Intelligent Governance In Challenging Economic Times

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Intelligent Governance In Challenging Economic Times

In times of extreme financial volatility and uncertainty, the balance sheets AND the leadership stability of all independent schools and nonprofits are vulnerable to varying degrees. How do the Head and the Board manage these stresses? Does the board engage more often and actively in decision-making and offer more advice or expertise to the Head and to the school in an effort to weather the economic storm and calm constituent anxieties?

If so, how does the board lend its knowledge and skills while preserving appropriate boundaries and channels? This is a very delicate line to walk, and when tensions are high, healthy board governance may be at risk.

Schools that are steeped in tradition with deep endowment pockets usually are able to weather successfully the effects of a periodic governance meltdown without fear of serious enrollment or financial repercussions. Survival is the not the question for these schools but rather managing effectively board or constituent anxieties that have the potential to undermine the head, the board, or both and sometimes charitable giving as well.

For younger and/or less wealthy schools, a governance crisis emanating from board misbehavior and inappropriate responses to incidents or external events (economic or other) can lead some schools to economic problems and possibly long term financial stress.

Thus governance training for boards and healthy board responses to constituent and other challenges becomes a sine qua non for maintaining some underlying stability. Note the warning here.

I. Tuition Increase Reaction and Appropriate Response

One school recently, like so many, raised its tuition by 8% both to help increase the amount of money available for need based financial aid and to retain current families strapped by job losses and economic pressures. There was parental backlash even though the Head and Chair sent out an intelligent, persuasive and articulate letter. Even the parents who were not yet feeling economic distress were worried about the possibility of a future decline in the value of their assets and expressed little sympathy for families needing more financial aid. They indicated less inclination towards giving to the annual fund.

This School is new in the sense that it has only a 25 year history. The Board’s and Head’s response to this angry parent reaction defined both the best and worst of governance behavior. The Finance Committee made the initial decision about the tuition increase, and thus even the parents on the Board undercut their own position and that of their fellow trustees by complaining about the process.

The good news is that once realizing the consequences of the lack of full Board debate, the Board acted expeditiously and decisively. The Head and a few key Administrators and Trustees met in focus groups with any parents who wished to attend explanatory sessions and discussion. They heard as a result 200 out of 1000 in groups no larger than 15. The Board reached a compromise: a more modest tuition increase plus a commitment to increase non-tuition revenue sources more aggressively. Parents were given a voice but no precedent was set for a “vote” on tuition increases.

Despite some governance missteps at the outset, the School leadership responded powerfully and appropriately and avoided the typical traps of boards that are “incident based”, i.e., over reacting, by holding a town meeting of many angry parents in a gym where the very nature of the setting and the crowd leads to shouting and not listening, anger and not persuasion, posturing rather than positioning for solutions. Never hold a town meeting.

II. Conflict of Interest and Vendor Connections

In another case for many years a Board member has provided landscaping and similar services to the School through a family-owned company at fair market or slightly lower value. The charitable contributions of the family have been very generous over time. Many School families were aware of the relationship.

No one has ever challenged this Board vendor seriously about this relationship but with recent program cuts and tuition increases, parents and other Trustees are questioning the Head and the Board about whether the School is bidding out all services.

A clash has now evolved between the long time supporters of this vendor including families, faculty and even students and other Board members and families who find the relationship entirely too “close” and even inappropriate in times when greater financial scrutiny and oversight are needed. This “noise” is detracting from a current capital campaign and from the need to make macro decisions to balance the budget.

In the current economic and regulatory environment inviting or allowing vendors (any individual or company with a relationship to the School providing a service for compensation) to serve on a board is extremely risky, no matter how transparent that vendor/trustee may be about that relationship. Even when competitive bids are invited (and often they are not), expect such connections to be challenged for legal reasons (including the need for disclosure of conflict of interest on the 990) and for reasons of community perception. The IRS Form 990 form has changed and asks for more detailed information than ever before, including a particular focus on transparency and disclosure of any conflicts of interest.

III. Searches in Challenging Times

One Board Chair recently said his school could be “one head away from closure” by which he meant that the School did not choose wisely following the retirement of a long term Head. The current Head has been there five years, and the economic and admissions issues have become more pronounced. In reality, that Head may have also served the role of the “sacrificial lamb”, i.e., the one who serves in between a long serving head and the next long term successful one.

The Board is concerned that the next Head needs to be an innovator able to demonstrate the rationale for a pricier independent school in this community of very good to adequate public schools and good but much less expensive Catholic schools. The Chair indicated that unless that next Head can create programs and centers of excellence to justify annual tuition of $15,000 a year, the School may well risk closure in the near term.

When schools change heads, they seldom plan for a period of transition. In these times, high head turnover will be even more detrimental to those schools without deep pockets and significant endowments. Thus knowing full well in advance of the search what kind of head profile the school wants and needs is crucial. Does the board REALLY want an innovator or a go slow consensus building decision type?

Is the school really clear about the degree of skill its next head will need in the areas of fund raising, marketing and financial management? Will it stay with its original profile of skills, experience and characteristics desired in a new leader or will it change that profile in the face of economic uncertainty? One international School recently launched a global search with a desire for a new Head with a “driver” personality. However, when enrollment projections fell below expectations it felt safer with a choice who seemed less like a change agent and a break with its traditional roots.

