Addressing the Leadership Crisis in the Nonprofit Sector
Seven years ago, Tom Tierney co-founded the Bridgespan Group, a consulting practice that bridges the divide between corporate management consulting and the organizational strategies of foundations and nonprofits. Tierney left his chief executive position at Bain & Company in 2000 to devote his efforts to Bridgespan Group. A few years later, he would also lead the development of Bridgestar, a nonprofit Bridgespan initiative established to address the leadership deficiencies of the nonprofit sector.
Tierney frequently speaks and writes on topics related to philanthropy and leadership. He lectures at Harvard Business School and co-authored Aligning the Stars in 2002, a book on how to attract and motivate top performers by fostering what Tierney calls “constellation leadership.” Tierney received his MBA from Harvard Business School and now serves on myriad nonprofit board and advisory groups, including The National Center for Public Policy and Higher Education, the Hoover Institution, and the Harvard Business School Initiative on Social Enterprise.
He recently spoke with Philanthropy about the leadership crisis in the nonprofit sector.
PHILANTHROPY: Why are you so concerned now about nonprofit leadership issues? Could you give us the highlights of the new study that you recently published?
MR. TIERNEY: Bridgespan has now been serving the nonprofit sector for almost seven years. In the course of more than 150 projects with nonprofits and foundations, one of the most salient lessons we have learned is that organizations must have three key ingredients in place in order to deliver results: solid strategies, access to capital, and talent in the form of strong leadership teams. Now, that’s not necessarily a new insight, but it’s particularly important in light of the challenges that nonprofit organizations face in trying to attain all three—and particularly talent.
Early on, we recognized that even organizations with excellent track records were having a tough time filling certain kinds of jobs, for example, chief operating officers. Oftentimes, organizations would grow, the executive director would conclude he or she needed to hire a number two person to manage the increased scale of the organization, and they would search for a chief operating officer.
They would immediately realize a couple of things: Number one, they weren’t exactly sure of how this new role might fit in their organization. Number two, there was no ready supply of chief operating officers; the roles were hard to fill. And frankly, there was not much of a recruiting mechanism to identify qualified candidates. And it turned out that this challenge wasn’t just chief operating officers; it was true of pretty much all of what in business would be considered functional management roles, like CFO or head of human resources.
In the nonprofit sector, program-specific jobs were typically easier to fill because there are existing professional networks to access. But, as we discovered from our clients, high-quality general and functional management talent was and is quite hard to find.
We discovered that other people were exploring those issues as well. There were a series of studies, some done by United Way, others completed by CompassPoint in collaboration with the Meyer Foundation. These organizations were looking at the increased turn-over of executive directors and how incredibly challenging it is to replace a CEO, particularly the founder of a nonprofit. Often, nonprofits have not been adept at building successor candidates internally and have to go outside. Where do you find these people?
The various studies and our field experience led us to conclude about three years ago that it would make sense to rigorously evaluate the supply and demand trends surrounding leadership talent in the nonprofit sector. That evaluation led to the Bridgespan Group publishing a paper in which we referred to the nonprofit sector’s leadership deficit.
The highlights of that paper are actually staggering. Over the next decade, the nonprofit sector in America will need 640,000 new senior leaders. Moreover, that number is focused only on the top seven jobs in nonprofits; that is, the executive director, the CEO, CFO, et cetera, and does not begin to address the need for entry-level people. In addition, it relates only to certain kinds of nonprofit organizations.
For example, we excluded all healthcare groups where more technical degrees are necessary, such as in nursing. We excluded all higher education groups where you need college administrators and professors. We excluded anything that was not a nonprofit organization, so this doesn’t count government-run school systems. We refer only to the senior leaders of nonprofit organizations, primarily in human services, the arts, and the environment; the organizations that account for about 40 percent of the sector. We also excluded organizations with less than $250,000 per year in revenue.
Is 640,000 a big number? Well, to put it in perspective, that is 2.4 times the number of current leaders in those positions. If you had to source these leaders only from MBA programs in America, not that that would necessarily be a good idea, but if it were the only source of potential new leaders, you would have to recruit 50 percent of the graduates of every MBA program in America for every year over the next decade.
As demand for management talent is rising, a number of forces are reducing supply. One significant trend is that people are leaving the nonprofit sector for better jobs, or what they perceive as better jobs. If you are a chief operating officer in the nonprofit sector, you might have an opportunity to make more money and to earn better benefits by working in business or sometimes in government.
The second trend is people moving out of management jobs; for example, the executive director who has become tired of fundraising and decides to become a consultant.
