0.14 Chapter eleven: the importance of governance  (Page 5/6)

The proposed merger between the Society and the Museum of the City of New York (MCNY) further illustrates, however, how difficult it is for an institution, once it has slipped, to get back on its feet. It can become impossible to move be­yond the financial exigencies of a situation to evaluate the benefits of proposed so­lutions. Although the merger of these two complementary collections had (and still has) great appeal, negotiations never got started. Not only did the Society have insufficient resources to help effect the merger, but because its cash flow problems were well known, the Society's bargaining position was extremely weak. Regarded as needy by its potential partner, the Society found it impossible to reach an agree­ment with the MCNY that would recognize the fair value of the Society's resources.

A lack of cash impedes a board's freedom to make choices in another way as well: timing can become the single dominant factor in decisions of profound importance. Optimum solutions, especially if they involve protracted negotiations between institutions, may simply not be possible. If the other institutions are also nonprofit organizations, the chances of a productive resolution are even more remote. Nonprofit institutions have a fiduciary duty to protect the resources and collections that they hold in public trust. Properly discharging that duty extends the time needed to craft such agreements. For institutions under siege, that kind of time is likely to be an unaffordable luxury.

Consider the Society's attempt to borrow $1.5 million from the New York Public Library in December 1992. One of the most promising aspects of the loan was that it would establish an official link between two institutions with highly complementary collections that could potentially lead to a more permanent re­lationship. As negotiations proceeded, however, the Society's cash flow situation grew increasingly grim. Society leadership had very real fears that they would not have the cash necessary to issue paychecks in January. Even though both institu­tions were eager to conclude an arrangement and were aware that time was of the essence, it was impossible, given its fiduciary obligations, for the public library to negotiate an agreement that quickly. It proved to be far easier for the Society to reach an agreement with Sotheby's, which, as a for-profit institution, was not bound by the same kinds of obligations to donors and public constituencies (in­cluding city government). Instead of embarking on a new course that could have led to a mutually beneficial relationship between two New York institutions with important collections, the Society added a $1.5 million creditor.

Public scrutiny leads to loss of control

If a nonprofit institution's difficulties become a matter of public debate and con­troversy, the board will invariably lose control over the institution. Because the nature of any organization's problems are more complex than can be encapsu­lated in a newspaper article, some issues will be oversimplified, and others will be exaggerated. When there is criticism, there will be an effort to identify a chief villain, even when none exists. The net result is that important observers can be led to conclusions that are based on insufficient and sometimes inaccurate infor­mation. Once a situation is publicly defined in this way, it is extremely difficult, if not impossible, to change that definition. As the situation degenerates, it is absolutely essential that key stakeholders—including members of the board— be kept well informed about developments. If there is a potential path out of such trouble, an institution's top leadership will have to prepare the way.