Ethics in a New Era: A Matter of Leadership and Trust

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Ethics in a New Era A Matter of Leadership and
Trust

• National Association of Veterans Research and
  Education Foundations
• 2005 Annual Conference April 11, 2005

Facilitator Michael G. Daigneault, Esq.
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A Bit of Background

• Facilitator Michael G. Daigneault, Esq.
• Principal Director of Advisory Services
• DeLeon Stang, CPAs Advisors
• Adjunct Professor of Business Ethics
• Georgetown Un. - McDonough School of Business
• Consulting Instructor
• George Mason University Graduate School of
  Education
• Ethics Officer
• United Way of the National Capital Area
• Senior Associate
• BoardSource
• Instructor
• Business Learning Institute (MACPA)

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Agenda

• Opening Hypothetical
• 4 Central Concepts
• Compliance
• Ethics
• Conflicts of Interest
• Governance
• 8 Governance Models
• 12 Questions Your Board Should Ask
• 6 Practical Recommendations
• Visioning the Future
• Governance Ethics Matter!

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Most of the problems that befall . . .
nonprofit organizations stem from the fact that
boards and executive directors have over the
years, translated their mandate with as much
variety as husbands and wives interpret their
vows to love, honor and obey.
A Opening Thought

• -- Melissa Middleton

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Opening Hypothetical

• Justine loves life she has an interesting and
  challenging job as the Executive Director of the
  Colorado Area Research Education Foundation
  (C.A.R.E. Foundation) a VA affiliated nonprofit
  research foundation. Justines father was a
  veteran and she agreed to head up the C.A.R.E.
  Foundation as their research efforts genuinely
  helped both veterans as well as the general
  medical community. Besides, living in Boulder at
  the doorstep of the Colorado Rockies was a big
  plus for an avid hiker and skier like Justine.
  She did however, have a number of challenges that
  she must regularly wrestle with. Among them was
  Dr. Jones

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Opening Hypothetical

• Dr. Jones, a talented neurologist, likes to
  conduct research in addition to his clinical
  responsibilities, but has long felt his lab
  needed renovation. Dr. Jones believes that the
  C.A.R.E. Foundation should cover the 60,000
  renovation cost out of its administrative funds
  unfortunately it would use up nearly all of their
  discretionary funds. Dr. Jones has taken every
  opportunity to educate the other board members
  about his cause. He also casually mentions to
  the Chief of Staff that there are other research
  centers out there and he has opportunities if
  he does not get what he wants.

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Opening Hypothetical

• In addition, the Chairman of the Board has placed
  another item on the upcoming Board meeting agenda
  Credentialing Software Approval
  Authorization To Purchase. The Chief of Staff
  of the Boulder VAMC (a Board member) needs to
  purchase a 25,000 software package to track the
  credentials of everyone on the staff that has
  access to patients and patient records. In his
  VA budget he has the funds, however, as a board
  member, he knows that the nonprofit has a
  board-designated reserve of 125,000. At the
  Board meeting he will ask his Board colleagues to
  approve a purchase of the software.

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Opening Hypothetical

• The C.A.R.E. board is also debating whether to
  begin administering NIH funds for grants
  performed in their VA facility. Three board
  members also have appointments at the University
  of Colorado at Boulder. During the last board
  meeting, the president asked the board to
  consider whether C.A.R.E. should administer
  federal funds for grants performed in VA space.
  All three board members with appointment at the
  University were extremely vocal about how this
  was unnecessary.

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Opening Hypothetical

• Dr. Bones, a nationally renowned orthopedic
  surgeon and researcher on the Boulder VAMC staff,
  has told Justine to hire a non-VA friend and
  colleague as a consultant on one of his projects.
  The friend is highly qualified and has just lost
  his job so he is free to start immediately. The
  statement of work does not indicate a need for a
  consultant. Nor does the budget provide for a
  consultant. However, Dr. Bones has 20,000 in
  the general research account resulting from
  residual funds left over from projects under his
  direction to cover the cost. Suspecting that Dr.
  Bones may have a personal reason for hiring the
  consultant, Justine asks why he now needs a 20K
  consultant when one was not needed before. Dr.
  Bones says that he will take the issue up with
  the Board. Justine is concerned that to keep him
  on the VAMC staff, the board may allow Dr. Bones
  to do anything that he wants.

