A Good Cause

Five CFOs on how they can fix the nonprofit sector.
Janet KersnarNovember 22, 2006

Within 24 hours of the tsunami hitting southeast Asia on December 26th 2004, more than 230,000 people were dead, 1.7m people displaced, 430,000 homes destroyed and some €10 billion of damage done in 14 countries. It immediately became a showcase for aid agencies and other nonprofit organisations. As some €11 billion of donations flowed in to their coffers—the largest and fastest charitable response ever—international aid agencies raced around the region to provide care for the survivors and begin the massive reconstruction work.

Nearly two years later, however, recriminations abound. The nonprofit bodies have been coming under fire for poor planning and control, amateur management and a lack of transparency, leaving donors, beneficiaries and the general public uncertain about the credibility and trustworthiness of organisations they’d put faith in. These criticisms appeared in a report published in July by the Tsunami Evaluation Coalition, an independent body that includes more than 40 humanitarian agencies and donors, which assessed the first 11 months of the relief effort. One of its observations: “the urgency to spend money quickly and visibly led to many poorly executed aid projects and acted against the best interests of the affected people.” All told, the report concludes, it’s been a missed opportunity.

Though unique simply by virtue of its scale, the tsunami relief effort speaks volumes about the state of the entire nonprofit sector. Having sat comfortably for years between governments and companies, nonprofits are suddenly at a crossroads as their number and size reach record levels. Over the past year, 5,000 new nonprofits were registered in the UK alone, bringing the national total to nearly 200,000, with a combined annual income of nearly €30 billion.

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On top of this, pressure to take a more businesslike approach to their affairs is coming from a new wave of philanthropic billionaires. Bill Gates, Warren Buffett, the Google founders and the rich donors behind Bill Clinton’s Global Initiative are among those forcing their results-driven culture on the nonprofit sector. Their sheer size ensures they’ll have an impact. In October, Clinton clinched some $7.3 billion (€5.7 billion) of pledges, which will be focused on causes like combating poverty and climate change. Meanwhile, Google founders Larry Page and Sergey Brin, personally worth more than $8 billion each, have said their new Google Foundation will aim to invest in for-profit projects that tackle global woes. Outdoing all of those, businessman Buffett earlier this year said he would donate $37.4 billion of his wealth to charity, $31 billion of which is being earmarked for Bill and Melinda Gates’s already wealthy foundation, which has earned a reputation for its rigorously results-focused approach to giving.

For the traditional nonprofit sector, this is both a threat and an opportunity. Some of the largesse will, undoubtedly, make its way to their organisations. But it also means that public scrutiny of nonprofits’ efficiency and effectiveness will continue to intensify.

This puts nonprofit finance teams at centre stage. In the following pages, CFO Europe profiles some of the efforts that finance chiefs of five major international nonprofits are making. Some of the ideas are big, some small, some borrowed from the for-profit sector, others unique to nonprofits. All are aimed at bolstering the credibility of working for a good cause.

International Committee of the Red Cross

In terms of financial reporting, the ICRC is streets ahead of other nonprofits.

After all, it was the first major humanitarian organisation to adopt international accounting standards back in 2001, says Doris Pfister, the ICRC executive committee member in charge of finance and fundraising. It’s able to provide pages of financials and other information about the support it provides for millions of victims of conflicts and natural disasters, right down to the last jar of baby food. But like other nonprofits, the ICRC struggles to show whether it has delivered on the expectations of its beneficiaries; that it has, for example, consulted with them, treated them with respect and dignity. “That raises all sorts of questions,” says Pfister. “How would you define good performance for a humanitarian organisation?”

A big part of the challenge is the absence of meaningful metrics that can be applied consistently and efficiently to what nonprofits call “accountability.” It’s even harder in the emergency situations that are the speciality of the ICRC—the Geneva-based umbrella for the global relief efforts of Red Cross and Red Crescent bodies. “We’re not talking New York, Paris, Tokyo that we’re dealing with,” she says. While it can fly in emergency supplies to victims trapped in a remote war-ravaged village at the drop of a hat, it’s not always obvious how its mission benefited the victims, whether the right supplies were delivered and so on. Also, “the way delegates relate to people in the field is very important,” says Pfister, a former journalist who began doing fieldwork for the ICRC in 1989. “It’s something you just can’t measure.”

That doesn’t mean the ICRC hasn’t tried. “We began using KPIs a little while ago, but we had to stop,” says Pfister. “People just weren’t ready for them. We realised that they could start having a negative effect, and we don’t want people focusing on something just because it’s measurable. That’d be giving them the wrong incentive.” Now, after a break, the ICRC “is putting KPIs back on the table again,” says Pfister. “Part of the organisation sees it as a failure that we aren’t able to do KPIs.”

