Balancing the Mission Checkbook

How do you know what you don’t know? Someone asked this question last week in a workshop on the topic of board oversight and some high-profile problems. It’s such a great and critical question. There’s been a swirl of conversations in the last week or so about financial problems and governance issues at a number of nonprofits, both local and national. No matter what the details are, questions have been raised in every situation about the board’s role – what did they know, when did they know it, and what did they do? But what’s the first step for the board, since they are relying on reports from the staff and have little or no access to the raw information. Boards that ask for lots of details are accused of micro-managing and not trusting the staff. So how do you know what you don’t know? There has to be a balancing act between accepting reports at face value and asking questions that go beyond the information presented. I think that there’s an art to asking good questions – my favorites generally start with either “Why…?” or “What if…?” (I actually have those two words up on the wall in my office). Speaking last night to a group of people who had recently joined boards of nonprofits, I suggested that asking questions is their primary job. It’s great if they get an answer that makes sense. However, the role of governing requires further action and follow up when the answer doesn’t make sense, or when the answer is “Don’t worry about it,” or “I’ll find out later.” The distinction between hyper-questioning and prudent questioning depends on circumstances, but in every one of these recent governance and financial situations there were some “why” questions that needed to be asked and then carried through.

This complex balancing act between supporting and governing is discussed in the article Why Boards Don’t Govern available from CompassPoint. One point raised in this article is the importance of creating an atmosphere and culture at board meetings that encourages questions and disagreements. I know in financial matters, many board members feel like second-class citizens because they are not the “financial” board members. The fact is that if they have a question, or if something doesn’t make sense, they need to feel free and encouraged to ask the question. It just might be the question to unlocks the truth.

There was no telling what people might find out once they felt free to ask whatever questions they wanted to. (Joseph Heller, Catch 22).

Eight years ago, ACORN, a national grassroots community organizing nonprofit, was the victim of an embezzlement of almost $1 million from an employee who was the brother of the organization’s founder. The fraud was never reported to their board of directors or legal authorities, but a small internal group negotiated a restitution agreement and then kept the perpetrator on staff. The situation just became public after pressure from a whistle-blower and was reported this week in The New York Times. Quoted in the article, ACORN’s president said, “We thought it best at the time to protect the organization, as well as to get the funds back into the organization, to deal with it in-house.”

Can we make a list of the problems with this scenario? Among other reactions, I want to thank the whistle-blower, though I would like to know why it took eight years for anyone to think this was not OK. Yesterday, ACORN released a statement from the president apologizing for their handling of the situation and announcing that the founder (brother of the embezzler) had stepped down. The most alarming phrase in the statement is that “The ACORN Board recently learned …” How comfortable would you be if you sat on that board – with fiduciary responsibility – and learned that you had been sitting for years on this ethical powder keg?

The statement says, “We want to assure our many friends and supporters that ACORN’s Board has taken additional steps to ensure increased transparency and accountability” (emphasis mine). It seems to me that they need to start with basic transparency and accountability. They can start with a basic accountability overview from Independent Sector.

There is a lesson here for every nonprofit organization. Public trust really is the most important asset for each individual nonprofit and for the whole sector. It’s too easy to mess it up, which is why we all get asked to answer questions and fill out forms and certifications by donors, foundations, the IRS, state Attorney General, etc, etc, etc. As long as these kind of egregious situations occur, and especially when they are mishandled, nonprofits will be subject to deeper scrutiny and misgivings about trustworthiness.

When economic times get stressed, as they are now, nonprofit organizations are often urged to consider mergers or other collaborative structures as a strategy to navigate reductions and shifts in funding. The topic came up again at a meeting last week titled “The State We’re In: Fulfilling Human Service Needs in a Time of Economic Uncertainty.” Scott Russell at MinnPost.com wrote a good summary of the tone and comments of the meeting, Nonprofits hear a gloomy forecast about future funding. With financial pressures from all sides, coupled with increased demand for services stemming from employment and housing problems, many nonprofits will be hard pressed to keep up the juggling.

No one would say that mergers are the right answer for every nonprofit, but if you do think that joining forces would make sense and help your organization maintain stable services, where do you find your mate? All of the articles and books I’ve read discuss the importance of finding the right fit with leadership that can work together, board buy-in, and mission alignment. But where do you find them? What happens when the board chair or director of a small nonprofit calls the CEO of a large, established agency to inquire about a potential merger? Do they invite you over for coffee? Do they even return the call?

I think I’ve found the answer – speed dating for nonprofits! Speed dating is an organized event to help singles meet a number of people in one evening with the intent of finding one or two for an actual date. Speed dating for nonprofits would follow the formula. Nonprofit leaders, from large, medium, and small organizations, would be scheduled for a series of 5 to 8 minute conversations about mission, programs, and goals. A bell would indicate time to move on to the next “date.” No commitments or promises are made. At the end of the event everyone indicates on the list which of the nonprofits they would like to talk with further. It’s efficient and direct.

On the other hand, if you’d rather proceed with more control and confidentiality, there are a number of resources available. A short study published in 2004 by a collaborative of Milwaukee funders, Nonprofit Collaborations and Mergers: Finding the Right Fit, lists these key characteristics of successful partnerships: committed leadership, unambiguous goals, clearly defined roles, commitment at multiple levels of the organization, dedicated staff time, and sustainability in the midst of change. Fieldstone Alliance has two workbooks by David La Piana on nonprofit mergers. For hands on assistance, Project ReDesign is a new service from MAP for Nonprofits to assist with any part of considering, planning, and carrying out a merger.

