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Hello and welcome to tony martignetti non-profit radio big non-profit ideas for the other ninety five percent get excited for next week it’s our three hundred fiftieth show seventh anniversary i’ll say more in a few minutes and i’m glad you’re with me. I’d be thrown into psych ataxia if i tried to focusing on the idea that you missed today’s show look good to creditors loan credit line bond issue pull a park reveals how to impress creditors lenders when you’re knocking on their door for money, she’s senior vice president at bank united and what boards get wrong? You may have heard rumors that you’re bored isn’t perfect. We’ll run through the most glaring offenses you need to look for. Jean takagi is our legal contributor and principle of neo the non-profit and exempt organizations law group i’m tony take two, sixty nine and three fifty, but not four hundred nineteen. Responsive by pursuant full service fund-raising data driven and technology enabled, you’ll raise more money pursuant dot com and by we be spelling super cool spelling bee fundraisers we b e spelling dot com my pleasure to welcome first time guests to the show pullup park she’s. Senior vice president responsible for new business development in the non-profit hyre ed and healthcare sectors at bank united’s commercial banking she’s, a banking industry probono over twenty five years of experience focusing most of her career on the banking needs of tax exempt organizations before bank united, she was with wells fargo bank. You can email paula she’s offering her email. People are at bank united that dot com welcome polish pork high thank you. I’m very excited to be on the three hundred and forty nine forty nine that’s. Amazing, thank you very much. It’s almost set seven years called seven wow, seven years what’s one week between friends, right, seven years. Thank you very much. Um, yeah, i don’t know if i’ve had, uh i don’t know if we’ve had a bank around before. I think you might be our first banker. We’ve talked about financial things, but we’ve had, uh, more investment advisors you’ve had, you know, invite investors. We certainly had accountants on you. Might be the first banker zoho that’s. Exciting. Three forty nine. Right? Right. That’s like a low percentage. I feel i’m in the one percent you’re in the europe urine the point o o one. Yes. Okay, so we want to look good for creditors. White let’s. Just make something explicit. Just in case there are maybe or eggs that i haven’t thought about this. Why is it advantageous for them to borrow money? Well, you know, there’s. A lot of reasons for borrowing money. And first, i’d like to say that these air my opinions and up the opinions of my bank. Okay. Okay. Disclaimer. Thank you. So, you know, it helps you expand the reach of your own money. So not every organization can afford to do everything they need to do today. But, you know, do you have a long term risk repayment show source for a short term needs that’s a great reason to borrow. So you want an asset that will last you for the rest of your life. But you don’t have all the money today, okay? Like real estate. Like real estate. But you have the cash flow to support that. Maybe you want to think about borrowing, maybe it’s a great alternative to renting. Ah, and also non-profits use it to help them with their seasonality of their cash flows. Okay, that would be a credit line. Yes, and cried. Um, one of the purposes. Do you see clients coming to you for borrowing? Yeah. I mean, it’s, mostly capital and cash flow. Sometimes we bridge capitol campaigns. So again, back to this that, you know, you have pledges, but they’re going to come in over ten years. But you could buy that asset today if somebody will finance those pledges. Okay, so if there’s the right kind of documentation against those pledges, right? Like, if they’re biting their legally binding, right? I guess that would be part of your due diligence, and they allow lending. You have to let them, you know, they have to say in them that you could borrow against. Okay. All right. We’ll get to the details. All right. Cool. So so you have this future basically receivables? Yes. And you could borrow against them. And under the right terms? Yes. Okay. All right. All right. So it’s, mostly for assets and credit lines. Cash flow is mostly assets and cash flow. Okay, cool. Well, sam, just hand me the list of live listeners were bursting with live listeners who want to hear about looking good to creditors. Okay, we’ll get to the live. Listen, love that comes later. Okay. Okay. So, what should we think about before we approach a creditor lender and start an application or even to start inquiry? What do we need to have in line first? Yeah. I mean, i think you want to get your story together. You want to understand yourself and why you’re approaching them what you’re asking them for, you know, is there collateral? Can you offer collateral? You want to understand your own finances, and you have to be able to explain them to a bank in a way that they can understand wth? Um, okay, so we can’t just voice the whole bunch of documents on you and let you sort through it. Yeah, i know that’s an awful approach that does happen. And that tends to be the last thing you pick up. Don’t do this. Don’t do this. Don’t you throw a whole bunch of random things, really? Organize it. Think about your approach. Think about what you want to tell folks about yourself. Um, if you have a compelling story about yourself, tell it. And you have to be able to tell the story. Behind your numbers, because if you can’t tell it, nobody else can understand, okay, so you’re going to ask is this is this now is this? We’re like an initial phone call just like inquiry call i call up and say, you know, we’re thinking we have a cash flow issues, you know, we’re thinking of fifty thousand dollars credit line would be valuable for us, right? I could that would help us make payroll when you know things like that make our rent payments, et cetera, eyes this in an initial call, or do i need to have these things in line before i even call you and say, i’m thinking about doing this? Are you able to help? Yeah, i mean, i love asking questions, so don’t expect that the person on the other end of the line isn’t gonna have a ton of questions there are even in the usual cold, even in the initial call try to feel it out and see if it’s something you’re interested in or not, um and get an idea of what they’re looking for. Why, you know how they’re going to pay you back? That would be part of the initial conversation, because if it’s something you know you can’t help somebody with you don’t want to spend too much time on your trying to feel it our right. You’re beginning contrary, maybe the popular opinion. You’re not just throwing money at every organization that comes because you because it helps you make money, right know now you know. Okay. There’s due diligence. There’s a lot. I do know. How are you going to repay? All