I just finished the Trillion Dollar Coach. It’s wisdom gathered about the life of Bill Campbell who coached Eric Schmidt (Google CEO) and others.
The most challenging idea is that the CEO should drive near term actions of the Board and remove members who don’t add value.
His idea is that the CEO is the one person who vitally needs the right people on the Board in order for success. Although Bill was working with boards who paid board members, the compensation didn’t often pay for the steering work needed when someone needed to be in a different car.
While each board is unique, all board members need accountability. I recommend an outside appraisal of the board and board members every three years. Adding a driver’s role for the CEO to set the agenda and recruit board members for needed roles on the board may shift your nonprofit into high gear!.
Exactly 10 years ago as I write, I applied for a Vice President position at Edwin Gould. I just checked the cover letter and it was a masterpiece. Of course, one reason that I’m writing this is that I was rejected. No one could have known that Edwin Gould would be acquired by the former Leake and Watts in 2018.
How did an agency started in 1939 have trouble as a going concern with a revenue of about $30 million and fundraising costs of $118,047 at Ciprianis in 2008 when I applied? It’s like the Sears of Foster Care!
What Incidental Factors Don’t Matter in Going Concern Troubles?
Labor Efficiency Ratio – This is the biggest shock to me in the book. I preach labor efficiency with any company that I coach. It saved the nonprofit that I direct. It’s a simple ratio that X dollars of revenue must come into your company for every dollar paid to employees on the front lines. Nonprofits are often sloppy and overstaff programs and the results can drain cash. One of our programs had a labor efficiency ratio of 1.3 For every $1 paid to our program staff, we got $1.30 paid to us by the City. Suddenly, we couldn’t afford classroom supplies! Usually a LER of less than 1.5 is not possible to sustain. For profit business normally has a LER range of 3 -7. That means that for profit companies expect $3-$7 to arrive in sales for every $1 paid in compensation.
Amazingly, Edwin Gould had a LER of 1.77. For a social service agency that needs credentialled staff, I would assume this to be a well managed agency. The supervisors kept labor costs in check but it did not save the company.
Accounts Receivable – Many nonprofits bleed to death while waiting for government to pay. I could see how that would create a going concern issue. The going concern group of nonprofits in this study had about 17% of revenue still unpaid by the government. That is on the low side of normal in this study. Children’s Village has total revenue over $80 million with 24% Accounts Receivable. The highest A/R in the study was 39% of total revenue and that nonprofit continues to placidly sail along.
Assets / Equity – A normally leveraged for profit company should have some debt – generally under 40% of assets. That would give a ratio of 1.67. Most of the nonprofits in the study had an acceptable balance, including those in the Going Concern group. While most nonprofits don’t use assets or equity efficiently, they have so much trouble getting lines of credit and term loans that their fiscal structure remains intact. Edwin Gould and Sheltering Arms (a similar nonprofit) had negative equity. This can happen when an agency is in such dire distress that it records liabilities for the agency in excess of assets. Otherwise the Assets to Equity balance is not a good indicator of Going Concern issues.
# of Payrolls in Cash – Nonprofits are slowly losing their ability to have cash for paychecks. Some of the payrolls are over a month in arrears. I assumed that this would be a big signal of Going Concern. Amazingly, the Going Concern Group members had as much or more cash on hand as anybody else.
The Three Critical Factors of Going Concern
Management Leadership –
From the 990 alone, Board Leadership appears to have made a Succession error. There was 50% continuity on the Board of 12 persons from 2008 – 2016. However, three managers including Executive Director Audrey Featherstone lead the agency for about 10 years. Revenue increases and the agency survives a crisis in Foster Care in NYC in 2005.
There is a catastrophic loss of income in FY 2014 of $1.7 million as Featherstone leaves the agency. Two or more financial leaders turn over successively. With Featherstone gone, the Equity actually goes under water to negative $1 million in two years.
