With its impact on endowments and annual budgets, the current recession has made knowledge of finances more critical than ever. Knowing that many boards are grappling with draconian cuts in their budgets and massive losses in their endowment portfolios, In Trust set out last year to learn whether board members really understand their school's financial picture.
In August 2009, we e-mailed 1,846 board members (excluding board chairs) whose e-mail addresses were known to us. Of these, 293 (16 percent) clicked on a link to participate in an informal three-question survey. We suspect self-selection bias — board members already interested in finance were more likely to take the survey than other board members. These responses should be considered suggestive.
Question 1. How important is the oversight of the financial health of your school in relation to your other responsibilities as a board member?
A strong majority of respondents (81 percent) indicated that oversight was either "the most important thing" or at least a "very important" board responsibility. Almost all of the other respondents (18 percent) thought that oversight was important, "but so are many other things."
Question 2. How confident do you feel in your understanding of your institution's finances?
- Do you know how to interpret critically the financial data presented to you at board meetings?
- Do you feel confident reading a balance sheet?
- Do you know where to look to discern deviations from the approved budget?
- Do you feel confident that you know the right questions to ask about your school's finances?
More than three-quarters of respondents said "absolutely yes" or "pretty sure" to each of these four questions
Question 3. What would help you better understand the financial picture of your institution?
The open-ended format of this question proved a gold mine. More than half of the respondents took the time to write detailed comments about what they did not understand about seminary finance, what they thought of the decision-making process on their board, and their reluctance to question proposed financial actions.
Recurring themes fell into six categories:
Many respondents wanted a formal orientation especially tailored to their school's financial situation and reporting methods. One board member indicated that his board had an initial orientation, but he suggested another one after one full year of board membership since the "first orientation is a bit overwhelming."
A common suggestion was a formal training series. Board members wanted a "30-minute financial ABC's class" that included not just the current financial status of the school but a primer on reading and interpreting all financial reports.
Several respondents indicated the need for clearer benchmarks and goals so that they could critically evaluate finances. One respondent called for the seminary board to establish "focused financial reporting based on clearly understood parameters." Another commented: "I look for a report to describe progress in meeting specific goals . . . how our budget and balance sheet reflect what we have determined to be strategic goals."
Respondents asked for more frequent and more consistent access to comparative data about similar theological schools "to give context" to what is happening in their school. One respondent wanted to see "past trends and future projections."
Respondents wanted "simpler" reports presented in a variety of ways. For example, several respondents wanted written narratives to accompany spreadsheet data and charts when it is necessary to review complex comparative data. One board member said: "My job as a decision-maker is not to pore over numbers to discern the school's situation but rather to understand the school's situation so that I can ask questions leading to a solution or resolution." Another respondent indicated that his preferred method of reporting is in chart form since he is a "visual learner." And, finally, one respondent reported candidly: "I simply need to have it all presented in terms I can understand — like my checkbook."
Respondents identified the need for a thorough review, explanation, and discussion of the school's endowment. Some requested a "clear presentation of the endowment and the draw from the endowment." Another area of concern was the presentation of restricted and unrestricted funds. One respondent asked: "How is that determined, and how are they captured on supporting documentation that ties into the balance sheet?"
Several board members indicated their desire for increased involvement by the whole board in discerning and deciding seminary financial decisions rather than a total reliance on the finance committee alone. However, some members thought that the financial recommendations should come from the finance committee. Some respondents asked for frequent reports between meetings so that the entire board had ongoing data about the finances. Most respondents wanted an "open willingness to answer questions and engage other board members in the decision-making." One respondent said that when a question was asked regarding finance, "other board members assumed you were questioning their/administration's judgment [which] discouraged questions and continued conversation."
What financial data do board members need to know?
An interview with Robert S. Landrebe
Robert S. Landrebe is executive vice president and chief financial officer of Gordon-Conwell Theological Seminary. As an In Trust Governance Mentor, Landrebe helps educational leaders and their boards explore new ways to improve the economic engine in their schools. We asked him about his response to this survey of board members.
I was encouraged that a majority of the board members who responded to this informal survey expressed a good understanding of the financial reporting from their schools.