right. So how are we going to repay? I mean, if we need to borrow, how do we repay? Well, so, you know, there’s there’s. A couple of different ah, ways to do that. One is, obviously you have excess cash flow every year. So on a long term repayment, you know that extra hundred thousand dollars you have every year goes to pay the term long town. Okay. Okay. With, you know, with the capital campaign, you play it down, you pay it down, it’s the pledges come in and for lines it’s around your seasonality. So you know your your contract started. You perform the service now, it’s. Three months later. And you’re starting to get paid lines when i was in. College lines meant something different. I am not referring to the white lines now. No white lies a credit line. He’s a credit local. Just making sure. Yes, so would credit lines it’s based on your seasonality. So wants your money starts coming in from your government sources. You should be able to pay those back down, okay? Or maybe your donors, donors or your biggest and, you know, whatever that is. It’s it’s lines are meant to be drawn down and repaid and drawn down and repaid over the course of the year, and most of them have a thirty day cleanup. So you’re not supposed to use them for thirty consecutive days. Oh, meaning thirty days you’re supposed to be paid off within thirty days within it. Within thirty days of every year consecutively you have to pay a line of credit town. Oh, really? Yeah. Oh, keep about my organization. Can’t keep a balance. No, the idea is to show us that we’re not your permanent working capital, that we’re just a temporary solution. Otherwise, that usually shows evidence of a larger problem. Yeah, because i say all right, right. If there’s always a balance, then the credit line isn’t the right vehicle for you, right? There’s always a balance because, yeah, you have a systemic issue usually. Ok, which is you’re you’re going to try to get at before issuing the line, right? I try to figure that out. First poker. Sometimes things aren’t as visible. Okay, we’re gonna talk about that. We’ll get more detail. Right? So we got we got to go away for our first break for a couple minutes, and then we come back. Of course, paul and i’m gonna keep talking about looking good to creditors. Stay with us. You’re tuned to non-profit radio. Tony martignetti also hosts a podcast for the chronicle of philanthropy fund-raising fundamentals is a quick ten minute burst of fund-raising insights published once a month. Tony’s guests are expert in crowdfunding, mobile giving event fund-raising direct mail and donor cultivation. Really, all the fund-raising issues that make you wonder am i doing this right? Is there a better way there is? Find the fund-raising fundamentals archive it. Tony martignetti dot com that’s marketmesuite n e t t i remember there’s a g before the end, thousands of listeners have subscribed on itunes. You can also learn maura, the chronicle website. Philanthropy. Dot com fund-raising fundamentals the better way. Welcome back to big non-profit ideas for the other ninety five percent. Uh, paula okay, um, so now we’ve progressed past. We’ve gotten past our initial inquiry call, okay? And we’re still viable. Yes, we haven’t. Slobbered we understand our financials. Oh, how would you want to see you? So when you say understand your financials on what you’re looking for, what kind of explanation? I mean, you know, numbers tell a story and what we want to hear the story behind the story. So we want to understand, you know, what you’re doing out there, you know, how you’re helping people, but also how your funding helping people, what your cash flow cycles like, you know, why you’re goingto borrow you know, you’re you’re building a new homeless shelter? Why do you need it for how many people are going to stay in there? How do you how are you going to pay it back? You know, um, you know, how do you budget? How do you work towards your budget? I the one of the my pet peeves is when somebody tells me they don’t track their budget, that scares me. Oh, that’s, terrible ally, i admit that. To a potential lender. Yeah, i’ve had that several time. We don’t track our budget. We don’t track to our budget and money. And yeah, we don’t do internal financial statements. We don’t track to our budget, right? That’s about that’s a bad sign? Yeah. That’s a that’s, a big red flag right there. It’s like, how do you know what you’re doing if you don’t keep track, right? Yeah. How do you know? How do we know we’re going to get paid back-up wi calendar if if you’re not if you’re operating from a budget. So at the end of the year, you figure out if you made it or not. Yeah, december thirty first. Yeah. Scary. Scary. It’s bad. We shouldn’t be operating that way, but that’s systemic. I mean, that there’s a there’s. A problem with board oversight there? Yes. What is not executing its fiduciary duty? Okay, i don’t know if jean takagi is listening, but he and i are gonna talk about some of the things boards get wrong. That’s one of them? Yeah. Okay, now. All right. So next step durney. What is the next? How would you define the next? So so what? I usually do is i gather financial data. So i asked for three years of audited financial state man’s your current year today how you’re tracking to your budget, you know, some sort of a numeric picture of how you’re going to pay me back. You know, what’s the funds flow if it’s aline what? Your cash flow cycle looks like that’s. Another red flag when somebody says, i don’t know what my cash flow cycle looks like. Um, you know, what’s your plan to pay me back to cash flow cycle well, that’s, your receivable cycle. So most organizations, especially government funded, have a very typical we know. Yes. Okay. All right. So we know, on the end of the quarter, we were very rich, and then we draw it down from the end of the quarter. Because our government pays us, the state sends me. It sends us to check every quarter, and that sustains us for the three months and right. And then we have other revenue sources, like events. And then we have individual donors account for right. Thirty percent of our revenue like that. I mean, right, right. Yeah, yeah, yeah. That’s it and you. Show me your cycle s i collectibe bunch of financial dad and then what i like to do is come visit, meet in person, see what you look like, see where you work here, what you sound like in person and, you know, asking a lot of questions and again have you tell me your story? How can we impress you now now you’re we’ve given the documents now coming on site, right? Right? How can we impress you so that you will give us the loan? Whatever it is that we’re that we’re looking for? Yeah, i mean, first of all, i always bring somebody with me and they’re usually the credit person, one of the credit people, so if you don’t impress them, does that mean they’re the ones who make the decision date? They either make the decision or influence the decision, okay? And you know, if they’re not impressed, that’s it