Should I invest/donate to a specific nonprofit?
If you were approached to invest in a business, a significant part of your decision-making process would include conducting due diligence. In addition to running a preliminary financial review, you would look at the market, competition, and the company’s governance structure. You would also examine the leadership to ensure those involved have the knowledge and expertise to succeed. And even after doing that, you might dip your toe into the water first, making a small initial investment as you learn how the business operates. Eventually, you may become ready to make more significant investments as your ROI and confidence in the company grow.
Now return to the first sentence of the above paragraph and replace the word “business” with“nonprofit.” Would you go through the same steps? Independent Sector's 2019 Pennsylvania state profile shows 63,345 nonprofits in Pennsylvania alone, employing 790,368individuals (about half the population of Idaho). That is 15 percent of the state’s workforce. They are generating $132 Billion in annual revenues.Foundations invest more than $2.4 billion annually, and individuals invest an additional $6.5 billion (about $20 per person in the US). Nonprofits are the largest industry in the state, and the success of these organizations is vital to the prosperity of the communities they serve.
Investors (donors) often support nonprofits because of their passion for the mission. Still, proper due diligence is just as crucial for ensuring a return on their investment in the nonprofit sector as in the for-profit sector. In the for-profit space, a return on investment means you see a financial gain. In the nonprofit area, you know the organization successfully carries out its mission over the long term. A firm understanding of the state of the organization’s governance and business helps contribute to a better investment decision. And asking leadership the following basic governance questions before investing will encourage the nonprofit to apply a business lens to its operations over time:
What is the size and composition of the board?
Research shows smaller boards are more collaborative and make decisions faster. While nonprofit boards are decreasing in size (Leading with Intent: 2017 Index of Nonprofit BoardPractices), many--unlike their corporate counterparts--boards are large because their members are utilized for their ability to invest/donate or seek investors/donors for the organization. However, the larger the board, the more challenging it can become to communicate effectively, particularly around strategy and risk. If a board has more than 20 members, I suggest you ask additional questions, such as: “What is the committee structure?”, “What are the roles and responsibilities of the committees?”, “How do the committees report information to the full board?” and “What is the process to ensure the entire board engages in a robust discussion to provide strategic oversight?
A board’s composition impacts how it leads. Aboard with diverse thoughts can harness the full potential and promise of each person’s unique perspective and unique way of thinking. In conducting your due diligence, I suggest you explore and define the organization’s diversity, equiry, and inclusion values.
A board’s composition impacts how it leads.
Are the organization's goals consistent with its financial resources?
How many days of cash on hand does the organization have? In addition to reviewing the financial statements, this is a basic but essential question. The answer to this will vary across industries; however, knowing the number of days an organization can continue to pay its operating expenses, given the amount of cash available, will provide quick insight into its current state. More importantly, it will raise a red flag about the viability and financial health of the organization if it does not know the answer.
How do you assess and mitigate risk?
Too often, the risk is an after thought to strategy. Questioning how the organization deals with risk will provide insight into whether it actively identifies and addresses potential risks. Organizations that are not proactive in mitigating risks will be vulnerable to potential disruptors that could negatively impact the ability to deliver their mission.
Suppose investors think twice about investing in organizations that cannot answer these questions. In that case, it will cause nonprofit boards and management to have serious conversations about the strategy that powers the mission to ensure a viable future and the organization remains sustainable. When individuals incorporate the above questions as part of their investment decision, they will be helping a vital industry grow more robust and have a more significant lasting impact.
