CEOs are eager to go into the boardroom if they have a pretty financial picture to paint. But when the picture is less than attractive, having a good strategy in place will help turn the conversation into a problem solving session.
A new initiative is "over budget." The quarterly financials are "worse than expected." Or maybe revenues are "down." These are just a few examples of announcements association executives don't look forward making to their boards. But with more associations experiencing drops in conference attendance, membership levels, or the value of their assets, more of these conversations are happening. "My first trip into the boardroom was with numbers that didn't look anything like what came before," says Mike Grubb, CAE, the new president and CEO of Southern Gas Association.
However, the state of the economy has brought a sense of solidarity to associations, and the bar for what passes as a true financial crisis has been, if not exactly raised, then shifted to a new standard. For example, when the American Physical Therapy Association lost $6.6 million in 2008, about $6 million of which was directly related to investments, the board was not surprised. "There wasn't even a blink because it was 2008," says APTA CFO Rob Batarla. "It was the recession."
|Online Extra: Mike Grubb on Crucial Conversations|
Watch Mike Grubb, CEO of the Southern Gas Association in Dallas, Texas discuss early conversations he had with his board chair that helped build a solid relationship and made it easier to work together constructively later on when SGA had to tackle budget shortfalls.
However, regardless of the economic backdrop, the onus for turning things around is on the CEO. The way in which association executives break bad financial news to their board can have a direct bearing on how quickly and constructively they can address the core issue and move on.
"If the CEOs realize the board members they have are in those positions to help associations, and you give them enough time to help, that makes everyone on the same team," says Larry Montague, president and CEO of TAPPI, an association dedicated to serving the pulp, paper, and packaging industries. "I know this may sound crazy, but sometimes bad news, when presented early and sincerely, can improve relationships with your board. After all, anyone can have a great relationship when things are going well. The true test of a relationship comes when things are not going so well."
Decipher the Money
Financial setbacks cannot always be avoided, but what can be avoided is poor communication and sharing of the crisis with your board. For example, it's not enough to send regular financial reports to board members. Association executives must also act as translators. According to Joanne Dunne, CAE, president of the Lyons Consulting Group, LLC, board members often are not as skilled at financial assessment or reading statements as might be expected. "One of the complaints is that no one tells them anything. You have to really probe that," says Dunne, who has been involved in multiple association turnarounds. When sending financial updates to board members, Dunne says, "Do you send any kind of explanation? Do you review it with them?"
Dunne is a big believer in using the CFO and outside auditors to clarify dimly understood aspects of finance for the board and the CEO. "In general, most CEOs don't have the level of expertise to make these kinds of forecasts," she says. "You've got to have really good financial advisors." When a crisis does occur, she said, the presence of outside professionals can bolster the board's confidence about the path they choose to take.
Batarla agrees, adding that the CFO role is supposed to be proactive on that account. "A lot of time, CFOs think their role is to stand up and report. It's my job as CFO to make sure we know why" the numbers are the way they are, he says. "It's not about reporting numbers; it's about looking forward."
Batarla makes a point of using board meetings to educate APTA board members about finance. He also avoids the temptation to put a spin on the numbers, instead doing what he calls "overemphasizing" honesty and transparency. "It's one thing to say, ‘We broke even.' It's another to say, ‘Well, we did well with one, and we did worse with another,'" he says.
|Transparency With Clarity|
When Larry Montague joined TAPPI, an association dedicated to serving the pulp, paper, and packaging industries, as CEO in 2006, he inherited an organization that had lost nearly $24 million during the previous 11 years. "I am still amazed, to this day, at how many longtime employees and members respond, ‘I had no idea that things were in this bad of a shape,'" he says.
Montague's strategy has been to make the facts known. During nearly every meeting, he shows the "upside-down bar graph," as it has come to be known, "so that the new board members will have a baseline of where we were when the current team took the reins," he says. Now an on-staff controller gets numbers to him within two weeks. Montague sends out a profit-and-loss statement, balance sheet, and executive summary to the entire board and staff, pointing out any variances and their causes. He also identifies any potential threats to hitting their numbers. "If we are off our pace for membership renewals or attendees to a conference, I not only let them know, but I solicit their help in rectifying the situation," he says.
Calibrate the Timing
So how do you determine the right time to involve the board if there's a problem? "The great answer to that is it depends," says Batarla. "You don't want to rush, but you don't want to delay." Among the variables are the severity of the situation, timing issues, and whether it involves priorities that the board is sensitive about. "You have to know your audience," says Batarla, adding that his personal litmus test is the impact the information would have on the business at hand. "Would this piece of information affect someone's decision making? If they didn't know X, or if they did know X, would that change their decisions?"
Certainly it is wise to keep the board president and treasurer in the loop between meetings when a crisis is looming. In addition to leading board meetings, they play an important role as sounding boards and advocates. "You don't bring up a financial problem for the first time at a board meeting," says Dunne.
