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Effective Board Governance in Turbulent Times

by Dan Busby

So, you agreed to serve as a board member of your church or one of your favorite ministries. There are the meetings and the preparation for the meetings. You share some of your wisdom during board meetings, support the church or ministry with your donations, and encourage the pastoral staff or the CEO. That’s about it—right?

The furthest thing from your mind is a collapse of Wall Street that significantly impacts Main Street—a collapse that impacts many of your donors and funders, and in turn, impacts the budget of the ministry you serve.

When once-in-a-lifetime events like this occur, is it business as usual for your church or nonprofit board? For the boards of many churches and ministries, the last few months have included special agenda items relating to finances, extra meetings of the finance committee and a specially-called meeting of the board to review financial issues and perhaps approve budget revisions and more.

Effective governance relating to an organization’s finances during these turbulent times includes the following:

  • Ask for the Lord’s help. These are days to be free of fear (2 Timothy 1:17), depending on the Lord for guidance. May we say with David: “You’ve taken my hand. You wisely and tenderly lead me, and then you bless me” (Psalm 73:23-24 The Message).

  • Review the core ministry. Tough times require critical thinking. A crisis can create unusual windows of opportunity. Tom McCallie, ECFA board member and Foundations Coordinator with the Maclellan Founda­tion, suggests ministries ask the following questions:

    • What is our core ministry?

    • What are the annual expenses for our core ministry?

    • What is our plan for protecting the core ministry in 2009?

  • Give your ministry an integrity checkup. Ryszard Kapuscinski once said, “Money changes all the iron rules into rubber bands.” In the midst of financial pressures, boards should be sure their organization is not compromising its integrity in any way—in regard to financial accountability, stewardship practices, and in any other way.

In the last few weeks, I have received several calls saying: “We are in a financial bind; do we really have to honor donor’s gift-restrictions?” For ECFA members, the answer is “Absolutely, yes!” For all nonprofits, the answer should also be “Yes!”

Is your organization borrowing net assets related to donor-restricted funds for operating purposes? Are payables, payroll taxes, and insurance premium payments (especially directors’ and officers’ liability premiums) current? This is not a time to borrow money, through payables or other debt, which cannot realistically be repaid. (See below for questions boards should be asking).

  • Be sure the board has a clear financial view. Did the organization have adequate financial reserves before the economic downturn? Do you need to modify your investment policies? When you deduct net property, plant and equipment less related debt from your unrestricted net assets, is the result a positive number? Do board members receive dashboard reports that communicate key financial data elements at a glance?

Does the audit or finance committee spend quality time reviewing the interim and annual financial statements with the independent CPAs? Or, do the financial statements only get a cursory review?

  • Don’t confuse policies with governing. With the new questions on the Form 990, there is more focus on policies than ever before. “The danger for nonprofit directors, however, is believing that by positioning the organization such that the relevant items on the Form 990 can be checked Yes, or by complying with some Sarbanes-Oxley checklist, this somehow satisfies their legal obligations as board members. It does not. It may make the board operate in a more businesslike manner, but it does not constitute ‘governing.’”[1]

  • Consider all financial-related options. In financially challenging times, options should be on the table that generally would not be discussed. For example, sources of cash might include the sale of assets, the sale of notes receivable, or additional financing. It may be prudent to delay construction projects and other initiatives. Review all loan documents for terms, covenants, and any options that may be available to the lenders or the ministry. Mergers or partnerships may be an option.

  • A time to focus on ministry outcomes. Long before the stock market crash, donors had been focusing more on ministry outcomes—not outputs, but the effect of ministry programs on the lives of ministry recipients. Some donors now have less money to give and/or may be reducing the number of charities supported, so there will likely be even greater attention given to how you are meeting ministry goals.

While an organization’s staff may set the priority on measuring and reporting ministry outcomes, more often the impetus for measuring outcomes comes from the board’s attention to this concept.

Measuring and reporting ministry outcomes comes with a price. It takes staff time. But the benefits in communicating ministry outcomes to donors will often outweigh the cost of providing the information.

  • Increase communication—be candid. Leadership of a church or nonprofit organization can be a lonely position especially during a financially stressful period. This is a great opportunity for board members to provide encouragement to their senior pastor or CEO.

This is also a time for increased communication between the senior pastor or CEO and the board. Keep the candid information flowing to the board. The concept of “no surprises” is especially true in communications to the board during financially tenuous times.

 

Seven Questions Boards Should Ask
Especially During Times of Financial Stress

  1. How many days of cash are available (cash and cash equivalents plus investments that can readily be converted to cash compared to annual unrestricted expenses)?

  2. Are payables, payroll taxes, and insurance premium payments (especially directors’ and officers’ liability premiums) current? 

  3. Is our organization honoring all donor restrictions (ECFA Standards 7.2 and 7.3)?

  4. Has our organization borrowed any net assets relating to donor-restricted funds? If so, how much has been borrowed and do we have a plan to restore the funds in the short-term?

  5. Has our organization experienced endowment fund losses? If so, how much and what impact have these losses had on endowment earnings anticipated for support of operations?

  6. How have the financial market changes impacted our pension plan assets and funding requirements?

  7. Are the reserves for charitable gift annuities issued by our organization adequate to meet state requirements?

 

 

[1] Hugh K. Webster, Webster, Chamberlain & Bean, in “Non-Profit Boards: The Current Legal Environment.”


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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