0.14 Chapter eleven: the importance of governance

Chapter eleven: the importance of governance

It is hard to imagine an institutional history that would provide a richer illustration of the difficulties that nonprofit organizations face than that of The New-York Historical Society. Major issues already discussed in the second part of this study include the unique character of nonprofit assets, the distinctions be­tween restricted and unrestricted income, and the importance of careful endowment management. But perhaps no lesson manifests itself more clearly than the critical importance of governing boards to the long-term health and viability of organizations in the nonprofit sector. After all, the Society's trustees are ultimately accountable for the decisions and policies, pursued over many years, that brought the institution from a position of relative financial stability to near insolvency.

Exactly what are the responsibilities of a nonprofit board? There has been considerable research on this subject.

Unfortunately, the Society's board cannot be said to have fulfilled these responsibilities. Over most of its history, the Society did not reexamine or update its mission, even though its operating environment had changed drastically. In addition, the long string of operating deficits serves as clear evidence of the board's failure to ensure that the institution had sufficient resources to meet its objectives. Most important, there is little evidence to suggest that prior to the crisis of 1988, the board faced up to the problems besetting the Society and then set a strategic direction for the institution.

But the purpose of this chapter is not to affix blame for the Society's predica­ment on its board; rather, it is to highlight what might be learned from this board's struggles. More specifically, it is hoped that delineating the issues the board faced during the Society's decline might help other nonprofit leaders recognize the warning signals of impending trouble.

The Society's saga demonstrates that recognizing trouble and taking steps to overcome it in a timely way are enormously important. If the stature and health of a nonprofit institution are allowed to slip, a loss of board autonomy often fol­lows. What are the steps that signal this loss of control?

When a stable institution first encounters operating deficits, the board has many options for responding to the problem, both in terms of managing short-term cash flow and making longer-term revenue and expenditure adjustments. As deficits mount, however, either financial assets are depleted or debts are incurred, and financial flexibility is sacrificed. If the situation does not turn around, the institution is then forced to look to outside parties to help it avert a financial cri­sis, a step that sacrifices strategic control. Fundamental decisions about the mis­sion and long-term direction of the institution can end up largely in the hands of outsiders. If the situation devolves further into public controversy played out in the press, the attorney general's office, or politicians' public hearings, the board's ability to direct or even to frame the debate concerning important questions will be lost. The implication of this progression is clear: trustees of institutions fac­ing difficulty must resist the very real temptation to wait for circumstances to improve; they must take action while they still have the power to be effective.