but the end of the line and how to impress them. So you know again, you tell us your financial story. You tell us how you’re going to pay us back. You tell us about what you dio and how you do it. If you have a great program that you can show us that that’s going to really impress us. That always helps a lot. Ok, so show off our facility. Oh, yeah. Even if it’s not directly related to our loan. Yes, absolutely. Okay, you know, bring important people. Bring the cfo. Bring the executive director. Boardmember bring aboard matter-ness boardmember i love when they bring boardmember bring a boardmember show how committed everybody is, you know, talk about why they’re there and how much they love it. And, you know, it’s and the personal impression means a lot. You know, if you leave a meeting and you don’t trust the people you spoke with, they don’t sound articulate. They were confusing. You know, the chances of getting the loan get lower and lower. What about its summertime? Okay, if i show up at this meeting shorts and flip flops. Yeah, shorts and flip flops are a very bad idea. I’ve had it happen. Birkenstocks, you name it. Cut off jean shorts. You know the bank for god’s? Yeah. Think about your audience. You know, even if you have casual fridays, you should probably hold off on showing me your casual fridays until i know you better invite you for monday through thursday. Yeah. Invite me monday through thursday if you don’t want unless we’re doing a barbecue sacrifice your casual friday. Yeah, yeah, but don’t turn up in your casual friday close. I want to bring my credit people it doesn’t mean they’re in suits and dresses. Yeah, we just sweat it out and suits and you’re in your flip flops. They feel insulted. Okay, what else? Anything else? Tip of ways we can impress you. Tips inside of these the pro tips. I mean, you know, the pro tips. I guess one of the things we talked about was pricing hot off the show. But pricing bad banks, you know, come up with a score card on you. They basically take all your data and important into a financial model. And we come up with a risk rating for you and it’s. A number, man. Every bank has a different range, but the idea is the same. And and the number we come up with for you goes into usually some sort of a pricing model. And based on the number your price changes like there’s no, your interest rate. You interest rate, right. So the mohr um risk-alternatives and some of that’s quantitative. So you can’t really change that, it’s. Just a number driven there’s a portion that’s, qualitative and that’s. Where impression and how you sounded in how your story sounded. That all goes into the quantitative piece. Quality. Yes, qualitative piela that that moves your number around. What would you say that proportion is quantitative qualitative in deciding this risk rating? I mean, quantitative hyre okay, but sixty, forty years? Seventy, thirty, thirty percent. I can influence about a third that’s. A lot of my rate by putting on a good show having good present that making a good presentation, right? Right. I mean, there’s, nothing you khun dio, if your numbers are never going to work, there’s nothing you can do to change that. Okay, but if your numbers do work there’s a lot you could do to move, move it around and and put yourself in a different place. Okay, so, you know, i think that’s an important thing to consider is is what impression you’re leaving people with, you know, think about before you have before you call before you meet. What impression am i? Trying to give you what are some of the numbers that go into the these these? Yeah, that go into the risk lady. Yeah, s so what we do is we take your you typically it’s three years. We take your last three years of audits, and we lined them up against each other so we can look at trends. And we re like ratio analysis. We like, first of all, we do a percentage for everything. So revenues is, you know, made up of seventy percent this and ten percent bad expenses. We break every line item into a number and a percent. And then we blind him up so we can say things like, why did your program express spence? Increase relative to your revenue? Why was it twelve percent last year and this year, it’s? Thirty ah, wei take numbers and we pour them into a whole bunch of ratio analysis. Leverage is an important one. It’s basically debt to net assets. All right, we’re getting into jargon jail territory now? Yeah, you just defined leverage. That’s. Good it’s. A ratio of debt to net asset that to net assets. We look at liquidity numbers, which can be all different. It could be a gross numbers. Something like cash and i’m restricted investment. You can be a ratio like sabat current assets minus current liabilities. That could be current assets divided by current liabilities. So there’s a whole bunch of different numbers to look at. And then they think the most important one is debt service coverage ratio here in jargon. Jill. Yeah. Yeah, i know, but i can tell you thie d s c r the common. No. Yeah, yeah, yeah. It’s, it’s, your operating access plus interest appreciation operating access that we have to find that. Alright. Wait. All right. So let’s, just leave it with dug a hole here. Alright, jargon, but you get me out. Get me out of this hole. I mean, this dark hole, all right, basically shows us how you can pay us back that we have the capacity to pay you back. Yeah, it has to be better than one. If you want more detail in that email. Female polar at people back tonight at dot com. Okay, i got out of that slow. Okay. So, what’s all right, so you’re going toe. You’re doing deep evaluation. This is your your due diligence, right? God, quantitative and qualitative. What are some red flags? That that, yeah, what is a red flag? Yeah. I mean, you know, you’re looking for big, big red flags are ah, negative net assets. So negative equity negative equity means you you own less than you owe you. Owe more than you. Everything, including our copier are if we owned property, whatever all our assets yet or less than our liability. Yeah. That’s, that’s a big no, no, but, you know, this debt service number we’re talking about is below weinger okay, skip over that. Okay? You’re okay, you’re below one the one that’s bad that’s bad. You’re operating continually at a loss like year after year after year after year here on it’s getting worse, okay, you know, so the trends are getting worse. You know that? The number that you’re looking at two pay your backs getting smaller and smaller and smaller. Right? So your risk the risk of this money that you’re going to be lending is rising and rising, right? What? It may just be so high that when that we can’t even help you. Right? Right. All right, red flags. Any other red flags? Birkenstocks, you’ve got a deal. Killer it’s not a deal killer. I’ve done, i’ve done deals for cookie people and strange outfits, but but there, but they paid more. They might have paid for that race probably were hyre yes, stocks, birkenstocks will cost you, you know? I