Governance


Upon joining the non-profit sector, a number of people opined to me that they are happy I’ve decided to dedicate my time and effort towards strengthening the sector’s work. In fact, one of the sound bites I kept hearing is that non-profits – despite their inability to sell equity (and thus raise money through either private investors or the larger public capital market) or the lack of an agreed upon “profit” metric for measuring organizational success – need to behave more like for-profit businesses. So, listen up my fellow non-profit professionals, I’m going to impart some words of wisdom I learned from my days working in the for-profit world (at institutions such as Freddie Mac, UBS Investment Bank, and others).

We need larger pay packages to attract and retain qualified professionals. In order to create the type of fast thinking, innovative companies such as AIG, Bear Stearns, Enron, Tyco and others, we need to increase our compensation packages. Currently, this kind of fast-thinking/innovative executive talent retails for approximately $10.5 million, or roughly 344 times the average worker’s salary ($30,700). Since the average executive director of Southwestern Pennsylvania only makes a mere $96,110, or 3.6 times the average worker’s salary – that’s a lot of innovation we’re leaving on the table! Lesson #1: if we are to attract for-profit executive talent then we must start paying our non-profit executive directors better.

Ignore sustainability and adopt a “do whatever it takes” attitude to exceed your short-term goals. We in the nonprofit sector spend far too much time talking about creating sustainable programs and achieving long-term outcomes. Instead, we need to adopt a more market-centric view of the world, just as for-profit businesses have to when their performance is measured by the market. Take General Motors, for instance. In the late 1990s and well into the first decade of the 21st Century, GM ignored suggestions that the company should rethink its focus on the sale of light trucks and SUVs and instead become a pioneer in the production of fuel-efficient (sustainable) automobiles. However, GM’s short-term focus on becoming the premier seller of light trucks and SUV (its most profitable product line) seemed to be paying off:

In 2002, GM sold more than 8.5 million cars and trucks and was the first auto manufacturer to sell 1.2 million SUVs and 2.7 million trucks in a calendar year. The company set industry sales records in the United States and owned nearly 15 percent of the global vehicle market. And investors took notice – the company’s stock rose approximately 45% over the next year.

Of course, you know the rest of the story by now – fuel prices rose and consumers grew tired of paying for non-fuel efficient vehicles. GM was stuck with a bunch of cars and trucks (mostly trucks) that they tried to “give away” with 0% financing and large rebates – again, focusing on exceeding the company’s short-term sales numbers even at the expense of hurting long-term profit margins – but nobody wanted them. Lesson #2: for-profits rarely practice sustainable planning so why should your organization.

The market rewarded GM's banner 2002 year with stellar market returns in '03. Nevertheless, GM's lack of a sustainable business model finally forced the company into bankruptcy in '09.

Transform your board. Nonprofit executive directors, not only are you egregiously underpaid relative to your for-profit brethren, but also you need to hold more board power. This year’s Nobel Memorial Prize in Economics winner, Oliver Williamson, in a recent article, “Corporate Boards of Directors: In Principle and in Practice,” submits that today’s corporate boards are largely ruled by the CEO and are passive financial stewards. He writes:

The CEO is in de facto control of the operation and composition of the board…most boards most of the time are responding with nodding approval, and boards are beset by inertia, hence are slow to become active when the corporation experiences adversity” (260).

In hindsight, we’ve spent far too much time espousing the idea that nonprofit boards need to be active and chart the agency’s strategy, raise money, etc. After all, when is the last time you heard of a corporate board functioning this way? No, on a corporate board the CEO/Chairperson sets the agenda and the remaining board members are asked to “nod in approval.” Lesson #3: we need to retrain our board members to be passive financial stewards and centralize all power with the executive director (and newly appointed chairperson).

As you read these “lessons,” I hope it is apparent by now that there is an awful lot each sector – the for-profit and non-profit – can stand to learn from one another. I think the three lessons above illustrate areas the for-profit sector should take a cue from the nonprofit sector and consider adopting these practices. Conversely, there are a number of for-profit practices – strategic planning, capital budgeting, using data to inform evaluative programmatic judgments and more – that I believe are beneficial for nonprofits to adopt. However, to think that either sector has a monopoly on best practices is just over simplistic and flawed logic. As Jim Collins’ writes in his monograph Good to Great and the Social Sectors, “We need to reject the naïve imposition of the ‘language of business’ on the social sectors, and instead jointly embrace a language of greatness” (2). Touché, Jim.

Anarchists Ballot

*Note: to our knowledge, there is no Allegheny County Anarchists Association.  This is an anarchists nonprofit governance joke.

“Well, how much cash should we have?” a client asked during a recent Board meeting. Scott and I explained that an organization should have at least a 3 month operating cash reserve (90 days of cash), and aspire to a 6 month cash reserve (180 days of cash). In keeping with statewide best practices, it was absolutely the right answer.

