Mainebiz Special Editions

W W W. M A I N E B I Z . B I Z 13 G I V I N G G U I D E 2 0 1 6 – 2 0 1 7 T he CEO has just announced that she's leaving. What's next? If you aren't sure, you're not alone. For many Maine organizations, businesses and nonprofits alike, this is not a hypothetical situation: According to Boston-based ird Sector New England, more than half of Maine survey respondents said their nonprofit anticipates a leadership change in the next five years as baby boomers, who have often delayed retirement due to the recession, step down. On top of these natural generational shifts, organizations face transition in senior leadership positions regardless of leaders' ages: most workers change jobs several times during their careers, seek- ing new challenges and opportunities well before retirement age. All this adds up to mean that orga- nizations should take to heart the old adage, "Change is the only constant." It's best to prepare to navigate both planned and unplanned leadership transitions. is is especially true at nonprofit organizations, which provide critical services to their community and whose boards have a responsibility to consider sustainability beyond any individual leader. When faced with leadership tran- sition, nonprofit board members can use this checklist to get started. ü Breathe: A change in leadership is inherently an organizational transi- tion. Too many boards rush to fill the shoes of a departing leader without thinking through the opportunities the change may present. ü Form a transition committee: Identify the board members and stakeholders who will lead the process. is group will not only guide the internal and external communications about the transi- tion, but shepherd the organiza- tion through the following steps. ü Take stock: What are the organi- zation's current strengths, chal- lenges and opportunities? Are there clear strategic priorities? A strategic plan is a valuable tool dur- ing the transition. If there isn't one currently in place, it is important to complete some kind of assess- ment to identify shared expecta- tions around strategic priorities. Prioritizing strategies and goals will highlight the particular lead- ership skills and characteristics needed in a new executive leader. ü Seek input from staff: It is vital to engage staff in the assessment process. e mission is best served by having the most complete picture of both strategic and operational strengths and weaknesses. ose closest to the work will have valuable insights. ü Consider an interim: In cases where the exiting CEO was a founder or the departure is sudden, or where there has been a crisis or pending merger or restructuring, an interim can be a good solution. An interim can provide a neutral perspective, resolve various issues and help move the nonprofit into the future. ü Develop a position profile and begin the search: It is only after the steps above that an organization should move into the search phase of a transition, with a designated search committee. is phase of the process deserves its own article and there are numerous resources avail- able, including consulting support. Want more help? A change in leadership is inherently an organizational transition. Nonprofits must keep mission in the forefront by shifting their mindset about succession planning to one of deeper sustain- ability planning, thinking holistically about identifying organizational values, developing emerging leaders, and put- ting in place practices that safeguard the important work of your organization beyond any one leader. Whether your organization is facing an imminent transition, or working on longer-term organizational develop- ment, visit MANP's Mission Driven Leadershift page at NonprofitMaine.org/ leadershift for resources on succession planning, leadership development, and managing executive transitions. M o l l y O ' C o n n e l l , assistant director of the Maine Association of Nonprof its, can be reached at moconnell @ n o n p r o f i t m a i n e . o r g F or most organizations fortunate enough to possess an endowment, the funds are intended to be perpetual and to provide a stable and grow- ing source of financial support to the organization well into the future. But in the here and now, budgets are typi- cally tight, so boards and investment committees must address the creative tension between meeting today's spend- ing needs while considering spending needs in the future. Arguably the most important endowment management consideration is determining a spend- ing level that is truly sustainable, which means the buying power of the current endowment drawdown will be the same or higher in the future as it is today. In practice, no spending rule is per- fect. Rather, a formula for endowment spending should serve as a guideline. In real life, investment and budget circumstances change, which means boards will always need to use their best judgment around portfolio and spend- ing issues. We spend a great deal of time with our institutional clients on invest- ment policy considerations directly related to portfolio spending, including asset allocation and liquidity needs. e most commonly used spend- ing formula applies a fixed percentage, usually codified in the organization's investment policy statement, to the market value of the endowment assets. is spending rate varies by organiza- tion based on each situation, but typi- cally it ranges from 3.5% to 5.5%. Since annual market volatility can be high, organizations often apply their spend- ing rate to a rolling-average of the value of the portfolio, usually over the trailing three years. is helps dampen the volatility of what the spending formula suggests the organization can spend; but large market moves in either direction over longer periods of time can impart volatility into the prescribed endowment drawdown. Of course, the key variable in this calculation is the percentage spending rate the organization uses. To achieve true sustainability, over the long-term an endowment's investment return has to be high enough to cover the payouts, but also keep up with inflation and cover all fees and expenses. Naturally, spending less permits the endowment to grow faster and reduces the possi- bility of having to take large principal drawdowns during periods of mar- ket duress. We think a good working sustainable spending rate is 3.5% to 4.0%, which is a conservative spending allocation of about half the portfo- lio income and real growth from an equity-oriented endowment portfolio. Today, the asset allocation decision is complicated by the steep decline in interest rates since the Great Recession. Investment-grade bond yields have fallen sharply. For the last five years, yields on intermediate maturity, invest- ment-grade bonds have remained below the yield available on stocks. Indeed, today the yield available in stocks exceeds even the yield on the 10-year US Treasury note by a significant 0.5%. Going all the way back to 1954 stocks had not yielded more than bonds until 2011. Additionally, real economic growth in the developed world and in corporate earnings has been slowing: Many non-profit boards are work- ing hard to make budget adjustments to reduce endowment spending in the face of this lower-return environment. For organizations with stubbornly high endowment spending rates, or who are highly dependent on their endowment, we are recommending they consider putting one or two years' worth of spending in low-risk, liquid investments to drawdown while main- taining a full allocation to high-qual- ity, dividend paying equities yielding more than investment-grade bonds. Seemingly small adjustments to the spending rate can have a big impact on an endowment's ability to weather mar- ket volatility. Chronic overspending can permanently impair the sustainability of an endowment's purchasing power, which becomes a greater risk when investment returns are low and market valuations are high, as they are today. Pe ter E. Robbins, CFA, is CEO of H.M. Payson & Co. in Portland. He can be reached a t p e r @ h m p a y s o n . c o m Navigate a leadership change: a checklist for nonprofit boards Protect the endowment in a low-return environment B Y M O L L Y O ' C O N N E L L B Y P E T E R E . R O B B I N S H OW TO H OW TO Annual growth of earnings for stocks Annual 'real' growth of earnings Annual inflation Last 30 Years 6.1% 3.5% 2.6% Last 20 Years 4.8% 2.6% 2.2%

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