The Road to Financial Strength Starts with One Board Member

If this recession has any silver lining it could be that it’s forcing nonprofits to completely re-evaluate how they use money. There is a tendency in the sector to shy away from, ignore, fear or dismiss money. But when there is less of it, you are forced to learn how to use it more effectively.

And it is up to the board, who has a legally-defined fiduciary duty, to step up to the plate and provide a strategy for how money is used. But because boards are such a bizarre mingling of volunteer strangers it can be difficult for the group as a whole to take a leadership role, especially in the taboo area of money. The solution lies in encouraging a single individual board member to rise up.

Several recent articles have illustrated the need for nonprofit boards to become better financial managers. From Jan Masaoka’s (Blue Avocado) call for boards to use a budget more strategically,  to Rick Moyer’s argument in the Chronicle of Philanthropy that boards need to find “crystal clarity about their financial situations,” to Bob Carlson’s warning that poor nonprofit financial management can end up with legal nightmares.

But what all of these articles fail to address is that boards are ineffective fiscal managers largely because of their group dynamics. Countless times have I seen a nonprofit board of directors suffer from group think, head off in tangents, or avoid difficult conversations.

The opportunity lies in getting a single board member to play a leadership role. A nonprofit’s executive director can be instrumental in encouraging this coup d’etat by finding an individual board member who:

• Is passionate about the cause and the organization
• Has the respect of the majority of the other board members
• Understands, or is willing to be educated about, the basics of financial management
• Is confident enough not to be easily dismissed or swayed

And what does it look like when an individual board member takes a stand to move the board towards better financial management?

• Interrupting the annual rubber-stamping budget approval meeting to ask how the budget fully finances the overall strategic plan of the organization
• Asking for, and ensuring creation of, monthly financial statements that are understandable
• Ensuring basic nonprofit financial management training for board and key staff so everyone speaks the same language and understands the key ratios they should be analyzing
• Standing up to board members and staff who dismiss or discourage deeper conversations about how the nonprofit budgets, uses financial vehicles, handles financial reporting
• Interjecting, cajoling, persuading, and inspiring fellow board members to USE money to strengthen the work of the organization

As David Bornstein said, social change is often driven by “one obsessive individual who sees a problem and envisions a new solution.” So, too, in the world of the sometimes intractable nonprofit board. It may require a single board member to stand up and demand that financial business as usual doesn’t work anymore. If it takes a recession to make money a true tool for social change, so be it.

Photo Credit: faungg

Tags: Blue Avocado, Chronicle of Philanthropy, financial sustainability for nonprofits, managing a nonprofit board, nonprofit board of directors, nonprofit financial management, nonprofit fiscal management

Unlocking Philanthropic Capital: An Interview with Sean Stannard-Stockton

In this month’s Social Velocity blog interview, we are talking with Sean Stannard-Stockton, one of my favorite people in the social innovation world.

Sean is a visionary leading the charge to transform philanthropy. He is CEO of Tactical Philanthropy Advisors, a philanthropy advisory firm. He is also the author of the very popular Tactical Philanthropy blog and writes a monthly column for the Chronicle of Philanthropy. He is a member of the World Economic Forum’s Council on Philanthropy & Social Investing and his insights on philanthropy have been referenced in The New York Times, Wall Street Journal, Washington Post, and Financial Times.

You can read our past interviews with Clara Miller, Kevin Jones, Lucy Bernholz, Paul Tarini, George Overholser.

Nell: At the first Social Capital Markets Conference (SoCap) in 2008 one of the keynoters said “we’re not here to talk about nonprofits.” We’ve come a long way from there to this year’s devoted track around philanthropic capital and the nonprofit space at SoCap. Where do you think the initial hesitance to connect philanthropic and impact investing came from? And how do we continue to integrate the two worlds?

Sean: I think that one of the segments of people who are attracted to impact investing are people who think philanthropy doesn’t work. While I view philanthropic and for-profit social capital to be part of a single continuum of capital, many people seem to feel that they are fundamentally different. Like most new ideas, early adopters often think it is a silver bullet that will “change everything”. Some early adopters of impact investing or other forms of for-profit social capital wrongly believe that impact investing will replace philanthropy. I think this is a fundamental misunderstanding. Continuing to integrate the two worlds will require helping the various points on the capital spectrum better understand each other. At the end of the day, capital shouldn’t be viewed through an ideological lens, but should simply be deployed based on what sort of capital fits the situation.

