Editors’ note: This article, which we ran in the fall/winter edition of the Nonprofit Quarterly in 2013, was posted to this site on December 19, 2013. It was adapted from “Board/Staff Relationships in a Growth Crisis: Implications for Nonprofit Governance,” which itself was originally published online on March 7, 2011, by the Nonprofit and Voluntary Sector Quarterly and subsequently released in NVSQ’s print publication in 2012.1 The authors appreciate Peter Roberts’s extensive editing support for this article.
This article looks at the ways in which board/staff relationships played out in four small cultural organizations—two museums and two performing arts companies—as each passed through three distinct phases of a growth/financial crisis. This research may inform nonprofit boards and managers in a couple of ways:
- It identifies patterns of board response around a crisis that may help in understanding and negotiating similar situations;
- It describes how trust and distrust play roles that are individually destructive but when combined are healthy and productive.
Our first contact with the four organizations occurred when we were contracted as consultants by government funding agencies that had been asked by all four for “bail-out” grants. This provided an opportunity to engage with the four organizations in this community-academic research project. The research included a questionnaire; organizational documents (grant applications, audited reports, strategic plans, and task descriptions); forty interviews—some open-ended and some focused—with key players; and participation in thirty-four meetings, all told. This research opportunity was quite exceptional considering that organizations in a sensitive crisis tend toward confidentiality, that we had access to a wide cross section of organizational players, and that the study continued over several years.
There were no government representatives on any of the four boards, and organizational membership in three of the four cases was limited to board members. While this may be common in nonprofits of this size, it constrains external monitoring of the board’s governance. For all of the organizations, federal, provincial, and municipal governments were significant providers of operating and infrastructure funding. The organizations were located in small communities in a region without a culture of philanthropy. Private philanthropic support was minimal, and non-governmental income was from corporate sponsorship or from earned income.
The Crises—In Brief
Each of the four organizations had responded to positive external recognition by making financially risky decisions to grow, entailing new or additional physical facilities or evolved programming. When increased expenses were not matched by self-generated revenues, staff did not preview cash-flow crises with the board. Instead, anxious external creditors were the whistleblowers. Audited statements prepared for members’ annual general meetings and reports to government funders were only available at year end, providing retrospective financial information well after the crisis had happened. Government funders declined an increase in their support.
The Three Crisis Phases
Four features appeared across all cases: high artistic quality and reputation, limited financial management, the CEO’s charismatic management style, and various styles of board engagement. Similarly, three phases of the crisis rolled out in each case: before the storm, the crisis trigger, and continued survival.
Before the storm. The organizations’ artistic successes were recognized outside the organization by peers, the public, and funders, providing a halo effect on the board’s perception of the CEO. The typical board/staff dynamic was highly trusting and influenced by the CEO’s charisma and significant psychological power, with “rubber stamp” governance behavior by the board. Board members were disengaged from active, collaborative, and more informed partnership with staff, but were very proud of their association with the organization. Risk assessment of expansion scenarios was hampered by management’s overly optimistic revenue projections, or deferred when financial information was unavailable. Under-resourced or neglected administrative functions limited the information available. In each case, the crisis was triggered by outside stakeholders—private creditors, banks, and suppliers—who were directly sensitive to organizational cash-flow and sustainability issues.
Artistically charismatic executives appear to have used positive press reports to convince boards to undertake projects without having to account financially for their recommendations. Boards passively supported these decisions because there was a lack of information about issues relevant to financial stakeholders. In addition, the organizations had easily obtained operational government funding early in their lives, and they seemed to lack an outside-oriented perspective that the presence of more extensive private fundraising might have brought.
The crisis trigger. This phase was precipitated by legal actions of external creditors who demanded loan repayment or settlement of unpaid bills, or who froze credit. In response to this threat to economic survival, board members snapped into action. They bypassed executive leadership and assumed control, negotiating directly with external stakeholders, seeking temporary extensions with suppliers, additional credit from banks and private lenders, and emergency grants from funders. As board members became preoccupied with financial procedures and efficiency, the CEO’s actions and decisions were challenged. The board’s former confidence and blind trust in the CEO’s competence abruptly changed to distrust. Decisional power shifted from the CEO to the board. Two CEOs were removed, and three board chairs resigned. In the fourth case, the government funder stipulated the addition of external board members to increase monitoring capability. In this phase, governance activity shifted to close oversight, emphasizing an active and engaged board that controlled and distrusted the CEO, reflecting the board’s significant lack of collaboration with the CEO.
However, after the immediate shock of the crisis, it seemed unsustainable to continue the intense level of involvement that the board needed to maintain its preeminent position within the organization and to control its relationship with the outside environment. The organizations entered the third phase of crisis.
Continued survival. This phase was characterized by the organizations’ adjustment to a more balanced and stable operation within constrained circumstances. In this context, the same or new players as board chair and CEO developed relationships, and trust grew; however, distrust did not completely disappear. Craving efficiency, both the board and the CEO sought to establish a more mature and collaborative relationship. Power appeared to be shared more equitably, with an expectation of checks and balances. Transparency became value