Several years ago, the President of a large membership organisation suggested that every annual meeting should open with a winding up motion. If you couldn’t mount a cogent ‘why not’ argument, then perhaps the time had come. The framing of the question points to a legal mind but the discipline needed to provide a succinct answer is more than useful.

Organisations of all kinds linger past their by use-by dates. Commercial entities based on narrow technologies can be quickly swept away. Among many examples, the American railroad industry—faced with air travel and interstate highways—clung to the train business, failing to understand that they were in the people-moving business.

This article was prompted by the continuing rise in the number of charities in Aotearoa New Zealand—28,000 and counting. But the central ideas apply to all forms of organisation.

Creative destruction

There is a view that creative destruction [1] drives economic prosperity. Of the companies on US Fortune 500 index in 1955, only 51 remained in 2020. In 1965 the average tenure for a company on the list was 33 years; in 2026 this is forecast to narrow to just 14 years.[2]

It has been argued that organisations in the non-profit sector are insufficiently exposed to ‘creative destruction’ and hence are slow to initiate necessary change. In Aotearoa New Zealand almost 80% of our 40 largest charities have existed for over 20 years.[3] Certainly, asset performance in the sector is not exposed to any scrutiny. It has a large and lazy balance sheet of $NZ70 billion, [4] skewed towards property.

Putting aside the casino-like chaos a continuation of the Fortune 500 churn will result in, it is interesting to reflect on causal factors. Hundreds of books have analysed corporate failure. Jim Collin’s How the Mighty Fall [5] is one of the best. The three key stages in his analysis were: hubris born of success; the undisciplined pursuit of more; and subsequent denial of risk and peril. In short, losing focus. In his earlier work Good to Great [6] he talks about the central idea of the company as a flywheel slowly gaining speed and momentum, a result of relentless focus and effort.

The main thing

The flywheel-dominant narrative—the why, true north—are all variations on a theme. All organisations must have a purpose for their existence, responding to a need in the community. When that purpose fades, so does the organisation. A helpful mantra for directors in the non-profit sector is to view boards as guardians of purpose:

.. if the board’s struggling with the 30-second elevator pitch, maybe there’s something going on
inside the company that’s got to be fixed. [7]

We have observed many strategic planning processes that charge off without addressing this central issue. Sometimes because it is too hard, or people feel that it is self-evident.

In our board assessment work, we occasionally ask directors what the organisation’s elevator pitch is — often a revealing exercise. But if the board is not clear then people turning up to work every day will, at best, lack focus or worse, be simply confused. Looking for clarity or lack of it throughout an organisation is sometimes used in due diligence processes by potential investors. We hear what the senior team are saying but if we go three layers down is the story the same or is it there at all?

Focus is essential, especially in these turbulent times. A lovely saying is credited to James Barksdale,
[8] former CE of Netscape:

The main thing is to be damn sure that the main thing is really the main thing.

Proof of impact

It is the board’s role on behalf of the ownership-equivalent group to be clear about how the organisation creates value and where the revenue margins lie. This can be hard in the non-profit sector and so is often put to one side. Now we see the rise of impact investing with a strong focus on results and—correctly—a higher level of scrutiny from funders on organisational impact. Large social programmes often have evaluation defined and costed in at the front end and, in some cases, embedded as part of the change process itself.

Plenty of organisations are good on raising money but less effective on quantifying what has
been achieved with it. Some of those we decline to fund.
Jennifer Gill [9] 

Warren Allen, former chief executive of the External Reporting Board, was very clear on the increasing need for impact assessment:

The competition for funding of non-profit organisations will only increase and, like the corporate world, funders will demand sophisticated levels of reporting, transparency and governance covering many different metrics. The research in the corporate world already clearly indicates those organisations embracing this approach have lower levels of cost of capital. It will be no different in the non-profit world.

