For projects considering leaving a fiscal sponsor, governance is a huge part of the process — and yet it’s one that often gets overlooked. We sat down with Greg Nielsen (right) of Nielsen Training and Consulting, a governance expert based
in Louisville, Kentucky to discuss some governance pitfalls for sponsored projects looking to transition out. The following transcript has been edited for clarity and length.
Schulman Consulting: Tell me about your experience working in the fiscal sponsorship realm.
Greg Nielsen: I am a former nonprofit CEO who led the Center for Nonprofit Excellence, in Louisville, Kentucky. And I saw firsthand a number of nonprofits who were in various stages of their life cycle. Everything from starting up to considering a merger and even dissolution. And perhaps it was based on my legal background, but I started to get more and more interested in fiscal sponsorship which led to consulting with organizations that were considering this as a form for their project as a form for their entity. So that has led to consulting with organizations both in the startup phase on the project side as well as on the sponsorship side. And also presenting to various audiences about the pros and the cons and the mechanics of fiscal sponsorship.
SC: I’d like to ask you a few questions about your work with both sponsors and projects and what you see from a governance standpoint. Let’s start with the startup nonprofit.
GN: I think when an individual or project is looking to start up, one of the first questions I’ll always ask them is, where do you see your initial impact? Where do you derive energy from? And more often than not, you hear people talk passionately about the programs that they want to operate. No one ever waxes poetic about, I want to set up a finance infrastructure. I want to make payroll or I want to file my 990 each year. And for a lot of startup organizations, fiscal sponsorship presents a great opportunity to pilot an innovative approach to a community challenge without all of the pain, all of the stuff that goes along with building a new organization. And fiscal sponsorship helps those folks as it allows them to really concentrate their limited energy, their limited resources on the program itself to see is this a viable long-term approach to this community challenge or not? And that that then shapes their decision whether fiscal sponsorship is the right approach for them.
SC: I couldn’t agree more.
GN: You mentioned the governance piece and that’s obviously a big distinguishing factor between being a sponsored project under another organization vs. operating your own 501c3 organization.
A nonprofit board of directors has really well-defined legal and fiduciary duties and therefore requires a different composition of individuals around the table than an advisory council, particularly if the council is just advising on the project. If that’s the case, the advisory council might be filled with more subject matter experts, could be more close colleagues who are more familiar with the program itself and don’t necessarily have to bring to the table some of those other competencies that you would need if you were building an actual board.
On the flip side of that, do you ever work with organizations that are separating from their sponsor? And how do you see that transition from having an advisory council to a full board of directors?
GN: Yes. I do work with organizations that are considering separating. And it’s about transforming the advisory council into a really well-established team.
When you think of an advisory council, that’s a group of colleagues who are providing advice and then stepping away, when I think of a board of directors, it’s a team that is all in with the executives or with the person who’s heading up the project. They’re going to carry fiduciary liability. They’re going to have to have the skills and perspectives and diversity around the table to be familiar with the finances of the organization, the marketing, how to evaluate the programs, how they plan to select and support their CEO and evaluate that person as well.
It’s just a much more robust entity as a board than it is as an advisory council. Advisory councils can meet periodically at the need of the executive, boards tend to typically meet at regular intervals, whether that’s monthly or every other month.
SC: And do you see advisory council members stay on as part of the new board or do they usually transition out?
GN: I’d say it’s typically a middle ground. Typically, some members of the advisory council will roll over onto the newly formed board of directors and some will simply step away at that point because they are either unwilling or they’re just not the right fit for what the board is going to need as a team.
What I see most effective organizations do is really focus on the mechanics of building a highly effective board. They focus on: what is it going to mean to be a board member? What are the expectations we’re going to have of our board? How are we going to recruit board members?
We may have used a pretty narrow or insular circle to form the board of advisors. But now that we’re going to a full-on board of directors as an independent organization, we want to have a little bit more formal and robust recruitment process.
How are we going to orient new people who may not have been with us on the initial journey as a sponsored organization to what we’re doing now? And our vision. And then what are all of the mechanics of the board going to look like? How frequently will we meet, what committees will we need? All of those kind of day to day tasks of how the team is going to come together and operate.
SC: I don’t think people realize how much it takes to do all of that.
GN: It is, it is. It’s arguably the most critical consideration for an organization when they’re making that initial decision to go out on their own. It’s really being intentional about what resources do we have and what resources – both human and financial – do we really feel comfortable that we can bring to the table.
SC: It’s something that not enough people think about even within the fiscal sponsorship space. People worry about the financial piece and the legal piece and even HR and those kinds of things. But I think sometimes the board is left to the side.
GN: Governance is hard. One of my favorite quotes when it comes to governance is “that a good board is a victory, not a gift.” It really is the product of intentional planning, intentional effort, and it’s an ongoing process. It’s not just, “we’re going to create a board, we’re going to ask 10 people to serve and it’s going to magically come together.” It’s really a day-to-day grind to build an effective board.
SC: And that usually falls to the ED as a big part of their work. Correct?
