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Feb 6, 2014

Overly Cautious Boards Can Be Reckless

I hear repeatedly from nonprofit executives that a major impediment to advancing their organizations comes from their “overly cautious” board.  At first blush, this seems ironic that a board, which usually is dominated by for-profit executives, would be hesitant to take on risks that are routine at their businesses.  I can imagine those nonprofit board meeting discussions:  “double our marketing budget — how do we know it will boost revenues by enough to cover the cost?  Take on debt to start a new program — is it prudent to use debt to finance operations? Start a new profitable side business — won’t that move us away from our mission?”  I could go on but I am sure some of these responses resonate with too many nonprofit executives.

First, let me assert that being cautious can sometimes be reckless.  In the past decade the nonprofit business has changed adversely and bold moves are necessary for the sector to regain its resiliency.  Government contracts too often are unpredictable and insufficient to cover expenses.  Foundation grant applications too often require substantial staff time with less than even odds of success.  And a successful grant too often mandates costly reporting that is not reimbursed by the grant.  And charitable contributions as reported by the nonprofits themselves in their IRS 990 filings have not increased as a share of nonprofit revenues for almost 30 years.  Surveys of giving or extrapolations of IRS 1040 itemized gifts sometimes show growth but the increasing dominance of Donor Advised Funds may skew that evidence since a Donor Advised Fund is a 501(c)3 and its receipts will be recorded as charitable contributions even though a nonprofit may receive nothing from the Fund.

Here are my two cents on why this inopportune caution persists on many nonprofit boards.

Hypothesis One:  the wrong people are put on nonprofit boards by their companies.  The risk-takers at for-profit companies are in production, marketing, new business development, and finance.  Yet many companies choose staff from their foundation, community relations, public relations, or operations staff.  Risk-taking is not routinely part of their jobs.  More often, stability or predictability is their primary task.  Nonprofits today need on their boards entrepreneurs, financiers, deal-makers, and innovators who bring experience with evaluating the appropriateness of risk and the planning and implementation required to use risk to reap sufficient benefits.  Need a primer on what role a board should play?  Reread Chapter One of More Than Just Money, and while you’re at it, reread Chapter Seven, “What’s Next for Nonprofits.”

Hypothesis Two:  boards view fiduciary duty more like archivists and preservationists of mission rather than as business people who need to ensure the mission stays relevant AND the organization thrives financially.  It is incorrect to bifurcate organizations into for-profits who focus just on getting strong financial results and nonprofits who focus just on their mission.  Nonprofits MUST focus on strong financial results (budget balance is not remotely good enough) or they will fail to thrive.  Fundraising is not a substitute for a business-like focus on earned revenue.  Fundraising rarely covers all the losses from delivering a mission that meets the community’s needs.  Too often the mission is scaled back to the level that can be supported by fundraising.  Scaling back on mission is neither community-oriented nor is it a basis for a sustainable future.  That is why I emphasize social enterprise:  profit-oriented activities by  nonprofits that supplement philanthropy to provide sufficient revenue for the nonprofit to keep up with evolving community needs and sustain its services through economic recession.  Have your board reread Chapter 8 “Profit-making by Nonprofits” in Linking Mission to Money, Second Edition.

Boards are often resistant to education and training.  But they need to relinquish their cautionary ways and embrace RESPONSIBLE risk-taking, which requires planning, investment, and acceptance that we cannot have successes if we do not tolerate occasional failures.  Let me at them with a workshop or retreat. You will find new energy and momentum afterwards.  Here’s just one example of the value you will get:

“Allen’s presentation had a powerful impact on members of my Board of Directors who were in attendance. I think they understood for the first time the needs and limitations of a small agency and what we are really capable of accomplishing.”
Anita S. Branan
Executive Director, St. Malachi Center