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Opening Hypothetical

• Dr. Bones, a nationally renowned orthopedic
  surgeon and researcher on the Boulder VAMC staff,
  has told Justine to hire a non-VA friend and
  colleague as a consultant on one of his projects.
  The friend is highly qualified and has just lost
  his job so he is free to start immediately. The
  statement of work does not indicate a need for a
  consultant. Nor does the budget provide for a
  consultant. However, Dr. Bones has 20,000 in
  the general research account resulting from
  residual funds left over from projects under his
  direction to cover the cost. Suspecting that Dr.
  Bones may have a personal reason for hiring the
  consultant, Justine asks why he now needs a 20K
  consultant when one was not needed before. Dr.
  Bones says that he will take the issue up with
  the Board. Justine is concerned that to keep him
  on the VAMC staff, the board may allow Dr. Bones
  to do anything that he wants.

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4 Central Concepts

• Compliance
• Ethics
• Conflicts of Interest
• Governance

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Compliance Ethics What Are They?

• Exercise
• What is
• Compliance?
• Ethics?

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Compliance Ethics Working Definitions

• In the context of our discussion . . .
• Compliance will refer to following or obeying a
  law, rule, regulation, policy or procedure.
• Ethics will refer to standards of conduct or
  principles arising from core values which
  indicate how we ought to act or decide.

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Compliance, Ethics Integrity
Compliance
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From Compliance to Integrity
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Conflicts of Interest What They Are Not

• To understand what a conflict of interest is,
  it is first important to understand what it is
  not
• It is inaccurate to define a conflict of interest
  as merely a clash between conflicting or
  competing interests because these are present in
  nearly every business relationship.

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What Does Conflict in Conflict of Interest
Mean?

• Indeed, the conflict in a conflict of interest
  is not merely a conflict between interests --
  although conflicting interests are involved.
• The conflict in a conflict of interest occurs
  when a personal or impersonal interest comes into
  conflict with an obligation to serve the
  interests of another person or organization.

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Definition Conflicts of Interest

• Therefore we can say that a conflict of
  interest is a conflict that occurs when a
  personal or impersonal interest interferes with a
  persons acting so as to promote the interests of
  another when the person has an obligation to act
  in that other persons interest.
• -- John R. Boatright

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What is Governance?

• To govern is to steer, to control, and to
  influence from a position of authority.
  Governance deals with the legitimate distribution
  of authority throughout a system whether a
  country or an organization.
• -- BoardSource, Nonprofit Governance

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Governance Structures Roles -The Board
Five Basic Board Responsibilities --
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8 Governance Models

• Operational the Board does the work of the
  organization and manages as well as governs it.
• Collective Board and staff are involved in
  single-team decision-making about governance
  and the work of the organization.
• Management the Board manages operations through
  functional committees but may have a staff
  coordinator.
• Representational the Boards primary
  responsibility is seen as balancing the interests
  of their constituents against the best interests
  of the overall organization.

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8 Governance Models

• Traditional The Board governs and oversees the
  operations through committees established along
  functional lines but delegates management
  functions to an executive director or .
• Policy (Carver) Board governs through policies
  that establish organizational aims.
• Advisory or Patron Board members simply provide
  advice to executive director who governs and
  manages the organization.

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The 8th Governance As Leadership

• Governance As Leadership The Board and
  Executive Director operate in a dynamic
  partnership. Boards thinks in a new and
  disciplined manner concerning the three modes of
  governance recommended by Chait, Ryan and Taylor
  in their provocative book entitled Governance as
  Leadership Reframing the Work of Nonprofit
  Boards.

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Governance As Leadership

• Type 1 A Fiduciary Mode of Thought is when the
  Boards primary concern is oversight and
  stewardship of tangible assets. Type 1 thought
  constitutes the bedrock of governance, the
  fiduciary work intended to ensure that nonprofits
  are faithful to mission, accountable for
  performance, and compliant with relevant laws and
  regulations.

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Governance As Leadership

• Type 2 Strategic Mode of Thought (not to be
  confused with strategic planning) The Board
  fosters a strategic partnership with
  management. Here is where Boards develop
  strategies with management to set the
  organizations priorities and course and to
  deploy resources accordingly. This creates a
  mental shift and entails a host of new
  relationships.

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Governance As Leadership

• Type 3 Generative Mode of Thought the Board
  along with the executive team asks fundamental
  questions that enables them to see their work and
  the work of their organization from a new frame
  of reference. Great governance often starts with
  asking great questions Who are we? Why does our
  organization exist? What are our core values? How
  can we make better decisions? How can we ask
  better questions? What questions are we not
  asking?

