonprofit I know first hand how hard it can be for a trustee to really know what's going on. Each month the finance committee of this organization received detailed financial information and each month I would ask management the same question: "any surprises?" And each month I was assured there were none. Until in the dog days of last summer a million dollar short fall turned up. Luckily - after a thorough and costly forensic investigation - incompetent accounting and not crime turned out to be the root cause.

If I had known what questions to ask, I'd have asked them. I suspect that would have been true of ACORN's board as well. Boards don't always know what questions to ask and managements are sometimes not forthcoming. Mind the gap .

STEWART R. MOTT

On Thursday June 12th Stewart R. Mott died.

I first met him in the late 1960s. The Oram Group served several clients in or on the periphery of peace and disarmament, family planning and civil rights - the prime motivators of Stewart's philanthropy. In those heady days the firm also did political work. I got to know Stewart over time and especially during Eugene McCarthy's presidential campaign when we spent time together. In 1968 or 1969 Harold L. Oram tried - for the first time - to sell the business - to Stewart and another peace activist Robert Wallace Gilmore. That bid failed for various reasons, the asking price foremost.

Our relationship continued through the clients we served - the McGovern campaign, other political campaigns that caught Stewart's eye and wallet, and of course the ongoing interests of Spectemer Agendo - Stewart's foundation now known as the Stewart R. Mott Charitable Trust.

In 1976 Harold Oram was a sick man. For the second time (that I knew about) he decided to put the company on the block. I owned 18% of Oram's stock and by refusing to surrender it was able to control to whom the company might be flogged. Harold was not pleased to say the least but it enabled me to block a buyer of whom I did not approve and for whom I would not work. Finally Harold said out of frustration "all right go to Mott and Gilmore" which I had wanted to do right along but only if a reasonable price could be struck with him.

I went to Stewart and Robert and asked them to back me in purchasing the firm. Both of them knew the firm well, they knew me, and they were interested because we were one of the very few firms in this niche industry serving the progressive causes and politicians to which they were committed. Without a lot of fuss they agreed and for the next year we negotiated with Harold. His need to sell was at war with his love for the outstanding firm he had created and like virtually all founders he doubted in his heart that anyone else could carry on.

Stewart was one of the smartest people I have ever met; he was a polymath and especially his ability to crunch lots of numbers in his head at bullet speed was scary. Having had his own difficulties with a parent Stewart dutifully analyzed Harold and figured out that what he really wanted wasn't money but the security he thought the money would bring; Harold wanted an income for life that did not rest solely on the company's ability to generate it. It was Stewart who came up with the creative financing that finally brought Harold around and my lawyer figured out the rest of it. In 1978 we closed on the sale and Stewart and Robert joined the board (along with their respective financial advisors) and there they remained until a company reorganization in 1992.

Stewart rode around New York in all weather on a motorized scooter and one raw rainy day he showed up for an initial board meeting. The receptionist buzzed me in the conference room to announce that "the messenger is here." There indeed was the "messenger" - Stewart in oilskins, messenger bag slung over his shoulder, absolutely dripping,late as usual but ready to work.

We had become friends before we became business colleagues. Friendship mattered to him. For many years my wife and I tossed a New Year's day party that Stewart faithfully attended always in his kilts, with several ounces of his top notch pot in the spoorn.

As I wrote in 2001 for a speech about my career at Oram:

"Stewart Mott, whose fortune came from General Motors, was brilliant, erratic, always true to his principles, and the family outcast. He was a libertarian marijuana grower -- in his Park Avenue penthouse -- devotee of Renaissance music, unpretentious but definitely odd. For example, he generally received any and all in his skivvies. When he wasn’t doing pot, he smoked an exotic brand of Egyptian tobacco that smelled like burning rubber and swamp gas, combined. Despite considerable wealth in the coinage of the time, and of course everybody was after it, Stewart was for a long time the Most Eligible Man in New York Never to Get A Second Date With the Same Woman. His courting style was truly pathetic. But no matter. The ladies came in hope, and left in tears. Feminine raiment accessorized his bachelor lodgings."

Harold Oram is gone.
Robert Gilmore is gone.
Stewart Mott is gone.

