Attention Nonprofits: If You Want to Avoid “The Squeeze,” Here’s the One Strategy That Can Help

With a competitive landscape in which spiraling demands are offset by a financing squeeze, nonprofits organizations have entered an era where only the strongest and best run will flourish, Prof. Eugene Fram, an author, consultant and nonprofit expert said in an interview. But that “strength” is easily attained, with a simple-to-implement game plan that strategically integrates the nonprofit’s board and executive staff.

“It’s a threatening squall – one I often refer to as ‘The Squeeze’,” said Prof. Fram, author of Going For Impact,” a guide to nonprofit dominance. “Just think about what’s happening. On one hand, because of slashed government budgets, there’s a growing demand for nonprofits to solve community challenges and societal ills. On the other hand, there’s the escalating challenge that nonprofits face because of a funding squeeze. Declining tax receipts are crimping many government budgets. The merger wave has slashed the number of companies that were traditionally big sources of giving. Even the recent tax cuts are squeezing funding. The competition for those fewer dollars is brutal. And that’s just on the funding side. There are also new challenges that nonprofits must address – challenges ranging from cybersecurity to sexual harassment. The bottom line is that nonprofit boards – and their directors or trustees – must be more vigilant, more informed and more proactive than ever. The good news is that the nonprofits that embrace this will be the organizations that emerge as healthy, even dominant. And the strategy isn’t that tough to enact.”

Dr. Fram recently sat down with veteran journalist William Patalon III – ironically, one of his former MBA students – to talk about the “State of the Nonprofit Sector,” and to explore what philanthropic organizations can do to “beat the squeeze.”

Here’s an edited transcript of their talk.

William Patalon (Q): So what prompted you to research and write Going For Impact?” What was the genesis of this project? Who is the “target audience” for this book?

 Prof. Eugene Fram (A): That’s actually a terrific question, Bill. Let me give you some context here …

I’ve been involved with for-profit and nonprofits boards for a long, long time – years. In fact, I’m right now serving on my 12th nonprofit board.

That’s given me a really unique vantage point – not only because of the boards I’ve served on, but also due to the other boards I’ve interacted with. That means the actual number boards I’ve observed – directly or as a consultant – numbers in the dozens.

Patalon (Q): And I’m betting that those observations led to some interesting conclusions – conclusions that led to your book.

Prof. Fram (A): You’d win that bet, Bill. And there was one observation that trumped all the others

Patalon (Q): And that one observation is?

Prof. Fram (A): That nonprofits – by and large – don’t do a great job training or indoctrinating new additions to their boards. In fact, in many cases, I would say that failure extends to new managers, as well.

Patalon (Q): Don’t do a great job?

Prof. Fram (A): That’s right – they don’t do a great job.

Far too often, nonprofit board members are left to figure out on their own exactly what they need to know. Managers are similarly left on their own to develop insights on board relationships – meaning they don’t understand how to utilize, interact with, or draw maximum value from the trustees, individual board members or the board of directors as a whole.

And that’s where my “project” – my book – comes into play.

Right now, there are more challenges – more potential difficulties – facing nonprofits than ever before.

That’s not altogether a bad thing, though. Remember, Winston Churchill once said that “a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

What I realized was that there was a real need for a simple-to-use guide that would give both new and incumbent volunteer directors – and also nonprofit managers – a way to better understand the challenges being faced by nonprofit boards in the 21st century.

These organizations operate as nonprofits. And they are philanthropic, charitable, professional and trade in focus. But they all still compete against one another. They compete for grants, for dollars, for projects and for talent in the hiring market.

A nonprofit whose board members and managers understand this – let’s refer to it as the “informed nonprofit” or “educated nonprofit” – will be more competitive than the nonprofit that doesn’t. That’s a fact.

This “informed nonprofit” will also be more attuned to the legal, regulatory, civil, social and competitive “pot holes” that exist – and will be better positioned to dodge these problems.

In short, Bill, the nonprofit that’s done a good job training its board members is the organization that’s more likely to make a true “impact” in its niche.

Patalon (Q): To make an impact …

Prof. Fram (A): [Nodding in agreement] To make an impact.

That’s where the title of my book – “Going For Impact” – comes from.

Patalon (Q): That’s powerful stuff.

Prof. Fram (A): [Nodding] Powerful – and exciting.

Patalon (Q): Having known you now for nearly a quarter century, I know that you really do find this work to be exciting. Indeed, I know that this has become, well, kind of a “mission” for you.

