2022: the year for longer-term planning?
Not-for-profit CEOs and Boards must take a longer-term view to future proof their organisations.
This is according to the results of PwC Australia’s 2nd Annual Not-for-profit CEO Survey 2021 (1). The survey found that 76% of NFP CEOs say one of the top outcomes from building future-focused skills is greater organisational growth. This means developing plans and making decisions that enable their business to deal with day-to-day challenges while maintaining a much stronger focus on long-term goals.
"The sector needs to focus on growth, embrace aspects of automation and seek efficiencies; to create adaptive, future-focused organisations." (1)
It is now critical that not-for-profit CEOs and Boards allocate more time and resources to creating adaptive, future-focused organisations.
Too often in not-for-profit organisations CEOs and Boards are not sufficiently aligned about the role of the Board. Even when unpaid and voluntary, not-for-profit Boards must still deliver to the same standards as for-profit, paid Boards. A CEO needs a Board to be actively engaged to help them make decisions about how best to deploy resources and achieve strategic objectives.
A forward-thinking Board will be able to give good counsel to the CEO on how best to allocate limited resources and resist short-term thinking that doesn't take into account long-term opportunities. Boards need a CEO to provide clear, comprehensive, timely information about how the organisation is performing over both the short-term and long-term so they can provide informed counsel and support decision-making.
After 2 years of operational shocks due to the COVID-19 pandemic Boards should be careful not to interfere in the day-to-day operations of their organisation. CEOs must be careful not to play on Board members' anxieties or create too much of a sense that immediate shocks are a signal of long-term underperformance. They should be able to articulate how the short-term challenges could impact long-term performance and make decisions that address short-term needs without changing the organisation's trajectory towards its mission/purpose. Boards should be able to provide robust, educated assessments about how well the organisation is performing now, and how well placed the organisation is to deliver impact in 5 to 10 years.
If Boards and CEOs work together, they can combine a wide-angle perspective with a shared understanding of what organisation's of tomorrow require to deliver impact and future growth.
How can a Board support the CEO to deliver long-term results?
In 2020 McKinsey and not-for-profit think-tank Focusing Capital on the Long Term (FCLT) Global published the paper "Corporate long-term behaviors: How CEOs and boards drive sustained value creation."(2) The article's position was clear;
"Time and again, research has shown that companies create the most value when executives and directors concentrate on achieving superior long-term results rather than meeting short-term targets."(2)
Let's look at the core ideas from this paper and how they could apply to the not-for-profit context.
The paper proposed three ways that Boards can help orient management toward the long-term:
"Ensuring that strategic investments are fully funded each year and have the appropriate talent assigned to them."(2)
A "strategic investment" is a commitment of capital and/or other resources to an enterprise, project, or idea with the expectation of obtaining some future benefit. The term "strategic" implies that the intent behind such investments is to create additional value. For not-for-profit organisations the value should be defined by the investment's ability to deliver tangible, sustainable progress towards the organisation's mission or purpose.
The challenge that many not-for-profits have fallen into is repeated lack of investment in critical operational infrastructure including IT and financial systems, learning and development, fundraising processes, and an ongoing management focus on short-term operational challenges. As a result, many "strategic investments" are short-term focused and required to repair urgent issues resulting from the previous underinvestment, rather than being truly "strategic" in their ability to deliver long-term value and progress towards mission/purpose.
Funding challenges remain top of mind for many not-for-profit CEOs and Boards. "Profit" for not-for-profits can be defined by an operational surplus where organisational expenditure is less than revenue. Too often a surplus is generated by another round of expenditure being removed or delayed. In some cases, budget owners are encouraged to underspend rather than fully expense allocated annual budgets. As revenue growth becomes harder in a fast-changing world, chronic underinvestment occurs in the name of operational efficiency.
Often the unbudgeted receipt of a large gift or bequest generates an opportunity to deliver a surplus. Unfortunately, these windfalls are usually absorbed into general revenue to cover immediate expenditure, allocated to new un-tested programs, or used to offset shortfalls in fundraising appeals, rather than treated as "bonus" revenue and invested accordingly.