mean, they’re they’re lovely, but not not, not when you’re meeting the credit people, right? And if you go out to meet with people and for burke, they don’t understand what they’re talking about and they can’t tell you why they’re expenses. Air hyre this year, and they don’t manage to a budget and you walk in and the ceiling’s falling down, you’re like, i don’t know if i want to do that. What if we’re lending for renovations because our ceiling is falling down? Well, that would be we’re borrowing. That would be a different story. But if this is like your not that, you know, your i’m in for working capital and you know, the book just fell on my head. I’m a little worried, okay? Yeah, but you have deeper issues beyond. Yeah, there’s more keeping your program’s going in. Your staff paid yes within which these programs and staff are residing is not stable, right? Your buildings falling apart. Yeah, this is fun. And you? Oh, well, let’s, get back to some of the fiduciary duties that the board should be overseeing. What if there’s excessive compensation, right? I mean, you know, there’s not a hard and fast rule for executive compensation. But i do think that if you see stuff that’s really out of the norm, it does raise a big red flag. And one time, for example, i was looking at the nine. Ninety of social service that their financial statement there ought. It looked a little odd, so i went to the nine. Ninety to see if i could dig a little deeper because there’s. A lot of information in there. And i found out thea president, ceo and cfo. Were husband, wife and son. Oh, no. The social service was it’s operating at a loss, but the three of them together made over two million dollars a year. And the headquarter hyre? Yeah, hop on. The headquarters was being rented from the president. Man, i didn’t do that loan, right? Yeah. That’s. Egregious. Yeah. That’s. Great. Where’s, the board i don’t know. And it’s it’s, you know, it’s, a founder run entity. So, yeah, that has to sell that story. Yeah, and i won’t tell you who but it’s when you know very marriage. One wife and son. Yeah, and the three of them are making two million dollars over that’s a lot for a social service. Especially one that’s operating at a deficit. Right? Him? Yeah. So, you know, i look for things like that. Google, sir. Oh, you mentioned. Oh, okay. You mention financial statements, flandez these come with a lot of footnotes? Yes. When i was in law school, i had a professor who he was so keen on the footnote being so important that the answer to an exam turned on whether you read the footnote or not. Yes, absolutely right or wrong in big way. Whether you if you didn’t read the footnotes. Footnotes i read, i actually i read the footnotes first before i even look at the financial numbers because their stories in there because that’s, the football i love the footnotes. Yeah, there’s. A lot of stuff in there. It’s. Very interesting. Um, all the good stuff’s in the footnotes if we’ve got stuff buried in the footnotes that we would rather you didn’t see? Should we just let you read it on your own? Or should we come out clean and say, you’re going to see cem, some improprieties or some, you’re going to see some red flags? Let me talk about these shoes. In other words, should we reveal it, or shall we leave it to you two? Maybe you won’t find it. Yeah, it’s always better off to come up front with things make cerini find it, maybe we find it and and you know what it is and and and if it’s on google, if i can google it, you have to tell me, because if it’s out there, i google search everybody everything yeah, bad press um and if it’s out there on google, everybody knows so china hide it it’s better to just tell you story a pride. It always sounds worse when you dig it up on your own. Absolutely well, that’s. Like being ten years old, it’s. Much better to go to mom and say you did something bad. Then have her discover that you fed the broccoli to your dog. Right? Right, it’s. A deal killer. When you find something on google and it’s egregious for me, it was liver, but i have cut it into little bits at a smother it with ketchup. I always say, if you covered cutting little bits and spread it around the plate, it looks like a lot less right, right. At least hide it under the mashed potatoes. Yeah, hide it or just diffuse it when it’s dense on the plate. That’s when? It’s scary, right? Just just last night, this came up, somebody cooked me liver, even smothered with onions. I just i’m not a liver fan myself, but you got to come clean. He gotta come tell up front. You know, we don’t like liver here in this organization, right? That’s, right? And we want you to know and here’s why? And here’s but here’s what we do instead we have other sources of iron right supplement. Wei have other sources of good protein. That’s right? We’ve finished. They were in vegan. They were even begin here. Yeah, there are good. So alright. Come clean. That’s. What you’re saying? Come clean. Dafs piela all right. Um anything else? All right, so now we’re getting to this, the evaluation, the number’s sounds like we’re just reduced to a bunch of spreadsheets cells, right. While we tell you story too, we tell you story and writing. Oh, so you tell us your story. We tell you, we tell our credit people your story. Okay. Okay. So are you? Basically is your role basically too be an advocate for the would you put it that way and advocate for the non-profit is that too strong of a navigator? As long as that they’re worth advocating for. Okay. Okay. Until they’re not your advocate until they’re not worth advocating for. Yes, absolutely. So you’re the liaison. I’m really a front face of the credit organization. Credit institution, bank united on dh. You’re working between the organization of the credit right in the middle person? Absolutely. I kind of represent both to each other. Anything else we can do to get the best rate possible? We just have, like, a minute and a half left. What could you d’oh? Besides, have great numbers tell you. Good story. Where the right clothes? Show me your show, mia programs. Okay, alright. Stuff recovered. Yeah, i can’t think of anything else in that case tell me why you love. You’ve been in banking and lending twenty for over twenty five years. Why do you love this work? Yeah, i mean, i’m here for the not-for-profits so i’ve always been a not for profit. I started lending to not-for-profits in nineteen, ninety and i’ve been hooked ever since. I love to be involved in the projects i love to be involved in the missions i love to meet the people i’ve set on board. I’ve done volunteer work. I’ve worked. It not-for-profits too and i just i just want to help the the not-for-profits helped the universe. Our cold is to go to that to go to the ribbon cutting oh, i love going to the river cutting that’s like your shining moment of glory when all the all that work you did paid off for everybody. Yeah, so that’s fun. We loved the ribbon cutting and we try to bring some of our bosses to the ribbon cuttings