TANGO Alliance Brings Free Market Principles to Nonprofits by Jack Horak reviews TANGO’s multi -part mission to bring “business-like” thinking to nonproﬁt board governance and management. The Alliance for Nonprofit Growth & Opportunity’s (TANGO) “business like” approach to nonprofit governance is similar to that of the National Association of Nonprofit Executives and Organizations (NANOE) – though it was shaped from my 36 years practicing both business and nonprofit law, and from sitting on both corporate and nonprofit boards.
With that said, let me explain what I mean by “business- like” and “non-businesslike” thinking in the context of a case study — a hypothetical merger between two social service nonprofit organizations.
Nonproﬁt A is a large, well-managed, and ﬁnancially healthy organization with 500 employees, annual revenues of $ 60 million, and a modest endowment of $ 4 million. Nonproﬁt A and its controlled subsidiary nonproﬁt entities provide a wide variety of social services in their geographic service areas, largely with government funding.
Nonproﬁt B is a more modest organization with 100 employees, annual revenues of $18 million, and no endowment. Nonproﬁt B provides services in ﬁelds like those of Nonproﬁt A – but Nonprofit B and A do not compete. In fact, their service ﬁelds are complementary to each other, and they operate in different parts of the state geographically.
Nonproﬁt B is in stable but deteriorating ﬁnancial condition. This is because it is burdened with excess personnel and pension costs, and long-term indebtedness of $ 3.5 million it incurred in an expansion plan that did not work out. Nonproﬁt B is concerned that its long-term prospects are not good given cutbacks in state funding, its smaller size, and more limited service lines. Nonproﬁt B’s board of directors includes several people whose family members have been helped by Nonproﬁt B over the years, and they are ﬁercely loyal to Nonproﬁt B and even more so to its Chief Executive Officer (Mary Strong) because of the compassionate high-quality care that Nonproﬁt B has provided under her tenure. They are looking for a “way out” of the situation so that Nonproﬁt B can return to stability.
Finally, certain inﬂuential board and management team members at Nonproﬁt A and Nonproﬁt B have known each other for many years and have very close personal and professional relationships.
Nonproﬁt B’s board chair and senior management team approach their counterparts at Nonproﬁt A to propose a transaction under which Nonproﬁt B would become a part of the Nonproﬁt A afﬁliated group — as a new subsidiary. In other words, Nonproﬁt B would continue to exist as a separate corporation (with its own board of directors) but under the corporate auspices and ﬁnancial structure of Nonproﬁt A.
Nonproﬁt A sees the transaction as one in which it could expand its service platform in the state and enhance its bottom line because its existing staff has the capacity to take on the administration of Nonproﬁt B’s programs without additional hiring, and because of the additional funding that comes with Nonproﬁt B’s government contracts. In addition, Nonproﬁt A foresees increased buying power with vendors and suppliers, and better annual fund and planned giving results arising from a merger. Nonproﬁt B sees the transaction as a potential lifeline given its poor long-term prospects.
THE DECISIVE ISSUES
Notwithstanding the solid and independent rationale for the transaction stated above, Nonproﬁt B’s board of directors makes it clear that while it has very high regard for Nonproﬁt A, it also believes that Nonproﬁt B’s unique, compassionate and successful approach to the mission must be preserved — and to this end characterizes the transaction as a combination or merger “of equals.”
Accordingly, it wants (a) Nonproﬁt B’s management and most of its service staff retained (especially its CEO Mary Strong), (b) to keep control of at least 50% of Nonproﬁt B’s board seats after the closing to be sure the quality of its service programs does not change, and (c) a “walk away provision” under which Nonproﬁt B could restore itself to independence if “things don’t work out.” How should Nonproﬁt A respond?
A non-business response: Nonproﬁt A could agree to Nonproﬁt B’s conditions. The rationale for doing so might be based on a combination of sentiments such as “wanting to help them out,” the desire not to lay people off, the beneﬁt of geographic and service expansion, and prospects for enhanced private fund raising. There could also be a strong sentiment at Nonproﬁt A that keeping 50% of Nonproﬁt B’s board members in place (and most of its management) is acceptable because they are good and trustworthy people who are known personally by people at Nonproﬁt A, and because Nonproﬁt B’s board members have been active fund raisers and donors. Finally, Nonproﬁt A might even see the rationale in Nonproﬁt B having the option to leave the afﬁliation if, indeed, things do not work out for either of them.
A business response: Nonproﬁt A must look at the proposal primarily as an economic event one in which it will incur the costs associated with the transaction (legal, accounting, insurance, IT, HR, real estate and others) in return for an “asset” in the form of Nonproﬁt B and its revenue streams (less it accrued pension obligations and long term debt). Nonproﬁt A would, at a minimum, need to see detailed ﬁnancial projections to ascertain whether the revenue streams to be acquired will be sufﬁcient to service the pension costs and long-term debt that comes along with Nonproﬁt B. The projections may show that the only way to cover the costs would be with signiﬁcant layoffs at Nonproﬁt B – both at the management and staff levels – including Mary Strong, the CEO.
As far as Nonproﬁt B’s board members remaining on the board at a 50% level is concerned, Nonproﬁt A’s attorneys point out that at the 50% level these people (if they vote as a bloc) would have veto power over any issue to come before the board — because a 51% vote is needed to carry a motion and a 50/50 vote would result in a deadlock. In other words, Nonproﬁt A would not have control over Nonproﬁt B in the event of any disagreements. Finally, as far as Nonproﬁt B’s request for a “walk away” provision to restore independence if “things don’t work out” is concerned, the business response is that the Nonproﬁt A “team” can only have one captain — and that it would make no sense to incur all of the time and effort necessary to integrate Nonproﬁt B’s operations into the system, only to be at risk of Nonproﬁt B determining it would be better off elsewhere.
The Answer From our perspective, the “business response” articulates the type of thinking Nonproﬁt A should adopt. It should not agree to the terms and conditions requested by Nonproﬁt B; and it should end the discussions unless Nonproﬁt B changes its mind. Nonproﬁt B would either have to take the conditions off the table, look for another merger partner, or devise a plan to work itself out of its troubles (which were created on its board’s watch).
While my advice may seem harsh, this is, in fact, the type of approach nonprofit boards and management need to adopt if they want to stay relevant in the 21st Century operating environment.
TANGO Alliance Brings Free Market Principles to Nonprofits was first posted at INSIDE CHARITY
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