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TANGO Alliance Brings Free Market Principles to Nonprofits

TANGO Alliance Brings Free Market

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.

THE FACTS

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.

TANGO Alliance Brings Free Market Principles to Nonprofits

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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