Executive Perspective on Top Risks for 2014 – Comparison of for-profit concerns with those of tax-exempt organizations

Protiviti reported their survey results from executives in the for-profit sector regarding their Top Ten Risks for 2014:

  • Regulatory changes and scrutiny
  • Economic conditions
  • Uncertainty surrounding political leadership
  • Succession planning for key employees and board
  • Organic growth
  • Cyber threats
  • Organizational resistance to change
  • Privacy and identity security system protection
  • Compliance with healthcare reform legislation
  • Volatility in financial markets

Other concerns include setting appropriate executive compensation and addressing the growing demands of compliance oversight.

Not surprising, the risk concerns stated above are very similar to those experienced by executives in the tax-exempt sector. Why is that? To remain viable within a commercial setting, a for-profit business must remain healthy, relevant and profitable. To compare, a tax-exempt organization must also remain healthy and relevant in order to meet its mission statement into the future.  The similarity is the need for relevance and strong financial health.  The contrast is that the goal of a for-profit enterprise is solely profitability, not the specific product or service it provides. This differs fundamentally from a tax-exempt organization that exists to accomplish its mission. In other words, for the tax-exempt organization, financial health is a means to accomplish its goal, not the goal itself.

Non-profit Sector Continues to Grow

Nonprofit Quarterly reports that the non-profit sector is experiencing great growth, in comparison to for-profit businesses.

NPQ’s Jaclyn Lambert attributes much of the growth to implementation of the Affordable Care Act and an increase in support for education; though she also notes that 50 percent of organizations experienced a decrease in government funding (source: Urban Land Institute’s Nonprofit-Government Contracts and Grants: Findings from the 2013 National Survey). Other facts of note:
• The nonprofit sector has the third-largest workforce in the U.S.
• Public charities contributed over $800 billion to the 2010 economy.
• The sector increased wages by 6.5 percent (from 2007 to 2010)

Check out the article for more data and a great infographic!

The OVERHEAD Myth

If you haven’t seen it yet, I encourage you to check out overheadmyth.com. In, what to me was, a surprising alliance between GuideStar, Charity Navigator and BBB Wise Giving Alliance, the new site is dedicated to exploding the myth that measuring the effectiveness of a charity by its overhead ratio is a valid measure of quality. The site’s centerpiece is a letter, signed by all three organizations’ CEOs, proclaiming that “Instead of focusing on the percentage of charity’s expenses that go to administrative and fundraising costs – commonly referred to as “overhead” – we need to focus on what really matters: impact.” Hear! Hear! As someone who has advised organizations for over a quarter of a century, I could not agree more.

While out-of-control administrative costs are a sign that the organization is being poorly, if not fraudulently, run, my experience is that we generally have the opposite problem. Not enough charities are investing what they need to in order to build an infrastructure that can support good decision making, protection of the organization’s assets and the public trust.  Often they do not even have the ability to accurately track and report financial information – including the amount of overhead actually incurred! As page two of the letter points out, there are statistics to support that what many of us know anecdotally – that a large percentage of organizations do not report their overhead expenses correctly, many by a long shot!

Not only is the information not reliable, it is irrelevant. As the letter points out “focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance can do more damage than good.” “When we focus solely or predominately on overhead…we starve charities of the freedom they need to best serve the people and communities they are trying to serve.”  In real life, I have seen time and again, organizations skimping on compensation, training, safe working conditions, antiquated computer systems and, yes, quality knowledgeable auditors – who are a key component to protecting the organization’s reputation and the public’s financial investment – only to see that same organization limp along and eventually close its doors, ultimately losing the ability to have any impact at all.

As donors, we all want to do good. Smart, effective philanthropy, is difficult. It takes a level of thought, research and understanding that demands more than a 2 second look at a single ratio. If you are not convinced, I urge you to take a look at the site and consider their case. If you are already a believer, I urge you to go to the site and learn how you can spread the word.

Industry Indicators Affecting Nonprofits

There are some broad industry indicators that may identify trends in the nonprofit giving.

