In this era of corporate accountability, boards of directors are facing more scrutiny than ever before.
The recent demise of PipeVine, a San Francisco non-profit, puts a similar spotlight on the competence of non-profit boards and the fiscal oversight they are supposed to provide.
PipeVine came under investigation by state officials after announcing it had apparently spent more donation money than promised on processing millions of dollars in charitable contributions for other non-profits.
PipeVine acknowledged it had discovered accounting mistakes earlier this year that led to an erroneous estimation of overhead. ``There is a potential loss of $1 million or more,'' said PipeVine spokesman Jeff Raleigh.
United Way of the Bay Area, PipeVine's largest client, will draw from its $5 million reserve fund to replace donations it may have lost to PipeVine.
(United Way Silicon Valley is separate from United Way of the Bay Area and did not use PipeVine's fundraising services.)
Tough to recruit
Public charity board members assume significant responsibilities, which can make it difficult for organizations to recruit volunteers. Not all of the directors have the expertise to understand an organization's financial underpinnings. Indeed, some board members are recruited simply because they are big donors.
``In spite of the best intentions, board members don't always view board service as work,'' said Molly Polidoroff, executive director of San Jose's Center for Excellence in Nonprofits.
By law, unpaid non-profit board members have immunity for ``simple negligence,'' said Tom Dresslar, spokesman for the state attorney general's office. ``The immunity does not cover gross negligence and willful misconduct,'' he said.
``I see the board as a very strong force in the oversight of the entire agency and, in particular, the actions of the director,'' said Tom Vais, who was president of United Way of Santa Clara County, now United Way Silicon Valley, from 1975 to 1991. ``If that doesn't happen, you are bound to run into problems.''
That's exactly what occurred about four years ago, when United Way Silicon Valley teetered on the brink of financial collapse after bad management decisions led to the firing of then-Chief Executive Eleanor Jacobs, recalled Mike Fox Sr., who was the agency's board chairman.
For example, he didn't know the organization was laying off 30 employees until a reporter called him. The board did not know about huge severance payments.
``The board was not running the organization,'' he said. ``You can't micro-manage, but you have to have the oversight of the board in a major way. The board has to be in charge and the director has to know who is in charge. It's just like a boss.''
In hindsight, Fox added, ``I would have hired the accounting firm and law firm. I would have overseen every major purchase. I would have asked for a report from the director as to his or her schedule every month.''
PipeVine spokesman Raleigh said board members didn't suspect anything was amiss until mid-February, when two former employees alerted management of ``accounting irregularities.'' After internal and outside audits, and a change in management, PipeVine notified the Attorney General's Office.
``Absent the board looking at the check registers, there is no way they are going to find this baby out,'' Raleigh said. ``They received financial reports that indicated the company was doing what it was supposed to do.''
At least one PipeVine employee diverted at least $2 million in donations to cover operational costs, he said. Checks that had been written to charities were voided, then disguised as revenue from at least one former client, Raleigh said. ``If the management or board had noticed a large amount of revenue coming in from uncashed checks, it would have raised flags,'' Raleigh said. ``In order to hide it, they used false entries that indicated a former customer had given revenue that it actually did not.''
Earlier this year, ARIS, which for 20 years provided assistance to HIV/AIDS patients, all but closed after a $500,000 shortfall in donations. The agency's board was fully apprised of the problems as they unfolded, said Tom Robinson, ARIS board president.
``The board was brought up to speed regularly,'' he said. ``If we did more micro-managing, or taken a more hands-on approach, would things be different? I can't say that.''
Focus on accountability
Within the sector, and within the media, increasing focus is being placed on accountability, observed non-profit consultant Barbara Kibbe, former director of organizational effectiveness and philanthropy at the David and Lucile Packard Foundation.
``The idea of board service isn't about fun anymore,'' she said. ``It's about responsibility, liability and accountability.''
A ``healthy tension'' should exist between the board and management, Kibbe said.
A non-profit board's first duty is to hire a competent staff, said Mercury News President and Publisher Joe Natoli, chairman of United Way Silicon Valley. It's important that a board consist of people with a mix of skills and have a committee structure that allows those with particular expertise to ``get close enough to what you need to know,'' he said.
Because credibility is critical, ``we spend more time than we'd like on internal finances,'' Natoli said.
Kibbe and others worry that high-profile accounts of unraveling non-profits and questions about board governance might deter people from joining non-profit boards.
``The emphasis on scandals, even though they are rare, causes people to think twice and not sit on boards because they are afraid of public censure,'' Kibbe said. ``These are volunteers. What's in it for them?''
