Nonprofit Sector

The Price of Nonprofit Leadership Transitions: Managing Financial Health through Change

September 24, 2018

Is our nonprofit sector amid a substantial leadership shift? Headlines and anecdotal evidence point to executive directors and CEOs ready to retire (or already gone) as this transition has been heralded for several years now. A 2007 study indicated that as many as 75% of nonprofit leaders nationwide were planning on leaving their posts in the next five to ten years. Regardless of whether this wave has crested, passed, or is just gaining momentum, leadership transitions will always be a significant force in the sector. 

An often-overlooked component of transition planning is the role of an organization’s finances, and the potential financial impact of the transition. This came to the forefront of Nonprofit Finance Fund’s (NFF) work on the Newark Resilience Initiative (NRI), a place-based initiative developed in partnership with Prudential Financial that paired financial technical assistance with flexible capital grants. While working with a cohort of 15 Newark nonprofits over the past two years, around half of all participating organizations either went through a leadership transition during NRI, in the two years prior or were preparing for an upcoming transition. 

Through NFF’s consulting and lending clients, we frequently see the challenges and opportunities an executive transition can bring firsthand. Nonprofit succession planning is notoriously rare with just under one-third of BoardSource’s 2017 survey respondents indicating their organizations have a written succession plan. According to results from NFF’s 2018 State of the Sector Survey, just 23% of responding organizations in New Jersey reported developing a succession plan in the prior year. Yet executive transitions occur regularly in the sector and regularly in Newark. These changes in leadership often prove disruptive for longer-range plans, strategies, and equally important – for the organization’s financial health. During such times of executive change, and even in preemptive succession planning, it is crucial for leaders to prioritize sharing financial knowledge and anticipating how the change may affect financial performance.

Through NRI, NFF consultants worked closely with nonprofit leaders to help plan for the financial implications or navigate the aftermath of a leadership transition. We worked with an Executive Director planning for retirement to help other senior and financial staff build their financial knowledge and take on additional responsibility for budget management. NFF consultants helped one board of directors keep financial planning as a guidepost for key organizational priorities through two executive leadership transitions. And we provided a new leadership team with the analysis to better understand the business model they inherited, the financial levers within their control, and a framework for prioritizing a myriad of financial challenges and needs – establishing a new path for the organization. In these and other cases, financial management and strategy proved indispensable for weathering the uncertainty and pursuing the new opportunities that an executive transition can offer. 

While the focus of our work at NFF is on nonprofit finance, in many instances, it is intertwined with leadership change. Reflecting on the stories, learnings, and experiences from NRI, the following considerations can help nonprofit leaders smooth the sometimes-choppy financial waters of leadership change.

  • In succession planning, maintain inventory of key funding and partner relationships and build in relationship continuity. Identify who holds each relationship – whether the executive director, development director, or another board or staff member. For key relationships with top donors, funders, or contractors, make more than one relationship connection. If a key staff person leaves, relationship continuity can help ensure that funding doesn’t also leave with that staff person.
  • During the transition, use “financial storytelling” internally and externally to share financial information and clarify resource needs. This communications approach brings to life an organization’s recent financial past, its current situation, and its future plans and financial goals by pairing numbers with narrative. For internal staff and board audiences, candid communication about the organization’s financial strengths, challenges, and needs can provide alignment and reassurance. For external audiences such as funders, candor about the financial story can go a long way in gaining confidence that the organization clearly understands its financial situation, has a plan to move through the executive transition, and can articulate funding requirements in light of both. Regardless of audience, address financial red flags head-on by recognizing the issues and sharing a plan for rectifying the situation.
  • With new leadership, take a fresh look at financial management and strategy. While change is challenging, it can also provide a fresh opportunity. After allowing time for a new executive to catch up on the financial health, management practices, and strategy for the organization, it’s worth taking stock of what works well and what may need to change. Avoid making change just for change’s sake (“if it ain’t broke, don’t fix it”), but consider providing staff with a forum for ideas and improvements in financial management which can surface new opportunities for efficiency and effectiveness. Are financial reports as clear, timely, and reliable as necessary for staff and board audiences? What tools or analysis would help make financial plans stronger? Does available financial data allow for action?

Leadership transitions can be complex and emotional processes with lots of important needs to focus on. It is also important to pay attention to the change’s financial implications to ensure stable or even improved financial health. 

This list is simply a starting place with rooting in our work in Newark. What financial health suggestions do you have to aid in succession planning and executive transitions? Let us know.

Click here to learn more about the unique story of each participating NRI nonprofit and how they’re serving the Newark community.

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