Prof. Fram (A): It has, Bill, it has – because I truly enjoy this work. Nonprofit organizations provide tremendous benefit to our economy and to our society – much more so than most people even realize. I want to see that value maximized. That’s why I like this work so much. As I believe we just mentioned, I am serving on my 12th nonprofit board. The types of boards on my resume range from small local boards to big national ones with substantial reach.

In characteristics, they include human-services boards, professional boards, association boards and advisory boards. My books, my Website, my 480 blog posts, and several dozen journal articles typically center on what nonprofit boards can learn from for-profit boards and vice versa.

Patalon (Q): That last point is interesting. It sounds as if you’re advocating – perhaps in part – that nonprofits be run more like for-profit businesses?

Prof. Fram (A): What I’m saying is that there are managerial techniques that can be adapted from the for-profit world. But the nonprofit world also has its unique points. Again, in an effort to make this a simple-to-use, I focused on 15 specific areas that I believe will determine the success or failure of a nonprofit organization

Patalon (Q): That’s fascinating. Well, to give folks some insight into what you’re referring to, how about naming two of those 15 – and then explaining why they’re crucial.

Prof. Fram (A): Certainly.

Here’s one I think lots of people will be intrigued by – since it has to do with the Internal Revenue Service.

Patalon (Q): The IRS?

Prof. Fram (A): Yes. Now each and every one of us – as consumers, as employees, as spouses – all deal with the IRS. And we know that companies do, too. Nonprofits have tax regulations they must follow, too.

Well, in a chapter titled “Straight Talk About Nonprofit Directors’ Responsibilities,” one of the topics I address is what may happen if directors violate something called the Federal Intermediate Sanctions Act. In short, in situations where this regulation (IRS Code 4958) is violated, the IRS can add taxes to a volunteer director’s personal income tax liability. And what I’ve found through the years is that few nonprofit board members know about this potential liability. It’s not part of their “onboarding” training – they’re never been told about it. In addition few directors know that they must participate in the development of the IRS Form 990 each year and must approve it before submission. Form 990 is often the only source of public information about a nonprofit’s finances. And certain types of nonprofits – especially those in healthcare – have more-stringent reporting requirements. Again, directors are often unaware of these requirements – a reality that can be problematic.

Patalon (Q): Forewarned is forearmed …

Prof. Fram (A): Exactly.

Patalon (Q): Okay, we said we were going to talk about two of the 15 areas you address. Let’s look at another one.

Prof. Fram (A): One of the other chapters is titled “What Management Should Expect From the Board.” This chapter serves almost as a “checklist for success.” It’s a list of topics that really need to be addressed in the board’s action plan.

Those topics – which I cover in some depth – include things like:

  • Candor, Integrity and Independence.
  • Trust and Confidence.
  • Fostering Knowledge.
  • Charting Direction.
  • Responding in an Appropriate Manner.
  • How to Prepare for Successful Meetings.
  • And Asking the Right Questions.

Patalon (Q): Interesting. Some of these sound procedural in nature. But others seem to cut right to an organization’s very culture.

Prof. Fram (A): That’s a good way to look at it, Bill. Procedures, processes, and rules of operation – those are all important and needed. But the fact is that there’s no way to cover every contingency. One way to put the odds in your favor is to have a healthy organizational culture – one that’s ethical, open and organized. On top of that, you want to grow and succeed – to be competitive, as we mentioned earlier – so you want to also foster originality, innovation, and creative, critical thinking. This “checklist” will help the board to build this kind of organization.

Patalon (Q): In some of the discussions that you and I have been sharing over the last few years, you make the point that nonprofits face a very different landscape than they did in the past.

Prof. Fram (A): Nonprofits have always faced challenges. Those challenges change with the times.

Patalon (Q): That’s very true.

I know from our talks – and from the reading I did to get ready for this Q&A with you – that some of these challenges are financial in nature (too many needs facing a dwindling supply of dollars). Some are technological (you recently wrote about cybersecurity risks). And some cut right to the core of how an organization is run (with the sexual harassment firestorm serving as the prime example).

Is this the most-difficult backdrop nonprofits have ever faced? Or is it just different … different times mean different challenges?

 Prof. Fram (A): It’s not just that the times are different, or just that the challenges are different. Some aren’t. Some of the challenges that nonprofits faced 25 years ago, or 35 years ago, or 50 years ago, are still being faced today.

However, there are new challenges to add to this mix. And some of those challenges also add to and/or exacerbate the traditional ones – like fundraising and recruiting/onboarding qualified directors. And some – like cybercrime – introduce risks that weren’t even imagined years ago.

Cybersecurity is actually a good example to use here.

