Governance in Not-for-Profits : It Starts with Fiduciary Responsibility; James Lockhart Explores the Governance Requirements of Organisations Where Outcomes Other Than Profit Are the Primary Means through Which Performance Is Measured
Byline: James Lockhart
Not-for-loss boards have a peculiar almost love-hate relationship with fiduciary responsibility. On the one hand the classification of these organisations as not-for-profit suggests that outcomes other than profit ought to be at the focus of their boards' attention. But on the other is the actual achievement of profit -- especially the cash or near-cash components of profit that are critical for longevity in both the short and medium term. It is only after fiduciary responsibility and consequentially profit, however minimal, is recognised as essential by the not-for-loss board that other key performance indicators (KPIs) follow.
In its strategic capacity, the not-for-loss board must clearly distinguish between activity and outcome, for it is through the achievement of well selected and measurable outcomes that the performance of a not-for-loss organisation should be measured. What role does the board have in identifying these outcomes, other than profit, and then setting appropriate targets for achievement?
Only rarely will a board come into the strategy conversation cold. Inevitably there is some form of process in place, for better or for worse. The board must take responsibility for first, understanding the relationships between key metrics and second, establishing appropriately stretched performance targets.
In a social housing complex, for example, occupancy rate is often the critical variable in determining financial performance, assuming that rental rates have been set below market, or at market with the management of access to accommodation supplements. However, the value of turnover of tenants through active placement in permanent accommodation via social services, education, and or financial support needs to be considered.
A social housing estate may achieve a near 100 percent occupancy with very little turnover of tenants. Is this the best outcome to be achieved from the assets, and is this the best outcome for the organisation? Namely, once it is occupied its contribution to new emerging accommodation needs is limited. Is a lower occupancy rate acceptable if accompanied by higher turnover of tenants through their managed placement in longer-term accommodation, the provision and development of skills, and better access of tenants to social services?
The determination of those outcomes and the relationship between key variables and how they are to be managed are strategic decisions for the board. A social housing complex, accompanied by the correct services, that remains accessible by managing accommodation needs will make a greater contribution to the community in the long term than one that is inaccessible by virtue of full occupancy through near perpetual tenants.
Sustained periods of economic growth, such as that experienced in New Zealand from 2001 to 2007, can mask a number of weaknesses in the not-for-loss organisation. Appreciating asset values, through increases in the value of realty or land holdings have been reported as profit (although GAAP requires that book values -- cost less depreciation -- be reported on the balance sheet for most assets). Under such circumstances it is easy for governance not to examine performance with the scrutiny required to ensure that outcomes, especially those requiring cash, continue to be delivered.
For instance, the significant demand placed on the tertiary education sector by international students during this period appears to have 'hidden' weaknesses in curriculum and the relevance of programmes for many Kiwi students. Yet throughout this period the sector apparently bloomed. The dramatic downturn in international demand in 2007 and 2008 caught the sector by surprise, exposing these weaknesses. However, head count, like occupancy rates in social housing, continues to be the sector's key performance metric. It remains the sector's primary source of income. Given the requirement of open entry (or near open entry), the partial state funding of around 750 institutions, and a tax system that does not reward philanthropy on the scale of the United States, this sector struggles with determining effective outcomes, namely, teaching and research that actually achieves impact -- especially on the economy. …