Building Your Assets
There's more to "capital" than what shows on the balance sheet.
By Charles L. Baker
Comedian Moms Mabley had a wonderful line: "If you see anyone feeling normal these days, they're probably just not well." That sure looks like the case for many nonprofit organizations.
Wherever we look, it seems that formerly stalwart organizations are struggling with fundraising, loss of public confidence, or declining quality. These concerns nearly always end--or begin--in a conflict between board and staff. Your local newspaper probably has more than one example of a human service or arts organization where internal conflicts have spilled over into the public eye.
In the day-to-day operations of a nonprofit organization, it might be said that the goal of all activity is the building of capital for the organization. Although staff and board alike might agree with that sentiment, they often forget there are four types of capital.
All of these assets are vital in a strong organization--and "growing" one asset, if we aren't careful, may deplete another. It's greatly to the advantage of the organization's long-term health, however, to note that all forms of capital can be "spent," and given enough time and effort, each can be converted into one or more other forms.
During stressful times, it is common for the board and management to focus almost exclusively on financial capital. This is, of course, the money or securities that are necessary to meet the payroll and pay the bills. Financial capital is vital in the short run.
When executives gather at a conference, the conversation frequently turns to discussions of finances--accounts receivable, payables, and lines of credit. When board members are sharing lunch, their conversations turn to discussions about the size of the endowment fund and how to cut the budget. We've all been a part of those conversations--way too often. The other forms of capital don't get nearly as much attention.
When there is less financial pressure, both board and management often turn their attention to physical capital. These are the hard assets, such as buildings, vehicles, or equipment owned by the organization. Physical capital has everyday value, and it has the advantage of a having estimated financial worth that can be sold to generate financial capital in a time of need.
One new agency executive complains, "I have a roof on the administration building that leaks at the slightest sprinkle, but all the board wants to talk about is how to maintain our endowment fund."
The Chair of the board's Finance Committee has a different perspective: "When our time as board members is over, people will review our legacy and ask if we were good stewards of the endowment."
They're both right, of course, in this conflict of two different types of capital. Looking at the organization's overall assets is critical, no question. But, although they may not be popular for their views, members of the board's Property Committee must stand up for the legacy of neglected and deteriorating buildings.
At least financial and physical capital have a dollar value in the annual audit. True, physical capital may not get enough attention, but the auditor does provide a dollar value for the agency's buildings and real property.
But the board needs more than the Finance Committee, and management needs more than a CFO. Good CEOs spend a lot of time trying to grow human capital. This is the value of resources found in the employees of the organization, including their skills, education, knowledge, and experience.
Obviously, employees add value to the organization. Over time, their work and productive efforts build both the organization's financial and physical capital. Unfortunately, employees only show up in financial statements as liabilities. To forget that it is human capital that earns all the revenue of the organization is a terrible mistake.
One business executive complains, "I have some highly skilled employees, and every year I resent their very high salaries, but then I remember I wouldn't have a business without them."
Unfortunately, many child welfare organizations have not invested in the asset of human capital, and they tend to see child care workers and social workers as easily replaceable parts in a machine. As CEOs and boards focus too heavily on financial assets, they have seriously failed to understand, as one example, the connection between high turnover and the number of physical restraints of children. Inexperienced workers just do not know how to use their relationships in behavior management. This kind of skill is not developed in college classes; it's only developed through good supervision and years of experience.
We could gain some insight from those organizations that are more heavily invested in human capital. For example, it takes many years to select and hire the musicians who are the human capital of your local orchestra. Successful orchestras are deeply committed to low turnover. They realize that, just like the other forms of capital, human capital can be spent, and the orchestra board understands a dramatic loss of several players cannot be taken lightly--it's no less serious than financial mismanagement or failure to repair a leaking roof.
Child welfare agencies often do not spend the time and effort necessary to select, hire, and develop unique and highly qualified human capital. The evidence for this is in our very high rates of turnover. What does the management of an orchestra know that we don't?
Orchestras and child welfare organizations do have one thing in common--low salaries. But, whereas the orchestra conductor knows the orchestra is never going to be much better than the last chair of the second violin section, the board and management of many human service organizations tend to think that one direct child care worker is pretty much like any other. The orchestra builds retention through its selection process. Applicants know a lot will be expected, but if selected they will be working not just for a salary. They will be working for the applause. Boards and managers of child welfare agencies should perhaps more carefully consider how to recognize--and applaud--the work of outstanding frontline performers.
One humorous executive notes, "If every board member had to spend an orientation day working a shift in the group home--our staff would be appreciated a lot more."
With dedication and effort over the long haul, an organization can also build its social capital. This refers to the resources available to the organization by virtue of its history of positive efforts in the community. This is a reciprocal asset, built on mutual trust over time. Social capital is the good will of the public toward the organization. Only the best organizations--with insightful executives and board members with a genuine, long-range view--attempt to measure and care for the legacy of social capital.
Part of the notion of social capital is bound up in the public's perception of the quality of the service or product any organization produces--and the quality of something less tangible, like musical performance or child welfare work, is really quite difficult to measure. An in-depth customer and community survey, conducted by an external consultant, is necessary for this assessment. Interviews with key customers, vendors, political leaders, neighbors, and even competitors will give the organization an opportunity to take a candid look at the quality of its work and its value to the community.
Many organizations avoid such surveys, perhaps because of the expense, but such knowledge is extremely valuable to the board, since one measurement of social capital for a nonprofit is the amount of money that can be raised in support of the organization. Having a great reputation--positive social capital--can translate into stronger financial support.
Accounting procedures do a fine job of reporting on the net worth of an organization's financial capital, and an adequate job of discovering physical capital. They fail miserably in accounting for the worth of human and social capital.
In determining an organization's overall assets, therefore, the board and management must keep in mind that all forms of capital can be built, saved, and spent. Each form of capital can be transformed into another form, although with both human and social capital the process takes longer and is more difficult to quantify.
No nonprofit board, in the interest of positive fiscal health, can afford to make a mistake with either the human or social capital of the organization. The board's role is analogous to the chicken in the old story of the hen who suggested to the pig that, as a gesture of good will, both animals could make a contribution to the farmer's breakfast. The pig responded that although an egg is a worthy gift, bacon is a genuine sacrifice.
In a time of short-term financial stress, sacrificing the human capital of a good organization can reduce the public trust in the quality of that organization, and damage its long-term financial health.
Charles L. Baker is the President of Baker & Company, Louisville, Kentucky, providing support for nonprofit boards, executive coaching, and executive talent matching. Contact him at email@example.com or 502/290-4316.
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