Nell: The SoCap session on nonprofit rating systems like Charity Navigator and GiveWell demonstrated that there is still quite a divide between GIIRS (the impact investing rating system) and nonprofit rating systems. What is your sense of this? Do you think there is potential to somehow combine GIIRS (or something else) and nonprofit rating systems so that there is one comparable impact measurement system?

Sean: I would guess that any truly effective impact measurement system should be functional across both for-profit and nonprofit activity. A good impact assessment system wouldn’t care about the tax status of the entity producing results, it would just care about the results and the cost of obtaining them. That being said, I think evaluating a nonprofit organization is really quite different from evaluating a for-profit organization. So even if we have a unified impact assessment framework some day, I would guess that organizational assessment will utilize different systems and approaches for nonprofit and for-profit organizations.

Nell: How would you like to see the conversation about connecting philanthropy and impact investing evolve at SoCap11? What are your hopes for next year’s conference?

Sean: I’d like to work to profile more examples of ways that for-profit and philanthropic capital worked together to produce social impact. Our session on Evergreen Lodge at this year’s conference looked precisely at this question, but I’d like to see more examples. I’d also like to see examples of ways philanthropic entities have used for-profit investments or subsidiaries well or for-profits have effectively used philanthropic activities to drive profit and social results. However, one of the most important goals is simply getting the different players into the same room and getting them to come to understand each other better. While Kevin Jones and I had a good time talking about the Social Capital Markets as a meeting ground for the Barbarians and Byzantine, in reality none of us are barbarians.

Nell: Beyond SoCap where do you think the important conversations about unlocking philanthropic and government capital for social impact are happening?

Sean: This is an interesting question. SoCap is special because it is one of the only (the only?) conference that is specifically about capital for social impact without regard for sector. But versions of this conversation are happening around Grantmakers for Effective Organizations, The Social Innovation Fund, online and in a different sort of way at the PopTech conference.

Nell: At the last general session of SoCap Woody Tasch of the Slow Money movement said he doesn’t think mission-related investing will ever be adopted by the majority of foundations. What are your thoughts on that?

Sean: Social Responsible Investing, the practice of screening out stocks of tobacco companies, defense contractors and the like from investment portfolios, is not practiced by a majority of investors. Yet, SRI is very mainstream and has significantly altered the behavior of publicly traded companies. Today, SRI mutual funds are one of the fastest growing areas in money management. So I don’t think that the majority of funders have to adopt mission related investing for the concept to be deemed a success. It should be noted that SRI took a good 20 years or so to go mainstream. So it could be some time before mission related investing is considering mainstream.

Nell: And more broadly, what do you think it will take to change how philanthropists (both foundations and individual donors) use money to support social impact? How do we make more donors builders instead of just buyers?

Sean: Today, I think that very few people in the social sector really understand what “philanthropic equity” is and how capital differs from revenue. Nonprofit accounting does not acknowledge that capital even exists in the sector. Nonprofits can only book cash coming into their business as revenue or a loan. There’s no official way to account for equity-like capital. So I think that there needs to be a pretty major education effort to get the whole sector very clear on how fundamentally different it is for a funder/donor to “invest” philanthropic equity in a nonprofit vs paying a nonprofit revenue to execute programs. Personally, I don’t think much progress will be made until nonprofit accounting changes. Until that happens, it doesn’t matter much what we call “growth capital”, it is all just revenue to the nonprofit.

Tags: builders vs. buyers, Charity Navigator, Chronicle of Philanthropy, GIIRS, GiveWell, Grantmakers for Effective Organizations, impact investing, Mission-Related Investing, nonprofit accounting, nonprofit growth capital, philanthropic capital, philanthropic equity, Sean Stannard-Stockton, SoCap, Social Innovation Fund, social responsible investing, Tactical Philanthropy, Woody Tasch

Wielding the Money Sword

A new blog at the Chronicle of Philanthropy site launched this week that I’m pretty excited about. Written by Clara Miller and others at the Nonprofit Finance Fund, the Money and Mission blog will help nonprofits “understand and skillfully wield money as a tool.”  What a revolutionary idea.

As Clara writes in the inaugural post:

Great ideas, deep caring for those in need, creativity, resourcefulness, a service ethic, and an expansive vision for the future are abundant in the nonprofit world. But we lack the financial capacity to meet these ideals, and our financial habits undermine efforts to build it. We need to think of finance as more than a muddle of fund raising, budget monitoring, and compliance with overhead rules. The current, tough economic environment is spurring needed change. Now, understanding money concepts like risk, leverage, and accounting, seems to be a moral imperative.

