Will Bad Finances Sink You as a CEO?
A new study suggests that weakened budgets can hasten an executive’s departure. Building better bridges with the CFO can help support a leader before the numbers fall short.
“No money, no mission,” I’ve heard a few association executives say in my time. That is, if you’re not generating a profit, you’re not doing all the good things the nonprofit is designed to do.
And it appears that a good number of nonprofit executives are getting the message by getting shown the door when the numbers fall short.
In a study published last month in Public Performance & Management Review, North Carolina State University professors Amanda J. Stewart and Jeffrey Diebold found that “tenure in the executive office is sensitive to nonprofit financial performance.” For a lot of leaders, that’ll seem like a no-brainer. But because nonprofits aren’t accountable to stockholders or shareholders the way that corporations are, many assume that nonprofit execs are given more latitude in terms of financials, unless there’s a case of malfeasance or something similarly egregious.
Stewart and Diebold’s study of 998 nonprofits in the United States keys in on expenditures. They report that when a nonprofit’s expenditures fall by 20 percent over a three-year period—one sign of financial weakness—the nonprofit was 50 percent more likely than other nonprofits to look for a new CEO. “Nonprofits are not motivated by profit, but this study tells us that the field still holds its executives accountable for effective action and outcomes,” Stewart said in a release about the study.
Lowered expenditures aren’t automatically evidence that an executive is failing. As Nonprofit Quarterly’s Ruth McCambridge points out, “budget size is a questionable proxy for effectiveness.” But let us accept that an association’s board likely considers budget size to be a not-unimportant measure of effectiveness, and that as the budget size goes, the eyebrows of volunteer leaders go up. What can a CEO do to make sure that an association’s financial storms don’t disrupt his or her tenure?
Perhaps the first thing to recognize is that managing finances is not a one-person job. The CFO plays a critical role not just in managing the finances of an organization but, increasingly, connecting finances to strategy. A 2016 Ernst & Young study showed that finance chiefs are being asked to balance day-to-day operational duties with more big-picture work. To that end, CEOs would do well to solicit CFOs into the role of connecting the budget to strategy. “Execs should sell the CFO position as a strategic plan implementer,” association consultant Douglas Kleine, CAE, told me. “The CFO of the future needs to be the practical answerer of ‘We can’t do that’ with a ‘Yes we can, and here’s how.’”
And on the flip side of that, CFOs have a responsibility to inform executives about financial state of the organization, and provide fair warning about potential concerns. In 2014 PMMI VP of finance Craig Silverio, CAE, offered a series of tips for CFOs (ASAE members only) about improving relationships with a CEO. In addition to discussing relatively straightforward matters of contracting and risk management, he also recommends that the two work to clarify financial headwinds not just for themselves but for the volunteer leaders who ultimately have the power to remove a CEO. “Are you meeting with the CEO prior to board meetings,” Silverio asks this hypothetical CFO, “and reviewing the messaging of financial performance so that both parties are on the same page when it comes to potential board questions on any issues out of the ordinary?”
“The nonprofit sector has been critiqued as not holding its executives accountable, even when they are underperforming,” Stewart says. How much of that is folklore and how much is reality is an open question, though less so on the back of the new research. But there’s no question that association leaders often struggle with budgeting and strategic planning. A stronger grasp of the numbers—and a willingness to solicit the necessary help to get there—can keep an executive around longer, focusing on both money and mission.
What do you do as a leader to keep up with your organization’s finances, especially when budgets need to tighten? Share your experiences in the comments.
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