The Four-by Four Report: Effective Oversight

Copyright © Regina E. Herzlinger, December 1999

The Four-by-Four Report:Effective Oversight

Professor Regina E. HerzlingerHarvard Business School


Why Government Is Not It

Why Business Is Not It

Why Nonprofits Are It

Nonprofits’ Achilles’ Heel

Effective Oversight: The Four-by-Four


Society Needs Organizations That:

• Raise unpopular social issues

• Enable spirituality

• Redistribute income to the less fortunate

• Support cultural activities

• Provide long-term solutions for social needs effectively and efficiently


Why Governments Are Not It• Political focus mitigates sponsorship of unpopular

social issues–

• Church-state separation

• Political pressures on cultural involvement–

• Short-term focus, driven by voting cycle–

homeless requests rose by 15% in 1997-1998*

social realism

crumbling infrastructure

*Peter T. Kilborn, “Gimme Shelter,” The New York Times, December 5, 1999, Week in Review, p. 5.



Deinstitutionalization



• Short-term focus: Budget “savings”

• Interest group groupie: Who speaks for the less fortunate?


Why Business Are Not It

$

• Will sponsor unpopular issues only if sponsorship serves corporate purposes.

• Will provide services only if it can receive commensurate revenues.

• Is quarter-to-quarter oriented.


Governments Can Businesses Can

Redistribute Income

Provide effective and efficient products


Why Business Is Not It

• Short-term focus

• Goes where the money is

Lack of social entrepreneurship

Reluctance to redistribute



• Short-term focus

• Interest group groupie


Society Needs Organizations That:

• Raise unpopular social issues

• Enable spirituality

• Redistribute income to the less fortunate

• Support cultural activities

• Provide long-term solutions for social needs effectively and efficiently


Why Nonprofits Are It

• Social entrepreneurialism• Spiritual• Cultural• Redistribution to the less fortunate• Effective and efficient services• Long-term focus


• Social entrepreneurialism - Sierra Club, American Rescue Committee, Gay and Lesbian Activists

• Spiritual - Mormon Church• Cultural - Museums and musical

organizations• Services for the less fortunate - Many examples• Effective and efficient services - Homeless shelters run

by the Salvation Army• Long-term focus - Foundations

How Do Nonprofits Perform?


Nonprofits Are Not Always Wonderful


• Social entrepreneurialism - Foundations• Spiritual - Declining membership• Cultural - “Why are Museums So

Clueless?”• Services for the less fortunate - Hospitals, education and

cultural organizations• Effective and efficient services - Highest rates of inflation• Long-term focus ?

How Do Nonprofits Perform?


Foundations

*Marina Dundjerski, “Playing the Percentages,” The Chronicle of Philanthropy,” October 21, 1999, p. 21.**Peter Frumkin, “Private Foundations and the 1969 Tax Reform Act,” American Review of Public Administration 28(3), September 1998, pp. 266-267.

• While assets tripled, from 1981-1997, distributions to charity declined from 7.9% to 4.8%.*

Aimed at the Poor?

• Rise in administrative expenses, as a percent of grants, from 6% in 1960 to 18% in 1989.**

Efficient?

• “It is difficult to point to a major contemporary problem . . . for which foundations have played a leadership role.**

Effective?


Museums

*Nancy Keates, “Why Are Museums So Clueless?”, Wall Street Journal, April 4, 1999, p. W1.** Paula Weidiger, “The Supreme Commander of the Guggenheim Empire,” New Statesman, February 20, 1998 (127: 4373), p. 42.

• “All show and no tell” . . . “We don’t want to detract from the object itself. . . . (With) too much text, your eye is drawn away from the art.”*

Cultural?

• While 98% of the Guggenheim collection is in storage, the director bought 200 additional works.**

Efficient?

• “The Bilbao Museum is gigantic enough to dwarf paintings. (NotesPhillip Johnson) ‘When a building is (so) good, f--- the art.’”**

Effective?

Long Term?• The Guggenheim sold three major works from the permanent collection

to reduce a $50 deficit.**


Lack of Oversight

Achilles’ Heel


Oversight Problem Is Widely Acknowledged

Internal Evidence from Nonprofit Executives• 74% thought there was “a problem of openness and

accountability in the” nonprofit sector.