 

During the second quarter of 2012, the profits of US corporations rose 6.1 percent compared to the same period in 2011. This is an indicator of corporate sponsorships, memberships, and donations.

 

In July 2012, personal income in the US rose 3.6 percent compared to July 2011. Changes in personal income drive individual consumer ability to contribute to nonprofit organizations.

 

However, the total revenue for grantmaking, civic, professional, religious and similar organizations dropped by 9 percent during the second quarter of 2012 compared to the second quarter of 2011.

 

It appears there is still a lag in the recovery of the nonprofit sector. What steps are you taking in your organization to identify new sources of funding?

Election Time and Political Lobbying – What’s Allowed and What Isn’t?

It is election season and many nonprofits are contemplating their options in supporting issues or candidates. What can you do, and what can’t you do?

Organizations exempt under 501(c) (3) are prohibited from engaging in political activities, but this doesn’t mean your organization cannot participate in the process. What’s allowed and what isn’t?

Basically, activities done in a non-partisan manner do not constitute prohibited political activity. Organizations can also advocate for or against ballot initiatives, but this must be an insubstantial activity.

A 501(c) (3) is not allowed to do the following:

  • Make political contributions
  • Endorse a candidate
  • Speak in favor or against a candidate for political office
  • Use the organization’s property (phones, faxes, supplies, etc.) in support of or against a campaign
  • Lease space to campaigns
  • Provide volunteers to work on a campaign
  • Use the organization’s mailing list or lists of members for a campaign
  • Write letters to the editor or other public communications in support of or against a candidate during an election period

However, a 501(c) (3) can do the following to inform voters of the issues:

  • Voter education (candidate forums, candidate questionnaires, voting record reports)
  • Get-out-the-vote activities
  • Voter registration

These activities must be done without any stated or implied endorsement of a particular candidate or party.

This is a broad overview of the allowed and unallowed activities. If you are uncertain regarding a particular activity, ask for professional advice.

Nonprofit Boards and Corporate Governance

Working with nonprofit organizations gives me many opportunities to interact with Boards of Directors. Each Board has its own distinct personality. However, each Board also has some basic fiduciary responsibilities surrounding corporate governance, regardless of the organization’s sector, mission, size, or stage in its life cycle.

Those basic responsibilities of each Board member include:

  • Regular attendance and participation at Board meetings.
  • Familiarity with major Organization initiatives and the Organization’s mission and governing instruments, such as articles of incorporation and bylaws.
  • Familiarity with significant commitments made in relation to support and program service fee revenue-producing activities.
  • Financial knowledge and ability sufficient to approve budgets; review financial statements and operation reports on a timely basis so that informed decisions can be made; and authorize contractual, banking, and financial commitments. The Board as a group should have skills in all the legal, accounting, finance, and personnel areas for which a Board is responsible, even though any one member may not be skilled in every area.

A successful Board’s effectiveness could be enhanced by considering and evaluating the performance of the Board as a whole and each individual member in these areas.

Time for Reflection and Planning

As summer winds up, my thoughts tend to look back over the season to review where I have been and what I have done. The inevitable next step is to look forward to where I will go and what I will do. Nonprofit organizations do this (or should) on a regular basis, whether formally or informally. Sometimes it is included in a facilitated strategic planning session and sometimes it is just a discussion including management and board. The actual approach depends on the organization – where it is in its lifecycle and the environment in which it operates. Whether big or small, formal or informal, a successful evaluation and planning process will include these basic elements –

  • An assessment of where the organization has been and what it has done – In order to determine where you are going, it is important to acknowledge where you have been. How has the organization evolved, what challenges has it encountered, and very importantly, what has been accomplished?
  • A determination of where the organization is going and what it will do – In order to successfully move forward, there should be a consensus as to the direction of the organization. Will it continue on the path it is currently on, will it grow or will it contract? What is the vision?
  • A plan to accomplish the new or revised goals – The plan should include specific steps, assign accountability, and benchmarks to measure accomplishments.

There are many good approaches to this process. However, regardless of the size, style or situation of the organization, a regular and honest review of where the organization has been and done and where it is going and will do is a necessary step.