too, and let them see how great we are, where their money did something good for a change. Outstanding cool part. Thank you. Thank you. Ballpark. Senior vice president at bank united park at thank united dot com. Thank you again. Thank you so much. Jean takagi and what boards get wrong is coming up first pursuant they have ah, well, they have something, but you have seen a lot of midyear fund-raising reports now we’ve we’ve crossed june thirtieth and benchmarks being discussed everywhere, you know, whether you’re living up to what the community is doing or not, but one of the most important trends and how do you make the most of the best sense out of them for your organization? What if you’re not hitting the benchmarks that other people have created on dh? How do you keep rising above if you’re if you’re ahead? That’s what the next webinar comes in for from pursuant it’s, the state of fund-raising midyear checkpoint with ceo trent riker he’s going to be on the show next week for the three fifty and senior vice president jennifer abila they’re gonna help you push through your third and fourth quarters if you can’t make it live on july twenty fifth, watch archive either live or archive go to pursuing dot com click resource is then webinars. We’ll be spelling super cool spelling bee fundraisers make millennial money that’s my own that’s my own alliteration that’s not there so don’t don’t blame alex queer. We’d be spelling for that, but listeners have been talking to alex. I know he’s the ceo there he’s also going to town next week and you could be next. You could be a b you could be you could be next. Look at this. What is brilliant mind since that what? You’re witnessing it at work right now. Um, b next, check out the video at we b e spelling dot com and then pick up the phone for pizza. Talk to alex and look, look what his number is. Nine to nine to two four bees. Okay, see, i’m not the only one now the time for tony’s. Take two. Sixty nine and three. Fifty. I’ve got a new video. Feels good in sixty nine. Get the filth out of your mind. Get it out! This is a family show. Although i don’t know anyone under twenty one. Why anyone under twenty would listen. But in fact, if you are under twenty one and you can prove it to me, i’ll make you listen for the week. Get me at tony martignetti sixty nine is a new position for me, it’s. Hard it’s a hard position. Watch the video and it will all become very clear. Next week is the three hundred fiftieth non-profit radio we’ve got all the regulars that iran, including jeanne kaguya, was coming on very shortly hyre meyerhoff she’s gonna be with me the ceo’s from pursuing and we’d be spelling live music with scott stein he’s going to play our theme song, of course, cheap red wine and another and we’ve got giveaways from pursuant and your coffee. How do you enter the wind post your most creative? Congrats on the three fiftieth use the hashtag non-profit radio three fifty post will pick the best ones those will be the winners here’s that hash tag non-profit radio three fifty you’ll find my sixty nine and three fifty videos at tony martignetti dot com. And that is tony’s take two jean takagi. He, uh you know, he’s been listening to tony take two he’s been on for a couple minutes. You know who he is? He’s, the managing attorney of neo non-profit and exempt organizations law group in san francisco. He edits the wildly popular non-profit law block dot com and he is the american bar association’s. Twenty sixteen outstanding non-profit lawyer you’ll find him at gee tak gt a k jean takagi. So great to have you back. Welcome back. Thanks, tony. Great to be back. My pleasure. We’re talking about some, um, some mistakes that boards make. What, uh, what brings this to your attention? Well, it’s been in the news a lot on dh governance on every level in every sphere of ah, our country has been coming to a lot of attention and whether things were done properly up on the top or not, um, has become a big issue, and i think there’s a common saying the tone is set at the top and the tone of proper governance on non-profit boards really sets the whole tone for the organization and when you don’t have boardmember that air prepared to set that right tone, there are there are problems that follows, and those are the things that get into the news, okay? And we were just touching on just a couple of those with with paula park a few minutes ago, some talking about some of the fiduciary issues fiduciary duties that board members might be ignoring if they’re if they’re not. Properly prepared for, you know ah, credit application sabat okay, but aside from that let’s, see, what would you like, tio? What would you like to start with you? Pick you pick somewhere. We got to get a bunch to go through. But you pick something to start. I feel like i always dictate to you. You choose. Okay. Let’s do allowing. No, i’m sorry. Go ahead. What would you like to do? Well, i could actually let’s start with sort of conflict of interest transactions and that’s where boardmember sze decide that they want to sell services to the non-profits on whose board they sit and, you know, some some sort of say, all of that should not be allowed. And with private foundations there’s ah, much stricter rule that prohibits most of those transactions. But with public charities, it’s usually not sort of absolutely prohibited in some cases, a conflict of interest times action is actually to the organization’s benefit. Like kinda boardmember says, you know, i’ll give you rent at half of the market rate on you. And you can use my my offices to run the organization. That might be a very good deal for a public charity, but where board get in trouble is where one member of the board says, well, you know, i’ll sell you these advertising services for the organization, and my usual rate is five hundred dollars an hour, but i’ll charge you four hundred dollars an hour, and maybe that is what you know that person’s rate is when they’re selling him tto fortune five hundred companies. But for this little one hundred thousand dollars a year non-profit a four hundred dollar an hour rate for advertising is probably excessive. And if the rest of the board just blindly goes along that’s as well he’s giving us a twenty percent discount let’s go with it that gets boards in trouble. Yeah, okay. Would that fall under that eyes that a conflict, conflict of interests? Yes. I mean, there may be several laws where it could be a problem, but on sort of the federal level on the federal tax level, along with being a five a one c three organization and the public charity, you’re not allowed to engage in on access, benefit transaction where somebody like a boardmember gets an excessive payment. And if that happens, what? The irs could do would say, hey, you know, that was excessive, really, nobody should be paying a charity this side should not be paying more than let’s say, two hundred dollars an hour for those services, so you were overcharging two hundred dollars per hour and what