Metropolitan College of New York School of Management Master of Public Administration Program Alina Mikhaylova February 21st, 2012

NONPROFIT GOVERNANCE MIDTERM February 17, 2012 The midterm consists of four (4) essay questions which you are asked to answer on this document and then e-mail to me at wford@mcny.edu Please note that to be graded your exam must be e-mailed no later than February 21, 2012 @ 11:59 p.m. This is an open book examination and you may consult the class textbooks or any other relevant materials in the preparation of your response. The examination will be reviewed in class on February 28th. PLEASE PUT YOUR NAME ON THIS DOCUMENT AND TYPE YOUR ANSWER AFTER EACH QUESTION 1. During the first part of this semester your team project has focused upon establishing elements of the scope of work that is to performed for the client. Describe 2 aspects of that scope of work, describe the information and research strategy that you will be employing and provide your preliminary thoughts as to what steps you are considering that will be of assistance to the client. The Mid-Bronx Senior Citizens Council (MBSCC) is a community-oriented service provider for persons who are elderly or disabled, and works to enhance urban revitalization by renewing or reclaiming abandoned buildings and vacant lots for community purposes. Two aspects of the scope of work performed at the Mid-Bronx Senior Citizens Council (MBSCC) are enhancing worker morale and establishing effective communications between workers. Both of these practices are designed to promote the quality of service for clients by improving the organizational culture of the workplace.

Metropolitan College of New York School of Management Master of Public Administration Program Regarding improved organizational culture, like other non-profit organizations, the morale of employees and volunteers who contribute their services to MBSCC has also been negatively affected by the recent economic recession. Employees and volunteers are required to do less with more; they are expected to complete long-term projects begun before the recession began, and to continue to develop and invest in new projects using fewer resources. These burdens cause stress among employees and volunteers, and can result in attrition and turnover among both groups. Non-profit organizations have invested heavily in researching and developing strategies designed to target and enhance worker morale. The most effective strategies are those in which workers develop an emotional connection to the organization. This emotional connection is best achieved when workers can see what they do has value to the community; this perceived value offsets some of the stress associated with low wages or additional job stress. Non-profit organizations are especially vulnerable for attrition of volunteers during a bad economy, as part-time volunteers might lose their own jobs and might be forced to find alternative work, which can cut into their availability. Full-time volunteers who depend on a spouses wages or a stipend might also see these cut during a bad economy, which can also force them to find alternative work. The non-profit organization is not likely to compete as a priority when the volunteer has to earn additional income to support his or her family, but it is possible to emphasize the significance of the organization to the volunteer and remind that volunteer why he or she donated time in the first place. Attrition of volunteers might not be avoidable for non-profit organizations, but the negative effects can be diminished if the volunteers are persuaded to continue to contribute their time. It is also likely that the administration at MBSCC can enhance morale by maintaining communications with workers. Low morale can be improved if the administration emphasizes clear, authentic communications between themselves and workers, as workers feel better about problematic conditions when they recognize (a) why these conditions exist; (b) what steps the administration is taking to eliminate these problems; and (c) how long it will be before these steps create positive outcomes. Efforts to enhance communication might also have a positive effect on productivity. The current organizational structure is designed to facilitate independent self-motivated groups who are driven to complete specific goals. The purpose of this organizational structure is to distribute labor in the form of shared projects throughout the organization, rather than directing individual persons to complete tasks. Transformative leadership is a proven strategy for enhancing worker satisfaction in non-profit organizations, as participants in a workplace governed by transformative leadership are valued for their individual contributions and are rewarded for their efforts by increasing their autonomy and asking them to complete tasks requiring greater skill. Restructuring the communications strategies found at MBSCC must also take into account the existing

Metropolitan College of New York School of Management Master of Public Administration Program leadership structure, as it is likely that an improved focus on communication could also help promote a return to transformative leadership. By promoting high-quality communications with employees and volunteers, the administration can let these workers know that they are aware of the problems and are doing their best to resolve them. To enhance employee and volunteer morale at MBSCC, enhanced communication between administrators and workers is a necessity. Currently, communication is fragmented. A significant weakness of communications at MBSCC is that each project is managed independently, and aspects of each project are likewise under the control of smaller groups. With good communication and coordinated team leadership, such distributed efforts can enhance productivity and can improve morale by encouraging independence and self-motivation among workers. Unfortunately, while this type of distributed transformative leadership approach was successful at MBSCC in the past, communication between groups has declined in recent years. The result is a organizational culture that is divided into small isolated collectives, some of which are in conflict with each other due to competition over the same limited amount of resources. Efforts to enhance communication might have a positive effect on productivity. The current organizational structure is designed to facilitate independent self-motivated groups who are driven to complete specific goals. The purpose of this organizational structure is to distribute labor in the form of shared projects throughout the organization, rather than directing individual persons to complete tasks. Transformative leadership is a proven strategy for enhancing worker satisfaction in non-profit organizations, as participants in a workplace governed by transformative leadership are valued for their individual contributions and are rewarded for their efforts by increasing their autonomy and asking them to complete tasks requiring greater skill. Restructuring the communications strategies found at MBSCC must also take into account the existing leadership structure, as it is likely that an improved focus on communication could also help promote a return to transformative leadership. A second weakness observed in the communications structure at MBSCC is the time required to move a message from one person to another. As MBSCC is a non-profit organization, few persons have personal secretaries and must act as their own messenger service. Returning calls and emails are typically done during working hours, and employees and administrators might not be at their desks at the same time. Task completion can be slowed down when one worker requires information for another to proceed. It is possible that policy changes could be implemented to require workers to return messages more promptly, but the outcomes of these requirements might adversely affect the organizational culture at MBSCC. The workers are likely attempting to fit in messages when their schedules allow it, and placing further demands on their time might create additional job-related stress. Instead of implementing policy reform to coerce desired behavior, the

