Could one man really do that much damage to an Arizona institution as high profile and important as the Fiesta Bowl? More likely, the nonprofit scandal of the year was a group effort fueled by a dysfunctional board. The Fiesta Bowl board bears all the hallmarks of a board more interested in administering than governing the organization. Still, there are lessons to be learned from the Fiesta Bowl’s governance and oversight failures.
We know from news reports that John Junker, the Fiesta Bowl’s CEO, was a charismatic leader who believed the Fiesta Bowl was “his life.” However, no one individual can legally control a public charity such as the Fiesta Bowl. The chief executive does not have the power to override decisions of the board. Ultimately the CEO serves at the pleasure of the board. So where was the board when Mr. Junker was racking up a $33,000 tab for his Pebble Beach birthday party and millions in expense account charges?
The board has a duty to review the performance and set compensation for the chief executive and if necessary, censure or even terminate the chief executive. It would be interesting to know whether the Fiesta Bowl ever assessed John Junker’s performance and if so, whether that assessment was based on anything other than increasing revenues and successful deal-making.
Responsible boards also exercise oversight by adopting policies and procedures that impose checks and balances to protect the organization’s assets. One way to protect assets is to set a budget at the beginning of the year and require board authorization to exceed the budget. In addition, many boards adopt signature authority policies that require increasing levels of approval as the amount of a proposed expenditure increases.
Most non-profits understand that they need to have a Conflict of Interest Policy; however, many fail to monitor conflicts within the organization. The Fiesta Bowl even admitted as much in its Form 990. Another step many nonprofits skip is considering alternate arrangements that do not give rise to a Conflict of Interest. If after considering alternatives, the board still finds the transaction with the insider is in the best interest of the organization, then the board should carefully document the basis for the decision and the fact that the interested director did not participate in the deliberations or vote. The best practice is to follow the procedures outlined in the intermediate sanctions regulations to properly analyze and document the proposed transaction.
Another policy that the Fiesta Bowl could have benefited from is a Travel and Expense Reimbursement Policy. A well drafted Travel and Expense Reimbursement Policy would have sets reasonable limits on what the corporation would reimburse and would have required employees to pay for things that didn’t benefit the corporation such as spousal travel.
Finally, to ensure that those with knowledge of inappropriate activity feel secure in bringing issues related to fraud or mismanagement to the board’s attention, nonprofits should have a Whistleblower Policy that sets out a procedure for bringing information to the attention of the board and that ensures that the organization will not retaliate against the whistleblower.
Of course, implementing policies and procedures is not enough. The board must take steps to ensure the policies and procedures are being followed. Typically, boards rely on an the annual audit, careful review of the financial statements, financial reports, and Form 990 as well as careful review of the concerns raised by the auditors.
Careful monitoring of all of these factors requires regular attendance at board and committee meetings and careful attention to board reports. Further, during board and committee meetings, board members need to be willing to ask questions until they are satisfied with the responses. Like many nonprofits, I would be willing to bet that that the Fiesta Bowl board passed nearly every resolution “unanimously.” It can be difficult and uncomfortable to ask tough questions or disagree with one’s fellow board members, particularly when ones fellow board members are as powerful and distinguished as some of the members of the Fiesta Bowl’s board. However, the most valuable board members are often the ones who ignore peer pressure and respectfully speak their mind.
We also know from reports that the Fiesta Bowl had an executive committee. Typically, executive committees are charged with acting on behalf of the board when the board is not in session and cannot be easily convened. It is, however, accountable to the full board. Frequently, dysfunctional executive committees develop into mini-boards that exclude non-members from decision making. Board members who are not on the executive committee may believe the executive committee is handling things. This is a dangerous development. As the Fiesta Bowl’s board members are finding out, each member of the board shares in the board’s responsibility and potential liability for the organization’s actions. Board members who are excluded from decision-making may lack the information required to make informed decisions to protect themselves and the organization but they are still potentially liable for its actions.
Directors that hail from the for-profit world often assume nonprofits operate in a less-regulated environment. In reality, the opposite is true. Tax-exempt organizations enjoy an array of tax and other benefits. To ensure those benefits are not exploited, Congress and local governments have imposed additional legal requirements that tax-exempts must follow.
It is essential that directors of tax-exempt entities be aware of the various federal, state, and local laws that apply to the organization. Many directors are unaware whether they are governing a private foundation, a public charity, a supporting organization, or another form of tax-exempt entity, all of which are subject to different limits on their activities. Board members should understand, at a minimum, the penalties they face for overpaying key employees or other insiders, for engaging in excessive lobbying or political activities, for accommodating tax shelter transactions, for making egregious bad bargains on behalf of the organization, the impact of failing to pass the public support test, etc. Ongoing board training and orientation for new board members is often the best solution.
Finally, volunteer board members have a legal duty act with good faith, due care and loyalty to the organization. Volunteer board members also accept the potential liability for failing to fulfill those duties. As the Fiesta Bowl case highlights so dramatically, increased attention from the media and government regulators require vigilance at every step. It is no longer sufficient to rubber stamp committee or staff recommendations or to simply “abstain” from dicey decisions.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.