Luis Rodrigo Ubeda

Dear Jimmy,

I’ve worked in analyzing any actual or potential governance issues within POTC. This is

not a far-reaching assessment, but I believe it covers all the possible concerns and problems within

the organization and it will help you to reach a thoughtful decision regarding Buddy’s offer to be

elected as POTC’s Director. As you can see below and after a summary introduction of POTC, I

have broken down my analysis in different areas to help you understand its implications within

the organization. In addition, my analysis includes some questions that should be answered to get

a clear overview of the organization.

Mission, Values and Culture of POTC

The fundamental goal of non-profit organizations is not to further the economic interest

of its owners, but rather to achieve its mission in the society. The purpose of POTC is to provide

counseling and therapy to owners and pets who were not getting along or whose relationship had

suffered a sudden loss. However, the purpose of a non-profit organization it is only a part of its

mission. In this sense, you should understand what POTC’s mission is; including, for example,

the beneficiaries of the services provided. Buddy pointed out as a success the restoring of a broken

relationship between an extremely wealthy executive and his llama after an expensive treatment.

That is only an example, but are wealthy people the real beneficiaries of the services provided by

POTC given the expensive of the treatments recommended?

On other hand, it is also a matter of concern the values and the culture within the

organization. Values drive behaviors, and some of the behaviors you mentioned show a cultural

crisis within the organization. These include: Oscar thoughts about governance principles and

laws aimed at achieving them (he considers this regulation as a “spreading cancer”), meetings in

Grand Cayman, lack of oversight and violation of laws (ERISA violations considered ridiculous

by Oscar), arbitrary and excessive power of the CEO and the existence of conflicts of interest in

the organization. These issues will be covered in depth in the following sections. However, POTC

should clarify what its values are and act according to them.
Luis Rodrigo Ubeda

To finalize this section, I would also like to highlight the possible existence of lobbying

practices. POTC, as Oscar has recognized, is “taking advantage” of the Executive Order of the

President by which Medicare funds will cover expenses incurred by those owners who need

POTC’s Services. Although the existence of this regulation is not, per se, an issue; the existence

of lobbying practices to get passed that Executive Order would be of serious concern. The

organization should oversee if that lobbying practices are taking place and the relationship of the

members of the Board of Directors with politicians (especially given the sensitive topic at stake1).

1.   Board of Directors, Relationship Board-CEO and Committees

POTC Board of Directors is formed by six directors and at least three of them might be

considered interested directors. Independent directors are necessary to create an effective

separation between the oversight duties of the Board and the management branch of the company.

Oscar is the Director and CEO of the company; the “leading” employee involved in management

tasks. In this same position is Greta Wolf who is an employee of the company (POTC’s Vice

President for Client Services) and also has an extremely close relationship with Oscar. The

independence of Betty Fitch could also be challenged; she is a business partner of Oscar, a

consultant for the company and the CEO of Ex-O-Pet –a provider of services for POTC. The fact

that Ms. Fitch is an interested Director creates several problems considering her role as

Compliance Director, a position ideally held by an independent.

The lack of independent Directors within the organization is a reason of concern and the

incorporation of outside independent director is necessary, as the Attorney General (AG) properly

pointed out. The decision to elect outside directors should’ve been pursued by the company before

AG recommendations and it (the decision) should not be directed to find donors (as Oscar seems

to suggest), but to improve the governance of the organization.

Another important issue to remark is the relationship between the CEO and the Board

of Director. Oscar, who has been CEO during 10 years, sees POTC as his organization. His

management, as I will explain in the following sections, is a proof of so. As a matter of fact, he

                                                                                       
1
The use of Medicare funds which might be used to other purposes.
Luis Rodrigo Ubeda

does not appreciate a lot of questions about the way he manages the organization; particularly

from outside directors whom felt know very little how to run POTC. Although Oscar is an

innovator in the area of people/pet relations and the community acknowledges him as such; he

lacks to understand his duties as CEO. Oscar is the person responsible of the day-a-day operations

of the company, which does not mean that he owns the company. He should be accountable of

his actions and the Board of Directors is responsible of overseeing his management. Instead of

stating that governance rules are like a cancer or considering outside directors a burden, Oscar

should assure an effective board governance. Oscar’s attitude is a huge source of organizational

dysfunctions that ultimately leads to conflicts of interest, lack of oversight, uninformed business

decisions and excessive compensation due to CEO’s excessive power within the organization.

Moreover, there is not any sign of existence of governance Committees. An organization

such as POTC should have, at least, a Governance Committee, an Audit Committee and a

Compensation Committee formed, in its majority, by independent directors.

2.   Your role as a Director

Board of Directors or their Nominating Committees should be responsible of finding

individuals who satisfy the agreed set of criteria and that are interested in joining the board. In

your case, although I believe you would be an excellent candidate, there some concerns that I

should remark.

First, you have a successful background serving in several Boards and financial skills.