The final comment is most interesting. Cost of capital is largely a foreign concept in this sector, which is odd. Most not-for-profit chief executives will tell you if they could spend as much time on delivery as they do on fundraising, life would be rather better. In reality the cost of capital is huge, but the analysis of impact is low.

If you are not able to explain how the John Carver mantra of ‘the right benefits for the right people at the right cost’ relates to your organisation, then maybe your organisation has been in the game too long. We rarely see good interrogation of the last part of the formula: right cost. Margin is central in business but infrequently quantified in common-good enterprises. Which of our activities is making the most impact on our mission? And how do we know? These should be regular questions in the boardroom.

Too many mouths to feed

Coming back to our overabundance of charities. As a country we have always been eager to create organisations. But with just five million people, this just diffuses effort. Many commentators have observed that we can’t keep creating more. In 2018, Chris Clarke [10] summed it up neatly:

We can’t support 27,000 charities. Most are undercapitalised and under scaled. A number will fall
over because they will be too slow to respond.

So, should we wind up? Well, that is one option, accompanied by a transfer of assets to a like-minded organisation of some scale. Failing that, strong partnerships with others, [shared?] administration hubs, and joint fundraising platforms all warrant consideration.

America non-profit commentator Tracy Ebarb [11] offers some litmus test items that struggling
organisations can usefully reflect on:

• lack of sound planning
• over-optimism about support available
• failure to understand the necessary level of partnerships and alliances
• competitive blindness—belief they are unique in what is actually a crowded and competitive market
• failure or lack of capacity to embrace technology
• mission creep — diffused effort and donor confusion
• forgetting to truly communicate with funders and donors.

Unsurprisingly, some of these line up with the Jim Collins analysis of corporate failure. If, working through the list above, you check too many boxes perhaps these are additional reasons to get out of the game.

A checklist

So how does the board ensure there is a strong case for staying in business? Here are a few questions all boards can usefully ask from time to time.

Should we stay in business?

• Do we know (and are agreed among ourselves) what we are trying to achieve (our core purpose)?
• Can we express that to others clearly and succinctly?

Are we on track?

• Is the strategic plan expressed and reported on in a way that allows us to measure progress easily?
• Is the plan focused on outcomes and deliverable results, not on processes and ‘doing’?
• Measuring performance: Are we moving the dials, and do we have the right dials?

Is the money on the business? [Are we resourcing our priorities?]

• Does our application of resources (financial and human) align with the priorities expressed in the strategic plan?
• Can we prove that to ourselves and others?
• Are our products and services regularly reassessed for relevance, fit, impact (or margin) and discontinued if necessary?

Do we have a future perspective?

• Do we spend most of our time considering the future and what it might hold for the organisation?
• Do we receive the necessary information to support that discussion?
• Is our business model sustainable and how do we know?
• Could we achieve our goals more effectively by working with others, as part of a merger or in partnership?

Do we do good work?

• How do we know?
• Are our products and services a good match for the needs of our customers? How do we know?

Many organisations will cease to exist in the coming years. In a lot of cases the departure will be warranted. But prevention of an unplanned demise begins in the boardroom with the necessary focus and clarity suggested in this article.

Notes

1. Originally derived from an analysis of Marx’s thinking, largely credited to Austrian economist Joseph Schumpeter. His view was less favourable, being that creative-destructive forces unleashed by capitalism would eventually lead to its demise as a system.
2. American Enterprise Institute article
3. New Zealand Cause Report. JB Were 2017
4. New Zealand Cause Report. JB Were 2021
5. Collins, J. How the Mighty Fall.2009 Harper Collins
6. Collins, J. Good to Great.2001. Collins Business
7. Chris Brody, President Vantage Partners, New York
8. Quoted in Governance as Leadership. Chait, RP. Ryan, WP, Taylor, BE. 2005. John Wiley & Sons
9. Former chief executive Foundation North and one of the country’s most experience practitioners
10. Former chief executive World Vision and commentator on the charitable sector
11. National Director of the National Association of Non-profit Organizations & Executives