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Conflicts of Interest

December 27, 2020 by Michael Simkins

“Looking at the agenda, does anyone see that they may have a potential conflict of interest?”

As president of a nonprofit board of directors, I routinely ask that question at the beginning of each board meeting. Rarely does anyone speak up, and we go on about our business. We also have a conflict of interest policy and each board member must sign an annual acknowledgement that they have received and read a copy. When it comes to conflict of interest, our board is on top of things, right?

Not necessarily. At a recent meeting of leaders of some of our Spokes member organizations, the topic of conflict of interest came up. These leaders were concerned that their board members did not have a very sound understanding of what constitutes a conflict of interest. That prompted me to do a little research and guess what? I learned that my own concept of conflict of interest, while not wrong, was far too narrow.

Duality of Interests

First of all, the concept of conflict of interest relates to more than direct financial gain. Let’s imagine a board needs to hire a general contractor for some job. Let’s also imagine that one of the board members happens to be a general contractor. We probably all would say that board member should recuse him or herself from the discussion and decision on what contractor to hire for the job. On the other hand, what about a board member who also serves on the board of another nonprofit in the same community. Is that a problem? Could be!

Two considerations can help us to a broader, more complete understanding of conflict of interest. First, we need to think in terms of ethics rather than legality. An action can be strictly legal yet not necessarily the right or good thing to do. Second, we need to remember that among the three “duties” that board members owe to their organization is the Duty of Loyalty—essentially, that they will put the organization’s welfare first.

As the National Council of Nonprofits puts it, “Conflicts can be nuanced and have more to do with a “duality of interests” than a financial conflict.”

What now?

Based on my new understanding, I want to go back and re-read our conflict of interest policy. Are we following it? Does it reflect this broader concept? Does it say anything about how we will manage conflicts of interest that do come up? What should we consider adding or changing? My hunch is there will be work to do.

Want to educate yourself and/or your board on this topic? Here are some excellent resources to share.

Conflicts of Interest | National Council of Nonprofits

Charity Conflicts of Interest: A Guide – Non Profit News …

Nonprofit Conflict of Interest: A 3-Dimensional View – Blue …

Nonprofit Accounting Best Practices

October 28, 2020 by Grace Nielsen

Nonprofit accounting can be a daunting task due to its specific and detailed nature. Here we have compiled some basic information about nonprofit accounting including best practices and software choices. 

Basics of nonprofit accounting 

Since nonprofits have no ownership interests, receive donations from third parties, and have goals other than making a profit, accounting is much different and often more complex than for-profit accounting. 

What makes nonprofit accounting so much different? Business.com’s “A Nonprofit’s Guide to Accounting” sums up three key differences: 

  • Since a nonprofit does not have stakeholders, it produces a statement of financial positions, which outlines assets and debts rather than a balance sheet. 
  • Nonprofits do not have equity, so this item is referred to as net assets, which are labeled as restricted or unrestricted. 
  • Rather than an income statement, nonprofits produce a statement of activities that tracks revenues and expenses for each program. 

Nonprofit accounting best practices 

When managing your books, protecting your nonprofit’s financial data should be a top priority. Aplos’ “Ultimate Guide to Nonprofit Accounting” and National Council of Nonprofits’ “Internal Controls for Nonprofits” both list important tips for responsible financial management. These can be policies or plans which reduce risk surrounding your nonprofit’s funds or assets. 

  • It may seem obvious, but creating a budget and a multi-year plan is a great way to prepare for spending ahead of time. Both should be realistic for your organization.
  • Understand the requirements of the IRS and GAAP and remain aware of any rule changes. 
  • Make sure everyone in your nonprofit understands how money travels through your organization. Creating a flowchart can help your staff visualize different responsibilities and risks at different points. 
  • Delegate financial duties among multiple employees.This can prevent fraud and increase accountability. 
  • Manage your fundraising expectations. Use past data to set realistic goals and adjust them if anything goes wrong—or right!

