Balancing the Mission Checkbook

My last post of 2007 is a few suggestions and recommendations for your leisure time review.

Tucked in the Business section of the Saturday, December 22, 2007 New York Times was a wonderful story, Emerald City of Giving Does Exist, about the Twin Cities’ enviable amount of corporate philanthropy and commitment. I hope you don’t miss this in the flurry of the holidays. We may wish there was even more to go around, but we are the envy of many nonprofit leaders in other cities, and I thank the business community for that.I have three books to suggest. First, I recommend that everyone interested in developing great boards read Governance as Leadership: Reframing the Work of Nonprofit Boards by Richard Chait, William Ryan, and Barbara Taylor. This book, published in 2005 by BoardSource, starts with the premise that many boards do not really have a problem of performance, they have a problem of purpose. The book will open your eyes and mind to a new way of thinking about board roles and leadership.

The two other books were published in 2007 and offer interesting ideas and thinking on important nonprofit management topics. I’m still reading both of them, so my reviews will wait for another time. Forces for Good: The Six Practices of High Impact Nonprofits by Leslie Crutchfield and Heather McLeod Grant offers an analysis of twelve organizations that the authors selected based on their impact, reputation, and scale. One important finding was that the high impact nonprofits achieved this impact not only through their direct services, but also by deliberately rallying others to the bigger cause through networks.

ROI For Nonprofits: The New Key to Sustainability by Tom Ralser (published by Wiley) offers a detailed study of how to translate the work of nonprofits into the increasingly important frame of venture capital and business. Whatever your personal opinion of this trend, it is here now and it’s worth your while to understand it.

Finally, a few favorite blogs to read next year:

• Mission-Based Management: Smart, interesting, and useful management perspective
• Gift Hub: Incredibly timely and interesting references, links, and thoughts on philanthropy
• Stanford Social Innovation Review: In-depth analysis and ideas, requires some time to read and consider.
• Nonprofit Technology Blog: Even if you’re not a tech person, we all need to pay attention to trends and new uses.
• Nonprofit Accounting Boot Camp: How can I resist a regular blog about nonprofit accounting issues?
• Give & Take from The Chronicle of Philanthropy: The editors read all the blogs and compile interesting posts in one place – a timesaver.

Cheers, and Happy New Year to you all!

Continuing a theme from last week, during this year-end fundraising season I’ve come across quite a few “tips” for donors about how to select charities to support. Universally, every list includes advice to review the portion of expenses devoted to program compared to administration and fundraising. The responsible advisors generally suggest that program expenses represent at least 70% of the dollars. While I wish that we could move away from using this ratio as a primary measure, I agree that program expenses should dominate any budget. I have a problem, though, when the advice goes further and characterizes administrative and fundraising costs as a poor use of resources. This is especially important when, at the same time, we see more and more opinion pieces that demand greater openness and measurement of impact and effectiveness. The Wall Street Journal published one the other day, December 10th. The writer chastises charities for failing to disclose and share information about their financial activities and the impact of their work. She suggests better use of websites, annual reports, and evaluation and measurement systems and reports, all of which I wholeheartedly support. However, these critics need to understand that you can’t have it both ways. If donors and the public want nonprofit organizations to be accountable, transparent, well managed and governed, then we need to spend some money to build and maintain staff and systems to accomplish these important goals – and these costs are administrative costs.

In the same issue of the Wall Street Journal was an accompanying article, “Checking on Charities,” which offers advice about how to evaluate a charity, including the comment “Let’s start with how much the charity spends on its work.” Communication and disclosure activities would not be considered by our accountants to be part of our “work,” so when we build good systems for measuring and communicating impact, then we will spend more on administration, not less. I fear that we could feel a backlash as the expense ratio inches up.

Part of the problem probably lies in definitions. An outside donor likely has his or her own idea or impression of what is considered “administration,” but the actual expense classifications are dictated by FASB (Financial Accounting Standards Board) and IRS rules. Nonprofits Assistance Fund has prepared a short summary of these rules, Overhead Costs. As an example, here are some of the expenses we classify as administrative at Nonprofits Assistance Fund:

• Completing the financial audit and 990
• Organizational communication, including annual report and website
• Planning evaluations
• Consultants to create a system to monitor evaluation results and impact
• Submitting information to the state attorney general, Guidestar, and other watchdog agencies

We are committed to strong infrastructure and greater disclosure and accountability, and our administrative expense percentage has increased as a result. We also do great work in the community. We can certainly do a better job to educate our donors on the value of our administrative costs and how these best practices allow us to do our “real work” most effectively. And I do worry about the impact of the contradictory clamor.

Are you also concerned about this double bind – do you hear more demand for disclosure and information at the same time that administrative costs are criticized?

In the midst of the big fundraising season of the year, I’m wondering about how much nonprofits really want to be open and forthcoming about their financial information. With all the talk about accountability and transparency, I don’t see a lot of evidence of easily available, freely shared financial information from most nonprofits. While I realize that I have a unique (and probably unusual) interest in financial information, I think that it’s important to walk the walk of transparency.

The Panel on the Nonprofit Sector, convened by Independent Sector, just released their report, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations. The report lays out 33 practices “that should be considered by every charitable organization as a guide for strengthening its effectiveness and accountability.” Number seven on the list reads:

A charitable organization should make information about its operations, including its governance, finances, programs and activities, widely available to the public. Charitable organizations also should consider making information available on the methods they use to evaluate the outcomes of their work and sharing the results of those evaluations.

In the longer description of ways to implement this practice, the panel suggests an annual report and using websites to make available information such as the IRS 990 and other financial statements.

I would strongly suggest that nonprofit organizations make the effort to make usable financial information available on their website. The IRS 990 is already a public document, so it seems like the obvious tool for financial disclosure. However, I think we should go past the 990 to share better information, especially since everyone seems to agree that the current version of the IRS 990 is overly complex, confusing, and very difficult to use. A better solution would be having the audited financial statement easily available on the website. Many nonprofits already do this, but most do not. I checked the websites of six organizations in Minnesota that I have supported financially in the last few years. Of these six, one had their audit posted, three had a detailed annual report but no audit or 990, and two had no financial information that I could find. Why not post the audited financial report?

I recommend a look at the financial section from the website of The San Diego Lesbian, Gay, Bisexual, Transgender Community Center. In addition to posting their annual report and audit, The Center devotes a page to describing their financial management commitments and policies what a great a model of financial transparency.