Still curious, our client inquired, “According to whom should we have 3 months of cash on hand?” And there you have it – the question that kicked off in each of our minds the need to move beyond conventional wisdom and arrive at an empirical explanation as to why nonprofits should maintain at least 90 days of operating reserves. Or should they?

Logically, the next step in our thinking was to obtain a national sample of nonprofit financials to begin our analysis. We turned to the National Center for Charitable Statistics (NCCS) for our figures, and obtained financials for over 230,000 U.S. nonprofit agencies.

As you may have already guessed by now, our empirical findings call into question whether or not a 3 month cash reserve is a realistic guideline for all nonprofits to follow, indiscriminate of an agency’s size or mission. For starters, out of the 230,759 nonprofit organizations we examined, the median number of days cash on hand was approximately 75 days, with 25% of the upper distribution (top quartile) holding 187 days of cash or more, and the lower distribution (bottom quartile) holding 19 days of cash or less.

Further, an agency’s unique mission and size illustrate why it’s arbitrary to apply the 3 month cash operating reserve to all agencies without taking into account these important characteristics. For example, to ask that a human service organization target a cash reserve of 180 days seems unreasonable given that the median number of days cash on hand for an agency with such a mission is 62. Additionally, we can see that arts organizations should attempt to grow a cash reserve in excess of 90 days since that is the empirical “norm” finding. We encounter similar difficulties when analyzing cash operating reserves by organizational size (operating budget).

Days Cash on Hand by Mission TypeIn the final analysis, we recommend you benchmark your agency relative to organizations of comparable mission, size, and even location to assess your financial health. This is something we can do for you with our statistical data analysis as part of the Bayer Center’s Financial Wellness Package.

Only when you are fully aware of your internal financial performance (trends) and external positioning (benchmarking) can the Board and senior management truly begin to layout a realistic and informed cash reserve policy, one that is both realistic and in line with peer organizations.
Days Cash on Hand by Budget Size

My name is Laura Rentler and I am interning at the Bayer Center for Nonprofit Management this summer.  Currently, I am a junior at Robert Morris University where I am majoring in Marketing and Hospitality and Tourism.  I will also be receiving a certificate in nonprofit management through American Humanics.  To receive this certificate, students must complete a 300-hour internship with a nonprofit, attend a conference, and take two courses on basic nonprofit information.  A few of the BCNM staff members were in charge of teaching the class at Robert Morris University, which is how I got this great opportunity of working here for the summer. 

I remember in my junior year of high school I told my Mom that I wanted to be an accountant.  She was shocked and knew that I had a different calling in life.  Well, she was right.  My senior year of high school, I was asked to be the keynote speaker at a luncheon for the Highmark Caring Place.  My family and I attended the Caring Place in 1998 after my father passed away.  The Caring Place helped me grow as a person, so I was honored that they would ask me to speak in honor of them.  After I delivered my speech, one young high school student came up to me and said, “I know how you feel.  I lost my father and I haven’t gotten help for it.” You could tell this particular audience member was really touched by my story and could relate in some way.   After that moment, I instantly knew that I wanted to be working in an environment where I could make a difference in people’s lives.   I can’t tell you what came over me that day that possessed me to choose the nonprofit field, but I knew that this was my calling. 

When I got home from the luncheon, I told my Mom that I wanted to work for nonprofits the rest of my life, and she was thrilled.  I told other family members and friends and kept getting the same comments and questions:  “Why would you want to work for a nonprofit; you are not going to make any money.” To this, I would always say that I want to make money to pay the bills and provide for myself, but I also want a job that I love doing. I want to be one of those people that comes home from work and says, “I love my job!”  Let’s just say that I didn’t get the reaction out of them as I did from my mom, but then I do come from a family of financially oriented people.

Overall, I feel happy with the direction I’m taking, but I still have questions:

  • Will I find a job after I graduate?
    • I know Pittsburgh has a large amount of nonprofit organizations, but many agencies it seems have small staffs that tend to be loyal.
  • Is there opportunity for career growth in the sector?
    • It seems like it is more difficult to progress into a higher position since many organizations are small and folks seldom leave. Of course, I realize that most sector professionals had to start somewhere, but I don’t want to put in years of energy to realize there was a glass ceiling all along.
  • Will I have a salary even if the organization is struggling?
  • What happens to an agency if it raises less and less money every year?

I don’t think my concerns and questions are any different than other college students as they near graduation.

Over the last six months, Scott Leff and I have observed a greater proportion of nonprofit Boards seeking clarification of their agencies’ finances – distilling the important and necessary financial information into a condensed report – and financial health. With that in mind, the Bayer Center recently unveiled a set of diagnostic tools that we are calling our “Financial Wellness Package.” To borrow a little medical parlance, we liken it to a “financial check-up” with your friendly Bayer Center consultant.