Holiday Reading

New York Times reporter Stephanie Strom published a page one piece on May 26th once again raising the issue of charities' tax-exempt status, leading with "Authorities from the local tax assessor to members of Congress are increasingly challenging the tax-exempt status of nonprofit institutions — ranging from small group homes to wealthy universities — questioning whether they deserve special treatment." Her story cites a Minnesota Supreme Court decision requiring a child care center to pay property taxes because they charge one price for all regardless of any subsidies they may receive from government.

The article underscores that with the economy in recession, state and local governments are trying to replace shrinking tax revenues any way they can. Making tax-exempt groups prove they are actually charities - i.e, they give away their services - may be as much as the Times could come up with on a lazy, sunny, long Memorial Day weekend. Not to be disrespectful to Ms. Strom but this dog barks in every recession. As she mentions private hospitals as well have cut way down on charity care yet remain tax exempt. What she doesn't write is that the grumbling has been going on for decades with no legislative result. (See Oram Matters April 4th blog below).

Her piece also gets to the Congress's interest in going after wealthy universities, who pound for pound are much wealthier than hospitals. They have alumni. Hospitals have those who left vertically or their sometimes grateful families when they go out toes up. But Congress going after wealth through legislation is markedly different from local tax authorities squeezing local nonprofits. Legislation to force reform is going nowhere in an election year and if history is a guide not any time else either.

Immense wealth is ever more concentrated in fewer and fewer hands. For example the worth of the 20 richest Americans, reported by Forbes was $436 billion last year. Efforts to redistribute that wealth is really not an agenda item for any breathing politician or government official. Nor will it ever be. No matter how they may game the system and there's some pretty inventive stuff out there - including complex gifts to charity - the taxes these folks paid in are enormous, assuming an effective 15% tax rate that's $65.4 billion.

The aggregate worth of the universities is much less. MSNBC reported that the 20 largest endowments were sitting on 134.4 billion dollars. If these schools' spend rate was 5% - which it isn't - $6.7 billion would be going into operations and the cost of sending your kid to one of these schools could go way down. In fact a few have made big cuts in their tuition to respond to the pressure but most are sailing merrily on.

Loathing the tax collector is an American pastime and an attack on wealth concentration is not in the cards.

Cooper Union Tops Out!

An Oram client,The Cooper Union for the Advancement of Science and Art (www.cooper.edu) today celebrated the topping out of its new East Village academic building. Designed by West Coast architect Thom Mann this "green" and very innovative addition to New York's civic spaces has been made possible by generous private philanthropy, borrowing and modest government encouragement.

One of the most striking attributes of the building is - despite its cutting edge look - how easily it complements the original (and still functioning) Foundation building completed in the late 19th century. For a tour of the new building visit the Cooper Union web site.

Congratulations Class of 2008!

For 20 plus years I have been adjunct professor of philanthropic management at the Milano School for Management and Urban Policy at The New School University in New York. Next week my current group of 15 graduate students - having to my satisfaction completed case studies on existing or start up nonprofits - will graduate. We all began working together at the end of January this year and this required seminar is the only thing that stood between them and graduation.

Of course each year's class is unique and so was this one: 13 women, 2 men, one Thai one Canadian, 2 ex-Peace Corps women, one recovering lawyer, one Latino, one African American woman, one Floridian by way of Colombia and one Vietnamese-American and one Korean-American. The age range is from right out of college to early 40s. These people worked hard and with no little anxiety. They have been at this for three years in most cases and by now they just want to be done with it. Some are full time students, the others hold down jobs.

The subjects they explored included the Dominican Diaspora, the creation of an environmental social venture for profit/nonprofit, strategic and financial planning for under-resourced organizations, arts education in the schools, performance metrics and organizational structure and management. We learned from each other of course. But I learned more from them than they did from me.

As we know commencement exercises and blather go together. So I'll just limit myself to congratulations to each of you. Well done!

Silicon Valley Psychosis

You don't have be in Silicon Valley to contract Silicon Valley Psychosis (SVP).

A self-anointed group of mostly young technocrats calling themselves "social entrepreneurs" want to use the tools of venture capital to restructure private charity. They use the term "metrics" geek code for upsetting bloated nonprofits, sluggish bureaucracies, impenetrable opacity, lack of accountability and too much distance between social need and demonstrable outcome. They put up money to start nonprofits of their own cut to their own notions of social responsibility and charitable purpose.

