Monday, January 5, 2009

Tales of the Dark Side

I'm a big Star Wars fan. The story line resonates for me in a personal way in part because of what I have seen in my years of helping to manage public charities. I have observed the same story over and over again: a CEO or Executive Director rises to the top, and as their authority grows, they take the path to the dark side. Some started out of the gate that way and others evolved into it, but the end result remains the same. They focus on getting whatever they can for themselves out of the charity, rather than serving the mission. I submit three examples to corroborate this point.

In the first case, the Executive Director started right off on the dark side. He formed a charity in a field where he saw financial opportunity for himself. He aggressively grew the company and secured as many grants and donations as he could for the primary purpose of lining his pockets. He hired a strong number two person to run the day-to-day operations while he spent his days watching his stock investments and brainstorming new ways to take from the company. He successfully became a millionaire and pilfered from the charity for many years. In the end he was investigated and fired. However, he remains a wealthy man and I am sure he will go on to do more awful things.

In the second case, the Executive Director had worked for many years in the sector at a middle management level. She then secured the top position at a small non-profit and began her tenure with the mantra, "Stupid people have made a fortune. We are smart so we should have no problem doing so." That mantra would be fine if she were running a for-profit, but in a charity dedicated to serving the poor, the perspective had frightening consequences. Once again, she hired a decent number two to run the day-to-day operations and spent her time reading novels, balancing her checkbook or talking for hours on end with friends. However, her mantra of becoming wealthy grew louder and louder as her number two grew the organization. She eventually found a willing partner in her scheme to draw money out of the organization and was found out and fired a couple of years into her wealth building scheme.

In the final case, the CEO was much cleverer. He was more careful to stay technically within the bounds of the law. As a result, he remained in the position of leadership of a large charity for over 30 years. He also amassed a significant amount of money, did little to no work day-to-day and manipulated the board into thinking that every good thing that happened at the agency flowed from his genius. Because he was slicker, he was more dangerous than the two earlier examples because the damage he caused to the mission of the organization was sustained over a much longer period of time. As a result, the morale within the organization was abysmal and their ability to maintain a financially and programmatically strong agency was even more dramatically reduced.

I have intentionally not named names here because I do not want the many wonderful programs within these charities to suffer any more than they already have. There are also stories of wonderful leadership that is reflected in the fact that 65% of the charities we evaluate rate Good to Exceptional. I believe these are the places where self-interest is less focused on and mission is front and center.

However, my emphasis in this particular blog is to highlight how important transparency and accountability are in the charitable sector. These terms are becoming buzz words that almost everyone in a management position seems to be using. Anyone who calls for less regulation of charities to unleash their full potential needs to be reminded of the stories such as those above. The temptation to go to the dark side is strong when big money is involved. Some people believe they are above the normal rules and regulations once they reach the top tiers. What a sad day it is for any charity that has to endure the kind of selfish, myopic leadership I described above. As a result, I believe there is a need for more oversight, not less, in the charity sector. Given what is happening in the for-profit sector at the moment, I suspect the same could be said for them!

12 comments:

Kate Barr said...

I agree that these stories, sadly believable, are a call for more oversight. But they are also a call for more whistleblowers. These CEOs all had number twos, finance staff, administrative assistants, development associates, etc, etc. At least some of the subordinates either had direct knowledge or an inkling about what was going on. We need to tell heroic stories of whistleblowers because they are more likely to find fraud that remote, periodically involved board members.

steelhorseprophet said...

Ken,

I appreciate the insight on the temptations non-profit leaders face. Recently, it seems charities have readily adopted business paradigms from the "For-Profit sector" that do not necessarily apply to non-profits. I believe CEO compensation is one of them.

Positive Cash flow/Increased revenue are crucial to the survival of any business. Non-profit Leadership must resist the urge to focus on increasing revenue at the expense of The Mission - Improving the lives of those they serve. It is a delicate balance for Non-Profits, unlike For-Profits - creating value through business strength versus organizational excellence and focus on the The Mission.

Non-profits get in trouble when it's Leaders fail to keep "Ministry" a priority over "Money"!

In my experience, charities improving lives which keep this priority, "Ministry over Money" WILL GROW (w/a corresponding revenue increase). Revenue increase, managed effectively, should be utilized to strengthen, THEN enlarge the foundation-helping more people and not necessarily rewarding leadership, for their business acumen, (as for-profits do)!

Non-profits cannot afford the "CEO Crisis" now rampant in other industries!

It is refreshing to see the CEO of the largest charity "oversight organization" in the US (i.e. Charity Navigator) bring this timely, yet sensitive issue, forward, especially in light of recent high profile cases of fiscal abuse.

It certainly increases my confidence in your organization and it's bright future.

On a personal level, our family is praying for financial increase to be able to support your organization.