Software 

When it comes to accounting software, Best Accounting Software has compiled one ranking of software for nonprofits. Their recommendations: 

  • Aplos as best overall software: Aplos has features important to nonprofits such as fund accounting, membership management, and fundraising capabilities. 
  • QuickBooks Online best for small nonprofits: QuickBooks is an inexpensive software that has the basics of program and fund accounting, donation management, and more.  
  • Blackbaud Financial Edge most flexible for nonprofits: more suitable for large nonprofits, Blackbaud offers user-level permissions tools, customization, and flexibility in financial reporting and analysis.  

For more information on nonprofit accounting: 

Cal Nonprofits’ Nonprofit Compliance Checklist

Indiana Attorney General’s Best Practices for Nonprofits Checklist (pdf)

Risk Assessment for Nonprofits

September 22, 2020 by Grace Nielsen

Last week, we covered the types of insurance your nonprofit should consider. But how exactly do you choose what types of policies you will need for your organization? Doing a careful risk assessment is a good starting place.

What is a risk assessment? Ready.gov provides a simple definition: “A risk assessment is a process to identify potential hazards and analyze what could happen if a hazard occurs.”

A risk assessment contains multiple stages of identifying and prioritizing risk. Nonprofit leaders are responsible for recognizing vulnerabilities and monitoring any risk that could affect their organization.

There are many ways to accomplish a risk assessment based on the size of your organization. For smaller nonprofits, the best way to save money is for internal leadership teams—such as volunteers, boards, or staff—to conduct the assessment. Larger organizations might hire a risk professional or even employ one in-house.

BoardEffect provides a simple risk assessment template that any small nonprofit could use as a practical guide. Essential steps include:

  • Identify risks in categories such as governance, external, financial, or operational.
  • Analyze risks and score each for likelihood and impact.
  • Prioritize and determine how much risk your organization is willing to accept.
  • Determine which risks are acceptable and decide what you will need to take action on.
  • Ensure that risk controls are in place.
  • Monitor and review identified risks and update controls as needed.

Once your organization has recognized and prioritized risks you’ll have a much simpler experience selecting the types and amounts of insurance appropriate for your organization.

Additional resources:

  • Nonprofit Risk Management Center
  • Stanford Law School Risk Assessment Tool
  • 7 Critical Risks Facing Nonprofit Organizations

What Types of Insurance Should a Nonprofit Consider?

September 10, 2020 by The Spokes Team

Insurance can be overwhelming for anyone, let alone for a nonprofit organization. However, it is extremely important to stay educated on the types of insurance your nonprofit may need.

View insurance as a step along the way to fulfilling your mission, as it will help protect your organization and its assets and limit barriers to success.

Here are some of the types of insurance policies you may come across. Every nonprofit’s needs are different, so you will likely require a specific combination of policies.

Directors and Officers
A directors and officers policy is important to consider as the management and board of your organization can be sued for wrongful acts or mismanagement, which can result in financial damages not covered by your general liability policy. This coverage can provide defense and indemnification for lawsuits alleging errors made by higher tier executives.

Employment Practices Liability
An employment practices liability policy protects your organization against employee claims of legal rights violations. These internal violations can include sexual harassment, discrimination, and wrongful termination. Some of this type of coverage may be included in your Directors and Officers policy.

General Liability
A general liability policy can protect your organization from claims alleging negligent conduct by your employees, volunteers, or agents. Negligent conduct means your nonprofit failed to use the proper standard of care when carrying out services and this resulted in bodily injury, property damage, or personal injury. This type of policy is one of the most common for nonprofit organizations.

Workers Compensation
California requires that all employers with more than one employee provide workers’ compensation coverage for job-related injuries or illnesses. This policy will protect your organization from employee lawsuits claiming negligence as a cause of workplace illness or injury. Like most other policies, it can be helpful to get quotes from several providers as premiums can vary greatly.