Metropolitan College of New York School of Management Master of Public Administration Program administration at MBSCC might want to invest in new technologies that allow for personal and group communications via computers and smart phones. These community-based technologies will let all involved persons view messages left in the public section, and they can add information to these messages as needed. The public feature of the messaging service might also influence more rapid turnaround time on personal messages, as workers can influence others behavior. These outcomes will not require policy change but might provide an alternative to the problem. 2. In class and in the assigned reading you have reviewed the core functions of a board of directors. Describe those core functions in useful detail and describe how a nonprofit board of directors differs in function from the board of directors of a for profit corporation. The core functions of a board of direction differ between those required by non-profit organizations and those that affect for-profit institutions. Assessment of these two different boards of directors can be done by looking at the significance of the mission, the organizations finances, and the executive structure of the organization. In terms of mission, the board of directors at a non-profit organization must place the mission of the organization ahead of all other concerns. The core functions of the board of directors at the non-profit organization are to: (a) uphold the mission; (b) assess allocation of resources; and (c) use metrics to assess success that are not limited to financials. Cash-loss generation might be the key service provided by some non-profit organizations, meaning that the sum of the financial income received by the non-profit organization is not practical to evaluate or assess the viability of the organization. In contrast, the board of directors at a traditional for-profit institution is also guided by the mission, but financial results are the most significant metric for performance. Then, the board of directors is defined by the financial structure of the organization. The non-profit organization recognizes the importance of financial metrics and will manage budgets and cash flow. The source of funding is typically from charitable giving, grants, and operations that take in some revenue (e.g.: a thrift shop). However, when discussing the financial status of the organization is on meeting short- and long-term needs, and the board of directors should not incorporate any financial concerns that are not directly connected to the mission of the nonprofit organization. The for-profit organization, by comparison, is driven by financial analysis. The metrics of financial performance will determine the decisions made by the board of the directors; ideally, these decisions will be compatible with the companys mission, but it is not likely that all decisions made for a for-profit organization must align with the organizations mission statement. All funding for the organization will come from existing operations and from

Metropolitan College of New York School of Management Master of Public Administration Program sources of capital, including investments. The short-term goals to generate rapid returns on investments and enhance profitability are paramount to decision-making. Finally, executive decision-making differs between the board of directors at non-profit and for-profit organizations. The non-profit organization typically has volunteer governance. These heads of the board might have a stipend to compensate them for their time, but their position on the board is most likely seen as an honor and their compensation will be small. The overall size of the board will be large, with many persons who are invested in the organization attending to give voice to their concerns. Meetings are frequent and are often used to address problems that fall outside the stated scope of the board of directors, such as administrative or management concerns. The board of directors at a for-profit organization is likely to be small and participants will receive a salary or fee for their time. Administrative decision-making are separate issues than those faced by the board of directors at the forprofit organization: the CEO of the organization will likely be required to hold a position on the board and can report on policy and practice within the organization, but the board will have a defining say in the direction of the organization which supersedes internal governance. 3. In class and in the assigned reading you have reviewed the basic legal elements that pertain to tax exempt organizations: a. Primary purpose test b. Organizational test c. Operational test d. Private inurement doctrine e. Private benefit doctrine f. Legislative activities g. Political activities Describe the key aspects of each of these elements and explain their importance in determining and maintaining the tax exempt status of an organization. There are basic legal elements that pertain to tax exempt organizations. This essay question will briefly describe the key aspects of each of these elements and explain their importance in determining and maintaining the tax exempt status of an organization.

