Balancing the Mission Checkbook

Why board members miss the red flags, part 2

A couple of months ago I posted Why board members miss the red flags to urge board members to pay a little less attention to short term budget information and a lot more attention to cumulative results on the balance sheet. In that post I suggested that red flags are missed when board don’t know where to find them. Continuing with Part 2 on the theme, there are other reasons that are less benign than poorly understood financial reports. Sometimes board members miss the red flags because they really do not want to see them. We’ve seen quite a few situations at nonprofits whose board members, finance committees, and treasurers had accurate financial reports with great big RED flags but they avoided seeing the signals and delayed the questions and actions that were needed.

Last week we read another story about a nonprofit closing suddenly because of their dire financial condition. The YWCA of the Greater Triangle in Raleigh NC closed on Feb 29th. This excellent article in Philanthropy Journal unearths the history of financial problems, missed signals, and several years of inadequate response. I’m alarmed not only by the loss for the community, partners, and staff but also by the abrupt announcement of problems. As the investigative article points out, the financial problems that had been building for at least three years would have been clear with careful reading of financial reports, analysis, or metrics. According to the story,

Community members and the organization’s funding partners did not see the shutdown coming, and the YWCA’s board, while it had begun to worry, was trying to keep the financial troubles under wraps, says Maria Spaulding, a YWCA board member who served as chair until last fall.

The comment that the board “was beginning to worry” stands out for me. Beginning to worry? Were these problems really a surprise to the board, or had they been avoiding the problems with excuses and reactive actions? I don’t know what happened in this case but I have seen critical financial problems where the board looked the other way.

Why? In my experience working with nonprofits at times of crisis, I see a combination of embarrassment and fear of tarnished reputations and reluctance to take on the huge task of dealing with the problems. There may be members who don’t understand the financial information but there are often one or two (or more) who do. While some individual members may raise the right questions, collectively the board skirts the problems and fails to act. The problems rarely go away by themselves.

In the depth of the recession in early 2009 I wrote Improved Nonprofit Decision Making amid Economic Crisis for Nonprofit Quarterly. Whether the crisis is truly sudden, like the six-month free fall in 2008/2009 (or one that festers for years), the board of directors and executive leadership must pay attention to the signals, understand the real information, and take meaningful and timely action. If you are a member of the board of a nonprofit with red flags flying, it may be up to you to grab the reigns until attention is paid. It’s not fun, but nothing less will do.

 

Kate Barr believes that every nonprofit financial question relates to strategy, structure and mission impact. She enjoys interpreting financial information to find stories numbers can tell. She loves writing, teaching, and talking with interesting people.