we’re going to make you do, as the irs says, we’re going to say you have to return that excessive portion back to the charity, and then on top of that, we’re going to charge you a tax for violating that rule, and that will be twenty five percent of the excessive amount that you charged. And if you don’t fix that within the tax year, we’re going to charge you a two hundred percent penalty under the mountain, all right away, if any boardmember approved that transaction and they knew or he really should have known it to be excessive, we’re going to hit them with a penalty as well. Oh, my goodness. Okay. And i think you and i have talked about this not recently, but xs benefit transactions. I think we’ve covered this. This yeah, and then very i love that you point out the possibility of individual fiduciary penalties and my saying individual money, penalties for the board members, personal penalties. Yeah, really, really rare. But, you know, if if boards look like they colluded, teo benefit one of their fellow board members and weren’t really looking after the best interests of the organization, they can be imposed. Okay, okay, let’s go to aa, not preventing misappropriation, our misuse of the of the ah, the money’s that come in or the other other assets of the organization. Yeah, i mean, that’s a great segue way because one misuses overpaying a boardmember really is overpaying anybody. So maybe you’ve got a friend. And, you know, that friend is offering this great deal to the organization according to your friend, but maybe it isn’t such a great deal. Or maybe it’s for services that the organization really doesn’t even need. So he’s saying, you know, i’ve got this great storage facility. You guys should rent it, and you know, i’ll give you this this great deal on it, and so the organization goes ahead on, rents it but actually never uses it because they never needed that storage facility. Well, that would be kind of a waste of assets and potentially, a diversion of those charitable assets to benefit somebody’s friend. And again that back and get people in a lot of trouble about cyber security risks what’s the board’s responsibility there? Yeah, cybersecurity czar really hot button issue right now and then we’re seeing it everywhere from, uh, people getting their social security numbers stolen or credit card number stolen and identity theft associated with that. So when non-profits are collecting what they call personally identifiable information information that can be associating with a specific individual, they’ve got certain rules that apply, and these are specific to the states. So there’s certain rules that apply that say, you’ve got to really maintain and protect this information, and if it gets out, if your sites that contain this information are breached and those things that released a lot of states say you’ve gotta notify the individual who’s data has been breached and taken so that they can take steps to protect themselves. So really big deal now you you will have already breached the law if you didn’t create secure systems preventing certain breeches and hackers from getting at that data. And if you fail to notify possibly donor’s information, for example, or some buyers of your services or goods? If you don’t notify them of that reaches well, you could be violating another law. So a lot going on there in cyber security. Actually, another really interesting one was recently there was some ransom where that that was came out and hit not only for-profit organizations but some non-profits is well and ransom. Where is basically where somebody hijacks your site and some of some of your site, maybe for processing donations or for selling goods and services. And so you really rely on having them up every day while the hacker takes over your site says unless you pay me let’s, say, you know, ten thousand dollars by tomorrow, i’m going to keep your site hacked and it may take you, you know, even with your experts a week, two weeks to recover it, and maybe you’re gonna lose a lot more money if you do that now, what do you do? Yeah, we just had that nationwide within about the past, not not not just nationwide internationally with in the past, what, six weeks or so? See, i think the wannacry ransomware i don’t know if it’s called a virus or something else. But yeah, it was widely prevalent in a lot of organizations, and organizations have to figure out how to deal with that and it’s best to figure those things out before it actually happens, rather than after the fact we just had a guest with in the past. I’d say that in the past two months, mark last night was shine mark shine. I think, talking about cyber security on how to ensure against it, the different policies that are available. Teo, to protect your organization in the event of a breach s so you could listen to you could look back at that it’s just with i’m sure it was mark shine just in the past couple months, okay, let’s. See, um, let’s. I do want to get teo another, another popular blawg, not not as popular as non-profit law block dot com, but we’ll we’ll give ellis card or a shout in a couple minutes. How about yeah, investments what’s the what? I don’t think you and i have talked about this one, the board’s responsibility around the investment policy statements of the organization? Sure. So, you know, even some smaller charities, you know, they got reserves and order some of them anyway. If they’re lucky, enoughto have not have to live sort of day by day, have some reserves on dh. They may want invest those reserves rather than just keep it in in a checking account, for example. And if you do have assets for investment was a charity. There are state laws that are associated with prudently investing those foreign investor axe. Yeah, on dh those are really important to pay attention to so some charities and some have come to us for service. You know, when when the market is it is it’s hot on the market has been pretty good lately, you know, they’re also served deals out there, and some are like going no, you know, we would like to invest all of our our money in this hedge, but, uh, and they may not even know what a hedge fund is. And i don’t know that anybody actually knows what a hedge fund is, because that covers so many different broad groups of investments, but they tend to be wildly speculative, meaning you could make a ton of money on them in a short period of time, and you can lose a lot of money in a very short period of time and that type of speculative investment making unless it’s part of like a prudent portfolio where maybe, like ten percent of your assets are devoted to those that are, you know, much more speculative, but ninety percent are in much more conservative investments can be a real breach if you put all your money’s in one basket, which it’s never good ideas, we’ve learned from our our parents or our kindergarten teachers. Um, you know, you’ve got to make sure that the portfolio of different investments you have is prudent, and so you’ve diversified