• 52% of them said “public confidence in . . . Nonprofits will continue to erode.”

• Nonprofit leaders self-grades: 53% “C”, 35% “D”

Marina Dundjerski, “Non-Profit Officials Admit Weakness in Leadership,” The Chronicle of Philanthropy, November 4, 1999.


Oversight Problem Is Widely Acknowledged

External Evidence

• “’The watchdog seldom barks . . . the media has not done a very good job keeping . . . nonprofits accountable. But then, neither has anybody else.”**

*C. Eugene Steuerle, “Will Donor-Advised Funds Revolutionize Philanthropy?”, Charting Civil Society, No. 5, September 1998, p. 2.**George Rodrigue, “For America’s Nonprofit Sector, ‘The Watchdog Seldom Barks,’” Neiman Reports, Spring 1998, p. 1.

• Donor-Advised funds grew from zero in 1992 to $2 billion in 1999.*


Oversight Problems Caused Federal Regulations

• The nonprofit sector itself supported these sanctions to increase accountability.

Harvey P. Dale, “Reflections on Inurement, Private Benefit, and Excess Benefit Transactions,” Tax Forum, No. 520, November 3, 1997.

• To protect against inurement and private benefits, the U.S. government imposed intermediate sanctions.


Why Is Oversight Lacking?

• Few paying customers

• No voters

• No market mechanism


Why Nonprofit Boards Are Not Effective Overseers

Rah-rah

Conflict-of-interest

Micro-management

Philanthropic Advisory Serviceis arm of Better Business Bureau


An Example of Questionable Board Oversight

Allegheny Research and Education’s Billion Dollar Bankruptcy

Rah-Rah Board—Approved expansion despite surplus of hospital beds and dominant HMOs.

Conflict of Interest—Bankers on the board arranged repayment of their loans shortly before the bankruptcy.

Board members were prominent bankers and businesspeople.Ron Shrinkman, “Bankruptcy Filing by Pittsburgh’s AHERF Raises Questions About Its Board’s Role,” Modern Healthcare, August 3, 1998, p. 70.


Problem: Lack of DADS

1. Good Disclosure

2. Good Analysis

3. Dissemination of Informationand Analysis


Current Nonprofit Information

Scattershot, not systematic or comprehensive.

Focused on process, not outcomes.

Rarely compared to other similar organizations.

Rarely addresses information needs of all constituencies.

Rarely widely disseminated.


Example of Problems:A

• Rehabilitation agencies’ theory that every dollar produces corresponding social benefits had “nothing to back that up.”

• 70+ rehabilitation organizations signed up for “outcome” research with National Results Council that will compare programs using a common benchmark.


Example of Problems:B

• Data are revealing. One participant found that many of their trainees were not employable even after completing the program.

“It’s an eye-opener for us.”

• But, none of the participants have agreed to make their scores public.

Thomas J. Bilitteri, “Tracking the Effectiveness of Charities,” The Chronicle of Philanthropy, June 4, 1998, pp. 35-37.


Needs

1. Systematic, comprehensive, relevant way of presenting information

2. Comparative analysis

3. Widespread dissemination


Examples of Effective, Systematic,

Comprehensive Disclosure1. Ten Commandments

2. 1951: GE “Key Results”

3. 1990s: Dashboard and Balanced Scorecard Measures


The Four-by-Four: Systematic, Comprehensive Disclosure for Nonprofits

Four QuestionsFour Constituencies

1234

1 2 3 4


Four Questions

1. Mission vs. resources

2. Equity: Intergenerational and distributional

3. Match of resources to longevity of needs

4. Diversification of sources and uses of resources


The Four QuestionsExample: Social Security

Poor, as shown by huge deficit.1. Mission vs. Resources?

Poor, current payers finance past generations.2. Equity?

Poor, long-term needs are financed by short-term payroll tax.3. Match?

Poor, taxes are sole source of funds and government securities sole investment.

4. Diversification?


Four Constituencies

Clients Donors Staff Society

Is the Organization Meeting Their Needs?


Responding to the Four ConstituenciesExample: The Brooklyn Museum’s Sensation

Exhibition—Saatchi Collection: A

Cutting-edge art, including a Virgin Mary portrait smeared with dung.

