The world looks a lot different today than it did a few years ago. Businesses have continued to adjust to rapidly changing conditions, including the Great Resignation and continued flexibility around working from home, communities are suffering due to inflation and mental health issues, and many individuals and organizations are still finding their way forward. Nonprofits are no exception. Board members leading their organizations through these difficult times are reflecting on strategies for effective board governance in a time of crisis. In our Corporate Advisory practice, we help private and family businesses, as well as institutions, think about governance for their organizations. In addition, many of our business owner clients have private foundations or sit on nonprofit boards, so the conversation between nonprofit and for-profit governance has meaningful overlap.
Shoring up an organization’s financial position is often top of mind and requires sound fiscal management by the board. Many nonprofit boards have established practices intended to protect the organization in the event of an eventual downturn.
Established operating nonprofit organizations often maintain an operating reserve, which is intended to cover three or six months, or more, of operating expenses in the event of a disruption. Even organizations that have planned ahead may have insufficient operating reserves for a prolonged disruption, especially in the face of decreased charitable contributions and potential losses to their portfolios.
Private foundations and other grantmaking organizations often have spending policies that maintain purchasing power, are intended to be sustainable over a long period of time and are integrated with the investment allocation. Because the annual spending level is based on historic market values, a sudden drop in asset value may result in spending levels that exceed the spending rate in a given year, further depleting assets. Private foundations may be facing portfolio losses even as they recognize great need in the community.
Both private foundations and operating nonprofits might need to consider the impact of a prolonged disruption. Increasingly, sophisticated organizations are running stress tests, whereby they model various scenarios to analyze the potential range of results over a period of time. The results of these stress tests can help an organization determine the impact of spending and can inform budget decisions. If spending is necessary to sustain the organization, the board might think creatively about meeting spending needs, including through strategies such as traditional loans or bond issuance.
Strategic Planning and Adaptive Thinking
Boards that have adopted a multiyear strategic plan might need to revisit and revise the plan. Components may need to be reprioritized, giving top priority to those that are deemed essential for the operation of the organization or the delivery of essential programming in the current environment. Other parts of the plan – such as capital projects or campaigns – may need to be delayed or put on hold.
Boards might utilize an adaptive thinking model, whereby they take a high-level view of the circumstances, consider possible solutions, select and implement the most favorable option, review the outcomes and iterate. The adaptive thinking model assumes that mistakes will be made and embraces mistakes as a necessary part of the process to arrive at the best solution. It is important to identify mistakes quickly in order to make changes and try out new solutions. In reviewing the outcomes and in an effort to get to the next iteration as quickly as possible, organizations should reflect on how to shorten the feedback loop. There are various strategies for shortening the feedback loop, including seeking feedback during the implementation phase (instead of waiting until the end), asking for specific instead of general feedback and creating a distinction between those who contribute feedback and those who make decisions.
Collaboration and Best Practices
Even for nonprofit organizations that have faced difficult circumstances in the past, the current environment is presenting new challenges. The need to adapt affects operating organizations and grantmaking organizations.
Operating organizations may need to modify their approach in order to provide programs and services to their constituents that are appropriate in the current environment. Consider, for example, a science museum that provides hands-on, interactive experiences for its visitors. In the current environment, hands-on exhibits might not be as attractive to germ-wary visitors as they were prior to the pandemic. The museum might think about adjusting the ways it offers experiences to its visitors. Solutions may include reconfiguring certain exhibits so they can be offered in a touch-free way, increasing handwashing and sanitation stations and signage, and limiting the number of visitors in a particular exhibit. In addition, the museum might want to capitalize on the increased awareness and interest in infectious disease by providing relevant content.
Organizations looking for solutions will recognize that they are not alone in their need to adapt and may consider collaborating with others in the development of best practices. Many organizations are having regular meetings with peer groups to facilitate these discussions. It is important to recognize that established best practices may need to be refined regularly given the rapidly developing situation.
Grantmaking organizations may wish to adapt their spending policy or strategy to meet current needs. Consider, for example, a private foundation that is interested in solutions to affordable housing and makes grants to organizations that seek to expand the number of affordable housing units in its geographic area. Recognizing the impact of inflation on those experiencing difficulty affording their rent, the foundation may consider adapting its strategy and expanding its funding to include rental subsidies, which provide immediate relief. The foundation may consider collaborating with other grantmakers to identify effective relief programs; the foundation may also consider collaborating with its existing grantees to discuss relief-based solutions.
During tumultuous times, board members are reflecting on effective governance. In our Philanthropic Advisory practice at Brown Brothers Harriman (BBH), we work with endowments and foundations to help manage assets and advise on spending policies, philanthropy, management of operating entities, fundraising and governance. If you would like to discuss any of these topics, we would welcome the conversation.