GN: Yeah, I think in the initial stages, absolutely. It’s the EDs vision that typically gave rise to the project in the beginning. And it’s typically the EDs persistence and vision that’s going to get it off the ground as an independent organization if they do choose to break away.
But I think the sooner that executive can surround himself or herself with a board chair and really key board leaders that can as much as possible drive the board governance piece, the more likely it is that that organization’s going to succeed. Because the reality is the executive can’t do it all themselves. They have to at some point have a partner in that board chair and that board leadership role that’s going to work with them on building an effective board.
You know, one of the first pieces of advice I would give an organization that is going to go independent is find yourself someone who will step into that board chair role and be your partner in building this organization and putting it on solid footing.
SC: That’s great advice. You mentioned thinking about what the resources the organization can devote to this and really planning to succeed – how long does that process usually take?
GN: For most of the projects that I’ve worked with, having a six to 12-month window allows them to thoughtfully plan for the future and, and whatever form that may take, whether that’s re-upping with their current sponsor, finding a new fiscal sponsor or going out on their own. And part of that will entail the cultural transition of going from a project to a standalone nonprofit. And I think that to do that thoughtfully and with intentionality does take six to 12 months.
SC: That’s good to hear. A lot of people believe they can separate in a month or two – and usually they don’t realize everything that’s involved.
GN: One of the things that I find is the need to kind of back up the conversation. I will typically get a lot of folks who come to me who say, ‘I want to leave my sponsor,’ or ‘I want to become an independent 501(c)3 organization. And I want to do it as soon as possible so that I can do X, Y, and Z.’ And I tend to have to back up the conversation to look at the existing relationship with the sponsor and say, why is it that now is the right time for independence? Is it that you’ve just outgrown the sponsor? Is this not the right sponsor for you at this point or, or is there something else going on there? Because I think that informs the decision. Sometimes it can feel a little black and white to organizations. Fiscal sponsorship is either working for them or it’s not. And, and sometimes it’s important to say, maybe you just don’t have the right sponsor. Let’s examine that first.
SC: Yes, exactly. I always start with ‘why.’ Like you said, Why do you want to leave? Why now? Most people don’t know that, ‘Hey, if I have a sponsor right now and they can no longer support me, there are other options besides getting a 501(c)3.’
GN: And that leads me to one of the bigger misconceptions that I hope starts to clear itself up: that fiscal sponsorship is just for a short term or just a probationary period or just a kind of a waystation until you’re ready to form your own 501(c)3.
I’ve known a lot of projects that have stayed in fiscal sponsorship status for an extended period of time and it’s the right model for them, the right fit for their organization. It provides benefits for them that they wouldn’t have if they were a standalone organization. So I’m not advocating on one side or the other that they be independent or that they stay with their sponsor. But I do push back against that misconception that it can only be for this incubation period.
SC: There seem to be a lot of people out there who don’t realize that fiscal sponsorship could be a lifetime home. I’ve worked with a number of organizations in that situation and have no intention of leaving.
I think things may be moving in that direction, slowly. The biggest issue I hear right now is with funders who are pushing for separation or don’t support fiscally sponsored projects for different reasons. And I think that’s a conversation that the sector needs to have.
There’s obviously a tension there between what funders are saying — the importance of having a model that is sustainable long term, how they are granting funds – for those who have policies against funding fiscally sponsored projects or make it difficult for them, etc. A lot of fiscally sponsored projects find that fiscal sponsorship is a business model that works well for them
GN: Right – and penalizing them for being in that status and pushing them towards independence that may not be in their long term, sustainable, best interest. It’s definitely a contradiction. I’d love to see the sector have more conversation around funding and around requirements and restrictions that may penalize fiscally sponsored projects.
SC: Agreed. Especially in a world where overhead is still such a big part of the conversation. That’s starting to change slowly too, but many funders have been focused on ‘how can you get that overhead number down to the lowest possible amount.’
GN: I think we hear a lot about the importance of sustainability, the importance of collaboration, of being efficient and, and with limited resources and collaborating for back office functions. And I see a lot of that in fiscal sponsorship. So, I don’t know why we would want to penalize a project by withholding sources of funding from them for doing exactly what we are, what we want to encourage.
SC: Very true. Especially if you don’t have a team that has experience in all of the compliance and regulatory issues. Why not hand that off to somebody who does those things for a living?
Do you have any other pieces of advice for those who are under sponsorship, maybe consider who are on their own on the board front?
GN: I think for projects that are considering going out on their own, it’s especially important to focus on strategy, to focus on a vision, to have a business plan, not only for those initial six months of independence, but what does independence look like for your organization long term. I think that the importance of investing in building a board, the importance of investing in strategy and talent development, which may include professional development for the executive to add those additional competencies that they’re going to need. Leadership development and coaching. I think those are things that are especially important when a project is considering independence.
SC: Those are critical in the transition period. Which invariably brings out lots of new responsibilities. It’s important that everyone grows to meet the new challenges.
GN: Absolutely. Without a doubt.
SC: Thanks so much Greg. We really appreciate your time.