Author's Note: I had a strong desire to write this article several years ago and started outlining it in my mind over and over. My outline was pretty much shaped up several months ago. The first draft was completed several weeks ago. I was having a hard time deciding how to end the article, so I stopped writing and let my subconscious work on it for a while. I believe the issues addressed in this article are among the most challenging any non-profit will face. I know of several similar situations. It is very hard to speak up - and sometimes reverse course - when an influential board member (or, worse, several influential board members) push an agenda that is detrimental to the non-profit organization. I hope the ending to the article is now appropriate.
What is a non-profit organization (NPO) to do when its most influential board members are just plain wrong? And, what are the implications for other NPOs, particularly in a small to medium-sized community when a single project emerges and sucks the life out of the collective non-profit community by demanding tremendous amounts of donor contributions (public and private) and human energy? As non-profits struggle more and more in this down economy, a well-intentioned, but just plain ill-conceived community project can wreak havoc on the community's welfare for years and years to come. In fact, one could argue that it would be impossible to compute the long-term damage to the community.
As an aside, non-profits need to know that the accounting rules changed some years ago (well before Sarbanes-Oxley) so that "multi-year" pledges offer no accounting benefit to the donor and, arguably, can confuse the contribution issue. Multi-year pledges by a corporation or foundation must be accounted for, in full, in the year the pledge was made - not the year in which the funds were actually dispersed - even if the donor uses accrual-based accounting. It makes sense when you think about it: the donor has incurred an Account Payable for future years and that pledge (commitment) needs to be taken into account (booked) in the present term to properly value the debts of the company.
Why does the booking of multi-year pledges and an ill-conceived community project present a "perfect storm" that can wreak havoc on a small community? To use an example, an excessively expensive community project was championed by influential community leaders (let's refer to these leaders as the "best and brightest") and large contributions were requested from local corporations which required the payment of those contributions over, say, a five-year period. Because the accounting regulations required the booking of the donation in the year in which the pledge was made, corporations had unwittingly tied up their contributions budgets for several years into the future. This was particularly problematic for regional operations of larger corporations (such as banks) - whose local management did not even know about the accounting requirements - and for other local non-profits who were expecting to be back in the running for funding in the subsequent years. Many non-profits were even told they were over-reacting, not to worry, and to come back next year with their funding request. Unfortunately, many non-profits were taken out of the funding loop for at least five years due to the multi-year commitments made toward one large community project.
Let's put some numbers to this example to make it even clearer. If a solicitation was made to a local corporation in the amount of $250,000, chances are that the corporation would have to "spread" the actual contribution over several years (from a cash flow standpoint). With pressure applied by key community leaders in the solicitation of unprecedented large contributions to a single capital campaign, not only did that individual pledge exceed the donor's current-year total contribution budget for the community, but the donor, in essence, "borrowed" from its contributions budget in future years in order to be able to make the large pledge and be part of the "in crowd" to help meet the target of the capital campaign. There was much confusion between the solicitor, the donor, and all the rest of the non-profits that were left out in what was thought to be only a one-year funding crunch. Make no mistake about it: the pressure that key community leaders can place on virtually all of the corporate and private donors in a small community is very real - and frightening - especially if the project is ill-conceived. Few donors are able to resist the pressure when the community's "best and brightest" come calling.
As the actual future unfolds over the next five, ten, or fifteen years, this particular example would be an excellent case study in governance and accountability to determine the long-term, negative effects of an ill-conceived community project that was made possible only when the "best and brightest" (which we, unfortunately, often define as those with access to the most money) board members of just one non-profit exerted major community pressure to force a "solution" (project) to a community "need" that did not even exist.
As we continue to attempt to learn about the proper (best practices) governance of organizations within the Non-Profit Sector, it is difficult to understand how the community's "best and brightest" could be led down the so-called primrose path (i.e., delude themselves) into conceiving a project of such magnitude that no logical business plan could sustain. The small non-profits - those with the "regular" board members - were able to see the writing on the wall, but despite numerous efforts by many other truly wise community leaders, the "magic project" forged ahead - literally at all costs.