Meanwhile, there’s another project that Pfister is working on which she hopes will keep the organisation in touch with beneficiaries. Her finance team is undertaking its first risk-mapping exercise, to be followed by HR and operations. Pfister hopes to use the map to develop an enterprise risk management model. On top of all that, Pfister tries to visit one of the projects at least once a year. “Every time I do, I come back to Geneva remembering why I’m doing what I do,” she says.

Oxfam GB

“Overwhelming” is how John Shaw, CFO of Oxfam GB, the UK arm of the global aid agency, describes the public’s response to the 2004 tsunami. Along with donations coming directly to Oxfam GB, it raised £450m (€671m) as part of the Disaster Emergency Committee, a network of 13 aid agencies—”nearly ten times more than any other relief programme,” he says. The upshot: “In terms of the public perception of us, legitimacy, accountability and transparency have all come to the fore.”

No surprise, then, that the internal controls that Oxfam GB deploys to monitor all that aid money have also come to the fore. They’re being tested as never before as the organisation undergoes rapid growth following the outpouring of public generosity. Since the tsunami, Oxfam GB’s charitable spending has nearly doubled, to £220m (on income of £300m) in fiscal 2006. It now has 6,000 employees, plus countless volunteers, operating in eight regions. With finance on the spot to ensure results, Shaw says, “there are times when we can and should make a nuisance of ourselves.”

Shaw joined Oxfam eight years ago, shortly after he took early retirement from the UK’s Royal Mail, and became CFO in 2005. A critical part of his team’s work is confronting thorny issues like corruption, which frequently mire aid programmes and damage public confidence. Reporting to him is a vast network of internal auditors, who conduct onsite investigations and take action if something is amiss. For example, earlier this year, Oxfam GB shut operations in the city of Aceh Besar in Indonesia for a month when funds couldn’t be accounted for, leading to charges of misconduct against ten local staff members.

Training, including a series of fraud awareness workshops, also plays a big role. “But you absolutely have to take the context into account,” says Shaw. “A lot of places are very class or tribal oriented. You can’t rely on the whistle-blowing that we’re used to in our culture.” This means that treading carefully is key. Shortly after running a fraud workshop, Shaw picked up on what initially seemed like casual comments by some participants about a regional finance director. Putting two and two together, Shaw hopped on a plane to address the problem. “It was an inappropriate use of our resources, not quite fraud. But it showed me that his values weren’t in tune with ours,” he recalls. “And because of his seniority, I carried out the investigation myself and felt it was my personal responsibility to dismiss him.”

As Shaw explains, having good checks and balances in place is vital for protecting Oxfam’s reputation, not just with aid recipients and donors, but also with partners and suppliers. “We’re seen as experts, and that reputation—as well as a strong balance sheet—are important when we need to swing into action quickly,” he says. Without either of those, he adds, Oxfam GB would never have been able to get a plane in the air loaded with emergency equipment from a warehouse in Oxford within 48 hours of the earthquake that hit south Asia a year ago.

Shaw’s now hoping Oxfam can get a reprieve. After the recent spate of natural disasters, he reckons “we could do with some consolidation, catching up with ourselves.”

Amnesty UK

“It sheds some light on a very dark subject,” says Melvin Coleman, casting a satisfied glance around the bright, airy building that’s been the new London headquarters of Amnesty International UK since last February. As the CFO winds his way up a glasspanelled staircase to his office on the fifth floor, he describes the long project to find a new home, which began shortly after he joined the human rights organisation from another national charity ten years ago. It’s clear that’s he’s happy with the end result.

Shedding light on Amnesty is a big part of his job—notably by bringing more transparency to how money is raised and spent at the UK arm, which raised about a fifth of AI’s total income of €160m in 2005. One way he’s done this is by improving management accounting, making it accessible to both finance and non-finance staff. With a web-based tool, staff can download a 20-page performance review. The key, says Coleman, is that “it accommodates the different levels of financial literacy in the organisation. If a layperson just wants a quick overview, we provide that in the first page, but more detailed reporting is provided for those who want to drill down further. Coleman also aims to provide greater visibility into AI’s future. For example, plans are under way to implement new cash management and forecasting software—a rarity at many nonprofits, but “we’re always trying to tackle the needs of today as well as tomorrow.”