Clients?

Charles Saatchi donated $160,000 in exchange for considerable control over the exhibition.

Donors?


Responding to the Four ConstituenciesExample: The Brooklyn Museum’s Sensation

Exhibition—Saatchi Collection: B

Their role diminished by donor. Employees “fretted that Mr. Saatchi was taking over.”

Staff?

• New York City Mayor withdrew government support.• New York Times prints many unfavorable stories.• Saatchi planned to sell some of his collection after the

exhibition.

Society?

David Barstow, “Artistic Differences: Art, Money, and Control,” The New York Times, December 6, 1999, p. A1.


Four-by-Four ReportClients Donors Staff Society

Four Constituencies

Four Questions

Goals:

Equity:

Matching:

Sustainability:

Are the goals of each constituent group metin an effective and efficient way that isconsistent with the organization’s resources?

Is there equity across different generations and types of constituent groups?

Is there appropriate matching of the sources and uses of the organization’s resources?

Is the organization sustainable?


Girl Scouts of the USAThe Vision, Strategies, and

the Four Constituencies

The Vision

Help Membership toBecome Well-

Balanced, EffectiveWomen

Society

WidespreadFavorable

Recognition

Donors

DonorSatisfaction

Staff

Best of Class Staff

Clients

World Class Service


• Cookie sales are major source of revenue• Heavily invested in camp properties• Membership declining• Membership does not reflect face of America• Continual small losses• Staff somewhat depressed

The Girl Scouts of the USA:Problems


The Four-by-Four Report: GSUSA’s ClientsVision: Help Members to Become Well-Balanced,

Effective WomenStrategy: World-Class Services

Question1) Are goals met effectively

and efficiently?

2) Is there intergenerational and distributional equity?

3) Is there an appropriate match of organizational sources and uses?

4) Sustainability of resources to serve client needs?

Response• Current membership is

declining• Programs do not meet

their needs

• Members do not reflect diversity of U.S.

• Too much investment of money, too little use of camping properties

• Low staff turnover in organization enables continuity

Action Plan• Expand membership• New behavioral skills program:

less kitchen, more workplace

• New recruiting plan

• Consolidate camp properties, use proceeds for other programmatic purpose

• Continue to invest in training


The Four-by-Four Report: GSUSA’s DonorsVision: Help Members to Become Well-Balanced

Effective WomenStrategy: Donor Satisfaction

Question1) Are goals met effectively and

efficiently?




Response• Will donation to GSUSA

achieve desired goals?

• Pattern of “losses” robs the future

• More to camps than other programs

• Pattern of soft revenues for hard expenses

• Excessive spending on “edifice complex”

Action Plan• Need to demonstrate that

donations will accomplish goals

• Eliminate losses• Redistribute expenses

• Build up endowment fund

• Reduce “bricks and mortar” as a percentage of the total


The Four-by-Four Report: GSUSA’s StaffVision: Help Members to Become Well-Balanced,

Effective WomenStrategy: Best of Class Staff


and efficiently?




Response• Employee pay was competitive• Shortage of volunteers• Unrealistic self-image

• Employees’ average age increasing

• Staff did not reflect diversityin U.S.

• Training in current employees• Low turnover

• Disperson in types of employees

• “Star”

Action Plan• Develop new programs to attract

volunteers• Provide training to enhance self-image

• Recruit younger and more diverse employees

• Increase training

• None required

• Increase recruiting of diverse staff• Frances Hesselbein “resigns”


The Four-by-Four Report: GSUSA’s SocietyVision: Help Members to Become Well-Balanced,

Effective WomenStrategy: Widespread Favorable Recognition


and efficiently?




Response• Too much of the cookie sales

revenues is spent on administration

• Patterns of losses and poor camp maintenance steal from the past and future

• Organization looks old-fashioned

• Excessive reliance on cookie sale revenues

• Low staff turnover organization

Action Plan• Increase percentage of cookie

sales funding used for programmatic expenses

• Find other sources and revenues

• Capital drives to build up endowment

• Consolidate camps• PR campaign

• Build up endowment funds

• Continue to invest in training


Four-by-FourRelies on

Accountants


The Future Belongs to You

Documents

The Four-by Four Report: Effective Oversight