The theme for the Carnival of Nonprofit Consultants this week is “What one thing should we do to improve the state of the sector?” My nomination is to declare 2008 the year that the program service-administrative cost ratio formula became irrelevant. Yes, the good old 70%-30% ratio has been declared officially useless in identifying whether or not a nonprofit organization is effective in accomplishing its mission and helping the community. Most readers of these blogs have probably been beating their heads against the wall about this anyway. I read a lot of research reports and I have never read one that demonstrated that the expense ratio is a clear indicator of the quality of programs or management, or impact on the lives of people. One reason why we continue to chase this argument, though, is because the ratio is prominent, well known, and easily calculated. We need a two-step retirement plan. First is to jointly stop using the ratio as a way to distinguish our organizations from others, in an unhealthy type of competition, as in “our administrative ratio only is 5%, so your donated dollar will go farther with us.” The second is to find a better way to convey the quality and effectiveness of the work that you do, which requires a real method of evaluating and communicating the programs and impact on clients. So don’t be irrelevant – join the movement.

Since I am supposedly an expert in nonprofit financial matters, I shouldn’t be surprised that I am frequently invited to join nonprofit boards. I am surprised, though, when I’m recruited for the board of a nonprofit that I have no knowledge of, with no past relationship, and in a field of service in which I’ve never shown a particular interest. What do they think I will bring to this board? The honest answer is that I will be able to read their financial statements. I agree that financial oversight is an essential board role, and one that boards do not always perform well. For evidence of that, just read any of the recent stories about fraud, misuse of funds or insider transactions. I also know that it’s challenging to recruit board members who understand financial reports, budgets, cash flow, and audits. But is a specific skill – financial knowledge – enough of a reason by itself to invite someone to join the board? As the invitee, I would say no. I have some questions that I ask when I’m recruited for a board. First, of course, is whether I believe that the work the organization does, and how they go about it, is exciting and important to me. I’ve been asked to serve on boards of social service, health care, performing arts, literary arts, visual arts, community development, faith-based, education, and youth service nonprofits. I care deeply about some of these issues and not so much about others. Uninterested board members are often unengaged board members. My next question is, “why me?” The fact that I can read and understand financial reports is not a good enough answer.

The starting point of board recruiting needs to be a broader understanding of what kind of governance and leadership the organization needs, and how the board as a whole and as individual members can deliver on those needs. A common tool for board recruitment is a matrix that lists the skills and other attributes that are needed on the board on one side and current board members across the top. Fill in the boxes and, voila, you see the holes that need to be filled. Too often, though, this results in a board from central casting – an attorney, a CPA or banker, a business person with a marketing background, someone who (it is hoped) has access to potential donors, and then one or two people with long histories with the organization. All of these board members have skills and abilities but don’t always add up to become a great governance and leadership board. How can you get the board you need? First, open your mind beyond technical skills about what you need from individual board members. I’ve seen grids that list not only the specific skills like marketing, fundraising, financial, etc. but also personal qualities like “boat rocker” and “challenges status quo”. The list of skills and attributes needs to change over time, too, and project into the future – aligned with the strategic plan – what the organization will need to get it where it wants to go. I think that this enhanced grid can start to get closer to the broader needs. Second, think about the board as a group, not as a collection of individuals. Think about what styles, attributes, and skills will work together to create the best board team. Third, consider how you actually develop a list of nominees. Too often, a spontaneous and short brainstorming session evolves into a definitive list. The board, or a nominating committee, thinks of names of people they know of – off the top of their heads – and that becomes the list. I think that this is where my name tends to come up. Better to take some time to research and find people who will be the best match with the organization’s work, the skills and leadership attributes needed, and the dynamics of the group. Ideally this is an ongoing process so that you always have a list of potential board candidates. While this post is on the topic of recruiting new board members, many of the same ideas can apply to sitting board members through an assessment process. I have found some very practical and concise thoughts about board assessments on the Starboard blog by Jeff Wahlstrom like this excerpt from a recent entry - Board member, assess thyself.

• Do I know what is expected of me?
• Do I have what it takes?
• Do I have the necessary tools, information and instruction to succeed?
• Is what I’m doing on the board making a meaningful difference?
• Is there an opportunity here to make better use of my abilities/skills/experience/knowledge?
• Am I enjoying the experience of serving on the board?
• What would make my board experience even better?
• And (most importantly) what goals should I set for myself and my board experience?

Instead of New Year’s resolutions, my first entry for 2007 is a list of ten common mistakes (with comments) that nonprofits make in managing their financial life. This list is excerpted from a terrific paper submitted by one of my students, Nick Eoloff, in a Financial Management for Nonprofits class at Hamline University. I thank Nick for giving me permission to share his paper.

Ten Mistakes Nonprofits Make in Financial Management:

1. All your eggs in one basket – Pay attention to your reliance on any particular source of revenue, in particular government contracts.
2. Cash flow analysis done annually – You can’t know everything at the beginning of the year. Management cash flow never stops.
3. Financials that are opaque – Nonprofit financial reports can be complex and difficult but that’s not an excuse for board members that don’t understand them or poor communication about your financial situation.
4. Inflexible – Things always change – go with it.
5. Little to no overhead – Some organizations still believe that infrastructure and overhead are not a good use of resources. This decision never turns out well.
6. Low operating reserves – Everyone wants to have operating reserves but the only way to build them to by planning and managing surplus budgets.
7. Never leverage – Using loans and credit lines to build the organization and grab opportunities is smart management.
8. No long term plan – Strategic plans are great, but how much better if they include a basic financial plan for three or five years.
9. Preparing financial projections, but never reading them – See above.
10. The auditor’s notes don’t mean much – Make sure you read all the pages of your audit report. I know they don’t look interesting, but you’ll be surprised at how informative they are.

For a complete copy of Nick Eoloff’s paper with more description and references, click here. Use this list as the start of your New Year’s resolutions for better financial management.