Board members have an overview responsibility to make certain that the organization has adequate cybersecurity insurance. They cannot just assume – and I’ve seen instances where boards are making such assumptions – that cyber-related damages are covered under the organization’s general liability policy.

Patalon (Q): Sexual harassment, too, is probably a good example.

Prof. Fram (A): We’ve all seen reports that nonprofits have had their problems with sexual harassment complaints.

Combating this problem will demand new efforts in such realms as leadership, education, policy making, recruiting, onboarding, gender-equity initiatives in the fundraising realm.

Patalon (Q): Another challenge – mentioned at the outset of our talk – is financing. How tough is the whole financing challenge right now?

Prof. Fram (A): That’s the $2 trillion question – the approximate size of the nonprofit sector in the U.S. market. One class of nonprofit, 501(c)(3), accounts for three-quarters of these revenues. The fact is, that the financing environment for nonprofit organizations is getting tougher.

Patalon (Q): For a variety of reasons?

Prof. Fram (A): [Nodding] For a variety of reasons …

A recent report by the National Council of Nonprofits concluded that the Top Three trends facing nonprofits are:

  • Limited resources.
  • Increased demands on nonprofits, stemming from increased community needs.
  • And, lastly, the growing awareness that “every nonprofit and board member needs to be an active, vocal advocate for her/his nonprofit’s mission to affect policies in the community, and at a national level.”

Patalon (Q): And that’s “The Squeeze” you’ve referred to …

Prof. Fram (A): It is …

You have the opposing forces of rising demand and a reduction in available resources to meet that demand.

Just look at the newly passed Tax Cuts and Jobs Act (TCJA). What a lot of people are soon to discover is that they are no longer receiving the usual tax benefit for the money they’ve donated to charity.

And the impact of this reduction will be huge. Huge. The Tax Policy Center says only about 16 million households would file itemized deductions for their charitable giving this year – and that is a stunning 21 million fewer than in 2017.

The bottom line: Forecasters say that could take a scythe to U.S. donations, slashing them by as much as $12 billion to $20 billion.

Patalon (Q): Holy smokes …

Prof. Fram (A): [Laughing] Holy smokes is right, Bill.

Patalon (Q): When you step back and take a view of the nonprofit realm from, say, 25,000 feet, what would you say are the three areas of change, or focus, that would have the biggest effect on the nonprofit space?

Prof. Fram (A): Bill, this is an area I could talk about for – literally – for hours.

But when it comes to nonprofit boards, there are three areas that I believe warrant a special focus. And those three are:

  • Playing the “Long Game” – Most management experts would use their own bit of jargon: “Organizational Succession.” But nonprofits that play this are playing the “long game” since they’re taking strategic steps today to ensure that their organization is just as vital a decade from now as it is today. It’s funny, just as big public companies hamstring themselves by falling into the “quarter-to-quarter” earnings reporting trap, many nonprofits shortchange themselves by restricting their strategizing to planning cycles of only three to five years. They need to add some longer-range thinking to the strategic mix. If you’re a nonprofit, you want to have an idea who will be running the organization a decade from now – both in the executive chairs and along the boardroom table.
  • Holding Out For QualityThe first piece of advice relationship experts hand out to singles is “don’t settle.” By that they mean, “don’t rush into a relationship just because you want to get married – make sure it’s the ‘right’ person.” The same holds true for a nonprofit. With all the new challenges that are faced these days, you need really, really sharp folks on your board. And that includes, perhaps, some “experts” or “specialists” in the challenges you’re tackling. Nonprofits need to start recruiting higher-quality board members. From my own observations, I know that nonprofit nominating committees have not been proactive. They recruit friends, neighbors and colleagues of current board members – rather than casting a wide net and aggressively seeking out the very best candidates. This takes time and requires a more detailed vetting process. Board members have to agree to devote more time in order to interest more broadly based candidates. Perhaps you even “invest” (notice I didn’t say “spend”) money to retain a professional recruiting firm. Like most investments that are well thought out, this is one that will pay off big in the long run.
  • Embracing InnovationNo, I’m not talking about buying a new computer system. I’m talking about creative, innovative thinking in the fundraising realm. According to the latest reports, there are between 1.5 million and 1.6 million nonprofits – just here in the U.S. market alone. And many of those organizations are chasing the same dollars. Fundraising is the lifeblood of a nonprofit – so don’t pay it short shrift. New venues and markets for fund raising must be explored, whether they be social-media based (crowdfunding, for instance), or just new, untapped markets (like millennials). No funding source can be taken for granted, whether it be a person a foundation or local federal or state governments.