One piece of our “Wellness Package” consists of looking at your agency’s financial performance relative to organizations of similar mission and (budget) size. As a part of this analysis, we analyzed close to 240,000 nonprofit organizations that filed 990 information and calculated numerous financial performance ratios as one approach towards answering the Board question: “How financially healthy is my organization?” We refer to these figures as our “Financial Benchmarks.”

Originally, we had just planned to use the benchmark results as one component in our Wellness Package, and thought nothing of the broader sector implications that could be gleamed from our analysis. However, after further review and discussion, we’d like to share with you some of the broader takeaways we discovered that may influence how you think about your agency’s finances and where you stand relative to peer organizations of mission and size.

We look forward to sharing some of these findings with you as we all continue to seek and share industry best practices. Stay tuned…

A how-to guide on getting more out of your board

A how-to guide on getting more out of your board

One of the really nice things about my job at the Bayer Center is the abundant amount of learning opportunities around me. Accordingly, yesterday I sat in on Sally Mizerak’s “Using a Dashboard” class.

For those of us not in the automotive sector, an organizational “dashboard” is likely a “user-friendly, often color coded summary chart(s) of the key indicators of an organization’s performance.” I liken it to CliffNotes for staff, management, board members, donors, etc.

The “art” of designing your organization’s dashboard really depends on what story/message you’re trying to summarize. For instance, Scott Leff and I have been busy recently helping organizations reduce the stacks of internal financial reports they disseminate to board members and instead replace these trees with a single, colorful, summary financial report. From this report, board members can quickly glean how the organization is performing (actual vs. realized budget), how much cash is available, and how the organization is financially performing relative to its local and national peers (benchmarking) and its own past results (trending).

[Editor's note: My colleague Jeff Forster points out that he posted about Dashboards last month with two big points: 1) dashboards aren't just about financial measures, although they're obviously quantifiable and 2) CRM databases have thrust dashboards to the fore as though they're something new under the sun (but they're not). Also, Jeff and me rode together in CDCP's Pedal Pittsburgh (50+ mile) ride last week and spent much of the time discussing this blog entry and nonprofit dashboards, kind of.]

One way to get the internal dashboard dialogue started is to ask yourself if your board’s financial reports are telling the story that you are hoping to convey. If the answer is “yes,” then next ask yourself if you can do a better job of summarizing this information into one report?

If you think you can be doing better, then you probably are not using your board’s time wisely. (You’re supposed to be talking about mission-related information and not spending all your time on financial minutia.) A suggestion – consider putting aside a few hours to spend with your staff/colleagues/Finance Committee and conference on what financial picture/story you’d like to convey to your board. The benefits you’ll get in return from a more mission-focused board will far exceed your time investment.

Have a question or something to add to this post? Leave a comment, and you’ll be entered to win a 1 GB USB drive. One winner per week through the end of May.

 

This is what it means to be totally committed to your mission…

Yesterday, Garrett Cooper and I had the pleasure of hearing a talk by Jessica Jackley, co-founder of Kiva.org (and Pittsburgher by birth and upbringing).

Kiva is a fascinating organization and just about my favorite example of social networking. Kiva is a microlender. That is, they facilitate small loans to people in developing countries (soon in the U.S.) to help them build businesses and become kivaself-sufficient. Unlike the typical microlender, however, Kiva is not the source of the capital for these loans – you and I are!

On Kiva’s website, www.kiva.org, stories and photographs of individual borrowers and prospective borrowers are posted. You or I then go to Kiva and select the person or group that we want to support. We lend as little as $25, Kiva aggregates our money with other lenders, and – Voila! – a new business is launched. And when the money gets paid back, as it usually does, we can pick our next recipient. $25 at a time, and in just 4 years, Kiva has passed over $62 million of loans to the working poor the world over.

Here’s Kiva’s mission: to connect people through lending for the sake of alleviating poverty.

 

Read that again. That is a great mission statement. Clear, succinct, specific. No vagaries here. What do they do? Connect people. How do they do it? Through lending. Why? For the sake of alleviating poverty.

 

Some time ago, a company came to Kiva and offered them $10 million of CSR (Corporate Social Responsibility) money. Kiva asked them what they intended. Were they going to distribute the money to their employees so that all of them could log onto Kiva’s website and join as lenders? No, the company just wanted to give Kiva a check for Kiva to lend out. So Kiva referred back to its mission statement. $10 million could alleviate a lot of poverty. $10 million could provide for a lot of lending. But a $10 million check from a corporation wouldn’t connect people.

 

So Kiva said, “No, thank you.”

 

Let me repeat that. Kiva, a nonprofit less than 5 years old, turned down a $10 million contribution because it didn’t fit precisely with their mission.

 

Would you have that much courage in your organization?

 

This is what being truly committed to mission really means.

 

I’m planning to join Kiva’s network of lenders. Wouldn’t you like to? www.kiva.org

Have a question or something to add to this post?  Leave a comment, and you’ll be entered to win a 1GB USB drive.  One winner per week through the end of May.

 

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