Estimated Reading Time: 10 minutes
Executive Director
As another calendar year draws to a close, the subject of “endings” comes to mind. Every day across the U.S., nonprofit leaders experience endings of one kind or another. The departure of a long-time employee, the retirement of a board member, and the decision of a small commercial vendor to narrow its scope of services are just a few examples of common endings. In our work with nonprofit organizations in this country and internationally, we have observed that nonprofit leaders often experience anxiety when the “end” is near. The purpose of this article is to offer practical advice about managing the risks associated with relationships that are fated to end.
One of the most frequently omitted yet essential parts of a contract is the section indicating how each contracting party may escape from or terminate the arrangement. My own sense of why this omission is so common is that parties to a new contract tend to begin the relationship with an unrealistic sense of optimism. I invite you to reflect on the contracts you have signed during your career as a leader. How many times were you certain or even concerned at the outset that the relationship was doomed? My guess is that the number is negligible.
Few leaders possess the skill of prophecy necessary to forecast when and why business relationships will end. When we hire new employees and contract with third parties we are confident that things will work out. Biases distort the decision making process, and the bias of overconfidence may be particularly harmful to sizing up the risk of business relationships. Professors Paul Schoemaker (University of Pennsylvania — Wharton School of Business) and J. Edward Russo (Cornell) label overconfidence “a hidden flaw in managerial decision making.”
The lesson from recognizing the overconfidence bias in our decisions about partners is to provide for failure while planning for success. For example, remember to include an escape clause in every contract. The language of the clause will differ based on the circumstances at hand. For example, it may be in your nonprofit’s best interests to ensure the ability to exit an arrangement without delay or complication. In that case, a clause permitting termination with 30 days written notice may be in order. Also consider any special requirements that may be necessary due to the nature of the contract, such as the requirement that the vendor work collaboratively with and willingly transfer computer program code, or other property of the nonprofit to the new provider.
When I speak with nonprofit leaders who are reflecting on failed business relationships it’s not surprising to hear the sentiment: “there were signs all along.” Most failed relationships are preceded by signs that all is not well. Common signs include: missed deadlines, substitution of less experienced personnel, and inaccurate billing statements. In other cases areas of incompatibility become obvious and the prospect of a successful relationship grows dim. The mistake we too often make is to ignore the warning signs and hope that things will improve. A better approach to the “hope springs eternal” school of risk management is to take the following steps.
A popular retailer in my community offers year-round, complimentary wrapping of any gift purchased at the store. I find the option irresistible. No matter how long I labor over a package, it will never look as neat and attractive as the box wrapped by the store clerk in just a few minutes. Yet I will acknowledge that I could, if motivated, probably learn how to wrap effectively. Many nonprofit leaders seem similarly disinclined to learn how to wrap business relationships with care. The consequences of my stubbornness with gift wrapping are minor when compared to the potential risks associated with the mishandling of a failed partnership or business relationship. A simple reminder about “wrapping with care” can help you avoid the unnecessary exposure to legal claims, reputation risk and more.
The expression sometimes attributed to Socrates, “the only thing constant is change,” is an absolute truth with respect to the employees of a nonprofit. Over time, people come and go. Although most executives understand this intuitively, a large number continue to be offended when a valued employee identifies a greener pasture. That offense translates into less than generous treatment of the departing employee. No employee wants to see a co-worker being treated badly. Watching how the leader reacts may have the unfortunate consequence of causing others in the workplace to vow not to provide the requested notice period.
Employees who announce their intent to leave should be treated kindly. Here are some important steps to avoid the risk of negative fallout:
Employees who must be terminated for poor performance should also be treated kindly. Here are some important steps to minimize the risk that your decision to fire will cause a firestorm:
With respect to any departing employee, make certain you follow your written personnel policies closely. Always obtain an independent review of your planned approach to terminating an employee for cause. The independent review might be provided by an employment attorney licensed to practice in your state or a consultant at a firm with HR expertise. Finally, arrange for an exit interview with every departing employee. The interview should be conducted by a senior professional who is not the employee’s direct supervisor. It can be conducted in person or by telephone.