Michael W. Blades
Director, North America Sales
EMERSON PROCESS MANAGEMENT

Mike said...

What a sad day it is for any charity that has to endure the kind of selfish, myopic leadership I described above. As a result, I believe there is a need for more oversight, not less, in the charity sector.

I'm of the same opinion.

After investigating further into various Form 990s, I'm coming to the decision that being an executive of a charity is probably one of the biggest under-reported scams in America.

It's pretty depressing, and if it continues to be unregulated and swept under the rug, I'm thinking about forgoing charitable giving altogether.

Ken Berger said...

Kate

Although it is true that there are others within the organization that could be whistle blowers, there are often few protections and high risks involved for being one (see my blog earlier blog entry on this as to how to do it if you want to try - http://www.kenscommentary.org/2008/09/what-do-you-do-when-ceo-is-only-in-it.html).

I agree we should tell the heroic stories of these whistle blowers if we hear of them, but more urgently, we need to foster an environment that makes it safer for people to do so.

Ken Berger said...

Michael,

Thank you for your kind words of encouragement and your prayers!

Ken Berger said...

Mike,

My goodness! I hope you do not make good on your thoughts of disengaging from charities!

PLEASE remember that 65% of the charities we rate get a score of good or better. PLEASE remember that there is amazing work being done every day by the people in those charities and vital services to people in need and other important causes are getting accomplished. PLEASE remember that without the charitable sector we would live in a much colder and harsher world.

The intention of this particular blog entry was not to encourage you to forgo charitable giving, but rather to make sure you do your research on the charities you want to give to.

Not all CEO's are scammers, its just we need to watch out for those that are!

Mike said...

PLEASE remember that 65% of the charities we rate get a score of good or better.

But I don't agree with your rating system. It seems flawed.

For example, you give the Arizona Humane Society a 3-star rating, but according to your reports, the President/CEO makes over 250K yearly in compensation (2006). I find that level of income overly excessive for such a position.

In comparison, the recently resigned director for the CDC, Dr. Julie Gerbeding, working for a national agency that employs over 9000 people with a budget of about $9 billion, only made a little over 200k in total compensation yearly (2008).

If that level of executive pay is rated "good", something's wrong your rating system.

Ken Berger said...

Mike,

Our rating system has 7 separate variables that are used in coming up with a final score. To base a system of evaluating a charity solely on one dimension is just that, one-dimensional.

However, we are intending to add a new component to our rating system soon that includes, among other things, asking a more important question. The question is this - "Does the charity Board have a process for determining CEO compensation which includes review and approval by independent persons using comparability data and keeps record of the deliberation and decision?" - We will be able to get this information for the first time in 2009 since it is now a part of the IRS filing requirements.

This is more important because it compares CEO salaries based upon other charities within the same cause area. It is similar to what you are doing in your example. However, it is based on the entire class of charities, not just comparing one specific charity to another, which is not necessarily representative of the market as a whole.

For more of my opinion on CEO compensation you can cut and paste to this link - http://www.kenscommentary.org/2008/08/ceo-compensation-donor-frustration.html

Anonymous said...

I agree. I have worked for several non-profits over the years. Not charities per se, but non-profits for the disabled. I have seen number 2 and number 3 a number of times. The last example is perfect example of my last job, which is why I left the field altogether and went to a completely different line of work. I couldn't take watching the number 2 person at the organization line her pockets, take all the glory and do things the bordered on the unethical constantly while bullying the number 1 person at the company to the extent that those we were to be serving suffered. I was exhausted trying to fight for the good of those we served while fending off the constant bullying and under handed tactics of the person in charge.
Trying to report it to the board was a joke, b/c they are mainly her friends, college buds and family of the clients (who are afraid to buck her b/c of things she has done to those in the past who tried).
The number one person has changed d/t the retirement of his predecessor, but the beat goes on...Because number 2 is powerful in the small county where I live, I need to remain anonymous
Thanks for the blog

Ken Berger said...

Anonymous,

Thanks for the feedback and so sorry to hear that you left the field. I hope that we can get more transparency and accountability into the sector so there are less horror stories like yours and mine. I am glad to see that you at least are still keeping an eye on the field!

Kara said...

I agree that additional oversight is required, but the methodology must be very even and fair. I have seen some of the less than 'gentle' giants pull ideas, innovative programs, even board members and donors from smaller organizations who were attempting to be more transparent than their peers, effectively stomping them out. In the current environment which values teamwork, collaboration and transparency I think it is very important to ensure all charities are treated equally and fairly.

I also agree that this industry attracts more caring individuals and makes for an incredible working environment, despite a few bad apples. I am glad to see 65% of charities are meeting your criteria!

Ken Berger said...

Kara,

Agreed on all counts!

Ken