As trustees of tax-exempt corporations, nonprofit board members hold their organizations’ assets in trust for the community and are expected to ensure their wise use. Of all the challenges boards face, this one seems easy to get right. Financial management is a well-developed, standardized discipline, familiar to many board members from their jobs. And there are high stakes—the fear of insolvency, theft or public squandering—to motivate board members to get serious. Yet things often do go wrong, in part because ensuring the wise use of an organization’s assets is not just about balancing the books and preventing theft: it means using financial information as a tool for improving the organization’s performance. Boards need to think about all these aspects of financial responsibility and develop the tools to meet them.
The board’s first and most basic obligation is to prevent financial malfeasance, which requires both systems and judgment. Neither one is enough on its own. Strong financial systems—with regular, thorough financial reports and sound controls (e.g., requiring two signatures on large checks, or board approval for especially big expenditures)—provide the foundation for protecting the organization’s assets. But board members need to bring their judgment and vigilance to bear on those systems. This means being alert for and willing to question reports that you don’t understand, as well as questioning financial systems in which you’re not confident. Most nonprofit financial scandals and catastrophes take place in organizations that have plenty of systems, but not enough vigilant, tough board members willing to raise questions. Conversely, letting systems wither while trusting to the board’s sharp nose for possible irregularities is foolhardy—and useless—if the board wants to move from preventing abuse to promoting wise financial strategies.
To move from safeguarding resources to really ensuring that financial strategies support the organization’s mission, a board needs to integrate financial information into its decisions.
It’s tempting to leave a function like cost-accounting in the back office, as something for bookkeepers to tidy up, but boards can use such financial information to inform fundamental questions of mission and strategy.
Consider an organization that is weighing whether to compete for a government contract to deliver services. It might be enough to be assured that the bid offered by the nonprofit will cover its costs, but an effective board will want to know more. Have we really accounted for the full cost of doing right by our clients? Or are we simply being cost-competitive? If we know from our cost accounting information that the government contract will not cover the true cost of the service, are we going to subsidize the gap from other sources? If we don’t challenge the government on its cost guidelines, are we complicit with the public funder in under-funding vital services to needy populations? It’s difficult to formulate, much less answer, these questions without good financial information. It can help the organization remain solvent by avoiding underbidding and help it remain true to its mission by ensuring that clients’ interests are not compromised.
The final challenge—for boards that have good systems and judgment for safeguarding assets and that know how to inform questions of strategy and mission with financial information—is to remember that finances aren’t everything. Precisely because financial management seems to offer clarity, and may be familiar to boards, there’s a risk that board members will retreat into financial issues, paying less attention to other aspects of performance.
It’s important to remember that most financial information is both retrospective and fairly crude. It tells you how you did last quarter, or year, and doesn’t tell you why you did well, or how you might do better in delivering on your mission. Meeting budget targets doesn’t mean you’ve delivered the best possible services, or protected staff from burn-out, or been responsive to community or client needs, or taken advantage of the best available knowledge or practice in your field. There’s danger in overusing financial information, just as there is in neglecting it.
William P. Ryan is a consultant to foundations and nonprofits and a fellow at the Hauser Center for Nonprofit Organizations at Harvard University. His consulting and research focus on nonprofit organizational capacity. He is co-author of High Performance Nonprofit Organizations: Managing Upstream for Greater Impact (Wiley, 1998).