Let me mention another pet peeve of mine. I am of the opinion that most any group can form a non-profit and solicit funds for a capital campaign (i.e., the construction or purchase of a facility to house the non-profit). We see this happen all the time. It is not unusual for even a small community to have multiple capital campaigns under way concurrently without any coordination among them as to the timing. However, when the capital campaign is over, funds never seem to be forthcoming when it comes to the actual operation of the facility. (Worse, many large foundations limit or exclude requests for contributions to operations.) So, a successful capital campaign can launch or expand a non-profit only to see it fail because sufficient operating funds were never available.
Again, let's make this example clearer by putting some numbers to it. Let's say the budget for the construction of the new building was $50 million and its annual operating budget was projected to be $25 million. (By the way, the projected annual operating budget for this one new project exceeded the sum total of all the other arts and cultural NPOs in the small community, thereby making the ill-conceived "magic project" even more disastrous; surprisingly this fact was never fully understood by its board or the community at large.) And, sadly, things got worse: the construction budget went from $50 million to $100 million! How could something like this happen? After all, the community's "best and brightest" were on the board, celebrities from all around the state, nation, and world were being hauled into the community to tout the magnificent vision of such an ambitious project; certainly, once and for all, the community would finally be "put on the map" as a true destination location.
Unfortunately, things just continued to go bad. The construction budget was again exceeded, community donations had long since dried up, and even the "deep pocket" contributors were becoming nervous. Somebody on the board dreamed up a solution of obtaining personal guarantees from some of the wealthy board members to cover the construction loans - never intending to need to call on those personal guarantees if the ongoing fundraising was successful. But, the notes with the personal guarantees were called by the banks when the recession hit and the scrutiny on bank lending practices came under intense review.
Some would say there was a bright spot in this worst-case scenario project: the construction was (basically) completed and perhaps the most spectacular grand opening event in the history of the community was staged. "Regular members" of the community were even invited to participate with the "best and brightest" and the festivities were indeed unprecedented. Every dignitary imaginable was invited to come and congratulate the non-profit organization for its commitment and vision.
And, so, the new project was completed and opened to the public for visitation.
But, nobody came.
And, the operational problems continued and began to surface.
At first, the fact that the projected attendance figures were all wrong was simply explained as not a problem. After all, the project was to draw people from all over the state, the country - even the world - and it would take some time for the marketing and advertising to produce results.
With the grand-opening festivities complete, the "best and brightest" board members retired or resigned and the remaining and new board members inherited an unbelievable reality: funds for the operating budget had not been raised. The inaugural executive director died suddenly, newly hired staff members were terminated, operating hours were reduced, entrance fees were increased (this was a particularly curious decision since the visitation was already nil - if people were not paying a $5 admission fee why would they pay a $10 admission fee?). Just about anything that could go wrong went wrong, including mechanical equipment malfunctions, architectural design problems, and a contractual dispute with a key tenant in building. A mid-summer storm even flooded one of the main ground floor galleries! What else could go wrong? The non-profit even approached several public (governmental) entities to rescue the project, but those requests were denied.
An answer soon came: the economy went into recession. In a sordid way of looking at things, this was a blessing for the "best and brightest" because there was now an excuse for the unbelievably poor project planning: it was nobody's fault; the recession caused all the problems. (Sadly, to this day, some people actually believe that story to be true...) The board was meeting in private trying quietly and quickly to solve its problems, other NPOs were yelling "we told you so" and with the festivities and celebrations and public acclaim over, the "best and brightest" disappeared from sight (and site).
So-called "worst-case scenarios" like this one could occur in any community. When attempting to teach best practices for non-profit projects, the challenge is to look back at how the problem was allowed to reach such negative proportions and determine what can be learned to prevent it from happening again. Such a review should be all the more important when, truly, the community's most benevolent and dedicated donors were all at the board table and determined to move forward with the project. Is it possible that they were ALL duped? Ideally, it would seem that someone would have questioned the assumptions. However, in reality, appropriate questioning does not often happen around the NPO board table (and this must change with in the Non-Profit Sector). CEOs have taken quite a public beating in recent years (rightly so) and it seems logical that any CEO must be more focused on his or her primary business than the business of any non-profit board that he or she serves (in other words, if the board member cannot give thoughtful focus to the NPO, that board member has no business serving on the board). From a governance standpoint - and an accountability standpoint - this situation presents serious consequences for the entire community.
