Perspective: The View from the Board Room

by John Koprowski

[John Koprowski comes into the lives of nonprofit organizations when they reach a bump in the road. We asked him to reflect on the key lessons his experiences have taught him. Following are the results. AMC]

Nonprofits Are Different

What makes nonprofit managers different from their for-profit counterparts? For one thing, the CEO of a corporation usually came through the ranks, there, or at a similar organization. The person is known for something - a particular strength, like marketing, finance, or production - and is a generalist about the other elements of the company.

In contrast, nonprofit leaders don't usually bring broad management experience to their new job - almost always, they come up as director of a charitable program sponsored by the nonprofit, or else from government or academia. In any of those three scenarios, the person has gathered limited experience managing finances or people, may know little about the other program areas, and may have little skill as an administrator of a business.

Such lack of experience is not a barrier to selection - candidates are up-front about their inexperience, and the nonprofit's search committee is rarely surprised to hear it. The problems arise later, after the new executive director is in place. She will likely get little or no training in the areas where she is weakest; usually the organization is too busy, or the funds are too scarce, or both.

Compounding the potential for trouble, the second-in-command is likely to be weak in the same areas: limited skills working with staff, little management experience, and practical experience only on outdated equipment. This leaves the nonprofit with some major gaps in administration, finance, and management. Usually, the organization is unaware how important those gaps are and what a priority filling them needs to be.

Oops

In a sort of seduction, the suitor tells all to his intended only after it is too late to back out gracefully. Accepting the job, the unsuspecting executive director is not aware of the whole picture. The impending disillusionment is gradual: First, the nonprofit executive calls me to say, "They tell me we're in good shape financially." Next, I hear, "There's a bit of a budget deficit - $ 200,000 out of our total budget of six million." By the next phone call, the deficit has grown to 1.5 million out of the six million total. Then, the news arrives: 60 percent of the contracts that bring in program dollars will not be renewed for the coming year. From "good financial shape" to teetering on the brink of bankruptcy, the process of revelation may only have taken a month or two.

When the awful truth is revealed, the executive director may find that some members of the Board had been trying for years to get the real facts about the financial picture. How could this have happened? No one had all the information. The organization's ongoing charitable programs held the attention of management and the officers, at the expense of business updates. Another weak link in the chain is the in-house accountant, who can become so invested emotionally in the nonprofit that his professional, arm's-length view of his client's deteriorating circumstances is compromised, or he never looks behind the numbers to understand their implications.

What about outside auditors? Isn't it their job once a year to give a financial seal of approval? Not exactly - they opine on whether the financial recordkeeping fairly presents the situation as of a certain date and ensure that reasonable controls are in place (two signatures required on checks over $ 5,000, for instance). The auditors don't usually give financial advice, so sorely needed by the organization.

Leaders of organizations with budgets between one million and thirty million dollars a year really need a management skill set; their strong program skills that got them the job are not enough. The leaders need management experience, and learning on the job is the hard way. If a new executive director is able to take the time and money to learn how to manage, it benefits the whole organization from the top down. Where the top manager is aware and well informed about the entire operation, the limitations of those directly below become less important, as well. The accountant, then, works harder to present accurate, up-to-date information to management so situations remain in-hand. Costs of technology are no longer a barrier, either - affordable computers and financial accounting software packages are available and reasonably easy to use. If the organization trains its top managers and streamlines the flow of information, course corrections - if they are needed - are more likely to be made in time.

Apathy Begins at Home

In a struggling nonprofit, accounting errors that may seem harmless at first - commingling bank accounts, combining funds designated as restricted - can bring an organization down. And when chronic underfunding is the way of life, a nonprofit may agree to take on off-mission projects, just to bring in enough money to keep the doors open and the salaries paid. Needless to say, this is a short-term fix with long-term toxic effects.

A kind of apathy can enter in. Too often in a nonprofit built around a unifying Cause, the people at the top are on fire with the importance of the group's mission, while the non-program staff - the secretary, the clerk, the in-house bookkeeper - have very little interest in, or knowledge of, program activities. Without a sense of involvement, the staffers have no reason to take a stake in the ongoing growth and well-being of the organization - thus, all the reporting so vital to management's tasks can be slow in arriving, incomplete, poorly focused, or downright inaccurate.

Small "cause"-oriented nonprofits can also be home to ineffective staff members whom the organization can't or won't fire. All members of the same dysfunctional family, they remain loyal to each other in the face of practical incompatibilities, and some even want to remain in dead-end jobs. Non-program staff members have no career path in many nonprofits: at best, a secretary may rise to a minor administrative position, e.g. office manager. The likelihood that an office worker will become a program officer is about as small as a stagehand's chances of becoming an actor.

Underpinnings

Another area where nonprofits can lag is in the organizational infrastructure. A grassroots neighborhood nonprofit, for instance, can't send a simple fax across town, but their opposition on a referendum, a nonprofit offshoot of a major corporation, can distribute a fax to thousands around the world at one push of a button.

As mission-critical as basic electronic communications can be, grantmaking organizations are not drawn to allocating funds for such mundane things. For many nonprofits, even the idea of outsourcing their weekly payroll is a new one. So often I hear one of the staff members say, "It's okay, I can handle the payroll in-house," only to find out that it takes that person a day and a half each week to do it.

Board Accountability

Board members should involve themselves in the work of the nonprofit and understand its financial structure. They should know - or get - the answers to such questions as: How are central administrative functions funded? How does the accounting system charge overhead to grants and contracts? Is their fundraising profitable? Do the fundraising events have real, specific targets that can be tallied and tracked? In addition, board member need to know their own quantified fundraising responsibilities. In the well-worn phrase, they must "give or get" - write the checks or bring others with deeper pockets to the table.