The impact of underpricing by many not-for-profits should also be addressed. Few organisations accurately price their services. Fierce funding competition, a lack of product differentiation, and a focus on short-term receipts have resulted in the erosion of the true value measure of much of what the sector delivers. Taking a long-term view of value creation, and pricing according to value (as defined by outcomes and impact), over and above the cost base must become a focus for forward-thinking CEOs and Boards. Cutting costs to support lower pricing to win contracts or appease unrealistic donor expectations only erodes an organisation's ability to deliver a surplus that can be invested in true "strategic investments."
When a surplus does occur it is often used to strengthen the balance sheet and prepare for a "rainy day." Whilst a strong balance sheet is fiscally responsible it is too often seen by not-for-profit Boards as the most appropriate and only response to managing uncertainty and risk. Governments provide revenue from public tax receipts to deliver services to citizens today and donors want measurable progress towards mission delivery. Neither expects surplus revenue to sit unused on balance sheets for long periods. The review and management of not-for-profit balance sheet assets should become a major topic in the next few years. A not-for-profit's long-term objective should not be to operate in perpetuity. A commitment to redundancy through the achievement of mission must remain a priority.
The not-for-profit sector is starved for talent. Uncompetitive remuneration, lack of learning and development, poor succession planning, insufficient leadership pipeline development, combined with less than ideal working conditions, have all contributed to burn-out and exit. The use of executives with for-profit experiences looking to work "for purpose" at the end of their corporate career has failed to fully offset the talent drain, and in some cases exacerbated the situation as for-profit work styles can be incompatible with not-for-profit contexts.
To deliver strategic investments that are fully funded each year and have the appropriate talent assigned to them, not-for-profit Boards should:
Ensure that the definition of "strategic investment" is clearly and consistently understood by the Board and CEO.
Request the CEO identify what the "strategic investments" are in the annual budget/plan and provide a clear, direct link to the organisation's stated long-term mission/purpose.
Ask open, forward-looking questions when reviewing strategic investments including; "What does this investment look like in 5 to 10 years?" and "What are the emerging issues/trends/signals that this investment seeks to exploit/mitigate to create value?"
Remain intensely curious about the links between income and expenditure. Ensure contracts and proposals are priced at value, over and above cost.
In the past year's accounts, and the future year's budget, have clarity on what did, and could, deliver surpluses. Call out windfalls and unexpected events and query how the revenue has been applied.
Have a Board position on the size and use of balance sheet assets. Be able to articulate this to funders and stakeholders.
Consider the use of external support to create a detailed 5 to 10 year vision supported by the use of robust foresight tools to create future scenarios and support long-term organisational planning.
"Evaluating the CEO on the quality and execution of the company’s strategy, the company’s culture, and the strength of the management team, not just on near-term financial performance."(2)
For not-for-profit Board members, think back to the last time you discussed your CEO's performance, what did the discussion focus on? Was the conversation held in the context of a clearly articulated long-term organisational vision, or focused on the responses and plans to the operating environment of the past and next 12 months? Did you discuss how the CEO was building talent and supporting the development of a high-performing team, or constantly recruiting and onboarding for existing vacancies? What was the balance between discussion on current budget deliverables and long-term operational requirements? What % of their time was the CEO allocating to long-term thinking? Who led the performance conversation, the Board or the CEO?
The purpose of his article is not to review CEO performance management rather encourage its delivery consciously and comprehensively, with a bias towards long-term sustainable organisational growth. In "Building Better Boards: A Blueprint for Effective Governance."(3) they describe a system that Boards should actively avoid:
"The more senior the executive, the greater their impact on the organisation's performance, the less rigorous the evaluation process. In many companies, front-line supervisors are subjected to yearly painstaking reviews in which they’re systematically graded on a detailed set of performance goals. As you go up the ladder, the reviews become more conversational, informal, and sometimes downright perfunctory."(3)
"Structuring executive compensation over longer time horizons— including time after executives leave the company."(2)
One of the biggest challenges a not-for-profit Board faces is CEO remuneration. Attracting, sustaining, and incentivising a high-performing CEO within the context of organisation size and capacity, benchmarking, relativity, and stakeholder expectations is a critical process. The use of bonuses or long-term incentives can be challenging due to the
"assumption that nonprofit organisations operate under a non-distribution constraint, which prohibits the paying out of excess earnings and requires instead their application to advancing the mission of the organisation."(4)
In short if you are operating as a "not-for-profit" should there be "profits" available from free cash flow for distribution as bonuses?