This consultant finds that most search committees today both in the US and in other parts of the world are seeing a shallow pool of experienced school leaders with the financial, marketing, crisis management and fundraising experience required by the number of schools seeking such talent now. Despite that shortage, many schools seem reluctant to choose an aspiring senior administrator, even though that person has great chemistry with the Board, one of the ultimate keys to school stability.

The exception is internal searches where truly popular, well known and respected insiders stand a far greater chance of survival and success than does an outsider to the school culture. One of the fascinating aspects of searches is that while only 10% of head positions are filled by strong internal candidates, less than 2% of those individuals are “fired” in their careers there. On the other hand as many as 80% of outside hires are “fired”. Companies learned a long time ago to groom insiders for upper management positions, and it may well be that in these more difficult economic times there will be more internal succession plans in the world of independent schools.

III. Boundaries and Channels: More Important Than Ever

There are always governance challenges with board members stepping into the areas of management, curriculum, personnel and/or other operational issues, especially in the case of day school boards made up of 100% current parents.

With the present financial challenges in both enrollment management and balancing the budget, many board members are finding that their anxieties are straining their normal adherence to sound governance practices. Under these circumstances, trustees may feel an increasing need or desire to help by jumping into the fray. They offer their own skills as CFO’s, consultants, accountants, marketing specialists, or other areas where they presume that they can apply their particular skills and experience directly to perceived school needs and, they hope, save the School some money.

There is a real danger here that stressful economic times “unleash” board behaviors not normally accepted or attempted. Whereas in the past board chairs have been able to rein in these behaviors, there are many examples now worldwide of trustees intruding in major ways into the development, admissions and business offices of schools suggesting whom, where and what to cut and how to manage these functions “better”.

One School, following a drop in inquiries, created a marketing committee to help focus on potential ways to convey the School’s mission more effectively to the community. Many good ideas came from these discussions between Trustees and Staff but trouble began when Trustee leaders began to give regular instructions to the advancement and admissions staff and to attempt to make decisions for the School’s management, often bypassing and not consulting with or even informing the Head.

The Committee Chairs enjoyed the work and saw opportunities to transfer their experiences and practices from their own professional life to school life. They almost began to act as on site managers employing the Head rather than the other way around. A new key Administrator became surprised and confused about his reporting relationships and authority shortly after he was hired. Anxiety and frustration and eventually anger arose from staff members, the Head and even some uninvolved Trustees. They felt these directives were no longer about keeping the School healthy or devising a sound marketing plan but about personal agendas. In this case, economic stress and micromanagement by well-intentioned Board members willing to give their time caused a downturn in the Head and Staff’s morale that the faculty began to sense as well.

Such intrusions not only threaten the viability of the leadership of these administrators in these posts but the credibility of the head as well. Further, the solutions proposed by the well-meaning trustees may undermine the very essence of the mission of the school. Therein lays another enormous challenge.

In another School, some Board members have questioned periodically whether the Admissions function is generating a high enough number of inquiries, applications and acceptances given the number of staff in the Office. Some question the effectiveness and personal style of the Admissions Director in particular. Yet they have refrained fortunately from demanding that the Head replace this Administrator or become involved in the day to day operations of the Office.

When does well meaning attentiveness to economic and financial issues begin to undermine the core mission of the school? This usually occurs when the head signals to the board growing sentiment from the “ranks” that budget cuts are undercutting the long term mission and viability of the current culture, its values and priorities. When that occurs, and even after better economic times return, the board may find that the culture does not bounce back and is permanently damaged.

How does the head channel the time and talents of board members into appropriate areas? Trustees bring skills, talent, and motivation to the table. They also need to bring “wisdom”, the most important trait we must seek and cultivate in board members.The wise head finds strategic areas in which to direct and challenge trustees, such as how to secure bond debt, thereby helping to avoid their focusing on micro managing questions.

How much cutting or programmatic sacrifice needs to occur in order to ensure a balanced budget and yet not impair the ability of the school and culture to rebound when times improve? This can be measured only partially because at the front end you cannot determine fully the potential damage to the culture caused by cutbacks. On the other hand, if the school’s economic strength or health or survival is dependent on major immediate cuts, then culture falls somewhat by the wayside with the hope that elements of quality education can be retained, even if the security of faculty culture is strained.

How does the Head convey strongly that he or she was hired to manage staff and program when board members and parents are clearly feeling stressed? This is always a balancing act. A strong head knows when to play the key “cards” of taking a determined stance with the Board, balanced by a healthy respect for those on the Board with professional acumen and experience. The keys are listening, compromise, cooperation and ultimately a unified front.

IV. Summary

The core principles of healthy board governance are more important than ever in times of economic stress and uncertainty. Wise board chairs and thoughtful chairs of the committees on trustees must apply the rules of the road more firmly and evenly. Those holding these two posts are the disciplinarians of the board, and the parties most responsible for ensuring appropriate dialogue about finance and mission and helping the trustees balance the two properly.

John Littleford
Senior Partner