This is my first post where our undivided attention will focus around a set of important PASAMBAs (Practices, Actions, Styles, Attitudes, Manners, Behaviors, and Attributes) that attach to some critical function undertaken by every change-making board. All the collected PASAMBAs I’ll outline in subsequent blog posts share one thing in common—they make board governance more consequential and impactful—and they are universal in the sense they can be applied across all public and nonprofit sectors of activity. So if your board exercises leadership oversight for an organization—be it in healthcare, education, arts and culture, human services, or faith-based activities—the PASAMBAs we’ll be reviewing in the months to come are important to support true change making.
For this inaugural blog discussion of PASAMBAs, I’m starting with those that relate to a major function under the Fiduciary-Operational facet of the Four Facets of Change-Making Boards (see the archived September 3, 2021 post if you need a quick review of the Four Facets): Financial Oversight and Auditing. It seems right to me to open with this specific area of responsibility. Boards exercise strong financial oversight not only to provide stewardship for their organizations, but just as importantly to cultivate the trust of clients, donors, other stakeholders, and the general public in the process.
Another big reason for kicking things off with the financial oversight PASAMBAs is that this function tends to be one where trustees feel the most inadequately prepared, or even intimidated, especially if they have no previous board experience or limited background in financial management and audits. Fortunately, you don’t have to have a business degree to provide strong oversight! As much as anything, the Fiduciary-Operational facet in general is more about knowing what’s important, what to look for in terms of information, and how to evaluate the data received.
Over time, the typical trustee who’s paying attention to things will gain the fundamental knowledge of an organization’s enterprise in ways that contribute to more effective, change-making financial governance. Nobody expects a trustee to have command of everything one needs to know when joining a public or nonprofit board. In the meantime, as that knowledge grows among all members, the following PASAMBAs will expand the board’s expertise when dealing with financial oversight responsibilities.
Financial Sustainability Should Be the Focus: Identifying signals of financial distress and recognizing signs of trouble in financial statements are often viewed at the heart of this governance function. No doubt that’s important and it’s why care should be taken in carefully reading and monitoring the statements and staff reports provided to the board by its organization’s leadership. But that level of governance is not enough in itself. The change-making board must continually analyze financial outcomes holistically and in terms of the immediate and long-term effect on the organization’s programs and services—extending its financial analysis on through to the impact on programmatic outcomes as well. Financial sustainability looks well beyond the periodic reporting which may only compare current financial achievements with previous years’ performance—to also project programmatic results arising from likely future financial trends.
Build Reserves, But Be Careful With Investments: It can take a while, but as they become larger and more operationally “mature,” successful organizations will eventually get to a place where it’s possible to set aside funds for other purposes. Building some financial reserves provides a cushion in the event of a funding shortfall or an unanticipated rise in costs. In that sense, reserves are an insurance policy for long-term sustainability when a crisis hits. Reserves can also permit greater organizational risk taking by expanding services or making a big capital purchase. No matter how they might be used, reserve levels should be an explicit decision of the board, although most experts suggest having between three and nine months of operating cash available. Of course, that recommendation can vary considerably according to the purpose and nature of your organization. As reserves grow over time, they may be used to generate additional income through investments. A clear board policy on investments should guide how excess funds are used, specifying what assets can be invested, how they are allocated to diversify the portfolio, and when rebalancing occurs. Public and nonprofit boards are stewards first and foremost, so prudence is the watchword when it comes to the right investments to make—ensuring sufficient cash is always quickly available to meet daily operations and fulfill the organizational mission.
Pay Attention to Audit Findings: An independent audit conducted by an external accountant is invaluable for pointing out any weaknesses in accounting practices, bolstering financial policies and procedures, and strengthening a culture of transparency for your organization. An audit report (or financial “review” for smaller agencies) typically contains a list of findings with a letter to management. This management letter should go to all trustees (via the audit committee, if the organization has one) as it lays out the auditor’s recommendations regarding procedures and policies, plus any weaknesses in the internal control structure of the organization—all important to the board’s governance oversight and often having a budgetary impact. Depending upon the nature of the problem, addressing issues noted in the audit may take some time to carry out. Whatever the case, progress on the audit response actions should be monitored by and updated for trustees just as frequently as any strategic plan action. Failure to follow up on any shortcomings cited in an audit may limit an organization’s ability to seek outside funding or gain donor support in the future.
As always when I post about a set of related PASAMBAs, more information and greater detail can be found in my book, The Change-Making Board: Consequential Governance for Public & Nonprofit Organizations, available from all major online book retailers or on the “Book” link at the top of the homepage for this blog. In the post next time, we’ll examine the best PASAMBAs associated with running volunteer programs in our organizations. And remember: Any comments or criticisms, plus ideas or requests for a future post, can be sent to me at email@example.com.
R. J. Dunn