It would make sense to continue this article with suggestions that could prevent, or even remedy, such ill-conceived projects; but, instead, I will choose to leave the question open - hoping that this article can provoke some thought and action within the important Non-Profit Sector. Just what does a community do when its wealthy and, therefore, powerful citizens come together for all the best intentions, but royally botch the project? Who picks up the pieces when these leaders disappear (i.e., run for cover)? Are there lessons to be learned and will those who messed up allow the lessons to be learned? Are powerful citizens able to admit failures and discuss course-corrections? Will they put their own money (not that of the stockholders of company which they lead) into solving the problem they created? Will they put their own time (not that of the company whose stockholders pay their salary) into making the hard decisions? The answers to these questions will affect the success or failure of the Non-Profit Sector in every community. There simply must be accountability for the board-directed, non-profit organizations that make bad decisions.
Let me return to my "Author's Note" at the beginning of the article. Not until the state of the union address by the president, and the media comments that followed, did an appropriate way to end this article finally hit me. One of the journalists that I most admire is Bob Schieffer - he is very experienced and, quite frankly, has reached the pinnacle of his career; whereupon, he can pretty much say whatever he wants to say. Hearing him speak after the state of the union address, I was reminded of a totally unrelated "Face the Nation" episode where Bob Schieffer closed by saying words to the effect, 'after all my years in this business, I keep asking myself when politicians will learn to just tell us the truth.' Amen. If there is a serious community problem - particularly of the magnitude portrayed in this article - then the "best and brightest" owe the community the truth - as quickly as they determine it - not after they have tried to cover it up - and not after they have chosen to run away from it.
Something tells me that if the truth is shared during the non-profit project conception and planning stages, the community will be capable of making any necessary course-corrections to avoid disasters. Yes, Bob, your question was well-stated: when will 'they' learn to tell 'us' the truth? Equally importantly, when will 'we' demand it?
What is a non-profit organization (NPO) to do when its most influential board members are just plain wrong? And, what are the implications for other NPOs, particularly in a small to medium-sized community when a single project emerges and sucks the life out of the collective non-profit community by demanding tremendous amounts of donor contributions (public and private) and human energy? As non-profits struggle more and more in this down economy, a well-intentioned, but just plain ill-conceived community project can wreak havoc on the community's welfare for years and years to come. In fact, one could argue that it would be impossible to compute the long-term damage to the community.
As an aside, non-profits need to know that the accounting rules changed some years ago (well before Sarbanes-Oxley) so that "multi-year" pledges offer no accounting benefit to the donor and, arguably, can confuse the contribution issue. Multi-year pledges by a corporation or foundation must be accounted for, in full, in the year the pledge was made - not the year in which the funds were actually dispersed - even if the donor uses accrual-based accounting. It makes sense when you think about it: the donor has incurred an Account Payable for future years and that pledge (commitment) needs to be taken into account (booked) in the present term to properly value the debts of the company.
Why does the booking of multi-year pledges and an ill-conceived community project present a "perfect storm" that can wreak havoc on a small community? To use an example, an excessively expensive community project was championed by influential community leaders (let's refer to these leaders as the "best and brightest") and large contributions were requested from local corporations which required the payment of those contributions over, say, a five-year period. Because the accounting regulations required the booking of the donation in the year in which the pledge was made, corporations had unwittingly tied up their contributions budgets for several years into the future. This was particularly problematic for regional operations of larger corporations (such as banks) - whose local management did not even know about the accounting requirements - and for other local non-profits who were expecting to be back in the running for funding in the subsequent years. Many non-profits were even told they were over-reacting, not to worry, and to come back next year with their funding request. Unfortunately, many non-profits were taken out of the funding loop for at least five years due to the multi-year commitments made toward one large community project.
