Jaw-dropping Conflicts of Interest
Alan Zarembo’s story about a wayward local nonprofit – and unabashed self-dealing by executives and board members – was featured above the fold on page-one of yesterday’s Los Angeles Times.
Francis Hill, a University of Miami law professor, responded to the situation with these words, “My jaw is dropping over this.” Mine too.
In California since the 1970s, mental health and drug treatment programs, while funded primarily by the state, are run by 501(c)(3) organizations. Tarzana Treatment Center is – according to Zarembo – the largest recipient of public funds for drug treatment in Los Angeles County. Based on the report, the center is regarded as among the best providers in the county.
But put that aside and consider whether the compensation given to executives and board members is reflective of a well-managed, mission-driven nonprofit organization.
COO Albert Senella – $428,057 salary; CEO Scott Taylor – $330,732 (for 32 hours/week).
Both men received “hundreds of thousands of dollars more in deferred compensation in recent years,” and Taylor received $237,956 in 2007 for providing legal counsel to the center.
In addition, in 2007 Taylor, Senella and two other board members received $2.27 million in rent from properties that the center leases from them.
Six of nine board members “were receiving income from Tarzana.”
Let’s stipulate: the services provided by Tarzana Treatment Center may be first-rate; the executives may be good managers; the legal fees may be competitive; the rent may be a bargain. But there are huge conflicts of interest involved in these financial relationships and – when so much money coming through the door of a nonprofit gets shoveled back to executives and board members – something is wrong.
Update – Comments moved into post:
Comment 1 - Steve – July 26, 2009:
If Tarzana Treatment Center is “regarded among the best providers in the county”, meaning that their clients have the greatest success in improving their mental and physical health, through appropriate treatment of mental illnesses and getting off of drugs, then the executives ABSOLUTELY are earning their salaries. The success of the drug treatment program directly leads to less costs, paid by the same LA County government, for incarceration of minor drug users and the mentally ill. Why isn’t the value of Tarzana’s $45 million budget weighed against LA County’s $857 million budget for jails? Isn’t it worth paying people well when they are saving the County millions more?
Of course there is a possible conflict when the executives are the landlords, and this could be problematic, especially if it isn’t disclosed. But does that mean that Tarzana’s programs, if they are successful, should be shut down anyway, because of some hypocritical moral umbrage? Too many people believe employees at nonprofits should wear a hairshirt – all that attitude accomplishes is to drive talent away from companies that are tasked with making our society a better place. That attitude makes no sense.
Comment 2 - Peter Golio – July 26, 2009:
Thank you for your comments; you make several good points. I agree with much of what you have to say. Yes, we should compare the cost of treatment for drug offenders with the cost of incarceration; the savings to taxpayers are critical, especially at a time when the State budget has been decimated. I would add that, in addition to dollar savings, successful substance abuse programs can rescue individuals, repair families, and provide benefits that ripple across our community.
I also agree that employees at nonprofits should be fairly compensated for their work. But at Tarzana the guiding principle for compensation (at the highest level) seems to be the sky’s the limit. You may disagree with this characterization, but there is some evidence for it.
The article in the Times described Tarzana’s COO’s salary as “soaring above the highest paid county employee,” the medical director at Harbor-UCLA Medical Center, and noted that the Harbor-UCLA budget was 12 times as large as the Tarzana budget. The article asserted that compensation for top executives at Tarzana was higher than at “comparably sized treatment centers” in other parts of the county. At one such center, in New York City, the highest paid executive made $173,000 a year; that is a long way from salaries of the top executives at Tarzana – excluding other forms of compensation – of $428,000, $330,000 (for part-time work), and $280,422.
These references may have been mistaken or misleading, but I have no reason to doubt the reporter.
Even in corporate America executive compensation is controversial; in part this is because it often appears that top executives are benefiting disproportionately at the expense of the company’s owners: the stockholders. In such cases, boards of directors often appear to have abdicated their responsibilities to stockholders.
In the nonprofit world, there is an even higher bar: a 501(c)(3) organization must dedicate its assets to a charitable, educational, religious or other exempt purpose. The board of a nonprofit is responsible for establishing policies to assure that earnings and assets are dedicated to serve the public good.
I will say more in another post on the issue of conflict of interest – the subject of my initial post. For now, I’ll simply add that we agree on another point: Tarzana Treatment Center should not be “shut down.” There should, if I am right, be changes made at Tarzana – while it continues to provide substance abuse and mental health treatment.
Thank you again for your comments.
