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Looking Inward After Enron

by Nancy R. Axelrod

What can we learn from the unseemly spectacle of Enron's ethical and legal problems? For starters, nonprofit leaders might ask themselves a few risk management questions.

As the Enron spectacle unfolds, it's tempting to place the blame squarely on the shoulders of a single party or cause. Irresponsible accounting practices, greedy executives, board members asleep at the switch, abuses in stock options, colluding auditors, shareholders fixated on short-term performance, and even employees who slavishly deferred to management and ignored asset allocation have all been rounded up as the usual suspects. But the finger pointing that's going on all over the country-from congressional hearing rooms to nonprofit boardrooms-just increases the danger of treating the Enron scandal as a mere exposé.

That would be unfortunate, because Enron's collapse reflects risk management fault lines we need to monitor in the nonprofit sector. Before dismissing this as someone else's scandal and moving on, I suggest that nonprofit leaders stop and ask themselves a few questions.

Do we understand our true financial condition? Aggressive accounting practices that inflate profits and hide debt and fuzzy disclosure policies have been identified as major reasons for the breakdown in financial reporting standards at Enron. But this subterfuge raises the deeper question of how much the average board member can rely on any institutional financial statement.

Like Enron's accounts, the financials of some nonprofits don't always divulge all discrete expenditures-travel costs, excessive compensation, indirect costs or conflicts of interest among board members. Even when there are no improprieties, the extent to which board members understand and assume their financial responsibilities is uncertain. During the last few years, more nonprofits have taken the time to educate their trustees about the mysteries of fund accounting and provide "Cliffs Notes" for nonprofit financial statements.

While an increasing number of board members now demand greater clarity and transparency in reports, too many remain unaware of key financial transactions or the true financial picture of their organizations. To remedy this situation, the chief executive of an organization with an active and otherwise effective board is providing a lively "trustee continuing education unit" on investment policies at an upcoming board meeting.

Where was the board? Enron has been cited as an example of a breakdown in corporate governance-big time. Why didn't board members question repeated efforts to inflate profits and mask debt? Were board members guided by their own interests, as corporate insiders with stock options, rather than the interests of shareholders? And why did board members tolerate such a cozy relationship between the company and its auditors?

In the for-profit sector, the board is ultimately accountable to the owners or the shareholders. In the nonprofit sector the board is accountable to the public. For both types of boards, their central challenge as fiduciaries is to maintain the structures as well as the processes for accountability. The tensions that arise as board members seek the right balance between macrogovernance and micromanagement are inevitable and healthy up to a point.

Governing a nonprofit organization (unless it's staffless) requires two engaged, interdependent parties: a chief executive and a governing board. Dysfunctional practices are more likely to occur when the board and the chief executive don't take the time to periodically pause, take stock and reflect on questions such as the following:

• How can the board provide sufficient oversight without undermining the staff?
  
• How can the chief executive provide strong leadership without overshadowing and preempting the board?
  
• How can the board balance the competing expectations of funders, regulators, clients and communities?

Conventional wisdom, such as the "the board makes policy and the staff implements it," is simple, elegant-and often worthless.

Let's face it: Sometimes the difference between responsible oversight and meddlesome intrusion can only be determined with the wisdom of hindsight. Just ask the boards of Covenant House, United Way of America, the NAACP and the American Red Cross, as well as Enron, after their organizations got into trouble. Or better yet, just ask any parent.

The art of navigating ambiguity and overlapping responsibilities doesn't have to be acquired by surviving a calamity. There are no substitutes for robust accountability mechanisms and sound internal controls to prevent a board from defaulting on its responsibilities. These mechanisms include:

• a regular, constructive process for evaluating the performance of both the chief executive and the board;
  
• a process for executing (not just creating) conflict of interest policies;
  
• a safe forum for candid feedback and evaluation of programs and services; and
  
• regular opportunities to revisit mission, core values and strategic directions.

Do we have a culture of candor? A heroic board and strong safeguards aren't enough. Perhaps the single most important lesson learned from breakdowns, like Enron and United Way of America when Bill Aramony was CEO, is what they reveal about their institutional cultures. The shared beliefs and assumptions that people bring to their work are often so ingrained in an organization that they don't emerge until a dramatic change-a crisis, a leadership transition or a strategic shift such as a merger-outs them for scrutiny.

The rub is that staff members as well as trustees are often reluctant to articulate problems before they appear "above the fold" on the front page of the local newspaper. The fears of being put in a position of assigning blame, producing remedies or bringing negative publicity to the organization-let alone losing one's position or standing in the organization-are very real.

Who is responsible for accountability? The greatest casualty of Enron's implosion is the same as it is for every scandal we have faced in the nonprofit sector-the loss of trust and confidence.

If Enron's problems don't prompt each of us as board members, CEOs, staff members and investors in the nonprofit sector to get our own houses in order, the chorus demanding a more aggressive SEC to fix the problems should. It echoes the continuing calls for the IRS and state agencies to expand and toughen their regulation and enforcement of charitable organizations. These calls have been accompanied by demands to expose trustees to more lawsuits by easing the standard that plaintiffs must meet to show liability. If the leaders within the nonprofit sector don't accept responsibility for self-regulation and accountability required for the public's trust, they will lose it.

The 2001 annual report I just received from a major public company where I am a shareholder highlights trust as "an investment with no equal." The Enron case reflects many of the charges of excess and values lost that have characterized our most public nonprofit scandals as well as troubles in organizations that never reach the headlines. Those of us who govern and manage nonprofit organizations shouldn't wait for another United Way of America scenario, circa 1992, to consider lessons we can learn from Enron. Let's do it now-and not merely as a means of averting disaster, but as a fresh opportunity to take the lead in self-evaluation and accountability.

Nancy R. Axelrod is a Washington, DC-based independent consultant to foundations and other nonprofits. She is founding chief executive of the National Center for Nonprofit Boards (now known as BoardSource). Her most recent book is Chief Executive Succession Planning: The Board's Role in Securing Your Organization's Future, published in May by BoardSource. She can be reached at naxelrod@erols.com.

The previous article was adapted and reprinted with permission from Foundation News and Commentary, 1-800-771-8187.

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