Balancing the Mission Checkbook

It’s not a surprise that I talk to a lot of nonprofits about the current economic environment. We’re all looking for any insight, advice, and guidance. Recently, I’ve been paraphrasing one of my favorite leadership quotes because it fits the moment perfectly - the Stockdale Paradox.  To paraphrase:

You must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be.

Vice Admiral James Stockdale was a prisoner of war in Vietnam for seven years. When asked by Jim Collins, author of Good to Great, how he survived, he described balancing hope and realism. Stockdale said that the optimists didn’t survive capture because they told themselves that release was right around the corner and they died “of a broken heart.”

What nonprofits can learn from this philosophy is to maintain the conviction that their work in the community is essential, vital, and will be valued. Carry this passion with you in advocacy, fundraising, and communications as you tell your story and share the impact. At the same time, confront the brutal facts of economic downturn and budget cuts by being disciplined about financial information, contingency budgets (with multiple scenarios) and cautious use of reserves. I’m afraid that the optimists who approach next year with an upbeat attitude that funding will arrive “because it just has to” will be the ones that fail. The survivors will commit to and believe in their mission and be realistic in their decisions.

This is also a good time to leverage the networks in which your organization operates. Nonprofits work together in many ways, and will be called upon to increase network activities for both mission and financial reasons. At the Minnesota Council of Nonprofits’ Nonprofit Fundraising and Economic Outlook forum this morning several organizations shared their experience working with peers and community to navigate the downturn. MCN also released the Nonprofit Current Conditions Report based on a survey conducted just this month. This report gives us some real time information about the immediacy of the impact of this recession on nonprofits and their clients. All of this information, research, and peer conversations will be important - and remember to be confident, hopeful, and honest.

Nonprofit board members are asking what they should do - specifically to help organizations navigate the economic mess. BoardSource recently published Facing the Financial Crisis: 10 Smart Things Your Board Can Do Now. The article offers a solid, strategic perspective for boards. I have some supplemental words of advice for each individual board members - three steps for board members to consider in a downturn.

1. Step out

Step out of the familiar and comfortable role of supporter and cheerleader.

Now is the time to ask important questions about impact, effectiveness, and entrenched practices. Board members can often bring the outside viewpoint required to ask the right “why” and “what if” questions.

Some of the most important questions to ask right now are about budget assumptions. Any significant revenue number in the budget needs to have a good plan and rationale, not a wish and a prayer

2. Step back

Step back and let the staff do their work.

I have seen boards get carried away generating ideas for new reports, analysis, and research without considering how much time it would take the director and staff to complete the work required to follow through on the ideas. The board chair is the moderator of this balancing act, making sure that every new task suggested by the board is weighed against other priorities and internal capacity.

I urge particular caution for board members who suggest that the nonprofit start a new way of raising funds. If you’ve never hosted a fundraising event, or carried out a significant individual donor campaign, this might not be the time to divert staff time and effort. Remember that each type of income is essentially a new business.

3. Step off

Step off of the board if you do not have the time or energy to work hard for the next two years.

This is not going to be easy and nonprofits need to have the right people on the board. It’s nothing personal, but it’s a good time to ask yourself if you can commit to this organization.

The New York Times published an article this week about the Gilmanton New Hampshire Year-Round Library Association and their efforts to raise money for operating costs. Led by dedicated and committed volunteers, a facility has been built by moving and refurbishing an 18th century barn, but no funds are in hand to open the doors. The article reports that they are “looking for someone who will provide at least $1 million for a private endowment” to support the ongoing operating costs. Wouldn’t every nonprofit like to “find” someone who will donate $1 million! This is a case for Mythbusters - Nonprofit Finance Edition.

There are no magic donors. In the article, one of the volunteers hopes that “Maybe someone out there has had a dear loved one that’s passed away, or a child or parent they’ve given everything possible to, and this would be a special new gift.” I don’t mean to pick on the volunteers for their effort. And I certainly love the picture of the barn/library, having grown up in New England with a lot of time spent in a picturesque, cozy library. I hear that kind of wishful thinking elsewhere, though, and am concerned that the myth of the elusive, secret donor is dangerous. Hoping and waiting for One Big Gift that solves everything might just be an excuse not to do the hard work of fundraising. Now, as always, fundraising involves identifying those who care about the cause, building relationships, making the case, and demonstrating responsibility - step by step.  I recommend this recent blog post from PhilanTopic that smartly translates the core principles of donor cultivation and planning into useful advice for today.

