FOUR SEI NONPROFIT SURVEY SERIES Answers to Key Questions about Managing Nonprofits ONE PART

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1 PART ONE of FOUR Can boards and investment committees support their nonprofits more efficiently? 2016 SEI NONPROFIT SURVEY SERIES Answers to Key Questions about Managing Nonprofits

2 Background The SEI Nonprofit Management Research Panel completed a comprehensive survey of executives and investment committee members from nonprofits in the U.S. to gauge their views on a number of critical components of their organizations. The poll was completed by 253 participants, representing nonprofits with endowments ranging in size from $25 million to more than $5 billion. None of the respondents are current clients of SEI. The poll was conducted in January/February 2016 and will be released in a series of chapters. Summary This chapter provides the results regarding board and investment committee constructions and performance along with operational challenges. It s hard to argue about the magnitude of the impact that nonprofits have on the overall society within the U.S. According to the National Center for Charitable Statistics (NCCS), there are more than 1.5 million taxexempt organizations in this country. And the most recent approximation of the assets of those organizations was more than $3 trillion as of National Center for Charitable Statistics, Quick Facts About Nonprofits, from the NCCS Core Files 2013, accessed on April 27, 2016,

3 Leadership within those organizations comes in a couple of forms. Many nonprofits employ staff responsible for the day-to-day operations of the organization. In addition, leadership involves volunteers who populate boards and investment committees. The interactions between these two functions are often critical to the overall success of the organization. The majority of the respondents to this survey were staff from the organization. They were asked about operational challenges together with input on their boards and investment committees. The following three high-level conclusions were drawn: 1. Nonprofit management teams continue to be challenged to do more with less 2. Boards could improve their overall focus on assuring that the organization s mission is being accomplished 3. Investment committees could benefit from additional resources in overseeing an increasingly complex process The following is a detailed outline of the statistics found in the first part of this research series on the conclusions mentioned above.

4 section 1 The challenge is to do more with less 86% felt that there are increased expectations that nonprofits keep operational costs low and make every dollar go further. The challenges facing nonprofits have always been great. Meeting donor expectations by demonstrating clear and tangible results in achieving the mission is always present. Increased competition for donations and shrinking government aid are affecting revenues. Increased scrutiny for overhead costs continues to result in reductions. This is an environment way too familiar to the staffs of many nonprofits. While tight budgets are often commended, there s a definite trade-off and overall impact. 39% felt their website needs significant improvement 37% felt the organization does not spend enough on advertising/awareness campaigns 36% felt they lose staff because the organization s compensation levels are too low to compete 35% said the organization has felt the financial pressure from reduced government aid FAST FACT A recent trend of for-profit businesses incorporating social purpose was viewed as a potential threat to nonprofit donations. However, according to the survey results, 90% said they have not lost financial support to for-profit business models trying to solve social and environmental problems.

5 section 2 There s a need for boards to increase overall focus to ensure the mission is accomplished More than half (53%) felt the board could improve measuring success in achieving mission goals. Nonprofit boards have the ultimate responsibility of making sure that their organization is focused on achieving its mission. The day-to-day implementation of the vision tends to be handled by paid staff, so the board s role is to keep the organization on the right path. The most effective boards are those that are engaged and relentless in this oversight while allowing those responsible for day-to-day operations to do their jobs. A significant majority (87%) of those polled felt their board currently does an adequate job in allowing paid leadership staff to execute on day-to-day operations without interference More than a third (34%) said they don t feel their board is willing to challenge the CEO/ executive management on whether the organization is achieving their mission A responsibility of the board is to make sure they re the best they can be: 52% felt the board could do a better job of cultivating diversity among board members 28% felt the board could improve on awareness and understanding of laws governing tax-exempt organizations 20% felt the board needed to better establish and/or maintain governance policies (for example, a gift acceptance policy or a whistle-blower protection policy) 89% felt the board did a good job of conflict-of-interest management avoiding transactions or agreements that might benefit board members or officers 98% felt the board did an adequate job of mitigating risk when it comes to personal liability