The best way to incentivise a not-for-profit CEO is to ensure that the executive performance management is robust and comprehensive with a bias towards longer-term sustainable organisational growth. The use of bonuses or longer-term incentives should be carefully considered as a component of the price of delivering value.
How can a CEO support the organisation to deliver long-term results?
The McKinsey/FCLT(2) paper also proposed three ways that CEOs can help orient management toward the long-term:
"Personally ensuring that strategic initiatives are funded and staffed properly and protected from short-term earnings pressure."(2)
Is your organisation's planning a process of documenting executive management wishes, or a process for identifying and debating the critical decisions that the company needs to make to deliver long-term value?
Too often the process of planning is an annual process that simply documents the rationales for income and expenditure budgets. Decision making, especially big decisions with long-term consequences, is actioned separately on an ad hoc basis, at times as a reaction to a short-term challenge.
Being able to allocate budgets and talent to the projects that will deliver the greatest long-term value is a critical CEO skill. Protecting both the budget and the time allocation of the talent to these projects from short-term needs is a discipline that must be maintained. In resource-scarce environments like the not-for-profit sector, it is too sometimes too easily justified to divert cash flow and top talent to the short-term challenges that appear. Often this is the CEO who ends up allocating too much time to the short-term at the expense of long-term value creation.
In 2020 Jeff Bezos from Amazon(5) expressed a focus on futures by saying:
"...all of our senior executives operate the same way I do. They work in the future. They live in the future. None of the people who report to me should really be focused on the current quarter.
Right now I’m working on a quarter that’s going to reveal itself in 2023 sometime, and that’s what you need to be doing. You need to be thinking two or three years in advance, and if you are, then why do I need to make a hundred decisions today?"(5)
As CEO modeling a forward-looking, long-term value creation mindset, and expecting your direct reports to do the same, is crucial. Yes, little things will happen that need immediate attention, get them fixed fast, and then re-align back to the long-term.
"Adapting the management system to encourage bold risk-taking and to counter biased decision making."(2)
Bold risk-taking lives in the same house as feeling safe to make mistakes. In short-term-focused not-for-profits where underinvestment has eroded any margin for error, the workplace culture can inhibit any form of risk-taking, most of all bold risk-taking. This cycle of risk aversion, fear of mistakes, and increasing performance pressure results in paralysis of action.
Foward-looking CEOs should also be able to coach and lead their teams through biased decision-making.
Charlotte Vangsgaard & Martin Nylokke Gronemann from Red Associates in their article "Growing Beyond Your Core"(6) identify 5 biases that can make it difficult to deliver outcomes:
The tendency to like things to stay relatively the same.
The tendency to follow the actions or beliefs of others.
The tendency to filter information in a way that confirms one’s preconceptions.
The tendency to rely too heavily on one piece of information when making decisions.
The tendency to overestimate one’s own performance.
Creating a culture that provides space and time for reflection and thinking about how decisions are made, safely reviews performance without blame, and accepts that mistakes and errors can happen is a powerful culture.
There is a lot of emotion in the not-for-profit sector, it is a sector of "people loving people". As a result, the weight of mistakes is often felt heavily when combined with the perceived impact the mistake may, or may not, have on mission delivery. The fear of negatively impacting the social purpose or mission of the organisation can result in rampant risk aversion.
CEOs can encourage and support higher levels of risk-taking by:
Developing a "no-blame culture".
Create an environment where people feel safe to experiment and make mistakes in the knowledge that they will be supported and won't be punished.
Create a safe environment for reflective learning, where it is acceptable to reflect on what went wrong and why so that similar mistakes aren't made again.
Actively call out and coach for biases.
"Proactively identifying and engaging long-term oriented investors— and having the courage to ignore short-term shareholders and other members of the investment community."(2)
If your organisation's social purpose is going to take a long time to achieve (e.g. curing cancer, eradicating poverty, ending global warming) who are the likely long-term funders of your organisation at the scale you need to deliver your impact?
