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Guided by a Type II map, the board’s attention shifts from conformance toward performance, and the trustees’perspective changes from “inside out” to “outside in.” Balanced budgets are no longer sufficient if resources are dedicated to the wrong purposes; lawful conduct has only nominal value if the organiza-
5 2 GOVERNANCE AS LEADERSHIP
tion serves no useful social purpose. In Type II governance, an organization seeks to align internal strengths and weaknesses with external opportunities and threats, all in pursuit of organizational impact.
Trustees must cope with an additional challenge in Type II governance: a barrage of organizational theory, prescription, advice, and gimmickry that offers scores of ways to understand and influence strategy.To complicate the problem, most of these treatises are aimed primarily at for-profit executives. Partly as a result, many nonprofit boards attempt to do Type II work with a Type I mindset and tool kit that foster formal strategic planning—important work for organizations but not for trustees.To govern strategically, boards need to think, not plan, strategically. To help understand the difference, we trace briefly how these two approaches to strategy have evolved and influenced, if not confounded, trustees.
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Considerations of strategy have permeated discussions of corporate performance since the 1970s. Hundreds, if not thousands, of authors and consultants have suggested (or guaranteed) how companies can gain competitive advantage, either quickly or over the long run. As strategy became fashionable among corporations, most nonprofits continued to act as if the sector enjoyed a grant of immunity from competitive and environmental forces.The dominant “theory” was that success depended more on the organization’s self-evident virtues and unique purposes than on a carefully crafted strategy. Financial support was an act of faith and charity, not a response to an inspired strategy. Then circumstances changed.
TYPE II GOVERNING: STRATEGIC 53
• Demand for the services of some nonprofits declined. For instance, private colleges and universities confronted stiff competition from lower-priced public institutions. And with cutbacks in insurance reimbursements and the growth of outpatient treatment, hospitals were saddled with empty beds and budget deficits.
• Arts organizations, from orchestras to museums to ballet companies, simultaneously encountered a bevy of challenges: resistance to expensive tickets, distaste for modern genres, unfavorable demographics, and intense competition from popular culture for the attention of younger audiences.
• Nonprofits became subject to external ratings such as US News & World Report’s rankings of colleges, Leap Frog’s assessments of hospitals, and GuideStar’s financial analyses of charities.The comparative data enlightened and empowered consumers, shaped public perceptions, and prodded administrators to be responsive to customer concerns.
• Government agencies, foundations, and philanthropists started to treat grants to nonprofit organizations more like investments than gifts. Resource providers wanted objective assurances that allocations to a particular organization would yield a higher rate of social return than an alternative investment opportunity.
• With more information available about nonprofits’ performance, competition for personnel intensified as well. A high-performing organization could attract better staff and trustees than a low-rated one. Who wouldn’t rather be associated with a frontrunner than an also-ran?
Eventually, nonprofit organizations realized that these profound changes in the environment could no longer be ignored.
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Strategy became an essential organizational focus, and the board became a player. Steeped in strategy at work, many trustees were eager and able to apply these same techniques to nonprofits.
BOARDS AND FORMAL STRATEGY: A TYPE I APPROACH TO TYPE II WORK
Strategy has now become a watchword, if not a mantra, for the not-for-profit sector. The mere adoption of a strategic plan (never mind successful implementation) suggests, ipso facto, organizational professionalism and legitimacy. Few nonprofits can afford to be without a written plan. Funders and other influential constituencies expect a strategic plan no less than a budget and an audit. Savvy prospective trustees ask to see the plan which, at least symbolically, signifies professional management and organizational maturity. Normally, a few leaders of the organization, sometimes aided by consultants with off-the-shelf tools and step-by-step techniques, create or guide the development of the plan, a formal document often adorned with four-color graphics.
Like immigrants to a new land, many trustees import old customs to a new world; they carry the baggage of bureaucracy to the realm of strategy.The first and natural inclination of trustees is to do strategy the old way, much as boards do finance, facilities, and programs. Just as boards required and reviewed budgets, boards now expect to approve plans and monitor implementation. In fact, boards treat budgets and plans rather similarly. The standard procedure is to ask technical questions: Do we have the money, the space, the personnel? Do we have a feasible time line? Are the demographic or inflationary projections reasonable? Have we included benchmarks and milestones? Consistent