Metropolitan College of New York School of Management Master of Public Administration Program The primary purpose test is used to determine the most likely primary use of a specific resource during the time when it is in use. This is a necessary element to determine how resources purchased for a non-profit organization can be taxed. For example, a car purchased for a non-profit organization must be used for chores associated with that organization. The organizational test refers to the purpose of the organization and how this purpose is upheld. An authentic non-profit organization is governed by bylaws and other criteria (e.g.: mission statement) that establish what the organization can and cannot do. A major strategy through which this organizational test can be assessed is by applying an operational test, which is applied to identify how the non-profit organization functions and whether the methods in which that non-profit organization operates deviate from its stated purpose. The private inurement doctrine is intended to protect non-profit organizations from accidental or purposeful exploitation. This doctrine is put into effect when a non-profit organization provides money or other resources to an individual, but the organization does not receive a comparable return on this investment. Non-profit organizations are protected from private inurement, as this reduces the likelihood that insiders or affiliates can remove resources from the organization. If private inurement occurs, the non-profit organization can lose its status. The use of the private inurement doctrine is in part established to reduce the misuse of non-profit funds for personal use among persons of authority within these institutions. The private benefit doctrine is similar to the private inurement doctrine and is done to ensure that possible benefits associated with the non-profit organization cannot be exploited for purposes of individual gain. For example, job training or job placement offered via the non-profit organization cannot be used for private benefit. If it has been found that the non-profit organization has allowed individuals to use its resources for personal gain, the non-profit organization can lose its status. Examples of use of private benefits include resources designated for use in the non-profit organizations, such as taking a car home from the organization and using it for personal purposes. Non-profit organizations are restricted in involvement in legislative and political activities. Historically, non-profit organizations have historically been kept separate from political organizations. If an organization is to file a 501(c)(3) tax exemption, then the organization must be kept separate from political activities. As charitable non-profit organizations can receive tax-exempt status, these entities must meet qualifying standards established by the Internal Revenue Service. These standards include limits on spending and following internal safeguards such as the private inurement doctrine and the private benefit doctrine. The non-profit organization must also pay certain taxes that fall outside of the limits of nonprofit status, such as payroll taxes and some federal sales taxes. The non-profit organization must also allow its tax forms to be available for public review.

Metropolitan College of New York School of Management Master of Public Administration Program 4. Based upon the assigned reading and class discussion describe in useful detail the connection between the industrial revolution in the latter half of the 19th century and the origins of the modern nonprofit entity. The Industrial Revolution created a type of philanthropist that had never before existed. Prior to that era, persons who had the ability to give to charities were wealthy because of family money. These persons were likely to donate to persons in need through the church, as religious organizations were the most established forms of charitable organizations during that period. The rise of the industrial Revolution created a context in which innovative persons amassed wealth through entrepreneurship and mercantilism. These persons were not always from wealthy families, and some had direct experience with impoverished or immigrant workers, or had themselves been from the lower classes. Many of these persons did not want to leave the sum of their wealth to their children, believing instead that their wealth should be used to advance moral causes, promote scientific discovery, and would serve as a catalyst for widespread positive social change. Recognition of pressing social needs, such as poverty and illiteracy, was coupled with the belief that persons with great wealth were morally obligated to help others. The opportunities offered via wealth helped create new alternatives to traditional forms of church-driven charities. Non-profit organizations that were separate from a dominant religious affiliation helped facilitate greater access among persons with similar needs but who came from diverse backgrounds. Investment in education and personal enrichment was perceived by some philanthropists, such as Andrew Carnegie, as needs that were as critical to American society as food, clothing, and shelter. Carnegie observed that philanthropies offered opportunities to persons who were deserving of them but would otherwise not have access, and these persons were needed to continuously rejuvenate the U.S. economy and introduce new, innovative ideas for growth and social improvement. The modern non-profit organizations have evolved from these concepts of philanthropic giving. Non-profit organizations are established to meet social needs, and have been structured to meet these needs while receiving protections from outside influences. If the administration of a non-profit organization can demonstrate that this organization has (a) a mission statement; (b) a purpose or meets a social need; and (c) follows operational procedures expected of all non-profit organizations, then the organization will receive conditional protections which will better allow it to meet its goals. These conditional protections are offered via tax exemptions and legislative efforts applicable specifically to non-profit organizations. Specialization is also a hallmark of the modern non-profit organization, as individual causes have evolved to meet unique needs. Larger, more established non-profit organizations, such as the Carnegie Foundation, have evolved to

Metropolitan College of New York School of Management Master of Public Administration Program serve as a central organization with subsets designed to meet unique needs. For example, the Carnegie Foundation provides resources to Carnegie Hall, a music conservatory. One service offered by Carnegie Hall is access to music tutorship for disadvantaged youth who would otherwise not be able to interact with music. The increasing specialization of services offered by non-profit organizations can provide sustainability for the organization while also creating a structure through which more diverse social needs are met. In this sense, the same principles which governed early non-profit organizations are still in effect, as there is a continued expansion of available resources to meet social needs.