That's a big question. One that many CEOs and Boards should spend more time reflecting on and discussing. Once you have an answer, or something as close to an answer, ask, how much time is the CEO allocating to building relationships, presenting the case for support, reporting on progress, and identifying new prospects within this cohort?
A CEO with a focus on long-term orientated investors (funders) of their organisation should:
Have a working model of the optimal operational scale required to fully deliver their mission in the shortest possible time (or at the highest level) and be able to quantify this in dollars and years.
Be able to articulate organisational performance paths for the next 20 years across possible, probable, and preferred scenarios.
Actively communicate to long-term funders the issues/signals and trends emerging today that could impact future performance, and engaging them in developing resource plans to mitigate or exploit, beyond the financial.
Communicate openly and regularly to enhance funder confidence, support transparency, and allow them to better understand the company's long-term plan.
"Demonstrating the link between financial and nontraditional metrics to prevent short-term trade-offs."(2)
This should be one of the easiest activities for a not-for-profit CEO to do. In organisation's with a social purpose, the result is always beyond the financial. Financial outcomes are the means to deliver social purpose and progress towards the mission. One way to articulate this is through the use of a theory of change.
A theory of change is a visual diagram that shows how an organisation will achieve its desired social impact. It tells the story of how inputs are converted to outputs, then to outcomes and impact. In this story, financials are measured at the inputs stage, the start of the journey. A theory of change is an excellent tool for use by the CEO and Board to demonstrate the link between financial and non-financial metrics and maintain focus on the delivery of impact.
Theory of change models are a fantastic method to communicate an organisation's progress because it provides a lot of information that is easily absorbed. It outlines what is being attempted to deliver, the actions to be taken, the challenges being faced, as well as the social change being targetted. It can also help provide clarity and a way to decide where to focus resource allocation by identifying the factors that have been identified as being critical to an organisation's success.
A Theory of Change provides:
A strong and testable hypothesis about how change will occur that allows organisations to be held responsible for outcomes.
Data that makes results more credible because they were anticipated to take place.
A graphical depiction of the social change and how it will be achieved.
A model for assessing progress and establishing measurable indicators of progress.
A framework for stakeholders to agree on what constitutes success and what it takes to achieve it.
A powerful communication tool for accurately capturing the details of the work you do.
Using a theory of change will support a focus on non-financial metrics and the long-term purpose that will help avoid short-term tradeoffs.
2022: the year for longer-term thinking.
The best response to the turbulence and uncertainty being faced by the not-for-profit sector is to focus on delivering long-term value. This means having a 5 to 10 year view of how the world is changing and how your organisation will respond to, exploit, or mitigate these changes. This is not about the prediction of the future, a futile activity, but rather about being ready for what might happen next.
Now more than ever before not-for-profit CEOs and Boards must allocate more time and resources to creating adaptive, future-focused organisations. Not-for-profit organisations that adopt a long-term approach will be well placed to seize opportunities, manage the consequences of what others didn't see coming and create long-term value and impact.
References
(1)https://www.pwc.com.au/about-us/social-impact/not-for-profit-ceo-survey.html
(3)NADLER, D. A., BEHAN, B. A. & NADLER, M. B. (eds.) Building Better Boards: A Blueprint for Effective Governance. San Francisco: Jossey-Bass,
(4)Peter Frumkin, Elizabeth K. Keating, “The price of doing good: Executive compensation in nonprofit organizations,” Policy and Society, Volume 29, Issue 3, 2010, Pages 269-282,
(5) https://www.fastcompany.com/90578272/how-jeff-bezos-makes-decisions
(6) https://www.redassociates.com/perspectives-posts/2015/10/1/growing-beyond-your-core
(8) https://nonprofitquarterly.org/total-household-growth-decline-small-medium-donors/
(9) https://nonprofitquarterly.org/nonprofit-contracting-breaking-the-cycle-of-public-underinvestment/
(10) https://hbr.org/2017/05/what-sets-successful-ceos-apart
(12) https://nonprofitquarterly.org/what-drives-nonprofit-executive-compensation/
(13) https://www.inc.com/gordon-tredgold/how-to-promote-a-culture-of-smart-risk-taking.html
(14) https://hbr.org/2006/01/stop-making-plans-start-making-decisions
