As a consultant to nonprofits in situations of instability or turnaround, I have spent considerable time studying precisely how and at what point nonprofits begin to get in trouble. I have backtracked the specific history of several nonprofit case studies to identify where a wrong turn was taken. In most such cases, it was a board decision—quiet acquiescence or approval of a strategic direction that was not sufficiently challenged. Board members would likely not take such chances in their own enterprises.
A few examples:
- Business leaders know that their operating budgets must include building a surplus to cover technology replacement/enhancement and building repairs and maintenance. Very few nonprofit boards insist on this or even ask, “How much should be we building in reserves?” Few nonprofit board members would insist a current expense be cut to allow for the building of reserves for the nonprofit, but they would in their own companies.
- Business leaders also know evidence-based decision making rules the day. “What proof do we have this might work?” Back home, they are not swayed by passion and great creative ideas alone; they ask for best practices. “What are others doing in this field?” “Who else can we talk to?” They seek information to mitigate risk. In their nonprofit leadership role, many go along with the recommendation of an ardent Executive Director, figuring, “Well, it must be okay or others would be asking the questions.” If it was their own company or their own money in play, you better believe they would be asking questions and have their ears perked up for possible risk. I have encountered nonprofit boards that have approved an ill-conceived strategy because they think it would be fun or fulfilling for the executive director to work on as some kind of reward.
Chasing Rabbits Down Rabbit Holes
Board members well know the cost of delaying or revisiting decisions in their own professions. Yet in the nonprofit board role, this happens far too often. Decisions made get re-opened repeatedly—by a board member who was absent for several meetings, or a staff person who really doesn’t like the decision, or a new board chair—because the board doesn’t recall this decision is “done and done.” In their business lives, this would be recognized as a distraction, a waste of time and energy and resources constantly chasing rabbits down holes instead of making an informed decision and implementing it. Time really is money, for nonprofit organizations as well as corporations.
Drinking the Kool-Aid
In their own shops, board members have a balanced view of their executives and direct reports. They know their “rock stars” have weaknesses that have to be accommodated, worked around, or developed. But in their nonprofit role, where a primary part is managing the executive director, many don’t. They are often under the same spell they hear from others:
“You are so lucky to have her.”
“She is a godsend.”
“I hope you never lose him.”
“Can’t imagine this place without him.”
The executive director should be the well-respected face of the organization to the community, but the true, balanced picture of their performance must be known to the governing board. No one is perfect. In the “Dare to Lead” survey of nonprofit executive directors in 2011, 45 percent of nonprofit executive directors did not have a performance evaluation. (“Daring to Lead,” 2011, CompassPoint and the Meyer Foundation)
Some board members are so aware of the extreme stress and long hours on staff that they feel unqualified gratitude for the ED. Would that happen in their own businesses—unconditional love? No way. In some respects, it is also a bit patronizing. Board members might believe that “no one else could do this” or would do this for so little money. If that is true, it’s a disservice to the organization and the incumbent ED not to be paying them market rate for the position. But it’s possible that it is not true, and the organization should never feel so beholden or held so hostage that they don’t acknowledge performance issues. I have frequently seen organizations where the board members, once in crisis, say, “We asked him/her over and over again for information on this, but never got it.” How is that possible? The board is the boss. If the board asked for information and didn’t get it, what was the recourse, the consequence of nonresponse?
At their own companies, no superstar is perfect. They are evaluated on results and the process for getting those results; their strengths and weaknesses are known. Not so with nonprofit leaders! Sometimes adulation rules the board about the exec director: We are so lucky to have her! Best in the city! That may be, but what are the weak points that have to be acknowledged so they can be balanced against what the organization requires? Is she great with state legislators but lousy with staff relations? Is she great on fundraising but not so good at budgeting and fiscal management? Is he a nationally renowned practitioner or artist but less skilled as an administrator? The bloom is not off the rose, but it can’t be unconditional love because that is magical thinking. No one is perfect. You can’t salute every idea because it is coming from this ED’s mouth. Some of those ideas should be challenged and sent back for further information, research, and proof of life.