6 What s the right number of people to have on the board? According to Blue Avocado, this is the single most common question asked of experts of nonprofit boards and the correct answer is it depends. 2 One of the potential drivers of board size is the type of nonprofit and its overall mission. The survey results suggest that certain types of nonprofits tend to have much larger boards compared to others. Using a board size of 15 members as a point of delineation, the graphic below shows where the board size of the majority of respondents by nonprofit type. DID YOU KNOW? 69% of the participating private college and universities said their board had 20 or more members. FIGURE 1 Board size of the majority of respondents by nonprofit type Less than 76 % Arts, culture and humanities 70 % Faith-based organizations 71 % Health or human services 88 % Private foundations 15 MEMBERS 52 % College or university (public) 55 % Community foundations 83 % College or university (private) More than 2 Masaoka, Jan. What s the Right Size for the Board? Blue Avocado: A Magazine of American Nonprofits, accessed on April 27, 2016,

7 How long are board member terms? Similar to the size of the boards, the average term of members varied across the different types of nonprofits. Nearly two-thirds of those polled (63%) said the average term for their board members was more than four years. However, it varied significantly based on the type. For example, the majority (55%) of private foundations said the average term length was 10 or more years, while the majority of health and human service organizations (65%) said the average term was two to three years. The chart below shows the highest percentage from each type of nonprofit that identified that term length as the average. FIGURE 2 Average term of board members by nonprofit type Over 50% of board members in this Institution have an average term of 2-3 YEARS Over 60% of board members in this Institution have an average term of 4-10 YEARS Arts, culture and humanities College or university (public) Community foundations Faith-based organizations Health or human services College or university (private) Over 50% of board members in this Institution have an average term of OVER 10 YEARS Private foundations

8 section 3 Investment committees could benefit from additional resources and expertise in overseeing an increasingly complicated process More than a third (36%) said the investment committee is concerned about the resources required to perform the necessary due diligence for overseeing investment managers. Nonprofits invest in a complex and sophisticated manner. The overall goal of perpetual sustainability merits the need for extremely diversified portfolios that leverage complex asset classes and products. Investment committees (ICs) tend to be structured in a way to best support that strategy. Often, members have a solid understanding of financial services and investments, and do the best possible job of fulfilling their responsibilities in managing these large pools of investments. However, given the advanced complexity, it begs the question: Is there ever enough resources or expertise? The survey results show a wide variety of structures for handling the organization s investments. 20% said the board could be better at investment oversight and fulfilling fiduciary responsibilities Three-quarters (75%) of the nonprofits polled don t have a full-time chief investment officer (CIO) or someone solely responsible for overseeing investments on staff 20% of those surveyed said that internal staff, board and/or investment committee handle all investment management internally Three-quarters (75%) said they work with a discretionary investment partner

9 + How many members are on ICs? Nearly three-quarters (74%) of those surveyed said their organization s IC has between four and 10 members. Nearly half (49%) of the survey participants are on the IC for their nonprofit. That group was asked about the makeup and overall expertise of their organization s IC. DID YOU KNOW? 10% of the nonprofits surveyed said the organization has no investment committee. FIGURE 3 Of the investment committees with 4-10 members, how many members have professional investment management expertise? 0-2 members 26 % 3-4 members 41 % 5-6 members 23 % >7 members 16 %

10 FAST FACT A significant majority (94%) of those surveyed said the organization has an allocation to alternative investments. The experience of the IC member appears to drive the extent of that allocation. FIGURE 4 Of the group with at least 30% of the portfolio invested in alternatives 48 % of boards have or fewer members with alternative experience. Less than 30 % 75 % of portfolio invested in alternatives More than of boards have or more members with alternative experience. Conclusion This chapter of the survey results sheds some light on operational challenges being faced by nonprofits and how their boards and ICs are constructed. Operational budgets are small and it s impacting the ability to build awareness and retain staff. There are a variety of ways organizations are constructing their boards and it appears as if staff members feel they can be constructed better. Increasing diversity and adding expertise about laws governing tax-exempt organizations are just two examples of areas that could be improved. ICs are generally small in size and would appear to benefit from additional resources and expertise.

11 If you would like an advance copy of future releases in this series, please visit us online at seic.com/nonprofit2016 or

12 This information is for educational purposes only. Not intended to be investment, legal and/or tax advice. Please consult your financial/tax advisor for more information. Information provided by SEI Investments Management Corp., a wholly owned subsidiary of SEI Investments Company. Provided by SEI Investments Management Corp for Informational purposes only not meant to provide investment, tax or legal advice SEI (05/16)