That said, it does little good to share news with the rest of the board until the CEO is ready to explain what went wrong. "When you have to deliver bad financial news without valid reasons, then you're not showing accountability," says Batarla. "Someone's going to ask why. Someone should ask why."
When a financial crisis is ready for the board's attention, Dunne says, put it first. "The number-one agenda item has got to be that, because it's going to frame everything else," she says. Most importantly, Dunne adds, "You don't just bring the problems; you bring the solutions–or at least some recommendations."
The way an executive addresses the board matters, too. "I try to be very straightforward, very clear, about what the issues are and what the options are," says Dunne. "Besides being open and honest, I don't sugarcoat it."
That is the protocol Dunne has been following as interim executive director of the National Council of Catholic Women (NCCW), charged with helping the 90-year-old organization to turn around a dire financial situation. She started by meeting with the board president and treasurer, apprising them of the problems, and then she brought in financial advisers to help transition to a new accounting model and set new expectations.
|Timing the Telling|
In 2008, the Southern Gas Association dedicated a sizable sum to overhaul its technology systems and measure up to the promise splashed across its homepage:
"Linking people, ideas, information." Under new president and CEO Mike Grubb, SGA set into motion two new websites, including one devoted to distance learning, and a switch to a more integrated association management system.
Although the technology initiative has started to show benefits, it also has been more costly than anticipated. A week before his board of directors meeting in April, Grubb realized costs could exceed the project budget by 40 percent. He was faced with a choice: Tell the board at the meeting, or put it off until more information could be gathered.
After consulting with the chairman and the auditing and finance committee chair, the decision was made to put off telling the entire board about the situation until SGA staff could finish researching all the options. "If you're the one ultimately standing before your board, you'd better be able to answer them," says Grubb.
The NCCW leaders were shocked at the dire state of its budget, which had never been fully disclosed or explained to them, so they have appreciated both Dunne's unflinching realism as well as her collaborative approach. "That helped us to be on board with her. We have to trust our executive director, and they need to have enough trust in us, so we can work as a team," says NCCW President Patty Johnson. "In order to survive, we basically had to create a new organization."
When financial setbacks occur under the watch of a longtime executive director, there are additional challenges. The board may blame the executive, whether merited or not. Dunne advises letting board members vent before responding with facts and considering where their passion may be coming from. "Especially if their terms aren't very long, they want to leave on an up note," says Dunne.
While it is advisable to apprise the board leaders of financial problems before the rest of the board, it is important not to manipulate the process. "I've been on boards where there have been informal executive committees, a subgroup of the board that is unofficially aligned and communicate with the chair," says Norman Marsolan, vice chair of TAPPI. "That's one of the reasons I respect Larry [Montague]. He doesn't fall victim to that. He remains very transparent, and he communicates well with everyone."
Above all, keep things in perspective. "There is a natural tendency to possibly be defensive when breaking bad news. Fight that tendency," says Thomas Johnson, president/CEO of Medicaid Health Plans of America (MHPA). "Yes, there will be some feelings expressed initially that you may not want to hear. But the goal should always be to get the organization back on track. The fact of the matter is many of their own businesses have challenges as well. Things aren't always going to run smoothly."
|A Lesson in the Silver Lining|
A few years ago, the Medicaid Health Plans of America attempted to hold multiple conferences to increase nondues revenue. But the organization was still small and had held its first annual meeting only the year before. As a result, attendance was low for each meeting, and MHPA suffered strong hotel attrition losses that took about 18 months to overcome. "It was clear that our industry was not ready to attend four meetings during the year," says Thomas Johnson, MHPA's president and CEO.
The financial crisis served as a wake-up call that the organization had to do a stronger job of assessing such risks in the future, while it galvanized individual board members to ensure the organization would not go under. "I actually think it brought our board together in a way it hadn't been together," says Johnson. Since then, board members have taken up the cause to ensure one very strong annual meeting, and MHPA created an ongoing scoreboard of key metrics to ensure the organization stays on track.
In a financial crisis, it's important to manage expectations by setting realistic goals and limited benchmarks. "Creating too rosy a vision can be very risky," says Dunne. "You've got to be realistic and honest about what it takes to resolve a problem. In other words, you have to underpromise and overdeliver."
In a deep crisis, Dunne advises clients that it may take a year to stop the hemorrhaging of members, and real growth probably will not happen until year three or four. "It is year two that's the hardest. It's year two where turnarounds fail, because the crisis is over, but the growth hasn't happened yet. The boards get restive," says Dunne.
In the meantime, board members can take part in the solution, through fundraising, talking up a conference, or recruiting members. "In a crisis, it shows members and others that the board is committed," says Dunne.
Board relations can also be strengthened when CEOs and boards work together. MHPA's Johnson helped bring that organization back from near failure a few years ago and created a metrics dashboard to help avert future financial and operating problems. "I think that every association executive thinks about this issue more than any other on a day-to-day basis. I would hope that association executives know that they are not alone in dealing with financial challenges and that turnarounds do happen," he says.
Whitney Redding is a freelance writer in the Washington, DC, area. Email: [email protected]