Spotting the red flags

by Jini Stolk

Goodwill Industries Toronto’s sudden collapse after 80 years of providing work, training and other opportunities to people in need, especially those with disabilities, opened the doors to a flood of criticism and blame (even while their stores’ and workplaces’ actual doors were shuttered and locked tight.) I wrote about Goodwill’s lack of foresight and planning in a changing environment; others focused on the board’s lack of oversight and their attempts to run and hide when disaster struck.

Winding up on the front page of The Toronto Star is probably the worst nightmare of those of us who serve on arts or other non-profit boards. Although public collapse and disgrace is rare in Canada’s charitable sector, the Goodwill story offers fundamental lessons on the meaning of oversight and fiduciary responsibility. We don’t need to be wary, timid, or risk-averse around our board tables, but it would be terrific if we all learned how to spot the signals of trouble ahead.

Nonprofit Quarterly ran an unexpectedly relevant piece called Red Flags for Boards early last year, identifying a string of financial markers of fundamental instability including diminishing cash, ballooning debts, and recurring deficits. Yet, it also pointed out that board best practices warn about micromanaging and that most boards rely on the executive and staff to be forthcoming with information, including about problems. Kate Barr’s advice is for board members to learn how to ask good questions, such as “Is this is a trend or pattern that we should talk about?” “Is this unexpected?”, and to pay attention to cumulative problems on the balance sheet. A far cry from micromanagement, this advice recognizes that board members have a broad institutional scope and the advantage of observation over time.

This piece, written after Goodwill Toronto’s closing, says there were warning signs that management and board should have recognized in time to change Goodwill’s direction. Bill Kennedy outlines some obvious red flags that anyone could have seen – if they were paying attention – including:

• the organization’s recent selling of assets to pay for operations;
• inadequate reserve funds; Charity Intelligence Canada says that Goodwill’s 2012 financial statements included reserves of only 7% of annual expenditures. (I wonder how many arts charities hold reserves greater than that?)
• labour unrest, a big factor in public statements by the CEO and others about stresses and difficulties that faced the organization. (To which I say, “Your mission was to provide dignity, work, and job training to people in need: how could you have allowed labour unrest to grow so out of hand that it sank your organization?”)
• And the big one, a changing landscape, which as I mentioned in my blog post, seemed to have taken everyone by surprise and left no opportunity for changes to Goodwill’s business model. (I don’t buy it.)

This piece talks about how to recognize the signs of financial fraud (and I think we all know that there have been some quietly resolved tales of embezzlement in Toronto’s arts community), usually signalled by significant lifestyle changes, puzzling and previously unaffordable purchases, or the sad indications of addiction.

Rick Cohen’s tale of hair-raising conflicts of interest in a range of nonprofits in the States is a healthy warning against complicated business deals involving top staff or board members or their spouses or close relatives. A conflict of interest policy is always a good idea for an organization dealing in large sums (although, as I look at Creative Trust’s board Conflict of Interest policy I note that it only dealt with grant-making or other financial decisions benefitting individual companies, and that the Conflict of Interest section in our Employee Policies was too wishy-washy in retrospect.)

I think there are other red flags not highlighted in any of these posts, including internal conflict, lack of transparency or honesty in communications inside and outside the organization, fear of change, fear of failure, lack of creative thinking, putting off until tomorrow what should have been done today, etc.

The antidote? A smart and energetic staff working in harmony with a committed and engaged board of directors – the topic of the Toronto Arts Foundation’s next CREATIVE CHAMPIONS NETWORK Get on Board Speaker Series and networking event for boards of directors. This one features the wonderful Robin Cardozo, Chief Operating Officer of SickKids Foundation, with distinguished panelists including Andrea Bellefeuille, Chair, Against the Grain Theatre; Helen Burstyn, Chair, Evergreen; and Nancy Webster, Executive Director, Young People’s Theatre. Join us!

Engaging your Board Effectively – and having fun in the process

April 27, 2016, 5 – 7 p.m.

Gardiner Museum – Lecture Hall

5 p.m. Doors Open & Registration

5:15 p.m. Remarks

Panel discussion, Q&A, refreshments and networking to follow

Please reserve your seat by April 20 with Natalie Kaiser, natalie@torontoarts.org | P: 416.392.6800 x226