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Where Was the Board? Examining Governance in Nonprofit Closures

July 31, 2024 Category: Explainer

Many things have been written over the last several weeks about the closures of local nonprofit institutions University of the Arts and Benefits Data Trust that have caused a wave of discussion and concern in the nonprofit sector. 

 

The Chronicle of Philanthropy pointed to BDT’s “push to grow and innovate while maintaining financial stability,” and its  struggle “to juggle priorities and sustain its mega-donor-fueled growth.”

 

The  The New York Times reported that the UARTs announced on their site that “…situation came to light very suddenly.” It also noted that “UArts has been in a fragile financial state, with many years of declining enrollments, declining revenues and increasing expenses.”

 

However, there’s a crucial aspect that has been overlooked in these observations: the role of nonprofit governance, particularly the board’s responsibility in financial management.

 

As a source quoted in a report by Technical.ly on BDT’s failure pointed out, “This was a CEO who did not grasp financial management … and a board that wanted to believe the next grant would fall from the sky.”

 

In the end, these closures, while publicly sudden, seemed to stem from the long-term results of a lack of financial acumen in leadership.

 

The Duty of Care in Nonprofit Governance – Financial Oversight

 

The board of directors of a nonprofit organization has a duty of care, which is to oversee the organization’s mission, activities, budget, and finances. This duty includes questioning expenditures and ensuring financial practices are consistent with the mission and sustainability of the organization. 

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For this reason, there is usually a finance committee of the Board of Directors, and the financial reports are reviewed at every Board meeting.

Considering that these processes and structures exist, where did the board fall short in fulfilling these duties to their respective organizations? To what extent did these shortfalls play a role in the closures of each?

 

University of the Arts

A review of UArts’ audits for June 2023 and June 2021 show that their financial troubles may be traced to activities related to its investments. In 2020, the university purchased a property for $15 million. An expenditure of this size – particularly on non-operating activities – could trigger a cascade of financial burdens.

In 2021, UArts managed to recover some by collecting receivables and selling investments for a net gain of $800,000. However, the university made additional investments totaling  $2.9 million in 2022 and $6 million in 2023, resulting in negative cash flow.

 

Benefits Data Trust

BDT’s audits show a similar journey. From 2018 to 2022, BDT saw an increase in cash by more than $7 million and contracts receivable increasing by $2.4 million, however, grants and contributions decreased by $7 million.

In 2022, salaries almost tripled compared to 2018 and overall costs doubled without a proportional increase in income. In addition, BDT invested $24 million in Board Designated Funds (BDF) in 2022. These funds were not available for immediate operational needs at a time when cashflow may have been needed, and exposed needed cashflow to market risks.

 

The Crucial Role of the Board

While each audit report, returned a fair opinion and conformed with accepted accounting principles. The closures of UArts and BDT underscore the critical importance of sound board governance in nonprofit organizations. The board must provide vigilant oversight, strategic guidance, and transparent accountability to ensure financial stability and mission alignment. Reviewing financial strategies and anticipating and mitigating risks are among a board’s most critical duties.

 

Effective governance requires the board to be proactive in questioning financial management and strategic decisions. They must hold leadership accountable and ensure that financial practices are aligned with long-term goals. In the cases of UArts and BDT, one must ask: did their boards uphold these responsibilities?

 

Lessons for the Nonprofit Sector

While internal and external investigations are underway to get to the bottom of what happened at each organization, the experiences of UArts and BDT serve as a call for the nonprofit sector as a whole. Nonprofit boards need to strengthen their governance practices, focusing on financial oversight, strategic foresight, and accountability.  In doing so, they can promote the sustainable impact of their organizations and ensure that they can overcome their financial difficulties and continue to fulfill their missions.

Here are Five Key Financial Questions Nonprofit Board should ask to understand an organization’s finances to ensure stability and mission alignment.

  1. What is the financial health of the organization?

    Breakdown:
    This is about understanding the organization’s revenue sources, expenses, cash flow and reserves.
    Why it’s important:
    A clear picture of the financial situation allows the board to make informed decisions about programs, staffing, and fundraising.

  2. How does the budget align with the mission and strategic plan?

    Breakdown:
    This question delves into whether the organization’s financial resources are effectively allocated to achieve its goals.
    Why it’s important:
    Aligning finances with the mission maximizes the impact of the organization’s work.

  3. Are there adequate financial controls and risk management procedures in place?

    Breakdown:
    This is about assessing the organization’s internal controls, such as financial reporting, audits, and fraud prevention measures.
    Why it’s important:
    Strong financial controls protect the organization’s assets and reputation.

  4. What is the organization’s fundraising strategy and how effective is it?

    Breakdown:
    This question explores the diversity of funding sources, the success of fundraising campaigns, and the overall sustainability and likelihood of an organization’s current sources and future strategy.
    Why it’s important:
    A robust fundraising strategy ensures the organization’s long-term financial stability.

  5. How does the organization prepare for financial uncertainties?

    Breakdown:
    This is about understanding the organization’s contingency plans for economic downturns, changes in funding or unexpected expenses.
    Why it’s important:
    Proactive planning helps mitigate risk and ensure the organization’s resilience.

 

 

 

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