Organizations can learn from downfall of Wailuku Main Street Association

What went wrong with the nonprofit Wailuku Main Street Association is complex and started years ago. In essence, the problem was a strong executive director and a weak, uninvolved Board of Directors.

What began as a strong tool with a clear vision and goals for revitalizing Wailuku devolved into a personal fiefdom with powerful political connections through persistent lobbying efforts by the executive director, preventing any meaningful oversight. The other main obstacle was a board with planners and architects whose fears that refusing or countermanding the wishes of the executive director could jeopardize their projects or those of their clients.

When becoming chairman after the previous chair resigned midterm, I was told by other directors, the County Council and the mayor that the board needed to get control of the organization. To begin with, I asked that all organizational documents be presented at the next board meeting for formal review and discussion by the directors. We all needed a clear understanding of the duties and responsibilities of each officer, director and staff member, especially the board’s fiduciary and legal duties. Unfortunately, most information was deemed confidential, and all was controlled solely by the executive director. Reasons for denials of our requests changed several times over many months. In 2010, the treasurer asked for specific financial information as did the acting vice chair in 2011 and 2012. The requests were always vehemently denied.

The more I tried to assert the chair’s responsibilities and authority, the more resistance the executive director presented. I then contacted Hugh Jones at the attorney general’s office to find out what trouble the board could be in due to a lack of diligent oversight and what our legal rights were. Thanks to the hard work and perseverance of Jones, a new law based on my experience as a director will ensure that no other nonprofit director will be denied access to information fundamental to performing fiduciary obligations.

After resigning I obtained bylaws and articles of incorporation from the Planning Department because they are public records. We found that not only was WMSA not following the bylaws or articles, but the two documents conflicted with each other in a number of areas. One important item in the articles says that each year’s unspent “profits” were to be used on community projects, which was not done.

WMSA’s frequent public reliance on clean audits in the face of criticism means very little. External auditors, who are not rotated frequently, are given limited information and who do not interview directors or staff cannot produce a foolproof and thorough audit. Also, our audits did not reveal what the attorney general’s investigation uncovered, such as unlawful proxy voting, a confused governance structure, bylaw and articles of incorporation violations, failure to adopt policies recommended by the external auditor and inaccurate reporting on Form 990. Nor did we receive management letters enumerating strengths and weaknesses in the organization’s system of procedures and checks/balances. External audits are not designed, and should not be relied upon, to detect asset misappropriation or malfeasance. According to the Association of Certified Fraud Examiners, fraudulent activity is more often detected by tips and internal audits.

Red flags organizations should be looking for:

* Does the executive director refuse to take vacations or work frequently when no one else is around?

* An executive director who refuses to give over records and documents or to allow sufficient time for their review.

* An executive director who displays excessive control and overrides internal controls.

* Weak internal controls.

* Management that has frequent disputes with, shows disrespect for and threatens directors.

Preventive action for boards:

* A strong active board.

* Board orientation.

* Ongoing review of budgets and expenditures.

* Knowledge of governing documents.

* Full access to advisers (lawyers, auditors, etc.).

* Annual performance evaluation of the executive director and all employees.

* A clear process for hiring/firing employees.

* Establishing audit and finance committees with access to all financial records.

* External auditors that are rotated at least every 3 years.

* Board policies should be collected into a manual, available to directors and periodically reviewed.

Had these proactive measures been taken by WMSA, it would not find itself defunct, dissolved and headed for receivership.

* Sam Clark is a former chairman of the now-defunct Wailuku Main Street Association’s board. He lives in Haiku.