Indeed, the nonprofit sector has for too long been burdened by a lack of financial literacy and thus an inability to use money effectively. Sure there isn’t enough money in the sector, but if nonprofit leaders better understood the financial tools available to them and how to use them to their advantage, the results could be revolutionary. This is the argument in our Financing not Fundraising series.

Capital campaigns provide a great example of this. Nonprofits have used capital campaigns for years to raise money for a new building or, less often, an endowment. Capital campaign money is raised and used in a very different way from how general operating money is raised and used. A capital campaigns USES money raised to buy a building. An annual fundraising campaign USES money raised to buy additional services that the nonprofit provides (food for a food bank, mentors for kids). An annual fundraising campaign often RAISES money by cobbling together various activities (events, grant writing, some direct mail appeals) hoping that the sum will equal the expenses needed for the year. A capital campaign, however, RAISES money by conducting a feasibility study to determine how much they can likely raise, then creates a plan, budget, and case for support. Then potential donors are cultivated and solicited in a systematic way. This is a deliberate, strategic way to bring capital campaign investors in the door.

However, capital campaigns are often misguided attempts to grow the impact of an organization. A nonprofit thinks that in order to be taken seriously in the community and attract larger donors they need to build a new building. Enormous amounts of time, energy and money are spent to create a building they don’t need, burn out their development staff, and eventually shoulder new building maintenance fees for years to come.

What if nonprofits could pour those same desires–to do more, to make a bigger impact, to attract more resources, to build deeper networks–and that same time, effort and resources into a campaign that will actually help them build a more effective, more sustainable organization that delivers more impact? What if the methods of a capital campaign were instead employed to raise growth or capacity capital that allows the organization to provide more, better services to the community? That would be huge. Enormous.

The Nonprofit Finance Fund turned capital campaigns on their head with their SEGUE (Sustainable Enhancement Grant) program. It is essentially a capital campaign, but instead of buying a building, the nonprofit raises growth capital to scale the organization for greater social impact. NFF takes a concept nonprofits understand and are comfortable with, a capital campaign, and transforms it into a way to raise organization building money, a completely new idea. I’d love to see more nonprofits using financial tools already available to them to accelerate their ability to create social impact.

Like it or not, money is an incredible tool. If nonprofit leaders could better understand it, stop fearing it, and learn how to wield it effectively, the results could be transformative.

Photo Credit: piermario

Tags: capital campaign, Chronicle of Philanthropy, Clara Miller, financing not fundraising, growth capital, Money and Mission blog, Nonprofit Finance Fund, SEGUE

Don’t Go Blindly Into That Social Media World

Seth Godin has gotten everyone talking (some are even yelling) about his latest post that chastises nonprofits for not embracing change and getting on the social media bandwagon. Godin is irritated at nonprofits for not embracing these new tools to “focus attention and galvanize action” around their cause.  And the overwhelming amount of debate about the post  (Beth Kanter, Chronicle of Philanthropy, Tom Watson, to name a few) , has focused on whether or not nonprofits have embraced social media, whether they are “deer in the headlights,” whether they are risk averse, whether they “blow people away,” and so on.

This is a good debate, to be sure, but what interests me in all of this is a bigger question about the role of social media in a nonprofit’s overall resource engine. Social media is just marketing, right?  Some organizations have figured out how to tap into social media to spread the word, build a following and so on.  Some businesses have even seen a spike in sales.  That’s great.   But marketing through social media, just like any kind of marketing, has to have a bigger goal in mind.  You don’t market for marketing sake, and you don’t Tweet just because it’s cool and “everyone” is doing it.  Rather, you have to understand how that marketing activity (whether it is “free” or not, it still takes resources) is going to contribute to, or perhaps detract from, your bigger goal, which for nonprofits is to raise resources to execute on their mission.  So, in essence, nonprofits should be using social media to build donors, volunteers, advocates, supporters, right?  And as such, their use of social media has to be part of a larger resource plan.  Social media is another channel for the distribution of your message. You should not just go blindly into the social media world.  But don’t sit on your hands either, I get it.

I would argue that social media must be one component of a larger overall resource plan for a nonprofit, that brings dollars, volunteers, advocates, etc. in the door.  But first we need to take a step back to understand that resource plan.  Which brings me to a misunderstanding of fundraising in the nonprofit world and to my usual hero Dan Pallotta.  Pallotta’s blog posts are wonderful, and usually I read them while silent “Right Ons” and “Amens” stream through my head.  But his recent post on fundraising left me frustrated that Pallotta wasn’t stepping far enough out on the limb that he usually does.