Both of these trends are layered on the most important element of the reduced supply of leadership talent: retirement. As the baby boom generation ages, its members are leaving the work force in record numbers. The subsequent generation is substantially smaller, causing the advent of the “talent wars” that we’ve read about in the press.
PHILANTHROPY: Many Philanthropy Roundtable members are deeply concerned with scaling up their favorite grantees.
MR. TIERNEY: Absolutely. The scaling-up of nonprofit organizations is one of the major forces driving up demand for management talent (along with the increasing numbers of nonprofit organizations). And when organizations are growing, our observation is that outstanding talent and excellent people are in shorter supply than money.
Meanwhile non-government organizations are increasingly absorbing the responsibility of government organizations, which some of us think is a useful approach since NGOs can often be more effective than government agencies. With so much competition for management talent, it’s going to be harder and harder for those non-government organizations to attract and retain the right leaders. When the labor market is shrinking and the demand for labor is growing, you have a structural imbalance.
PHILANTHROPY: Speaking of increased supply, increased demand, there is an obvious price issue about that.
MR. TIERNEY: Exactly. Economics 101. We learn very quickly that if demand increases and supply goes down, price usually responds by increasing. Supply and demand drive prices.
One would assume that if the supply of leadership talent in the nonprofit sector is declining at a time when the demand for that talent is increasing, the price, that is, compensation, would increase. But compensation doesn’t move as easily in the nonprofit world as it would in a free market.
Why is that? For at least two reasons. One is cultural, and one is related to tax law. Our culture assumes that the people who are serving in leadership positions in nonprofits should be motivated by doing good, and be willing to sacrifice the personal financial benefits that they might achieve in a different kind of occupation. At the same time, the government requires that compensation of nonprofit leaders be “reasonable.” That is, they should not be “overpaid.”
In our research, we have found an inefficient labor market for nonprofit leaders earning in the range of $75,000 to $150,000. These executives typically serve organizations with revenue of $3 million or $5 million or even $30 million.
For these nonprofits, the marketplace is inefficient, so as the supply of labor declines and the demand for labor increases, there is this cultural concern about “paying too much” for the next senior executive. Boards of directors and executive directors may try to minimize compensation to avoid being perceived as “high cost”—even if that means they will not be able to attract the highest quality talent for the job.
It is fair and reasonable to be worried about the overhead of a nonprofit organization, because if overhead is high, then presumably less money is ending up in the direct services the nonprofit is supposed to perform.
But there’s good overhead and there’s bad overhead. Bad overhead would be excess rent, where the organization is paying above market rate for space that’s too fancy. On the other hand, it may be worth an organization’s while to pay $10,000 more for a higher-quality financial officer so you get someone who understands accounting thoroughly and practices it instead of someone who may have taken a few accounting courses but is basically an effective bookkeeper. That may increase overhead, but I’d argue that it’s increasing good and productive overhead.
On the compensation issue, I think there’s one more important point, and that relates to accountability. One of the more prominent trends over the last decade in the nonprofit sector is an increased focus on results. Some organizations go so far as to try to measure their social return on investment. More and more donors, and especially funders from the government and foundations, are demanding that organizations demonstrate and quantify results, and they are holding the leaders of nonprofit organizations accountable for results.
If we are holding the leadership team more accountable for results, we ought to be willing to pay fairly for the high-quality leaders who actually deliver those results.
PHILANTHROPY: How should donors respond to the leadership deficit?
MR. TIERNEY: There are perhaps four action implications that donors should consider when they’re thinking about grantees and potential grantees in the context of the leadership deficit.
The first relates to due diligence. Often, the due diligence process is heavily focused on the programmatic effect a nonprofit may be having, but not as heavily focused on the leadership capacity of the nonprofit. In this case, there are some specifics that a donor can kick the tires on. Does the organization have a strong management team? That’s a judgment call, but unless you interview that management team and really understand the individual and aggregate capacity, you won’t know.
Do they have adequate human resource practices? Are they investing themselves in building capacity? How effective have they been in recruiting? Does it appear as though they have high turnover or low turnover? Seemingly high turnover is bad. Yet zero turnover is also bad because that means they are not weeding out the lower performers. Do they have an effective performance review mechanism?
A part of due diligence might also be evaluating the perspective of other major donors. Are the board members or donors concerned about leadership capacity or not?
What if you are a donor and are interested in scaling a potential grantee and know that substantial leadership capacity is central to growth, but the other donors or board members say, “We can get by with a bookkeeper. We don’t need a CFO”? Well, that’s a red flag.
The second implication of the leadership deficit for donors relates to their grantmaking. The tendency among many donors is to try to devote as much money as possible to programmatic results. They like low overhead, if you will. But you’re not going to get outstanding and sustainable results without funding a great leadership team.