Believing Your Own Press
I have heard board members, once they have the “facts, ma’am; just the facts” in hand from our business assessment, cry in dismay, “But we do such good work! People love us.” At one theater performance, though the seats were scarcely one-third full, those present exclaimed how excellent the production was and how this was their favorite night out—“so much more affordable than the uptown theaters.” Other board members have quoted other service recipients or endorsements on their brochures as the justification for hanging on despite near-bankruptcy conditions. It reminds me of a presentation I once made to a very large audience in Tucson, Arizona. Hundreds were in the audience as I waited to go on. I heard my introduction being ably read by the Chair of the conference where I was speaking. He was listing my accomplishments and my head was swelling. I actually had the thought, “You know, I have done pretty well for myself in a short time,” when I had the startling realization: “Wait a minute, I wrote that introduction!” Believing your own press release is the sign you have clearly lost objectivity in evaluating your own organization and performance.
How Nonprofit staff Contributes to the Problem
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We in the nonprofit sector contribute greatly to the numbing down of board members. We emphasize in board orientations that nonprofit corporations are greatly different from for-profit concerns. The reality that we have to make our budget up from scratch every year often perplexes board members. They don’t have experience with having no starting point; a corporate annual budget usually starts with some allotment based on previous years and then percentages are negotiated with the corporate head office. For nonprofits, the annual budget must start with assumptions about revenue sources: what can be counted on and what is in jeopardy. County funding, large donor, major sponsor leaving town—all are closely followed by nonprofit staff.
“If X, then Y” thinking is how most nonprofit budgets are put together. Often, nonprofit annual operating budgets must be put together and approved by boards before the final budgets from government, grantors, or campaign totals have final approval, so these revenues are just estimates. However, there should be solid rationales and precedents for those assumptions. Because most board members don’t have this same experience, they rely on staff to tell them the operating budget and they leave the assumptions unchallenged or don’t ask, “What’s the basis for this revenue assumption?” What they hear from staff is different versions of “That’s not how it works in nonprofits,” “That’s not how we do it,” “We never have the money to do that,” and so on.
Board members encounter what often seems ludicrous to them but has grown to be expected by staff, such as government mandates without funding—extra reporting demands with no funding for personnel to prepare those reports; extraordinary increase in services needed but no extra funding; county and state arbitrary cuts in service that force increased demand for services to the door of nonprofits. Since none of that makes sense, they begin to think the whole business model seems illogical based on their experience and therefore they can offer no wisdom or objectivity to strengthen the business of the nonprofit.
Hope becomes the strategy of staff and boards because once upon a time, it worked. Before the most recent recession, in many communities if a nonprofit encountered a financial snare, a couple of community leaders made a phone call or two and “fixed it” with influence and getting large donations to cover the situation. That often doesn’t work anymore. Corporate and foundation coffers are tighter, with more explicit criteria and approval layers required for commitments.
Avoiding Magical Thinking
Deification of Staff
Realism and objectivity blunt magical thinking and can be the greatest contributions made by a board. Boards should have a realistic, albeit deservingly admiring, view of the nonprofit’s executive director and senior staff. Just as they do in their own business, they should know the skills and deficits of the team, the likelihood of turnover, the areas needing balance and oversight from the board, and what skills and characteristics need to be developed and hired for the leadership of the organization. Boards don’t need to micromanage hiring below the executive director level, but they should be alert to an ED hiring “in his own image” when what might be most needed is a complementary skill or expertise.
Board members are also expected to be aware of market salaries and benefits, per the 990 tax return, so that an ED paying a director much more than the market can be questioned, if not challenged, about the value of that decision. I have seen nonprofits that were unaware of the salary levels of direct reports to the ED, including one troubled organization with a program director making as much as the ED—and that salary was $15,000 above market for the position. The board should know that and know the rationale for it. There might be a good one, but it is inexcusable for the board not to know.