Let's put some numbers to this example to make it even clearer. If a solicitation was made to a local corporation in the amount of $250,000, chances are that the corporation would have to "spread" the actual contribution over several years (from a cash flow standpoint). With pressure applied by key community leaders in the solicitation of unprecedented large contributions to a single capital campaign, not only did that individual pledge exceed the donor's current-year total contribution budget for the community, but the donor, in essence, "borrowed" from its contributions budget in future years in order to be able to make the large pledge and be part of the "in crowd" to help meet the target of the capital campaign. There was much confusion between the solicitor, the donor, and all the rest of the non-profits that were left out in what was thought to be only a one-year funding crunch. Make no mistake about it: the pressure that key community leaders can place on virtually all of the corporate and private donors in a small community is very real - and frightening - especially if the project is ill-conceived. Few donors are able to resist the pressure when the community's "best and brightest" come calling.
As the actual future unfolds over the next five, ten, or fifteen years, this particular example would be an excellent case study in governance and accountability to determine the long-term, negative effects of an ill-conceived community project that was made possible only when the "best and brightest" (which we, unfortunately, often define as those with access to the most money) board members of just one non-profit exerted major community pressure to force a "solution" (project) to a community "need" that did not even exist.
As we continue to attempt to learn about the proper (best practices) governance of organizations within the Non-Profit Sector, it is difficult to understand how the community's "best and brightest" could be led down the so-called primrose path (i.e., delude themselves) into conceiving a project of such magnitude that no logical business plan could sustain. The small non-profits - those with the "regular" board members - were able to see the writing on the wall, but despite numerous efforts by many other truly wise community leaders, the "magic project" forged ahead - literally at all costs.
Let me mention another pet peeve of mine. I am of the opinion that most any group can form a non-profit and solicit funds for a capital campaign (i.e., the construction or purchase of a facility to house the non-profit). We see this happen all the time. It is not unusual for even a small community to have multiple capital campaigns under way concurrently without any coordination among them as to the timing. However, when the capital campaign is over, funds never seem to be forthcoming when it comes to the actual operation of the facility. (Worse, many large foundations limit or exclude requests for contributions to operations.) So, a successful capital campaign can launch or expand a non-profit only to see it fail because sufficient operating funds were never available.
Again, let's make this example clearer by putting some numbers to it. Let's say the budget for the construction of the new building was $50 million and its annual operating budget was projected to be $25 million. (By the way, the projected annual operating budget for this one new project exceeded the sum total of all the other arts and cultural NPOs in the small community, thereby making the ill-conceived "magic project" even more disastrous; surprisingly this fact was never fully understood by its board or the community at large.) And, sadly, things got worse: the construction budget went from $50 million to $100 million! How could something like this happen? After all, the community's "best and brightest" were on the board, celebrities from all around the state, nation, and world were being hauled into the community to tout the magnificent vision of such an ambitious project; certainly, once and for all, the community would finally be "put on the map" as a true destination location.
Unfortunately, things just continued to go bad. The construction budget was again exceeded, community donations had long since dried up, and even the "deep pocket" contributors were becoming nervous. Somebody on the board dreamed up a solution of obtaining personal guarantees from some of the wealthy board members to cover the construction loans - never intending to need to call on those personal guarantees if the ongoing fundraising was successful. But, the notes with the personal guarantees were called by the banks when the recession hit and the scrutiny on bank lending practices came under intense review.
Some would say there was a bright spot in this worst-case scenario project: the construction was (basically) completed and perhaps the most spectacular grand opening event in the history of the community was staged. "Regular members" of the community were even invited to participate with the "best and brightest" and the festivities were indeed unprecedented. Every dignitary imaginable was invited to come and congratulate the non-profit organization for its commitment and vision.
And, so, the new project was completed and opened to the public for visitation.
But, nobody came.
And, the operational problems continued and began to surface.