Kingsbridge is a similar agency in the Bronx with a going concern paragraph in their last published audit. In the case of Kingsbridge, a long term Executive Director appears to have misjudged the rapid changes in the non profit world.
The common thread in narratives of the Going Concern group is poor attention to selection or supervision of the Executive Director to make sure that the Director changes the agency nimbly to adapt to the funding available with a good strategy. Boards generally are too conservative on participating in and requiring reports on strategy. Both for profit and nonprofit agencies go out of business with plenty of assets.
Edwin Gould has $30 million going into the acquisition.
In 2005, Edwin Gould was ranked first in Foster Care Agencies in NYC (NYTimes 11/07/2007)
In 2011, Edwin Gould received $101 million grant from NYC for five years of children’s services
The right director could probably create a strategy to use those resources and network and keep an agency in operation.
Going Concern Group members generally have a persistent deficit over a period of years. Many of the Scaling Group members have occasional deficits which they quickly reverse with a change in strategy. There is simply no way to live with lines of credit, spontaneous financing, and deposits for future services over the longer period. All companies must have a positive net income.
One Source of Revenue
The Going Concern Group members only have government contracts as a source of revenue. The Scaling Up Group members have a 2nd major source of revenue – Charitable gifts (Individual, Foundations and Corporate Gifts), Donor advised funds, or Fee for Service. The unrestricted and surplus funds from these other sources are at least 10% of the net income.
Steven Rathgeb Smith (1993:133) outlines the fickle demands of regime funding. These are the contract funds from government which change as political priorities change and are willing to spend any amount of money to monitor the process. In addition, regime funding is the overwhelming majority of the Accounts Receivable that most agencies struggle to work around.
Edwin Gould, for example, received about $300,000 in fund raisers and contributions in FY 2016. The 1% of the net income that this provided was dwarfed by $550,000 of deficits in the regime funding programs. This is a perfect example of a large effective agency which would be in great operating condition today with $1 million annually in gifts and grants to provide the financing that fills in the gap created by inadequate contracts from government.
10 Nonprofits have just merged in New York City. It’s an industry with too many organizations who believe that regime funding is a Strategic Plan. If a nonprofit is weak in two or more of the critical factors, it’s time for an entire board meeting to occur on partnering, merging, or being acquired. Conversely, an agency with strong critical and incidental factors is in a place to extend it’s work for the public good through an acquisition.
What is the effect of a long-term CEO and management team on a nonprofit? What is the effect of a board with relatively little turnover? The 990 reports the name and position of each board member and senior manager annually. Let’s compare the lists over a 4 year period (2013-2016). Unfortunately, the truth is a wise and subtle mix of factors
Effect of Long-Term CEO – The vision of an effective CEO is one of the magic quantities needed to produce success.
One CEO in the study is in the 8th year of service. The nonprofit has more than doubled in revenue during that time to almost $30 million. Positive news articles have been written and many local school districts have signed contracts. These effective managers are rare outside of medicine and higher education (and not common anywhere – just ask Penney’s and S
ears!). He has been able to articulate strategy, keep the leadership moving together, and has grown in his own skills to manage a much larger company.
Unfortunately, another nonprofit with news reports about corruption also has a long-serving management team with board and management retention at 100% over 4 years. One way not to get caught is if you never leave!
Another nonprofit lost its way and the recent audit has a ‘going concern’ paragraph. I had only heard about them! This is a first. The founder stayed for 30 years and did not grow in capacity to match the growth and challenge of the $9 million agency.
Effect of a Long-Term Board – The growth companies in the study had board retention rates in the 80% range.
A nonprofit incubated by people from Harvard has a board retention rate of 94% over 4 years. The annual revenue growth rate for this nonprofit is 127% annually.
Nonprofits in existence over 25 years have more trouble keeping board members. They have a retention rate of about 50%. Many are teetering with ill-planned financing.
New successful nonprofits benefit from a startup with a skilled CEO and Board chair. One promising startup in stress has a board retention rate of about 10%. The Board Chair was inexperienced and could not drive the board to support the agency in networks.