Patalon (Q):  It sounds like you can basically look at any headline that details a big new trend, or major new narrative in the markets – from cybersecurity, to the way changing tax laws will change giving to the new regulations directors must learn about – and forecast how it will impact the nonprofit.

How can directors take the tools, lessons and guidelines that you detail in your book and put them to work for their organizations? How can they “Go for Impact?” 

Prof. Fram (A): That’s a great question, Bill, because that’s really what this book is all about. It’s a guidebook. It’s a checklist. It’s a game plan.

Don’t be daunted, though. It’s a relatively simple book – and I kept it that way on purpose. My goal was to ID the most critical topics, enabling nonprofit boards to adapt them to their own special needs.

It’s a powerful approach since identifying the most-critical topics is the real time-burner. So this will help nonprofit board members and managers save time and energy – while helping them focus their efforts on what really matters: Serving the community, clients, causes, members or others they are legally obligated to represent. 

Patalon (Q): It almost sounds as if you’ve developed a way for directors to “systematize” the process of evaluation, oversight, review and implementation of change. Like you are advocating the creation of an organizational culture that allows any nonprofit organization to address any change or crisis? 

Prof. Fram (A): That’s right. In fact, I describe it as a “trusting culture” that can accommodate rapid change – or even an outright crisis. This trust must be established between the board members, the nonprofit’s management team and the organization’s staff.

Here’s one of those spots where the differences between a for-profit business and a nonprofit organization need to be fully understood. In nonprofits, unlike in business organizations, staff members very closely monitor shifts in the board – board-member changes.

You see, Bill, these staffers know that these changes have the potential to affect their work.   Communication is key. Nonprofit directors need to interact with staff members when possible at social events and during time spent on board-staff committees. 

Patalon (Q): One place I really feel that you distinguish yourself – and display your very clear understanding of the nuances of effective nonprofit management – is the fact that you don’t just focus on crisis management.

You place just as much focus on the day-to-day operation of the nonprofit venture – and, in fact, really emphasize the importance of sharpening those operations.

We touched upon this a bit before. But it’s worth delving into it a bit more, I think. Are there similarities between the corporate world and the nonprofit? In terms of management, what are the biggest similarities? The biggest differences? 

Prof. Fram (A): The foci of the two are different. The business organization is profit, yet it is having an increasing social focus. The decision by Dick’s Sporting Goods to eliminate the sale of some high-powered guns is one example of this.

Now, the focus of the nonprofit – its mission – by definition circumscribes some of the actions it can take. Unlike the business organization, it cannot arbitrarily drop some client groups. If it doesn’t have the resources to serve a group, it has a “due care” responsibility to seek organizations that can assume the responsibility.

Patalon (Q): What’s the outlook for the nonprofit world? Over the next three to five years? Five to 10?  

Prof. Fram (A): The National Council of Nonprofits report mentions the growing focus on nonprofits by communities whose needs aren’t being met by public programs. We’re in the very early innings of that ballgame.

The fact is that the projected massive retirement of the Baby Boomer generation will place enormous pressures on nonprofit human-services organizations. Artificial Intelligence (AI) will help nonprofits to become more effective and efficient. But national associations with specific missions – such as the American Heart Association, for example – will need to lead the way for its local chapters.

Patalon (Q): How is globalization factoring into this?  

Prof. Fram (A): There will be huge needs in the human service sector; we are only beginning to see the first migration wave of international refugees. What we have witnessed in Europe may happen in our hemisphere if social and political conditions do not improve in Central and South America.

Patalon (Q): How is technology figuring to change this?

Prof. Fram (A): We already mentioned AI. Big-data analytics will be huge, too, giving nonprofits incredibly granular insights on their client bases and fundraising activities. That, actually, is quite exciting. Of course, that opens the door to potential data mismanagement – something we’re seeing in the news right now. And all this data makes for an alluring target for hackers. So there are risks, too.

There will be an intriguing socio-techno change, too, as millennials and generations that follow – each one increasingly more comfortable with ubiquitous technology – bring about changes in nonprofit management. They’ll do this as they help bring about succession (see above) and move into senior positions locally and nationally.

And with those changes, too, will come new opportunities – just as Churchill predicted.

Patalon (Q): And where can folks buy your book?

 Prof. Fram (A): They can buy it at https://goo.gl/iRrrtv

Patalon (Q): Thank you, Dr. Fram.

 Prof. Fram (A): My pleasure, Bill.

You can follow Prof. Eugene Fram on Twitter. To sign up for Dr. Fram’s article feed, click here. His nonprofit governance model is detailed here.

 

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