At first, the fact that the projected attendance figures were all wrong was simply explained as not a problem. After all, the project was to draw people from all over the state, the country - even the world - and it would take some time for the marketing and advertising to produce results.
With the grand-opening festivities complete, the "best and brightest" board members retired or resigned and the remaining and new board members inherited an unbelievable reality: funds for the operating budget had not been raised. The inaugural executive director died suddenly, newly hired staff members were terminated, operating hours were reduced, entrance fees were increased (this was a particularly curious decision since the visitation was already nil - if people were not paying a $5 admission fee why would they pay a $10 admission fee?). Just about anything that could go wrong went wrong, including mechanical equipment malfunctions, architectural design problems, and a contractual dispute with a key tenant in building. A mid-summer storm even flooded one of the main ground floor galleries! What else could go wrong? The non-profit even approached several public (governmental) entities to rescue the project, but those requests were denied.
An answer soon came: the economy went into recession. In a sordid way of looking at things, this was a blessing for the "best and brightest" because there was now an excuse for the unbelievably poor project planning: it was nobody's fault; the recession caused all the problems. (Sadly, to this day, some people actually believe that story to be true...) The board was meeting in private trying quietly and quickly to solve its problems, other NPOs were yelling "we told you so" and with the festivities and celebrations and public acclaim over, the "best and brightest" disappeared from sight (and site).
So-called "worst-case scenarios" like this one could occur in any community. When attempting to teach best practices for non-profit projects, the challenge is to look back at how the problem was allowed to reach such negative proportions and determine what can be learned to prevent it from happening again. Such a review should be all the more important when, truly, the community's most benevolent and dedicated donors were all at the board table and determined to move forward with the project. Is it possible that they were ALL duped? Ideally, it would seem that someone would have questioned the assumptions. However, in reality, appropriate questioning does not often happen around the NPO board table (and this must change with in the Non-Profit Sector). CEOs have taken quite a public beating in recent years (rightly so) and it seems logical that any CEO must be more focused on his or her primary business than the business of any non-profit board that he or she serves (in other words, if the board member cannot give thoughtful focus to the NPO, that board member has no business serving on the board). From a governance standpoint - and an accountability standpoint - this situation presents serious consequences for the entire community.
It would make sense to continue this article with suggestions that could prevent, or even remedy, such ill-conceived projects; but, instead, I will choose to leave the question open - hoping that this article can provoke some thought and action within the important Non-Profit Sector. Just what does a community do when its wealthy and, therefore, powerful citizens come together for all the best intentions, but royally botch the project? Who picks up the pieces when these leaders disappear (i.e., run for cover)? Are there lessons to be learned and will those who messed up allow the lessons to be learned? Are powerful citizens able to admit failures and discuss course-corrections? Will they put their own money (not that of the stockholders of company which they lead) into solving the problem they created? Will they put their own time (not that of the company whose stockholders pay their salary) into making the hard decisions? The answers to these questions will affect the success or failure of the Non-Profit Sector in every community. There simply must be accountability for the board-directed, non-profit organizations that make bad decisions.
Let me return to my "Author's Note" at the beginning of the article. Not until the state of the union address by the president, and the media comments that followed, did an appropriate way to end this article finally hit me. One of the journalists that I most admire is Bob Schieffer - he is very experienced and, quite frankly, has reached the pinnacle of his career; whereupon, he can pretty much say whatever he wants to say. Hearing him speak after the state of the union address, I was reminded of a totally unrelated "Face the Nation" episode where Bob Schieffer closed by saying words to the effect, 'after all my years in this business, I keep asking myself when politicians will learn to just tell us the truth.' Amen. If there is a serious community problem - particularly of the magnitude portrayed in this article - then the "best and brightest" owe the community the truth - as quickly as they determine it - not after they have tried to cover it up - and not after they have chosen to run away from it.
Something tells me that if the truth is shared during the non-profit project conception and planning stages, the community will be capable of making any necessary course-corrections to avoid disasters. Yes, Bob, your question was well-stated: when will 'they' learn to tell 'us' the truth? Equally importantly, when will 'we' demand it?