your risks and not put it all in some wildly speculative investment, and that could be not only a breach of your fiduciary duty but reach a prudent investor rules and there’s a rule we don’t wantto get into jargon jail, you’re always about the impression that the acronym uniforms prudent management. Of institutional funds act, and it says that you have to look at different concerns when you’re investing on dh. It really talks about conservative investing in a portfolio with an eye on what your mission is as well. Gene, just give that acronym and what it stands for again, please, i talked over you sure upmifa upm i f a, the uniform, prudent management of institutional funds act. If you google upmifa and your state, you’ll find what the law is, and i think that’s in forty nine states, i think maybe pennsylvania’s the outline, hold on. All right, all right, thank you. I’ll try teo, keep my tongue civil from here on, but all right, let’s, go out for our break. When we come back, i’ve got live. Listen, love a ton, and we’ll give a shout out to another law block that you might be interested in state with us. Like what you’re hearing a non-profit radio tony’s got more on youtube, you’ll find clips from stand up comedy tv spots and exclusive interviews catch guests like seth gordon. Craig newmark, the founder of craigslist marquis of eco enterprises, charles best from donors choose dot org’s aria finger do something that worked neo-sage levine from new york universities heimans center on philanthropy tony tweets to he finds the best content from the most knowledgeable, interesting people in and around non-profits to share on his stream. If you have valuable info, he wants to re tweet you during the show. You can join the conversation on twitter using hashtag non-profit radio twitter is an easy way to reach tony he’s at tony martignetti narasimhan t i g e n e t t i remember there’s a g before the end he hosts a podcast for the chronicle of philanthropy fund-raising fundamentals is a short monthly show devoted to getting over your fund-raising hartals just like non-profit radio, toni talks to leading thinkers, experts and cool people with great ideas. As one fan said, tony picks their brains and i don’t have to leave my office fund-raising fundamentals was recently dubbed the most helpful non-profit podcast you have ever heard. You can also join the conversation on facebook, where you can ask questions before or after the show. The guests are there, too. Get insider show alerts by email, tony tells you who’s on each week and always includes link so that you can contact guess directly. To sign up, visit the facebook page for tony martignetti dot com. Hi, this is claire meyerhoff from the plan giving agency. If you have big dreams but a small budget, you have a home at tony martignetti non-profit radio. Krauz hyre hopes could be with us next week for the three hundred fiftieth show as well. Jean takagi, listen, let’s, do the live listener love because we’re bursting here. Tampa, florida bronx, new york and if we got all five boroughs, we got multiple manhattan. We got bronx. We got staten island. Um, we have brooklyn where’s, queens, queens. Let us down. All right. We got four out of five and multiple said, multiple manhattan, woodbridge, new jersey. That’s not far. Laura, laura, laura, belinda, california live listen and love to all of you, but also to torrington, connecticut. I’ve been to torrington, that’s, a nice little town. I did some consulting there. Uh, social service agency. Torrington. And you have that that renovated theater right in downtown. I love that’s, very pretty. Minneapolis minnesota lives their love to you also new bern, north carolina and midlothian, virginia. Midlothian, midlothian live listen love. However you pronounce it let’s, go abroad. Not too many people abroad, nobody, nobody in asia, nobody at all in asia. This, i think, is the first show where there’s, nobody from asia. Wow. Okay, uh, they’ll be back. Uk? We can’t we can’t we see uk, united kingdom so we don’t know whether it’s whales or ireland or scotland or england we don’t know well, you’re in the uk so we always give always give you know you got to do the you got to recognize that there’s more than one country in the united kingdom, please and germany, good talk, live listen love all our livelong sinners on dh so of course, on the heels of that has got to be the podcast pleasantries because we’ve got over twelve thousand podcast listeners in the time shift. Thank you. Pleasantries to our podcast listeners, never forgetting them. And then, of course, the affiliate affections to our am and fm stations throughout the country. And by the way, i have four new stations to introduce next week on the three, fiftieth four brand new stations joining us throughout the country from new york, colorado to washington. I think porter stations but for the current stations listening today affections to our am and fm listeners. Thanks so much for being with us, everyone. Thank you, jean. Thank you for that indulgence. You know the thanks that you know the gratitude has got to go out, right? You know that? Absolutely. Thank you. Um okay. So let’s give a little shout out to ah, another. Another non-profit attorney ellis carter. She she she curates the charity lawyer blawg, cherry lawyer block. And you know, ellis carter. I did turn and she’s a wonderful person and a great attorney. Alice and i have had a chance to speak together and work together on the few occasions you’ve worked together too. Cool. All right. So on her block post going back, i think it’s two thousand nine there was one of her earlier poster, if not her very first post. She links to you while she mentions a bunch of your problem ideas. And i want to give a shout out to your block. Of course. Non-profit non-profit law block dot com where listeners can check out all your list of all ten because you did a post for this show, which actually you do that every week, which i always appreciate every time you’re on, you do opposed. So if you want to see the full list of jeans, go to non-profit loblaw dot com. But ellis carter has charity lawyer blawg and she’s got a couple on there. That i want to talk about, like micro managing staff are you are you comfortable talking about ellis carter’s board governance mistakes? Yeah, absolutely actually give credit to her. She came up with a list of ten, and then i just added a few more to to her list, and so she recaptured all fifteen together on her block, but she was the one who came up with micro managing staff and it’s a really important one because i think he probably seen it as well. Tony, where board members start to get involved and then go around the executive director and start to give directions to the staff. Yes, i have and creates all kinds of political trouble and reporting line trouble and yeah, yeah, but, you know, part of that can be the responsibility of the ceo to and blurring lines and, you know, having boardmember do things that maybe you’re not