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12 Qs Your Board Should Ask (1-6)

• Where do our revenues come from?
• What is our cash flow?
• What could really hurtor killour organization
  in the next few years?
• How are we doing relative to other organizations
  similar to ours?
• If our chief staff officer were hit by a bus
  tomorrow, who could run the organization?
• How are we going to improve, grow and move
  forward?

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12 Qs Your Board Should Ask (7-12)

• Are we living within our means?
• How much does our staff (and others) get paid?
• How does bad news get to the top?
• What are our internal controls?
• Do we understand what our auditors are telling
  us?
• Do I really understand the answers to questions 1
  through 11?

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6 Practical Recommendations For Improving
Governance Ethics

• Conduct a Governance Review or Assessment of
  your organization.
• Designate someone to be the key ethics contact
  and have clear ethics standards in place.
• Make sure Board knows its responsibilities
  legal, governance, regulatory financial.
• Evaluate leadership (Board Exec. Dir.)
  annually.
• Empower your Board Secretary/Governance Committee
  to improve governance.
• Provide constant education (much is changing!)
  and when in doubt seek expert counsel.

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Visioning the Future

• Heightened Oversight
• The Wild Wild West of Standards
• A Return to the Basics
• Governance Changes
• A Focus on Organizational Ethics
• The Search for Fraud
• A New Set of Core Relationships
• A Matter of Trust

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Governance Ethics Matter!

• Enron Sarbanes-Oxley are a wake-up call.
• Overall lesson is that governance and ethics
  really do matter.
• Its not just form -- its substance.
• Governance strategy go hand in hand.
• Governance drives values/standards and impacts
  (directly or indirectly) everything.
• Good governance and ethics are vital to good
  results.
• Governance is a real opportunity to improve your
  institution at little or no cost.

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In Sum

• Opening Hypothetical
• 4 Central Concepts
• Compliance
• Ethics
• Conflicts of Interest
• Governance
• 8 Governance Models
• 12 Questions Your Board Should Ask
• 6 Practical Recommendations
• Visioning the Future
• Governance Ethics Matter!

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A Parting Thought

• Keep your thoughts positive
• Thoughts become your words
• Keep your words positive
• Words become your behaviors
• Keep your behaviors positive
• Behaviors become your habits
• Keep you habits positive
• Habits become your values
• Keep your values positive
• Values become your destiny.
• -- Gandhi

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Thank You!
It was a pleasure . . For more information or
additional questions, please feel free to ask me!

• Michael G. Daigneault, Esq.
• DeLeon Stang, Certified Public Accountants
  Advisors
• One Bank Street, Suite 240
• Gaithersburg, Maryland 20878
• [phone] Ext. 308
• Michael_at_deleonandstang.com
• Director of Advisory Services DeLeon Stang
• Adjunct Professor of Business Ethics Georgetown
  University MSB
• Ethics Officer United Way of the National
  Capital Area

Conflicts presentation derived from John R.
Boatrights wonderful textbook Ethics the
Conduct of Business Fourth Edition
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Four Core Duties The Duty of Obedience

• Board members are duty bound to be faithful to
  the organizations mission purpose. This means
  that all potential board members are required to
  support the mission and that no action should be
  taken that is inconsistent with the mission.

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Four Core Duties Duty of Loyalty

• To be loyal means to be faithful to the
  organization. When making decisions, the board
  member must show undivided allegiance to the
  organizations welfare.

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Four Core Duties Duty of Care

• Known as the business judgment rule, the duty
  of care is defined as care that an ordinarily
  prudent person would exercise in a like position
  and under similar circumstances.
• This means that each board member is expected to
  stay informed, ask good questions and get good
  answers!

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Four Core Duties Business Judgment Rule

• Requires that decisions be made
• In good faith and without a conflict of interest
• On a reasonably informed basis
• With a rational belief (words connoting broad
  discretion and wide latitude) that the business
  judgment is in the best interests of the
  corporation

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Four Core Duties Business Judgment Rule

• For the business judgment rule to shield
  nonprofit directors from liability, the following
  must occur
• Prerequisite of a conscious exercise of judgment
• Prerequisites of good faith and disinterest
• Prerequisite of an informed decision
• The rationally believes requirement

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Four Core Duties Duty of Transparency

• Lastly, both publicly traded and nonprofit
  organizations have an obligation to be
  transparent about their activities and finances
  to the public and the government. Public
  corporations must be transparent to their
  shareholders and potential investors. Nonprofits
  to their donors, potential donors and the
  communities they serve.