Your nonprofit’s needs for business partners will change over time. The IT guru who works from her basement may not be equipped to manage your growing network with dozens of users. The public relations firm that has developed one-color print ads for your nonprofit may not be able to provide the candid, state-of-the-art advice you need regarding a proposed multi-media campaign. In every organizational lifetime the partners with which we do business change. Consider the following tips to ensure a smooth transition from one provider to the next:
Board transitions are a good thing. New members breathe life into age-old policies and bring new ideas to the table. Veteran board members provide perspective on the history and accomplishments of the nonprofit and help balance the sometimes intoxicating lure of rapid change. The reasons for board departures are as varied as the people who serve on your board. Some may depart when their term draws to a close, while others will plead to be let off due to busy schedules or resign in a huff to protest a policy decision with which they disagree. In rare cases a board member may be voted off for conduct unbecoming a trustee. No matter the reason for the departure, when it’s time to say “goodbye” to a board member, remember to:
The Clint Black song “A Bad Goodbye” offers a musical reminder that goodbye is “easier said than done.” Nonprofit leaders committed to managing the inevitable risks in relationships should exercise care when forming and ending business relationships. Your mission is too important and a “bad goodbye” is in most cases, avoidable. Armed with awareness of the overconfidence bias and a commitment to step carefully and with grace when it’s time to call it quits, you will be able to orchestrate the ending of any business relationship with minimal legal and reputation risk.
Melanie Lockwood Herman is Executive Director of the Nonprofit Risk Management Center. She welcomes your feedback on this article and questions about the Center’s resources for nonprofit leaders. She can be reached at Melanie@nonprofitrisk.org.
“First let me congratulate you on a conference well done. I had a great time at the Nonprofit Employee Benefits Conference and walked away with some valuable tools and questions that we’ll need to be addressing in both the short and long term. Thanks to you and your staff for all you do to provide us with quality resources in support of our missions.”
“BBYO’s engagement of NRMC to conduct a risk assessment was one of the most valuable processes undertaken over the past five years. Numerous programmatic and procedural changes were recommended and have since been implemented. Additionally, dozens (literally) of insurance coverage gaps were identified that would never have been without the work of NRMC. This assessment led to a broker bidding process that resulted in BBYO’s selection of a new broker that we have been extremely satisfied with. I unconditionally recommend the Center for their consultative services.
“Melanie Herman has provided expert, insightful, timely and well resourced information to our Executive Team and Board of Directors. Our corporation recently experienced massive growth through merger and the Board has been working to better integrate their expanded set of roles and responsibilities. Melanie presented at our Annual Board of Director’s Retreat and captured the interest of our Board members. As a result of her excellent presentation the Board has engaged in focused review which is having immediate effects on governance.”
“The Nonprofit Risk Management Center has been an outstanding partner for us. They are attentive to our needs, and work hard to successfully meet our requests for information. Being an Affiliate member gave us access to so many time- and money-saving resources that it easily paid for itself! Nonprofit Risk Management Center is truly a valued partner of The Community Foundation of Elkhart County and we are continuously able to optimize staff time with the support given by their team.”
“The board and staff of the Prince George’s Child Resource Center are extremely pleased with the results of the risk assessment conducted by the Nonprofit Risk Management Center. A thorough scan revealed that while we are a well run organization, we had risks that we never imagined. We are grateful to know that we have now minimized our organizational risks and we recommend the Center to other nonprofits.”
Great American Insurance Group’s Specialty Human Services is committed to protecting those who improve your communities. The NRMC team has committed to delivering dynamic risk management solutions tailored to nonprofit organizations. These organizations have many and varied risk issues, hence the need for specialized coverage and expert knowledge for their protection. We’ve had Melanie speak on several occasions to employees and our agents. She is always on point and delivers such great value. Thank you for the terrific partnership and allowing our nonprofits to focus on their mission!