Some in the legal profession seem to be stuck in an obsolete paradigm of compliance, transparency, and good board governance for nonprofits—while the accounting profession (and Sarbanes-Oxley) advocates a holistic approach with an integrated system of internal controls as its centerpiece.
Jack Siegel's Charity Governance blog called our attention to an article in the National Law Journal (Sheri Qualters) suggesting that charities are increasingly seeking legal advice on governance issues in light of Sarbanes-Oxley and unfavorable media coverage of organizations like the Nature Conservancy and the American Red Cross.
What struck me about this article was the superficiality of the examples it offered as responses to heightened concerns about charity accountability:
- board structure: instituting a two-tiered board structure rather than a board executive committee (to me it seems like just a change in labels),
- legal advice: paying for outside legal help or hiring in-house counsel rather than relying on a board member who happens to be an attorney
- and a long to-do list of activities: conducting legal and compliance audits, reviews of conflict of interest policies, bylaw revisions, creating audit committee procedures, crafting whistleblower polices and generally educating boards about their fiduciary duties.
All of this, it seems to me, reflects a spirit of mere compliance rather than a fundamental change in the way organizations do business. The fundamental idea here seems to be staying out of trouble, which is echoed both in the article and in Mr. Siegel's book, which is subtitled: Avoiding Trouble While Doing Good.
But the change that has come about in board governance in the for-profit world is not about compliance with external standards: it is about establishing an internal attitude that is reflected throughout the organization. More fundamental than compliance is the concept of an internal control structure in an organization, which the accounting profession (through five professional organization) has developed since 1985 in an organization known as COSO. The basic COSO internal control framework has five components:
- Control environment: the attitude and tone set by the leadership of the organization
- Risk assessment: identifying and analyzing internal and external risks to achievement of objectives
- Control activities: the policies and procedures of an organization, including: approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties
- Information and communication throughout the organization and with external players who interact with the organization, ensuring that all—not just the board—understand their role and what part they play in internal controls (this component also incorporates networks and software as a part of internal controls)
- Monitoring: ongoing supervision and periodic evaluations are an integral part of the process
The lawyers have missed the boat in three fundamental ways, it seems to me:
- The heavy emphasis on boards and fiduciary responsibility is misplaced. Internal controls are a matter of institutional attitude and culture that need to be reflected at all levels—yes, even by fundraisers and donors.
- Organizations need to evaluate and analyze their own internal and external environment, rather than rely on so-called best practices fabricated by other organizations, consultants, experts, or self-appointed standard-setting bodies. In theory, experts can help an organization understand its environment better, but often in practice organizations that lack a control environment use experts merely to provide checklists of things to do to keep them out of trouble.
- Most of internal control is reflected in routine, day to day activities that can't be regulated and management decisions about distribution of tasks and responsibilities that also can't be regulated. To me, it is more important to have a strong human resources resource in the organization that understands the importance of day-to-day management and supervision skills and knows how to find and nurture the people with these skills.