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Core Responsibility 1 Governance

• Establish independent leadership
• Ensure optimal board composition
• Maximize meeting decision-making effectiveness
• Evaluate board/governance efforts
• Communicate with key stakeholders

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Core Responsibility 2 Strategy

• Develop solid understanding of history context
  of organization
• Ask fundamental questions about the future
• Shape strategy
• Monitor strategic milestones
• Communicate with key stakeholders resources

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Core Responsibility 3 Management Development

• Understand help set managements goals based
  upon strategy
• Develop succession and development plans
• Evaluate reward for performance
• Ensure cascade throughout the organization
• Provide ongoing feedback

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Core Responsibility 4 Performance

• Establish appropriate financial and performance
  targets
• Stay informed about major operating developments
  risks
• Review results and approve corrective actions
• Communicate with stakeholders

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Core Responsibility 5 Ethics and Financial
Integrity

• Set model values standards
• Establish effective structure
• Ensure continuous rigorous oversight
• Monitor implementation and integration of values
  standards
• Communicate with stakeholders

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First Function Board Roles and Responsibilities

• Reviewing updating the boards statement of its
  roles, areas of fiduciary responsibility and what
  is expected of each member
• Periodically updating and clarifying the primary
  areas of board strategic focus and agenda
• Attentive to the Boards relationship with the
  CEO/Staff

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Second Function Board Composition

• Leads in assessing current and anticipated needs
  related to board composition
• Develops a profile of the board
• Identifies potential board member candidates
• Nominates individuals to be elected
• Communicates with each member to assess
  continuing interest

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Third Function Board Knowledge

• Designs and oversees board orientation
• Identifies gaps in the boards knowledge or
  skills
• Designs and implements ongoing program of
  information and education
• Helps to ensure a continuous learning loop and
  educational focus

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Fourth Function Board Effectiveness

• Initiates periodic assessment of performance
• Provides ongoing counsel to chair, board
  committee leaders re effectiveness
• Reviews practices regarding participation
• Reviews and updates board committee policy
  guidelines and practices

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Fifth Function Board Leadership

• Leads in succession planning
• Ensures Board Committee leadership development
• Nominates members for election as officers

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Lessons Learned from the United Way of the
National Capital Area

• Governance is at the heart of organizational
  success.
• A Board and staff that truly works well together
  can be smarter than any one individual or group.
• A Board cannot allow management to usurp its
  powers.
• If a Board does not consistently step back and
  view an organizations core principles and values
  it can lose sight of its mission and direction.
• Values and principles can set the stage for a
  very practical system of accountability they
  show up in how you monitor performance.

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Lessons Learned from the United Way of the
National Capital Area

• Organizations must be as concerned with the
  actual implementation and integration of core
  values as with financial results.
• An ethical organization does things that ensure
  that its results are ethical and consistent with
  its values.
• Just knowing or saying the right thing is not
  enough you have to allocate the staff and the
  resources to ensure it is done right.
• Board members have to pay attention and have to
  ask right the questions. If you dont know --
  find an expert that can help you.
• Make sure that your financials and audit results
  are understandable and understood.

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Lessons Learned from the United Way of the
National Capital Area

• Governance and ethics are the yin and yang of an
  organizations overall integrity.
• The rotation of people in key volunteer roles is
  necessary.
• There is a need for an Audit Committee separate
  from a Finance Committee
• Trust but verify organizations need to
  recognize that human nature can let you down.
• Lastly, for organizations that have gone or
  could go off the path, having an Ethics Officer
  is a vital asset to ensure that someone is
  looking at ethical issues dispassionately.

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BoardSource The 10 Core Board Responsibilities
(1-5)

• Determine the organizations mission and purpose
• Select the Chief Executive
• Provide proper financial oversight
• Ensure adequate resources
• Ensure legal and ethical integrity and maintain
  accountability

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BoardSource The 10 Core Board Responsibilities
(6-10)

• Ensure effective organizational planning
• Recruit and orient new board members and assess
  board performance
• Enhance the organizations public standing
• Determine, monitor, and strengthen the
  organizations programs and services
• Support the Chief Executive and assess his or her
  performance