However, you are a former Arthur Andersen (AA) accountant, a company usually related to the

Enron case. In that regard, POTC should know what role you played during your time at AA in

order to assess your candidature. Second, it is an issue that you are interested in joining POTC to

try to recruit Buddy; Directors should be committed with the organization they are serving

regardless of their personal agenda. You ought to be honest to yourself before reaching a decision.

Third, I am also worried that the ultimate purpose of the offer is to find a donor and/or public

relation to find contributors rather than an independent high-qualified director. It is true that

having Directors of non-profit organizations that are also donors is not a big deal; it is quite the
Luis Rodrigo Ubeda

opposite. Contributing to your the organization you serve as a Director is helpful to show to the

community your engagement with the project and to increase the amount of funds raised.

However, Oscar seems to be more concern of raising money to run the company than to find an

outside Director to improve the Governance of the organization.

3.   Reporting Channels and Lack of Oversight

In this section I identify two set of facts that may be of concern. First, an employee

contacting the Attorney General regarding several employment and governance related issues and

AG’s investigation and letter demanding reforms. Second, sanctions of the Department of Labor

for ERISA violations (Oscar arbitrary decisions in promoting and compensating female

employees) allegedly known by the Board of Directors.

These two situations clearly show a problem of oversight within the organization.

According to the facts, the employee went to the AG to report governance and employment issues.

That can only mean one of two things: either the Board of Directors knew about the reports and,

despite of the red flags, decided not to act; or there is a clear inexistence of reporting channels.

Besides, what was the response to AG’s recommendations (apart from finding two outside

Directors)?

The same sense of lack of oversight stems from the ERISA violations. Oscar’s alleged

behavior was not properly addressed because either the Board failed to implement any reporting

information system or, having implemented such system, they failed to monitor it. It looks like if

Oscar consider, for example, ERISA violation a “minor oversight” the Board of Directors will

just agree with the CEO (Buddy passive behavior is an example of it).

4.   Conflict of Interests

It can be drawn from the facts the existence of transactions in which there is a conflict of

interest. Again, Oscar is either directly or indirectly involved. The first transaction I am referring

to is the service agreement between Ex-O-Pet and POTC. As I have stated above, Ms. Filtch is

the CEO of Ex-O-Pet and also a Director of POTC; additionally, Oscar is Ms. Filtch’s business

Partner and CEO of POTC. The second conflict of interest refers to Oscar’s son engagement to
Luis Rodrigo Ubeda

do a promotional video for POTC in consideration of a camera and edited equipment. Oscar

consider both transactions to be “commercially reasonable”.

Both transactions interfere with the free and independent judgement of Oscar and/or Mr.

Filtch so the transactions should be subject to the scrutiny of independent Directors. Oscar or Ms.

Filtch’s thoughts about the reasonableness of the transaction are irrelevant because their

judgement is tainted and their loyalty might be challenged.

5.   Informed Business Judgement, Financial Performance and Compensation

Oscar received and rejected an offer for POTC’s building, one of the main assets of the

company. Oscar decision was based on the idea that the offer was too low. However, Buddy, for

example, was not sure about the rejection of the offer. This unilateral and uninformed decision

reached by Oscar is another issue to consider: Oscar only communicated his decision to the board

after the rejection of the offer. Oscar should have immediately communicated the offer to the

Board, especially given the delicate financial situation of POTC and its taxes related issues.

Instead, Oscar rejected the offer and later convinced the Board of Directors that the real state

taxes issue “would soon be resolved”. The Board of Director did not investigate deeper and, what

is even worst, Oscar assertions about taxes to the Board were based on the comments of a friend

about a “Florida case”.

To summarize: a) Oscar unilaterally decided the quality of the offer; b) He did not

communicate the offer to the Board of Directors before the rejection; c) Oscar later convince the

Directors that every tax related issues will be solved and d) the Board of Directors went along

with Oscar’s explanations despite POTC’s economic situation.

Moreover, Oscar is setting his own compensation. The compensation of the officers

should be set by the Board of Directors (including benefits such as the company car and the

chamber) considering the recommendations of an independent Compensation Committee. In this

case, Oscar is compensated for finding the building or for the recovery of taxes (a situation that

is not yet materialized). Both decisions were taken unilaterally by Oscar, increasing his level of

compensation. Officers setting their own compensation create huge problems of incentives.
Luis Rodrigo Ubeda

To finalize, I am also worried about the financial performance of the organization.

Despite the previous good performance of the organization, the last two years have been a

challenge and this year a substantial loss is expected. This situation comes out when Medicare is

covering pet owners who need POTC’s services and hence the incomes should have increased.

On the other hand, I am not sure what are the sources of revenue of the company. I guess a great

portion comes from contributors. However, what is more of concern, is the risks that Oscar is

taking: he seems to expect future incomes to come from new directors and their friends’

donations, grants (to receive a grant the organization should make clear in its application the

mission of the company –in POTC case is far from clear), and a refund of real estate taxes. Not

one of these sources of revenue are stable and they pose several risks on the organization. Despite

all of it, the Board of Directors lacks to control Oscar’s risk-management in a context where

POTC is facing financial troubles.

I hope it helps you to reach a decision.

Luis Rodrigo Ubeda