If you’re like me, you’re reading a lot of reports, surveys, and advice right now looking for useful data and direction. To help you cull through this material, Nonprofit Assistance Fund has launched a new blog, Nonprofit Harvest.  Our goal is not to post every available resource, but to consistently provide useful content that will help nonprofits.  I encourage you to read the blog, share resources you have found helpful, and offer your own suggestions for how nonprofits can navigate this challenging economy.

Earlier this year, I proposed Accountability Lesson Number 1: Questions Must Be Asked to encourage directors of nonprofits to overcome their hesitancy to ask questions. In particular, when financial or governance issues are unclear or incomplete, they should continue to pose questions until they get answers. In some ways, asking questions is one of a board member’s primary jobs. What comes next, though, after the questions are answered?

Next lesson: Action must be taken. One of the most interesting dynamics in nonprofits is the relationship and shared authority of executive directors/CEOs and their board of directors. We could debate infinitely the question of who is really in charge. In day to day life, most nonprofits find a way to make it work if they have assembled and hired the right people, agree on roles, and know how to share and use information. There are times, though, when the board needs to assert its real and legitimate authority to make a big decision - to take action in the face of urgent needs for the nonprofit and its mission. In Lesson Number 1, I said that asking questions is one of the board member’s most important roles. I will state here that I think the primary role for board members, especially board chairs, is to know when they need to take action, and then to do it. I think this is an urgent issue right now because I have often seen the sometime dire consequences of reluctant, slow decisions. Too often, board members who have been expected to be good supporters and cheerleaders can’t seem to change gears and be the leaders they need to be. If the board’s practice has been to ask for more information and then defer decisions to the next meeting, and then the next, then real problems can grow while the options shrink.

The need to step up and take action is always applicable, but it seems to be more urgent right now. If income sources are less reliable, or costs are harder to identify and match with impact, then boards simply must ask questions and then follow up with real decisions - and real governance.

What do you think about these Accountability Lessons?  Do you have an example where asking tough questions and then taking action led to positive change? Or do you have lessons learned that may be helpful to others?  I invite you to share your experiences in the comments section.

I’m pretty sure that every nonprofit would love to have enough money that some of the funds can be invested for the future. In the past month, though, nonprofits may have seen their investment portfolios buffeted by the markets. If that wasn’t enough of a concern, this week we read about losses for some local nonprofits from investments related to the Petters Company fraud case. News reports this week in both MinnPost and the Star Tribune describe the negative impact on organizations that may lose millions from investments that were made to provide short-term loans to companies for inventory purchases. As Scott Russell said in the MinnPost article, these cases are “a wake-up call for other nonprofits to review their investment policies and portfolios.”  As an outside observer, it’s easy to say that these investments seem like an unlikely fit for a nonprofit organization, but we don’t know what standards or criteria those boards were using to evaluate and select investments. This is a good time, though, to review some fundamental guidelines for investments by nonprofits.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.

I’ve been looking for something positive to write about following last week’s downer message about the economy. The best I can offer today is the suggestion that you consider approaching the current uncertain environment as if your nonprofit were in a turnaround mode. Turnarounds make great case stories after the fact - when the organization is revitalized and builds a new reputation for connections with the community, strong leadership, and financial health.  Who wouldn’t want all that? So why wait until things are bad?

Brandeis University Press has just published The Art of the Turnaround: Creating and Maintaining Healthy Arts Organizations by Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts in Washington DC. While the book’s title and cases are from the arts, the advice and lessons are relevant to nonprofits in social services, community development, or any other field.

A short excerpt from the book is available from The Chronicle of Philanthropy. Kaiser offers ten basic rules for every turnaround:

1. Someone must lead
2. The leader must have a plan
3. You cannot save your way to health
4. Focus on today and tomorrow, not yesterday
5. Extend your programming planning calendar
6. Marketing is more than brochures and advertisements
7. There must be only one spokesperson, and the message must be positive
8. Fundraising must focus on the larger donor, but don’t aim too high
9. The board must allow itself to be restructured
10. The organization must have the discipline to follow each of these rules

Read this excerpt and find out which turnaround steps can help your organization through this difficult and uncertain period. We’ll call it preemptive turnaround.