Auto
There are two types of auto coverage: hired and non-owned policies and commercial automobile policies. A hired and non-owned policy protects your organization against claims from employees and volunteers. If an employee or volunteer gets into an accident while driving their personal vehicle on behalf of your organization, this policy could protect against extended losses or lawsuits.

Commercial automobile policies protect the organization when an employee or volunteer is at fault in an accident and can also cover physical damage.

Property
Property insurance will protect property the nonprofit owns. Optional property coverage can include computer or electronic data processing policies.

Employee Dishonesty/Crime
This policy can protect against employee risk of crime such as embezzlement, forgery, theft, or vandalism. Optional policies also cover third party crime such as robbery.

Business Interruption Insurance
Generally, business interruption insurance protects an organization against lost income due to physical loss or damage to covered property resulting from covered peril. Some business interruption policies include special endorsements that insure against lost income sustained due to the existence of a communicable disease at the insured property or a government order prohibiting the use of the property.

There are many elements to consider when shopping for policies: measurement of risk, monetary limits, who is to be covered, and more. Make sure to work with an insurance agent who understands or specializes in nonprofit insurance and the specific risks you may encounter. This will ensure an informed and trusted decision.

Staying informed is the best way to protect your organization from any harm that could burden your mission.

Next time we will take a look at nonprofit risk assessment and how it can help you determine what insurance you may need.

Learn more about the various types of insurance:

What Basic Insurance Coverage Should a Nonprofit Consider?

Types of Insurance Nonprofits Should Consider

Business Interruption Insurance for Nonprofits – Is COVID-19 Covered?

To Merge or Not to Merge?

June 21, 2020 by The Spokes Team

The Covid-19 pandemic is impacting nonprofits in one of two very different ways: some nonprofits are experiencing a dramatic increase in donor support and demand for services while the other half have watched their programs and funding come to a grinding halt because of issues related to social distancing. On each end of the spectrum, nonprofits are re-considering their plans for the future and what partners will be needed to realize them. Some organizations will consider mergers and, as they do, we hope this article will serve as a guide for their process.

Is a Merger Right for You?

David LaPiana, a nationally recognized nonprofit merger consultant and author of The Nonprofit Mergers Workbook, Part 1 & II, stresses that successful mergers will be driven by one or more of the following long-term strategic goals:

  • Better market positioning;
  • A larger market share;
  • A higher public profile;
  • Greater political influence;
  • More strategic fundraising;
  • A larger staff, allowing greater specialization of functions and the provision of more service;
  • The creation of a continuum of services under unified control; and/or
  • Better economies of scale.

If your nonprofit is considering a merger out of a desire to immediately start saving money, be forewarned: mergers are expensive. Mergers done well will require additional resources that will increase your current operating budget. Any overhead or payroll savings will most likely not be realized for a couple of years.

According to the Chicago Nonprofit Merger Research Project, a partnership between Northwestern University’s Kellogg School of Management, Mission + Strategy Consulting, and eight Chicago foundation funders, published in 2017, the most common denominators among successful nonprofit mergers include:

  • A prior relationship or collaboration existed between the organizations that merged.
  • Third-party consultants or facilitators were hired to navigate the often-lengthy merger process. (Median merger negotiation outcome took 15 months.)
  • The board chair or a board member from one of the organizations emerged as the chief merger advocate. (Meaning that the merger process was championed at the board level and was not staff-led.)
  • Motivations for the merger were spurred by a desire to enhance the competitive position of both organizations in response to external forces: competitors, shifts in government practices and policies, and the need for greater financial stability.

If you recognize your nonprofit’s merger intentions and capabilities among the benefits and critical requirements listed above, read on to understand how to proceed through the three primary phases of a nonprofit merger: Negotiation, Implementation, and Integration.