The symptoms of SVP are ego driven myopia, arrogance, duplication of charitable services on a small scale, insufferable self absorption and the exact same problem of measuring results. Venture capital is but another form of "sea gull" behavior: fly in, fly out, leave a mess behind and not incidentally control the enterprise. SVP is driven by the notion that bringing a start up to market, spinning it off for a bunch of money, and going on to the next (ad)venture is a workable imitable and desirable model in the nonprofit world.

Responding publicly to a recent speech by Emmett Carson head of the Silicon Valley Foundation and a scarred veteran of the traditional foundation world - I observed to him and the audience that virtually none of these (mostly) guys is giving evidence of thinking strategically about the vast problems of the world's richest nation tolerating a poverty rate of 15%, the decampment of government responsibility for basic human services and a nonprofit culture that is indeed out of touch. Why can't they bring their creativity, innovation and get-it-done attitude to mainstream organizations? They could bring a profound difference and a new perspective but only if they stop to listen, respect the achievements of the charitable sector and enter the dialog.

The traditional private nonprofit culture they resist - despite its considerable inefficiencies - has made an exponentially greater difference in the lives of people everywhere than this small group of entrepreneurs thinking they can save the system only by throwing it over. The idea that private charities are too far gone to be made efficient, effective, accountable and transparent is plain out ridiculous. It's time to drop the pose. Social entrepreneurship is not going to replace the existing structure any time soon if ever.

With the economy circling the drain investment capital - venture or otherwise - is becoming scarce. In this environment is the social entrepreneur-venture capitalist really a new exemplar for charity or just the second lemming over the cliff?

"Nonprofit Hospitals Strike It Rich" - Wall Street Journal April 4th

This morning's top-of-the-fold story tells how a relative handful of big nonprofit hospitals net huge profits, pay out multi-million dollars bonuses to CEOs and spend virtually nothing on true charity care - the reason for their tax exemption in the first place.

Is there a connection between this story and the wealthiest universities hitting their endowment returns harder to give students a break on soaring tuition costs? Is there a connection between egregious nonprofit behavior and a recent Chronicle of Philanthropy piece reporting that only 68% of Americans think charities are making good use of their money? Is the public waking up? Maybe so. Are the serfs hoisting their pitchforks and storming the castles? Are the big plaques that hold up the buildings about to be peeled off the walls? Not quite yet.

Twenty-five or 30 years ago I made a speech on this very topic to an audience of hospital fund raisers at a conference in San Diego. My take was on the charity exemption because back then even the largest among them did not make the money some do now. But then as now many offered as little free care as they could. I asked these nice folks why anyone should donate money to their institutions.

I also poked pins in their eyes by suggesting that in most cases their earnest fund raising efforts produced only incremental returns (one or two per-cent of total revenues) (still true for most) and if you backed out fund raising costs most of these places could cut their budgets by half a point and eliminate their jobs. For some reason much of my audience was not pleased. Feathers flew. But a few actually agreed with me.

My point then was that the charitable exemption was and is widely abused by hospitals of all sizes, everyone in the industry knew it and I warned then that government would ultimately be prodded into doing something. As we know the feds move slowly and it took nearly three decades (though a few legislators made half hearted efforts over time). For the last few years Senator Charles Grassley (R) has been going after charity's abuse of the tax break. There is not yet legislation to show for it and in the Cave of the Winds all bets for anything meaningful are always off. The charities' lobbying has been intense; nothing will happen before the elections.

But I can just imagine the meetings, the gnashing of teeth, the wringing of hands going on this morning in the conference rooms of hospitals named in the Journal story and many others unnamed as well. I could write (and have) the-sky-is-not-falling snail mail messages and e-blasts that will be going out to the muk-muk donors - along with the contribution reply envelope or "click-here-to-donate-now."

Philanthropy is venture capital. R&D can bring real benefit and better health care to all of us. Government grants are flat or declining. But like the drug companies' justifying high prices citing R&D cost - when it's really marketing - the facts are in the small print. Not that a hospital financial statement is either comprehensible or comparable to that of another hospital.

Charities need to have funds in reserve - whether they're called endowment, or as in business retained earnings (cash). But it is the responsibility of a governing board to strike a balance between hoarding funds and spending to fulfill charitable purpose. Top tier universities realized the big donors want to see mission fulfilled. Others pointed out that earning 15-20 % and spending only 3-4% was piggy.

The big hospitals have been and are still in denial. But once the crisis management firms are called in you can expect to see the largest of the largest wiping away the large tears as they suddenly see the poor at the door sill.