The best nonprofit leaders share their own assessment each year with a board committee, including what they want and need to develop to be more effective in the coming year. They do not hide areas for improvement about their own performance or the organization. They are secure enough with a trusted group of board members to be able to share, “My strengths are not in general operations maintenance; I am better at fundraising and relationship management. When we can afford it, let’s consider adding an office manager.” The board creates an environment where this is a safe conversation, not one that an ED has to be fearful of and never share in order to protect their job.
Working for a nonprofit doesn’t make an executive director a saint without flaw. They might well be an extraordinary leader, much admired by board, staff, clients and community, but it’s important that the organization takes priority over any one person. My firm increasingly runs into organizations that are at risk because one staff person—sometimes the ED, often the program or artistic director—is given more devotion than the organization. The regional or national recognition of such a staff person is valuable but does not trump the mission of the organization, and the organization cannot be designed around that person. Too often, we see organizational structure created to accommodate this, or performance expectations avoided because the person is so highly regarded externally. If there is any one person who everyone walks on eggshells around, that is an organizational risk and needs to be acknowledged and a plan created for the good of the organization. Nonprofits are not family or vanity businesses. Board members can often see this more objectively than the staff, who are in awe of the person’s respect in their field.
In their own businesses, board members know that the flip side of any strength is a potential weakness. If the nonprofit’s executive leader is a distinguishing strength, that can be a potential weakness if there is turnover, and the board should be alert and attending to that proactively. Heads in the sand don’t prevent a rock star ED from leaving, which is almost always to the surprise of a board that thought, “I thought she loved this, I thought this was her life!” Could be true, but also be why an exhausted, burned-out exec decides to leave.
Assume Responsibility for the Financial Performance of the Organization (because you are!)
I often ask nonprofit board members to imagine they were asking family members for a loan to fund this nonprofit. How convincing could they be? Would they ask their family to support it? This will often immediately clarify for them that the nonprofit is not a business model in which they have personal confidence. They need to know they are just as responsible as if they were managing a small business and ask questions to understand and ensure there is evidence and facts upon which to make sound decisions. It is very appropriate for board members to ask for fact-based justification, proof of life, and the basis for assumptions. Explanations such as, “Well, we had 1000 attend our free weekend, so if each of them paid $10 that would bring in $10,000!” are naïve, not fact-based justifications.
Cash forecasts must be based on reality, not hope or implied promises. In business, we are asked, “How confident are you? One hundred percent? Ninety percent?” The same question is useful to approving nonprofit operating budgets and revenue assumptions. What is guaranteed? Highly likely? Purely speculative? And at what point in the year will you have to know for certain in order to make this forecasted budget?
Create Time and Forums for Benchmarking and Assessment
In order to gauge discussions of progress, boards and staffs should be working on the same set of critical issues and indicators. Create a performance dashboard with interim benchmarks so the board doesn’t wait until end of year for a pass/fail grade. Build in enough time for board discussions, in committees as well as board retreats, so the hard questions can come to mind and get articulated and discussed. Asking if there is any old or new business ten minutes after the monthly meeting is supposed to adjourn doesn’t cut it.
In summary, the environment is still tough for many nonprofits, and nonprofit board members must remember that governing is serious, consequence-filled work. It is important for them to understand that a decision not made or made without sufficient grounding is as important as a decision made well. They likely know that in their own places of work, and the same applies here in nonprofitland.
Boards should be passionate about the mission but never be so mired in admiration and awed by the awesome that they neglect the practical considerations that help an organization survive and thrive in up-and-down economies. The vision of the organization mission might be lofty and entail risk, but the details to be measured are nitty-gritty. The mission of service is too important to be left to part-time, magical thinking.
“If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.”—Henry David Thoreau