Pallotta argues that fundraising is a dirty word in the nonprofit sector and organizations work as hard as possible to spend as little as possible on it:

Fundraising is the black sheep of the nonprofit sector. Charities spend as little as they possibly can on it. They talk as much as they possibly can about how little they spend on it. The watchdogs, the IRS, and donors deduct goody-two-shoes points from nonprofits in direct correlation to every dollar they spend on it. Institutional funders penalize charities for spending on it… By extension, fundraisers are the black sheep of the sector’s workforce; second-class citizens to the program staff who are in the trenches every day doing the real work of social change.

He laments this reality and suggests that we better integrate fundraising into the costs of the programs that nonprofits operate:

This is ass-backwards. Without fundraising there are no programs. The less we spend on it the less money there is for programs…We should make fundraising a program domain in and of itself — every bit as important as the medical research, social services, advocacy, and everything else it makes possible. We should consider all spending on it to be a critical “program” expense. Instead of disdaining it, we should invest in understanding and developing it, because unless we do, we’ll never have anywhere near the money we need to address the massive social problems we confront.

These are all valid points, but then I lose him at the end when he claims:

Institutional funders should take the lead…Fundraising should be every bit as prevalent on the lists of their program interests as health, human rights, and global poverty. And when they are, they won’t need to be giving program grants to health, human rights, or global poverty anymore, because the fundraising arms of the organizations they support will be able to fund them on their own.

Huh?  I agree with Pallotta that there needs to be more risk and experimentation with fundraising.  But I would take this much further.  Fundraising isn’t just a “necessary expense,” rather a nonprofit’s resource engine must be fully integrated with and equal to its programs and operations.  We have to move away from the term “fundraising,” which has come to mean galas, direct mail campaigns (which Godin abhors), and foundation grants that are conducted in a vaccuum completely separate from and organization’s programs and operations.  Fundraising has become akin to a gerbil on a treadmill where nonprofits go from grant to grant, direct mail response to direct mail response, email campaign to email campaign, working their fundraisers to the bone trying to make the dollars coming in the door equal the dollars going out the door to run their programs.

That is “ass-backwards.”  The only effective way for a nonprofit to achieve its mission, and ultimately social impact, is to fully integrate their programs (the social impact they are trying to achieve) with their core competencies (what they do better than anyone else) and their overall resource engine.  This overall resource engine must be a diverse combination of activities that generate support for and work with, not detract from, the mission of the organization and the organization’s core competencies, like this:

I’ve written about this critical alignment before, and it seems to me that this integration of the three core activities of a nonprofit are rarely integrated effectively, or even recognized by those commenting on the sector, like Pallotta and Godin.  Any marketing or revenue-generating activities that a nonprofit embarks on must be chosen and invested in–with resources like money, staff, board and volunteer time–in accordance with the organization’s mission and core competencies.  And the marketing and revenue-generating activities from which a nonprofit can choose include things such as: individual donor cultivation, solicitation and stewardship; direct mail acquisition; online fundraising; foundation grants; earned income businesses; and yes, even social media.  Just as nonprofits should not shy away from social media because they are afraid of risk and change, they also shouldn’t run towards it if it doesn’t make sense in the overall picture of how they can effectively integrate their mission and core competencies to create a sustainable resource engine.

Nonprofits shouldn’t fear social media, nor any other technological, social, or financial shift in our world.  Nonprofits, just like any other entity, need to be aware of their environment and adapt their business to survive and thrive in that changing environment.  But it all has to be based on an integrated strategy.  Yes, be open to new things like social media and experiment to see how this new development might enhance or contribute to your mission, and your resource engine, while working with your core competencies.  But don’t blindly go there without understanding how it fits.

The bottomline is that the pace of change is speeding up for all of us.  Nonprofits have to be more open to change, yes, but any change still has to be digested and made part of an overall strategy that integrates mission, competency and resources.  I think Godin would be the first to agree that we are nothing without an integrated strategy.  So don’t jump on that bandwagon without one, just because Godin tells you that you are “paralyzed in fear.”

Tags: Beth Kanter, Chronicle of Philanthropy, Dan Pallotta, Fundraising, Marketing, nonprofit, Seth Godin, social media, Tom Watson