However, it is important to note that reading financial statements for a seminary is different from reading a similar report in a business setting. The endowment accounting rules are unique to nonprofits. Responsibilities for board prudence have changed. And understanding restricted funds is important to understanding the total financial situation.
Bottom line: Board members need to have a true economic understanding of their school. As presented to the board, financial statements should provide answers to questions like these:
Are the seminary's resources sufficient and flexible enough to support the mission and strategic directions of the school?
Is the school optimally managing its resources, including debt, to achieve its strategic goals?
Does the school consistently live within its available operating resources?
In Trust is a strong advocate of the Composite Financial Index scoring, and In Trust's Governance Mentors use it in their work with individual schools. It's a standardized measurement tool that been used throughout higher education for years. It offers one concrete way to establish baseline information, set financial goals, and measure progress.
I believe that all board members want to understand the big picture about their school's economics. If you're a relatively new board member, it's especially important to get a handle on the finances early on — so that you can have more confidence in your decision-making.
One of the hardest things to do is to create a set of concise reports that will give all of the critical data in a format that is not complicated. It is much easier to provide lots of financial data. The harder work is taking the complex and making it understandable - and that's the job of the chief financial officer.
Trends and comparative data are always important. The Association of Theological Schools and Auburn Seminary's Center for the Study of Theological Education have really good data available to help schools find out information about similar institutions.
I find that all board members really want to take responsibility for the financial well-being of their schools. In the United States, this issue has been affected by recent regulation. The new IRS Form 990 requires that the entire board review the financial statement of a nonprofit before it is filed and released to the public. More and more schools are including financial data about themselves on their websites — another good step in transparency.
The Strategic Information Report (SIR) is personalized to provide each theological school with a variety of strategic indicators to help assess its overall financial strength and recent financial performance. The SIR also provides comparative data with peer institutions and resources for strategic planning.
The SIR is distributed every other year to members of the Association of Theological Schools (ATS) from data compiled by ATS.
The SIR was developed by the Auburn Center for the Study of Theological Education and the Association of Theological Schools with significant support from Lilly Endowment.
Highlights from the open-ended responses
What would help you better understand the financial picture of your institution?
"I would like an unbiased person (auditor) to give the whole board an overview of the financial picture at one meeting per year."
"It [is] my responsibility not to leave the budget considerations to those with a financial bent/ background. I think it is the chair's responsibility to underline that everyone shares in the responsibility of looking at budgets."
"Our school has had some serious financial issues, so we've had an unusual amount of financial information given and interpreted at board meetings. At times it just all runs together."
"I'm on the finance committee and I don't understand the full financial picture of our seminary! . . . I do understand the investment strategy, having worked in that industry earlier in my career, but I do not fully understand the seminary's complicated budget. I need to ask more questions, but don't want to appear ignorant."
"The finance team does a nice job explaining the information, but that does not equate to me knowing the 'right questions to ask.' I am relatively new to this board. The seminary has a new governance policy which is intended to give responsibility for policy to the board and for implementation to the president. As a board member, I feel (and probably legally am) responsible for the financial well-being of the institution. I need clarity as to what my role and my responsibilities are."
"While we get a lot of information, I don't really feel it is delivered from an objective source. Since it comes from the investment managers, I always wonder to what extent they are making themselves look as good as possible. I have observed, in the past, that there were times when fiscal issues were misrepresented. I'm sure the intentions of the presenter were good, but the perspective was biased without disclaimer."
"There seems to be a feeling among both board members and the administration that a few polite questions are OK, but any serious examination and critical discussion of financial issues is somehow uncivilized and clearly not Christian. To my mind that is an invitation to catastrophe -- and, quite predictably, catastrophe has arrived. The catastrophic nature of what's happened was clearly avoidable if the culture of the board and the administration had been different."
"More explanation of history and trends and less political explanation to make things look as the administration wants."
"The board needs to understand fully the macro view of the budget and finances of the institution. At the same time, it is important that there not be so much information presented that it makes that picture more complicated than it needs to be."
" I am not interested in trivia, but if there are trouble spots I want to know them."