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DRFC Shows Danger of Country Club Trustees

 If you’ve been paying attention to the news at all recently, you may have seen stories about an ongoing investigation at the Detroit River Front Conservancy. The group’s mission is to revitalize Detroit’s riverfront through the Detroit Riverwalk, a 5.5-mile stretch of Detroit’s downtown waterfront. The DRFC now illustrates the danger of having country club trustees.

The DRFC has a 44-member Board of Directors. They are a Who’s Who of the Detroit business scene, with a smattering of local bureaucrats, Michigan’s Lieutenant Governor, and a host of “professional” board members. The DRFC’s country club trustees appear to be there more to be seen than to provide oversight for a nearly $200M organization.

Earlier this year, some of the conservancy’s board members became concerned when the non-profit organization’s financial statements suggested that it was running low on cash. As it turns out, the organization was running low on cash because its recently fired Chief Financial Officer had apparently diverted $40M from the organization’s accounts over a period of 11 years.

An audit, conducted by a top-two accounting firm, and a criminal investigation, conducted by the Michigan State Police and the FBI, confirmed a glaring and long-standing pattern of financial irregularities. The evidence included forged bank statements, unauthorized wire transfers, and a load of personal expenditures that traced back to the group’s money man. The erstwhile CFO now faces a host of 30-year felony charges while the group tries to repair its reputation.

Lax oversight is exactly how the former CFO systematically drained the organization of a cool $3.6M annually for more than a decade. According to the FBI, the CFO used DRFC funds to pay his American Express bill, fund a phony business, and open a $5M line of credit with a local bank among other things.

Country Club Trustees: the Subtle Difference Between Overseeing and Overlooking

The FBI brought the case to the Prosecutor’s Office less than a month ago, who filed charges last week. In other words, this didn’t take long to unravel.

It underscores the danger of having country club trustees who aren’t plugged into their oversight responsibilities. Among nearly four dozen people with an awful lot of business acumen, no one asked any questions. They accepted what the administration told them. No one independently verified the group’s bank balances, expenses, or financial statements. Nobody suggested structures and procedures that would have prevented or identified the fraud much earlier. Losing $40M is going to be a problem for the conservancy because the money represents a lot of charitable donations and grant funding from people who want to see Detroit succeed. It was intended to build a lasting legacy and revitalize the city’s riverfront, not pay someone’s AmEx bill.

This is what country club trustees bring to an organization. I said this in February about Eastern Gateway Community College. It was something along the lines of:

“… annual audits and trustee board meetings are little more than performative exercises designed more to check a box than prevent rogue administrators from damaging the institution. “

“… when an institution’s trustees do not take their oversight responsibilities seriously, there is no other defense against poor administration.”

A trustee’s job is deceptively simple: Watch the money. That’s it. That’s all they need to do. Everything else is noise.

Unfortunately, the DRFC fiasco is exactly what authority without responsibility looks like. It ain’t pretty.

Photo Credit: Michal Dočekal, via Flickr