Could Wells Fargo’s Issues Happen to Your Not For Profit? You Bet They Could!

Much has been and will be written about Wells Fargo’s turmoil, but can we in the NFP sector learn some lessons already? Absolutely.  Some deep-rooted issues at Wells Fargo seem to have crept into its very culture.  More unpleasantness may be discovered by the time everything shakes out.  In the short term, the management team has been punished and the issues will likely claim at least the Chair and likely other members of the WF Board.  Which for the most part is probably as it should be.  The Board did not uncover these significant issues. This may indicate that there was a lack of deep questioning at the Board level. The issues at Wells Fargo should serve as a learning experience for Not for Profit Boards. What is the NFP Board’s responsibility when it comes to avoiding issues similar to those experienced at Wells Fargo?  What can NFP Boards learn?

Primary Areas of Concern

There are two primary areas of concern that have surfaced so far.  Narrow success factors and ineffective oversight.  There are plenty of other issues to ponder, but NFP Leaders and Board members have a responsibility to understand these are two critical issues.  They can be present in NFPs and are manageable.

These are two areas of risk, to learn about others, see Major Types of Risk That NFP Boards and Leaders Need to Be Thinking About

Narrow Success Factors

Wells Fargo put in place an incentive system, presumably to support a Company-level strategy, that awarded staff for increasing the number of customer accounts. This program led staff to create fraudulent accounts and compensated them for those accounts. The performance metric was too narrow.  The real value in customer accounts at a bank is the value in those accounts, not just the raw number of accounts.  Focusing on quantity only, WF saw the growth favorably without a compensating metric that would show clearly that there were many accounts with little or no value.

At a NFP, there may not be incentive programs for customers, however, there are often some level of performance expectations tied to fundraising.  In addition, program impacts are often assessed as to the number of people served and less often on the quality of the service. Could you be motivating staff to prioritize quantity over quality?  Could your organization be so focused on your program metrics, that you miss out on opportunities for sustainable growth? Are your performance metrics sophisticated enough to raise red flags if the results appear too favorable? The Board has a responsibility to oversee performance assessments, so members should ask good questions about compensation and appraisal practices.

Complimentary Metrics

How do you assess the performance of your management team?  I can tell you from experience, a balanced approach is extremely difficult to design.  You need to use a combination of cross-linked quantitative and qualitative metrics. Linking metrics allows the organization to analyze several related metrics together.  These complimentary metrics, such as a balanced score card allow for a broader perspective on performance. From the WF case, account number growth is a single metric.  However, account number growth over total account value growth would show that the two metrics were not tracking together.  That would have suggested an issue was present.

Unfortunately, single focus metrics are common and cost control is one of the most popular of the single focus metrics.  NFPs tend to focus here and for good reason. Sometimes, however, over enthusiastic cost control can lead to an erosion of capability to deliver programs. Heavy focus on single metrics can lead to decisions that can negatively impact the organization’s ability to remain fiscally sustainable.

NFP Example

A NFP I became aware of several years ago faced this exact issue.  For several years, their Board had dictated and their management enacted a cost containment policy.  They changed several key benefits and abandoned programs that they determined too expensive.  Unfortunately, they soon found that they were not able to credibly pursue for new programs because they had lost many of their best staff members.  In addition, the NFP walked away from opportunities that they felt were not adding enough value due to the high costs of some senior staff members.  Unfortunately, those expensive staff members were the same folks that were driving the capability standards for the organization. They were internal educators who focused on new program opportunities. Eventually, the NFP significantly damaged its core capabilities which threatened its long-term viability.

They realized the issue in time to change course, but what was the Board’s responsibility?  The NFP had built a system of performance appraisal and compensation tied too closely to cost controllership.  They ignored many of the other important metrics, such as program capabilities, staff retention and thought leadership, which had been core to their organization for decades.  This narrow view of success almost ruined the NFP.

Ineffective Oversight

Too good to be true is just that.  In the case of WF, there were many available indicators that something was wrong.  The Company may have been adding a lot of accounts, but was there any metric showing the value of those new accounts.  Since most of them were false, they could not have been increasing the account value, if such a metric existed.  Was there a metric showing accounts with no activity?  That should be a flag, especially if those accounts were relatively new.

All the Board was seeing was growth and good results.  The Board did not have a completely accurate picture of what was going on, however, it also seems that they did not dig deep enough into the results to identify the underlying issues.  Was WF’s performance in other areas in line with the performance in new accounts?  Was there an overall industry trend that WF’s data matched? If WF was performing better than its peers, was there good reason for that outperformance?  Where these questions raised by the Board?

NFP Example

In the NFP sector, San Francisco-based Helpers Community Inc. is grabbing headlines.  Helpers’ Board recently removed their director after a San Francisco Chronicle investigation indicated serious management issues with the organization. Over the course of years, the director changed the focus of the organization, started spending extravagantly and decreasing funding to programs supporting the organization’s clients. These issues at Helpers did not occur overnight and while the Board eventually took action, it appears to have been a long time coming.

It is too early to identify all that went wrong at Helpers, however, it is easy to suspect that their charismatic leader made a strong case that the NFP was prospering under her management.  Overspending on non-program activities was masked by cuts to program costs.  The cuts decreased spending that benefited people that the organization was designed to serve. Did the Board act responsibly while the issues were mounting?  An outside investigation uncovered the issues. Did the Executive Director excel at hiding the facts from the Board or was the Board not providing effective oversight of the director’s activities.  We will learn more in time.

For more on Helpers Community Inc, see SF Chronicle Article

NFP Board Responsibility

The Board of a NFP has the responsibility to ensure that the organization serves its purpose. They do this by selecting leadership, overseeing results, ensuring compliance and aiding in the development and implementation of strategy.  The Board also oversees management actions and decision making processes and should develop itself to address the organization’s changing environment.  In the case of Wells Fargo, it appears that the oversight was missing or lacking and that the strategy implementation metrics were too narrow.

NFP Boards and leaders not only represent the organization they are serving but they represent the NFP sector in general. Although, WF’s issues are serious, they will likely not reflect poorly on the rest of the banking industry.  Issues in NFPs do reflect poorly on the rest of the sector.  The NFP sector exists to serve and we do so only at the pleasure of those who support us. NFP Boards and leaders must act responsibly to retain the trust contributors and sponsors place with us.

Bottom Line

As NFP leaders, we can and should learn from issues such as those at Wells Fargo.  We cannot make the mistake of believing that those issues can’t happen in a NFP organization.  They can and do.  NFP’s are very mission focused and can sometimes assess performance too narrowly. This can lead to major issues.  NFP Boards have many duties and can sometimes fail to ask the tough questions. They can allow a charismatic leader to drive the organization in the wrong direction because of the appearance of success.  The impacts can be devastating to the organization and the sector.

As a Board member or leader, take your responsibility seriously.  Engage management with probing questions.  Make sure that their answers fit the facts and that performance does not appear too good to be true. Understand your organization’s metrics. Don’t rely on the Finance Committee to check the numbers. Challenge assumptions and keep up to date on trends in your sector.  These are some of the keys to avoiding serious issues.

 

Please share your thoughts on this topic in the comments section.

If this article has been valuable for you, please follow me or connect on LinkedIn and check out my blog each week for new content, Not for Profit Beyond the Numbers – click the following link. NFPBeyondtheNumbers 

Thanks! –mike

 

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