Negotiation Phase

Once two nonprofits commit to exploring a potential partnership, the Negotiation Phase officially begins. Key steps of this phase include:

  • Instating a “Negotiations Committee” or “Exploratory Committee” consisting of an equal number of board members from each of the potential merger partners. Nominations of non-board members who may have specific skills or experience beneficial to the discussion may be allowed as long as those nominations are unanimously supported. However, once the committee is inaugurated, no new members should be allowed to join.
  • All Negotiations Committee members must sign an agreed upon Confidentiality Agreement. This exploratory phase will require both organizations to be fully transparent and divulge all aspects of their operations – including those aspects that may be embarrassing. If, ultimately, the merger is not pursued, all committee members must be held accountable for not divulging any information shared in negotiations with outside parties.
  • Minutes must be carefully recorded at each Negotiation Committee meeting.
  • Due diligence is conducted as both organizations present and jointly review the following documents:
    • Organizational – Articles of Incorporation, Bylaws, Organizational Charts, etc.
    • Tax – IRS and State exemption letters, 990 filings, state tax filings, etc.
    • Insurance – General Liability policy, Directors & Officers policy, Workers Compensation policy, etc.
    • Personnel – all employee job descriptions and compensation, personnel policies, employment contracts, benefits programs, volunteer policies, etc.
    • Financial – audited financial statements, current income and balance statements, current budgets, copies of loans or other debt financing arrangements, etc.
    • Real Estate – deeds, leases, mortgages, etc.
    • Legal – statements describing any current or threatened litigations, copies of licenses and permits, list of commitments that would cancel as a result of a merger, etc.

At the end of the Negotiation Phase, if a merger is still desired, the Negotiations Committee will document a merger proposal to present to the respective boards of each of the merging organizations. The merger proposal will summarize the outcomes of the exploratory conversations and identify which specific merger structure will be pursued. (Parent-subsidiary, one organization acquiring/absorbing the other, or dissolution of both organizations and the incorporation of a third new entity are just a few of the potential options for consideration.) Each organization’s board must approve the merger proposal presented per their respective bylaws in order to move into the Implementation Phase.

Implementation Phase

The Implementation Phase is often the shortest of the merger phases, depending on how the new merger will be structured; which is a good thing as it is critical to hire an attorney experienced in nonprofit mergers to guide this phase. Essentially, the only goal of this phase is to legally merge and incorporate the two nonprofits to become one entity. Unlike mergers conducted in the for-profit world where attorneys are hired to represent each organization in this process, nonprofit mergers should involve only one lawyer who serves as a mediator to create mutual success for the merging organizations.

Integration Phase

Usually, as organizations reach this phase, there is a sense that the majority of the work has been done. But, that’s not true. In fact, the Integration phase is the hardest and longest phase of the merger process. There are always unanticipated “hiccups” that arise as new boards, staffing structures, donor systems, financial records and organizational cultures are blended together. This phase requires significant behavioral change throughout both organizations and can be quite emotionally challenging. Make sure all members of your leadership team understand the full scope of the merger process and are fully committed to the work and patience required to successfully complete the Integration Phase. Integration is not easy, but it is the most rewarding of all the merger phases, as the organization’s new identity – and each person’s role within it – is defined resulting in a shared sense of empowerment and long-awaited forward progress.

Collaboration is the heart of nonprofit work and mergers are the ultimate manifestation of collaboration. Many of our most valued local nonprofits grew out of two smaller programs or organizations uniting and leveraging their combined resources to create a greater good. We understand that the process is complex and want to remind you that Spokes is here to help. If you need a sample Confidentiality Agreement, sample merger worksheets, consultant referrals or an introduction to nonprofit leaders who have led successful mergers, contact us! In the meantime, here are a few other resources that may be helpful for you as you consider if a merger is right for your nonprofit.

From Stanford Social Innovation Review, “Nonprofit Mergers that Work”.

From the Council of Nonprofits, “Mergers, Collaborations and Strategic Alliances”.

From Nonprofit Quarterly, “Nonprofit Mergers: New Study Sees Strategy and Success”.

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DISCLAIMER: Spokes offers informed advice and recommendations, not professional counsel. Blog content is current as of the date shown. Individual posts are not necessarily updated, so please confirm the accuracy of the information, especially of older posts.

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