0.14 Chapter eleven: the importance of governance  (Page 4/6)

If tendencies such as these make it easy to get into trouble, how can a non­profit board best guard against them? The most reasonable answer is through the development of an overall financial and strategic plan with realistic objectives and clearly defined expected outcomes. Only then can an institution's progress be mon­itored. If deficits must be incurred, the board must identify what is being pur­chased with those deficits, how large those deficits can be, and how long the institution can afford to run them. Then, if the institution is not achieving desired results, the board can pursue alternate courses of action before it is too late.

Once in trouble, it is difficult to escape

If a nonprofit board authorizes operating deficits for too many years, financial flexibility will be sacrificed. Deficits must be paid for, and it is likely that either the institution's capital reserves or its endowment will be depleted. As reserves are spent, the chances that any path out of trouble will succeed are diminished. There will always be mistakes, bad luck, and delays that have to be overcome. As every manager knows, having the financial resources to reduce the impact of such unforeseen events very often means the difference between success and failure.

A compelling illustration of the consequences of decreased financial flexibility is the Society's 1988 bridge plan. This plan, though overly optimistic in its revenue projections, was in other respects very well conceived. It was thoroughly evaluated and endorsed not only by Society management and the board but also by an outside advisory group of experts from relevant fields. It included both an overarching strategy and shorter-term objectives that were carefully monitored. As the plan unfolded, the board was kept fully informed about progress made toward those objectives. In all major respects, the plan and its execution met reasonable standards of sound governance. Yet it failed.

Had it been enacted earlier in the Society's history, the bridge plan would have had a much better chance of carrying the Society to financial stability. Barbara Debs and her staff made great strides in raising awareness of the Society and broadening its sources of support, but by the time the plan was put in place, the Society's financial resources had been eroded to such an extent that there was virtually zero margin for error. The Society could not afford even the slightest mis­fortune or surprise.

Unfortunately, barely a year into the bridge plan, management discovered that the roof urgently needed over $10 million in repairs. If the Society had had suf­ficient reserves, perhaps it could have patched the roof, buying time for an appeal to the state and city governments for capital funding. But the Society did not have the money or the time. The board was forced to conclude that the Soci­ety could no longer exist as an independent entity without substantial annual ap­propriations from the public sector or a huge private capital gift. Since neither was immediately forthcoming, the board began to assess more drastic solutions to the Society's difficulties, including possible mergers or affiliations with other entities.