Our Duty of Obedience

By Russell Johnson, President & CEO

Several years ago, I served as board chair on a nonprofit organization that suddenly lost a major contract with our primary funder. Faced with a significant revenue loss supporting the overhead expenses of a large staff and facility, we had to make swift and difficult decisions. Would we attempt to convince our funder that we really did provide the services they needed? Were the services we offered truly meeting the needs of both the funder and the clients? We knew something had to change – the big question was “what”?

As a board member engaged with our senior leadership team, I started by revisiting our mission. With mission as our anchoring concept, we opened a dialogue with our funder and discovered they had needs that we and our competitors were not addressing.  The ways we had been supporting our mission were no longer relevant to our funder.  But we asked for the opportunity to realign our core talents and resources to address the funder's needs and revenue swiftly resumed, even at newly negotiated, and higher rates. 

These conversations were difficult and awkward to raise as a board member. However, they were ultimately necessary to fulfill both my individual and the collective board's role- to assess the continued relevance of the organization's mission to those we serve and ensure that its activities were in alignment with that mission.

More simply put, this is the Duty of Obedience. It is a fiduciary responsibility of every board member. According to Board Source, the Duty of Obedience means that every board member must make sure they and the nonprofit organization are abiding by all applicable laws and regulations, do not engage in illegal or unauthorized activities, and must carry out the organization's mission in accordance with the purpose stated to qualify as a nonprofit organization.  As we walk through the crisis of COVID-19, and as nonprofits and boards are challenged beyond precedent to continue services, this Duty of Obedience is more important than ever for board members to remember and practice.

Before COVID-19: A safety net sector facing insolvency

Before Covid-19, the public-private partnership that supports the social safety net system was financially fragile. Data from IRS Form 990s told us that more than 40 percent of our region's nonprofits were operating with three months or less of cash reserves. An additional 11 percent were technically insolvent. That was more than half our system BEFORE the coronavirus struck.

While many foundations, including HealthSpark Foundation, have joined with other donors to raise additional funds to help nonprofits respond to the COVID-19 crisis locally, these efforts will not be enough to sustain financially fragile nonprofits much longer. In Montgomery County, more than 100 nonprofits and faith groups sought grants from local response funds within the first three weeks of opening. Many nonprofits indicated they had already spent their cash reserves while others noted they were quickly depleting their resources. Relief funds are essential right now, but they are not the long-term answer.

Managing through: Key actions for board members in the time of COVID-19

As board members engage their leadership teams and look to the future, the Duty of Obedience must come into focus – and quickly. Board members need to respectfully start asking tough questions and engaging in necessary conversations.

Primarily, board members need to:

• Refocus on the core mission. Board members can play a pivotal role in supporting Executive Directors in making mission-driven decisions. Sure, starting up a meal delivery program would benefit the community- but is your program really equipped for this type of service? Before engaging in new services, while deciding how to cut or reduce programs, and even before applying for grants- make the time to assess how well the opportunity supports your organization's core mission and whether there are local partners who might augment your mission without doing the work yourself.
• Be respectful but ruthless – if you don't ask, no one will until it's too late. The role of the board is to steward the organization's mission, which may at times conflict with protecting longstanding programs and funders, beloved staff or positions, or the current structure of the organization. An ‘obedient' board will ask the tough questions about each of these items during the period of reconstruction and rebuilding and is willing to have and endure through difficult conversations, when appropriate. Waiting until it's too late often means that the decision is out of your hands- and the program is cut, or staff are laid off without a transition plan, or worse, closed altogether. There is also personal self-interest for each board member whom the IRS holds personally responsible for the payment of the organization's payroll taxes.
• Assess whether your organization can endure and if not, explore mergers and partnerships. As your organization looks ahead, its best to get ahead of future funding cuts or reductions in service. Rather than continuing ‘business as usual', consider how to reduce expenses, conserve cash, and explore strategic mergers and partnerships. Would consolidating backroom operations such as accounting, human resources, benefits management, payroll, purchasing, legal, or auditing functions support a stronger recovery? Philadelphia area nonprofits have a tremendous resource in the Nonprofit Repositioning Fund for these types of opportunities. The Nonprofit Repositioning Fund provides confidential consultations of plans you are forming with others to secure long-term financial resiliency.
• Seek expert guidance, if needed. Board members bring with them unique capacities and expertise- financial, legal, community-knowledge, and so on. But these are unique times, and for some, it's likely the board doesn't have the appropriate expertise to navigate through these circumstances.
  • For nonprofit financial support, we recommend beginning with the free tools available from FMA and the Nonprofit Finance Fund. HealthSpark is also offering free webinars and up to 3 free hours of one-on-one consulting with FMA for area nonprofits- see here for more information.
  • Seek legal advice from attorneys with knowledge about laws governing nonprofit organizations. Remember at the end of the day, every Pennsylvania nonprofit is subject to the review and oversight of the Orphan's Court and the Pennsylvania Attorney General.

It's clear that we will not be returning to the “normal” that was defined before the coronavirus. Government budget revenues will shrink, and government at all levels will be seeking new, more affordable ways to support safety net services.  Ask how your organization can fill the gap and be prepared to think objectively and creatively about how you can redeploy your resources to achieve a more financially viable operation and solution your funder's need.  If this type of fundamental change is not feasible, have the courage to admit it, and then direct your efforts to responsibly transferring your charitable assets to others.  It's the responsible thing to do and fulfills your fiduciary duty of obedience as well.