Perhaps the greatest challenge for Coleman is improving the information that his finance team provides externally. “For us in the UK, the regulations in terms of reporting have increased significantly,” he says. Since last year, a new national charities accounting standard “requires that trustees try to account for impact and success, putting measures to things which I think the whole sector struggles to measure.” A case in point: valuing volunteer efforts. “There’s a strong case for doing that, but the challenge is really a technical one—we have 30,000 volunteers doing work for us, in their own time, in their living rooms. Would the effort be worth it?” he asks, pausing pensively as he looks out of the windows lining his office at the grey London sky.

WWF International

New figures from the European Social Investment Forum that socially responsible investing (SRI) is growing fast in Europe—around 15% annually for the past five years. The think-tank conservatively estimates that it’s now a €1 trillion industry.

That’s good news for Chiew Chong of WWF International. Like a growing number of nonprofit CFOs, Chong has been working with his trustees to channel WWF investments into SRI funds that chime with the charity’s mission. Such “project-based investing,” a hot topic among nonprofits, requires investing for a higher return socially rather than financially.

In the traditionally conservative investment world of nonprofits, SRI has critics. The Bellagio Forum, a network of grant-giving organisations, found that 43% of European foundation executives believe SRI policies reduce returns. And when asked whether asset management should be linked to a nonprofit’s mission, nearly 40% said “no.” Chong, who joined WWF’s HQ in Switzerland in the early 1990s from the for-profit world, argues that no evidence shows SRI funds underperforming non-SRI funds. That’s why he felt it made sense that WWF (which spent €367.5m on charitable projects in 2005 on an income of €400m) should not only invest in SRI funds, but also set one up. “I had been here ten years when I started asking myself what I could do to make a difference,” Chong recalls. “I knew my finance, I knew my conservation and somehow I wanted to bring the two together.” The Living Planet Fund was launched in Luxembourg in 2003 with the help of UBS and Sarasin and only includes firms that meet social and environmental criteria—firms with more than 10% of their revenue derived from alcohol, tobacco or arms are automatically excluded. The fund has grown from SFr5m (€3m) to SFr40m and Chong expects this to double by 2008—potentially becoming an important source of funding, since the WWF gets a cut of the management fees. So far, returns have been in line with equity benchmarks. It’s a direction that pleases Chong, who says the fund makes the 40% of WWF’s portfolio invested in equity entirely SRI based. “We’ve always been more or less investing ethically,” he says. “Now we’re totally ethical.”

Sightsavers International

Last year, Sightsavers International spent £45m (€67.3m) —74% of its income—to treat nearly 16m people around the world for potentially blinding conditions, while restoring the sight of 233,000 people.

It’s a far cry from the world of men’s toiletries that Petra Ingram, CFO of the UK-based nonprofit, left behind in 2003. She spent 14 years with US consumer goods giant Gillette, where she had been running a financial shared service centre with 150 staff. “I got to the stage where I wanted to do more with my career than just creating profit. I knew it’d be different and I was prepared for a change,” she says.

But was it that big a change? When she arrived, she found finance at Sightsavers doing much of what they would be doing in the for-profit world, including taking a “beyond budgeting” approach to planning. They now use a three-year rolling forecast, updated every quarter, with more detailed half-yearly reviews. “I have a management team that is thinking three years ahead,” Ingram says. “That must be a benefit to the organisation.”

And she’s continued to step up the pace. “Recruitment and having the right calibre of staff have been really important to us over the last couple of years,” she says. “Rather than having finance staff who are bookkeepers and administrators, we now have finance staff who are qualified accountants. That raises the standard in terms of financial controls and monitoring, and increasingly the types of reports that we give to our partner organisations.”

Like any CFO of a global organisation, one of Ingram’s biggest aims is to build a global finance team, not always easy when employees are in several time zones and report to local management. Last month, for the first time, Ingram brought together her finance managers to share best practice. One of the items on the agenda was partner risk assessment: the role of her on-the-ground team in assessing a partner’s financial capacity, their systems and processes, relationships with other donors and compliance with regulations at the national level. Based on those assessments, Sightsavers then decides on a case-by-case basis what the frequency of monitoring, onsite visits and reporting needs to be.

Ingram also used the meeting as an opportunity to introduce her team to the trustees and auditors, “who we want to get a lot closer to what’s going on in the field.” As for her finance staff, “we want them to get closer to what’s happening at a corporate level, to help them do a better job.”

Against this backdrop, Ingram has a clear vision of the future. “Our aim is to have a finance group that contributes proactively to our mission: preventing avoidable blindness, and helping people with vision impairment enjoy a better quality of life,” she explains. “To say that we’ve achieved that is not possible. But what we do have is a structured programme of development. We have a finance strategy for the next two years. At the end of that, I expect every single person in finance to understand and talk about how they make a difference to the mission.”