appropriate, like, you know, day to day tasks and things. Yeah, and so, you know, oftentimes when you, this is a kind of a growing pain for some non-profits as well, because when you’re on all volunteer non-profit organization, it is where the board members involved. With everything as well and and managing volunteers in that case. But once you start to grow up a little and have staff and haven’t executive director, the board members have to know to pull back and, you know, for one thing, boardmember should know that individually they have no inherent authority to do anything. They don’t have the authority to manage staff it’s only collectively as a board where they have authority officers like your executive director or your ceo perhaps might have the authority to give limited direction to the staff to ceo would obviously have have the ultimate authority there with respect to the staff, but just knowing where your boundaries are, it’s really important and from a liability standpoint, board members, if they start to mismanage, that could get hit with unemployment claim, which really makes up, i believe more than ninety percent of all directors and officers insurance claims our employment related and if they’re directed against boardmember themselves, and if you don’t have dino insurance boy, that that could be a huge problem for individual boardmember so they really have to be careful of that. Another one on ellis’s list is airing disagreements outside the board room and that reminds me of the very timely, like complaining about your attorney general to the new york times as an example, it just happened today airing disagreements outside the boardroom what’s the trouble there? Yeah, and obviously as a non-profit when you’re taking positions, you wantto have one position that you’re setting out to the public you don’t wantto have ah, divided ah statement that you’re giving to a public where some persons involved with the organization are on one side of an issue when other persons are other side of an issue and it looks to the public that the organization is poorly governed, poorly managed, and can’t even make up its mind on what its messages and therefore could jeopardize support. So aaron aaron, you know your disagreements outside of the boardroom, a really big problem for the organization in terms of its, you know, public relations, but also a huge, huge problem for the boards themselves because, you know, tony, if you and i were on the board together and we had a disagreement over a key issue on dh, we got a chance to discuss it, of course, when we go out you know, even if i may have disagreed with you and, you know, your side won, i’m going to be supportive of that. I might not say very much about it, but i’m definitely not going to say, well, i, you know, in in public that i disagreed with it because what happens if i start doing that is i’m a chill further board discussions, you know, if you don’t kick me out of the board for doing that, the board might find itself very, very leery of, you know, raising controversial points because you got this one person who’s going to be a blabber mouth and start teo, reframe everything and criticize you personally outside of the organization, a really big problem. The place for the robust discussion and disagreements is within the confines of the board meeting and maybe discussions that take place in committee or or even know our board members having back channel communications right privately on the phone or email, but publicly wait, where were we? Face-to-face we present one face yeah, and this along with your duty of loyalty to the organization as well, you’re supposed to act as a board member in the best interest of the organization. Not in your personal best interests. All right? Yeah. You don’t want to hurt the organization by by airing your grievances outside. Thank you very much. Looking forward to talking to you next week on the three. Fifty of jean? Yeah, i’m really looking forward to three. Fifty congratulations. Thank you so much, jane takagi you’ll find him at non-profit law block dot com and at g tak gt a k next week three fifty three five oh, how many times i have to say it, make sure you enter to win our giveaways post your most creative congrats with the hashtag non-profit medio three fifty can’t wait for that great fun! If you missed any part of today’s show, i beseech you, find it on tony martignetti dot com we’re sponsored by pursuant online tools for small and midsize non-profits data driven and technology enabled and by we be spelling supercool spelling bee fundraisers we b e spelling dot com our creative producers climb hyre half sam liebowitz is the line producer shows social media is by susan chavez and this fantastic cool music is by scott stein be with me next week for non-profit radio big non-profit ideas for the other ninety five percent go out and degree. Sametz buy-in what’s not to love about non-profit radio tony gets the best guests check this out from seth godin this’s the first revolution since tv nineteen fifty and henry ford nineteen twenty it’s the revolution of our lifetime here’s a smart, simple idea from craigslist founder craig newmark insights orn presentation or anything? People don’t really need the fancy stuff they need something which is simple and fast. When’s the best time to post on facebook facebook’s andrew noise nose at traffic is at an all time hyre on nine a, m or p m so that’s, when you should be posting your most meaningful post here’s aria finger ceo of do something dot or ge young people are not going to be involved in social change if it’s boring and they don’t see the impact of what they’re doing. So you got to make it fun and applicable to these young people look so otherwise a fifteen and sixteen year old they have better things to do if they have xbox, they have tv, they have their cell phones me dar is the founder of idealist took two or three years for foundation staff to sort of dane toe add an email address their card, it was like it was phone. This email thing is right and that’s, why should i give it away? Charles best founded donors choose dot or ge somehow they’ve gotten in touch kind of off line as it were and and no two exchanges of brownies and visits and physical gift. Mark echo is the founder and ceo of eco enterprises. You may be wearing his hoodies and shirts, tony, talk to him. Yeah, you know, i just i i’m a big believer that’s not what you make in life. It zoho, you know, tell you make people feel this is public radio host majora carter. Innovation is in the power of understanding that you don’t just put money on a situation expected to hell. You put money in a situation and invested and expect it to grow and savvy advice for success from eric sabiston. What separates those who achieve from those who do not is in direct proportion to one’s ability to ask others for help. The smartest experts and leading thinkers air on tony martignetti non-profit radio big non-profit ideas for the other ninety five percent.