NFP Boards Not Ready for Financial 'Future Shock'
A majority of Australian Not for Profit Board Directors do not have the financial literacy skills to meet the changing challenges of the future according to the findings of theGrant Thornton Financial Literacy Survey.
The Financial Literacy Survey in collaboration with Pro Bono Australia set out to understand the state of play in the Not for Profit sector in terms of the impact of new funding models and the ability of senior managers and Board Directors to deal with emerging financial issues and future sustainability.
“The results of the survey clearly indicate that there is a need to improve the financial literacy of Not for Profit Boards, particularly to deal with the challenges of the future,” Hancox said.
For this, directors need to be financially literate.
Pro Bono Australia states that only 40 percent of boards believe they have the skills to handle the financial challenges in the future. That is a potential 60 percent failure rate; a high risk situation as future sustainability is considered.
In a glance:
Most boards have less than moderate financial skills to ensure financial sustainability
Despite the clear relationship between director education and reducing organisational risk, less than 1 in 5 boards will invest in governance training.
The majority of those that do invest, or have other ways to ensure strong financial skills, grow.
Boards that are selected only from a membership base are at the greatest risk of not possessing the right skills to ensure financial sustainability.
Although group training is the proven method of training teams and ensuring everyone has the same level of skill, only a lonely 3 out of 10 directors will approve the investment.
How to Improve Financial Literacy
Areas found to improve director financial literacy, and areas that boards should focus on, included:
Evaluation of financial literacy during the director selection stage.
Including financial training in director induction programs.
Evaluations that assess board needs.
Ongoing director education programs.
The Crazy Part
Here’s the crazy part. While respondents are aware that director education improves financial literacy, only a small percentage of respondents focused on director education.
“The poorest result was recorded in relation to providing financial training for directors, with only 18% of respondents saying their organisation did so,” the national Head of the Not for Profit Industry Group at Grant Thornton, Simon Hancox said.
It’s a ‘we know it works, but we still won’t do it… we’d rather risk our organisation.’
And it’s a lonely road as well. While boards recognise that financial skills are important as a whole, the analysis showed it is equally clear that they believed individual directors should develop the skills themselves.
This may explain why there is so much angst and resistance around group training for boards and senior management.
Plainly put, it is illogical thinking. Group training for teams has been proven to provide the highest return on investment. Resisting group training allows the seat warmers to put tremendous pressure on the minority that engage in training.
Critical Skill Sets for NOW
Across the eight skill sets below, the strength of boards’ skill level was assessed as only ‘moderate’ across respondents, and Hancox sounded a warning for membership organisations.
“The performance level across all eight skill sets is lowest where the Directors are appointed solely from the member base,” Hancox said.
This is of concern for the registered club model, especially where the pool of nominations is further reduced by membership limitations (e.g. must be a sub-club, bowling, etc., member). The future of clubs is being put at risk by the lack of diversity and skill. Smaller clubs are at a more significant risk from the ‘old guard’.
Respondents indicated a moderately high level of reliance on both subgroups (e.g. finance committee) and management. This overall rating disguises the fact that 22% of director respondents said they were completely reliant on a subgroup and a further 22% of all respondents said that their boards were completely reliant on management in matters of finance.
The eight skill sets are (in alpha order):
Balanced - The board has a clear understanding of the respective roles of the board and management
Cost aware - The board understands the costs of providing services/programs
Critical - The board critically evaluates the financial performance of the organisation
Informed - The board understands the nature of key income and expenditure items and the factors that can affect them
Legally aware - Board members understand the legal responsibilities and potential liabilities of acting as a director
Prepared - The board reads and understands the financial information provided by the management team
Reactive - The board promptly reacts to changes in financial performance to mitigate any risks to the organisation
Strategic - The board has a clear understanding of the budget, how it supports the strategic plan and the risks associated with it.
Critical Skill Sets for THE FUTURE
The characteristics of an organisation that is future ready were assessed as the following (in alpha order);
Clear risk appetite
Growing funding / revenue
Knows service cost
Solid asset position
Out of these eight points, having a ‘clear purpose’ was ranked number one, closely followed by strong systems, strategic alignment and diverse boards.
It backs the position we at Integrated Governance take; that the budget is a financial expression of the strategic plan to ensure alignment plus the board needs to strengthen its monitoring processes to ensure the strategy’s success.
There were three areas which respondents believed were slightly less important: know service costs, effective investment and solid asset position. Grant Thornton Australia believes it is these factors that are important in meeting the new challenges of the market place.
Understanding of future revenue is another area that Grant Thorton Australia found performance was below the required level to ensure financial sustainability.
The weakest link, according to respondents, was boards’ ability to appropriately understand the risks and returns of investment and financing decisions. As many club boards sell away assets or buy into management schemes, this may be a high risk area and worth an independent review.
Is it worth investing into director training?
This raises questions such as, ‘Who is responsible?’
71% of respondents said responsibility for financial literacy rested with the individual board member. This is at odds with what actually works.
Because of the potentially devastating effects of poor financial knowledge on organisations, group training is critical. This gets all directors and management understanding the critical ratios for their organisation, how they are to be monitored and reported, and what each ratio means for the organisation’s strategy.
Pro Bono Australia states that organisations with training programs in place assessed the success of those programs as high, the poor take up may relate to a lack of faith that those training programs are cost-effective.
The responsibility ultimately lies with the governing body. Learning is hard and setting up and using new monitoring systems can be tedious.
Yet, to be ready for the future, learning the skills and reorientating your thinking for the future is a must.
About Integrated Governance
Shayne Leslie brings fresh interpretations to organisations that are stuck or want to stay ahead of the curve. She is a prolific idea generator guiding others into uncharted territories. Shayne has achieved breakthrough for many clients and peak bodies through her boutique approach to governance, marketing and recruitment.
Shayne has over 18 years’ experience in registered clubs, not-for-profits, membership-based and arts organisations. In that time, her diverse career has included marketing, entertainment and events, membership, professional development and learning and, more recently, governance and strategy - experience backed by university qualifications.
About the Survey
In looking to the future, the survey sought to identify those financial literacy skills required by Boards to face the challenges of change and to ensure their organisation’s future financial viability. The survey also asked respondents to assess the importance of certain characteristics of financially sustainable Not for Profit organisations.
The Grant Thornton Not for Profit Financial Literacy Survey is a public study undertaken to help understand whether today’s Boards have the skills necessary to guide Not for Profit organisations through the challenges and changes ahead.
Some 1065 respondents from small, medium and large organisations provided feedback for the survey.