An effective leader and an effective board chair drive success. Effective boards need term limits, additional volunteer committees, and board members committed to learning.
Effective management requires a leader with time to preach a vision, arrange a team for flawless execution, and work with the board for abundant cash to fuel growth. There is often a plan for succession in these nonprofits. One consultant said that successful nonprofits hire management from within. It reduces the shock of succession. Normal succession with an outsider has a management turnover of 50% within 18 months. This is necessary when the nonprofit is stressed.
Note to all: The CEO/ED job is challenging. A business coach can help and contact me if you need support to go through this process.
All 990s report on Board Members and Managers. When you join a board, the risk is to avoid one that is stuck or failing. The 990 information is a springboard to other sources and patterns emerge of the best boards – and the worst!
What is the worst number of directors for a healthy nonprofit?
Less than 11. The nonprofits in the study that had less than 11 board members reported on the 990 had reports of corruption in news articles or were really a family business in the garb of a nonprofit. If you want to disguise another business purpose in a nonprofit form, a small board is essential to keep secrets.
Otherwise, a small board is ineffective. Small boards are erratic on accountability. One poorly qualified member of a small board has an outsized voice. The line between a governing board and a working board starts to blur. A large board should have enough wisdom to sort out erratic opinion and be globally focused.
What are worst board members for charitable guidelines?
Members who Give Time Instead of Money!
Charitable gifts are important because contract money usually has a specific purpose that doesn’t fully reflect the nonprofit mission. Gifts also impress foundations and government of community support for the agency. 50% of the Board of Directors should be willing to host a fund raiser each year. 100% of directors needs to make an annual gift that is one of their top three charitable priorities for the year. No exceptions. Directors who don’t contribute should be offered a volunteer position.
20% of the Board of Directors should appear on 990 Schedule B as giving $5,000 or more to the organization. It’s a signal that someone on the Board really cares about this!
The indicators mentioned above for the Board charitable effort is a sign of the importance of your mission and the passion of the Board.
What is the worst Board Balance for Regulatory?
100% regulatory members
Every board has a universal need for 2 board accountants. The Board needs a CPA for the Audit Committee and at least one Management Accountant to analyze financial reports. Most of this business should take place in the Finance Committee. The 990 Part VII lists each Board Member. Always use the 990 as a beginning point for searching social media and online. Too many accountants on the Board will blur the line between management and board and meetings will be spent poking and probing the regulatory reports.
What is the worst Board relationship to the community?
The 990 Part VII lists each Board Member and Senior Manager. In New York City, the nonprofit world, similar to all other industries, attracts the best connected members and managers. If you search each name on Google and LinkedIn, successful New York City nonprofits often draw Executive Directors and board members from Ivy League graduates. There are exceptions, but you will work twice as hard to get the job for which you have the same credentials as the Harvard alum.
Perform a search of 20 nonprofits in your community in the size that you plan to be in your Strategic Plan. Make a chart of companies, colleges, and community activities to see what patterns emerge. Make sure that half of your new Board Members are connected to the central nonprofit community.
What is the worst Board for Directing the Agency?
The Board is charged with setting the basic direction of the agency and creating measures to measure the effectiveness of the Executive Director and staff. The 990 Part III asks about agency accomplishments. Schedule O gives opportunity for more reporting.
Most boards fail this last and most important question. The largest nonprofit in the study has three paragraphs on the 990 as to what it provides to children. There is no indicator that they accomplished anything. Part III gets little attention because too many agency missions are controlled by the demands of the funder. Boards of Directors simply give up and vote to fund the agency and hope for the best.
The 990 has information that is more than a report on financials. It’s possible to see the makeup of a board. One can discover the presence of major board member gifts. Most importantly, it has space for whether the board thinks about mission and results. It’s a great tool to use at the next time that someone asks you to join their board – avoid the worst!
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