Two recent surveys, each with significant findings, shed light on the financial stress the nonprofit sector in America is currently facing. These findings underscore the possibility that nonprofit boards may be forced to make difficult existential decisions in the near future.

Insights from Recent Nonprofit Sector Reports

The national accounting firm Forvis provided a series of noteworthy conclusions in its 2024 Annual State of the Nonprofit Sector. Another report from the for-profit consulting firm The Governance Institute, which focused on hospitals (Think Bold, Looking Forward with a Fresh Governance Mind Set, The 2023 Biennial Survey, available for $395.), reinforced some of those observations.

Both surveys offer a wealth of interesting observations and valuable recommendations.  Full disclosure: my knowledge of the Governance Institute report comes from an article by Kathryn Peisert in the March/April issue of Healthcare Executive.

What lessons can be learned from these reports?  Here are a few:

Nonprofits come in many different sizes

The IRS says there are approximately 1.8 million 501(c)3 tax-exempt corporations in America.  Likely, another 100,000 to 300,000 corporations are in formation or operation and planning to become tax-exempt.  A large percentage of these 2 million entities are small.  In the Forvis survey,  17.9% of the respondents had revenues of less than $ 1 million, and 40.7% had revenues under $ 5 million.

A significant number of nonprofits are grappling with weak financial positions, a concern that has escalated over the past year. 

Forvis reports that 38% of nonprofits state they are either “very concerned” or “somewhat concerned” about their financial position, an increase of 8% from the prior year.  The number of agencies saying they were “very concerned” doubled from the preceding year.  This is not surprising since over 7% stated they had less than one month of cash on hand, a three-fold increase from the prior year.

Nonprofits are relying on program revenue increases to offset charitable giving reductions. 

Forvis referenced several reports that identified an overall decrease in charitable giving by individuals and corporations.  This decline can be attributed to declining religious attendance and fewer people enjoying tax advantages for giving.  Unfortunately, most nonprofits don’t have a readily available alternate source for offsetting revenue loss and will need to consider curtailing programs or closing or merging with more viable agencies.

Governance concerns include succession planning, difficulty recruiting quality board members and lack of engaged board members. 

Reportsof this kind can be enlightening but sometimes a bit dry.  While reading the Forvis report, there was a moment when I  yelled, “Yes, someone understands what Northampton Advisors is trying to achieve.”  It was this paragraph that sent me into ecstasy:

“The growth and effectiveness of nonprofits often hinge on strong boards that understand and operate within clearly defined roles. Without proper training, well-intentioned boards can stray into areas outside of their scope, resulting in micromanagement, poor engagement, and dysfunctional governance.”

The report notes that “Difficulty in Recruiting Quality Board Members” and “Lack of Engaged Board Members” are among the top eleven reported challenges facing the surveyed organizations.

Boards are failing to adequately perform one of their key duties—preparing for the day they will need to replace the CEO.

The Governance Institute surveyed nonprofit hospitals from across the United States. In some aspects, their results paralleled Forvis’s findings. For example, they noted the high percentage of hospitals without a written succession plan.  The Forvis Report pegged that number at 55.8 percent in its report.

Rigorous board education is imperative to prepare the board for its significant leadership role

The Governance Institute also underscored the need for a well-trained board with “the tools and know-how to accelerate innovation and transformation.” It noted a strong correlation between educated boards and those with excellent performance.

Boards are becoming more diverse.

The Governance Institute observed a slow Increase in Board Diversity.  Comparing the results to their 2021 survey, they observed an increase in board diversity, with 97% of all boards having at least one female director. Twenty-two percent of boards had six or more female directors. Minority representation, while growing, still showed that improvement was needed, with thirty-seven percent of boards not having a single minority member.

According to the Governance Institute, in recent years, good governance among nonprofit healthcare organizations has experienced a hit, with boards taking a step backward from practices considered essential to peak performance. 

The Governance Institute saw boards engaging in fewer activities they would identify as “best practices.”   They found boards spending too much time listening to reports and dealing with mundane administrative matters instead of actively engaging in core governance functions like strategic planning and management oversight.

Taken together, the reports point to four conclusions:

  • Reduced charitable giving and weakening financial positions are pushing agencies to rely more on program revenue and less on philanthropy and are placing their agency’s future in jeopardy.
  • Many boards still lack the basic elements of an effective governance structure, setting themselves up for problems.                                                                                                                                                        
  • America’s nonprofits remain a work in progress and may have taken a step backward due to the pandemic.
  • Board diversity efforts are steadily moving from tokenism to creating boards that better reflect the communities served.

Hopefully, these reports will serve as a call to action, spurring nonprofit boards to become better versions of themselves, advancing their unique missions, and helping them serve their communities better.