Founding board members are sometimes old friends of the cause, brought in during the initial passionate stage in the nonprofit's life, when quantifiable board obligations were not considered. The transition can be awkward and difficult for such board members.

Eventually, the successful nonprofit recognizes that it needs to inform board candidates up front what will be expected from them - dollars, pledged property, services, introductions, etc. These days, no one should join a board just to enhance their resume, any more than an organization should accept a board member whose only gift to the group is the use of their name.

Looking in the Mirror

If a group built around a passionate cause gains a benefactor to provide an endowment and, thereby, permanence, everything changes. From activists on the street corner to people in power expected to know how to manage the office and the organization, the transformation is jarring. For example, a bank will sometimes make affordable loans to assist in the worthwhile cause. Then, one day the bank calls for the past-due loan payments, and the Cause's leaders suffer an identity crisis along with all the rest of their problems.

Examples like this illustrate the problem: Sometimes it is hard to see clearly what a nonprofit organization is and does, and how well it is functioning. It is a kind of a business, for all its tax-exempt status. I have found a collective psychological uncertainty in nonprofits - no one really knows precisely how to answer the question, "How'm I doing?" No one can say what is the best measure of effectiveness. It is often unclear. There are of course some basics: "Don't become insolvent" is one rule all organizations should live by. But, assuming you meet those basic minimum requirements, what is the bottom line by which you judge how you are doing?

In some ways, it is even harder to determine a nonprofit organization's health than that of a regular profitmaking business. Is it the number of clients served or of tickets sold? Statistics only provide part of the answer. With a business, you have a product or a service to market and make or provide. (And even with these yardsticks, over half the new businesses in this country fail after the first few years.)

From building new housing to becoming a landlord who has to collect the rent, the identity shift affects the populations being served, as well as the organization itself. The tenants in the neighborhood's new housing moved in thinking the nonprofit was on their side. This becomes hard to reconcile when that same nonprofit comes calling for past-due rent, eventually threatening eviction. One way to prevent such disconcerting moments is to establish separate functions within the organization - social services people, for example, are advocates for the tenants, while the property management people are on hand to identify those tenants behind in their rent payments. Accurate financial reporting forms another important part of the organizational solution.

The Doctor Is In

Why and when do I get called in? The organization hires me to look at a problem, or to perform due diligence - assuring a new executive director there are no bodies buried at the back of the drawers, for instance. Sometimes the group will say they have a problem with their accounting system, or they need to restructure the finance department. Sometimes, it's to the point: "We're broke." There are medium-sized consulting firms specializing in board training and development, but it's sole practitioners like me who tend to work on these other kinds of problem-solving.

Occasionally, a nonprofit is forced to close down. Although in the nonprofit sector there are no shareholders to force the issue, shutting the doors for good is sometimes the right course to take. Nonprofits have been known to close altogether, placing any orphaned ongoing projects with similar groups. They can also file in bankruptcy for a Chapter 11 reorganization, to restructure the debt and other obligations, while trying to keep the programs going. Mergers are possible but difficult under state not-for-profit laws.

It May Still Be Worth It

With all these pitfalls, what is the reason to form a nonprofit these days? Many think it's a tax shelter, but that is not usually the reason. If you're going to put in your own money to fund it, then why make it a nonprofit?

Take the Singers Forum, a New York City nonprofit I work with. They receive donations from benefactors and grants, and they provide a school, supported in large part by students' fees. This is the best of both worlds: the nonprofit gets tax-deductible contributions, as well as revenue from operations. Their activities could be either for-profit or nonprofit, but being a nonprofit helps them; if a nonprofit is at a deficit, it can solicit tax-deductible funds - something a for-profit group cannot do. At the same time the group raises funds from charitable givers, it can rest somewhat on the knowledge that eighty percent of its income comes from tuition. Students gladly pay for the singing, acting, and directing classes and lessons Singers Forum provides, while outside funders gladly contribute to further the nonprofit's mission.

Some say the nonprofit is an outdated economic model - that The Market will take care of social problems. I disagree. The nonprofit is a good model - it is the only way to get support for addressing social issues and a wide variety of artistic ventures. If the government did it all, well, no one would really want that, at this point. The private sector simply won't do it; there are problems that cannot necessarily be solved by the market, and opportunities the market simply won't recognize.

Make It Better

If I could change anything in the existing nonprofit model, I would advocate that grant-giving groups and individual benefactors give more support to a nonprofit's general operations. It can be irresponsible, in fact, to fund only programs, and not the organization's overhead. Funders can help here by funding "capacity-building" initiatives for technical systems consulting, equipment upgrades, communications improvements, etc. We don't need any more rules or percentage guidelines for these changes to take effect - we need communication between recipients and funders to highlight each organization's special circumstances.

Sometimes grant-giving foundations like to be "partner" with grantees, but as you can imagine the result is a little lopsided, with one side holding all of the money and most of the power. It behooves the nonprofit to identify and highlight its general-operations needs for any such "partnership" to benefit the charity.

The last decades' "devolution" movement - the government returning more money and programs to the states and cities - has not been kind to the smaller nonprofits, who find themselves competing with the cities and towns themselves for the same scarce dollars. This is one reason why the grantmakers need to give tools as well as funds. For instance, why not have Executive Director training? A six- to eight-week intensive program when the new manager comes in could make a world of difference.

And, of course, much of this could be solved by giving a large grant to me….

About the Author:

John Koprowski is a management and financial consultant to nonprofit organizations based in the United States and worldwide. He was the Corporate Treasurer for the Ford Foundation from 1983 to 1993.

Resources:

The Singers Forum (39 West 19 Street, New York, NY 212 / 366 0541) is a consulting client of Koprowski's. He also hosts their monthly open-mic night for singers.