Paul Brest of the Hewlett Foundation has been adamant about the importance of unrestricted or semi-restricted funding to build leadership capacity. Social entrepreneurs who are trying to build a portfolio should take a look at Doris and Donald Fisher’s relationship with KIPP Foundation, where they are investing in building leadership capacity for their grantees.
The third category relates to leadership development. Assuming you have the right people inside the organization, how can one improve the ability of those leaders over time? This is an especially important question for nonprofit executives, who often grow up in organizations trained in programmatic expertise, not general management. So they end up becoming a COO, or even a CEO, but they in fact don’t know much about management. So, how could a donor help the training and development of those individuals?
This is highly circumstantial. In some cases, a week-long management session at a university might be useful. Additionally, very few nonprofit leaders have executive coaches, although according to recent studies the number has been growing. These leaders also don’t have easy access to groups of peers. We’ve held gatherings for chief operating officers who are all working in the same field and are located in cities a few miles from each other—but who’ve never met. If a donor has a portfolio of grantees, he might think about possibly bringing the executive directors together for two or three days once a year to share best practices.
There might be a retired chief financial officer from business who is an adviser or consultant. Why not hire that person to consult throughout your grantee portfolio? Any individual grantee could benefit, but the aggregate—our or five grantees together—could benefit enormously.
The fourth implication relates to how the relationship with grantees evolves over time. Is the donor holding the grantee accountable for building leadership capacity? For example, in the reports that grantees write to donors on their progress, they often convey statistics about how many kids were served, how many acres were protected, or how many visitors they had in the art museum. Less often do they write about what kind of capacity they are building in the organization, how many new people they have recruited, what their desired turnover is, how effective they are at their human resource practices, and how competitive their compensation levels are.
How the grantee relationships are managed over time, what coaching donors might provide, what information donors might solicit, how donors prioritize the need for leadership, are all very important in guiding that grantee to higher performance.
More and more, we are encountering this kind of request. The Edna McConnell Clark Foundation is asking questions and is beginning to experiment on how it might build leadership capacity throughout its portfolio. Robin Hood Foundation is trying to do the same thing. More and more established foundations are asking questions about what they can do given their unique vantage point. What should they do across their portfolios that is relatively low cost and really leveraged in terms of leadership development?
PHILANTHROPY: Are there different qualities of leadership or problems of leadership for donors themselves?
MR. TIERNEY: Donors have a similar problem in that they are going to confront an increasing challenge in attracting high- quality talent. And they’re likely going to get what they pay for. I can’t tell you how many grantmaking organizations we see where they are looking for an executive director or a chief operating officer. Just as there is growth in nonprofits, there is also growth in foundations.
There are about 2,500 to 3,000 new foundations per year in America, and that number has been growing very steadily over the last ten years. The number and scale of private foundations will almost certainly continue to grow as the baby boom generation retires and the wealthier segment of that generation focuses more and more on philanthropy.
Thus, it’s going to be hard to attract the right people to the top roles. Second, running a nonprofit organization is really difficult. This isn’t like many jobs in business where there’s a lot of repetition. These jobs require enormous creativity and intellectual and management bandwidth.
Because the jobs are hard, and the leaders are in short supply, and you get what you pay for, donors are going to have to be willing to invest a significant amount of time in their own capacity building.
Now, is that leadership talent necessary for donors exactly the same as the leadership talent in their grantees? No. Grantees often require a set skill around fundraising, which obviously someone in the foundation does not need. Grantees have to have a set of skills around service delivery and programmatic expertise. Grantmakers don’t have to be as deeply expert in any individual program area. They must have a broad view of programmatic imperatives, which is particularly true if the foundation has multiple points of focus.
So, bandwidth is important, although the ability to exercise consultative skills is far more important. Think about the kind of leverage that board members need to exercise versus the skills of the general manager. It is fundamentally the difference between exercising influence versus exercising control.
Another important need of foundations is the ability of its employees to fit well with the needs of the donors. It is a family business in a way, and the chemistry between the individuals of the family matters enormously. That’s not the case in a nonprofit organization, although cultural fit is extremely important.
I want to step back from the leadership deficit even further. We’ve talked about the implication for donors in terms of their grantees and their own organizations, but I don’t want to lose sight of the bigger problem, and that is America will not have enough leaders to run non-government organizations effectively over the next ten years. That has macro implications for our society. It has implications for the relevant government versus non-government organizations. It has implications for the social return on investment that donors are actually able to achieve through their generosity.
PHILANTHROPY: What can be done systemically to address the leadership deficit so that, ten years from now, every dollar a donor contributes to non-governmental organizations generates a return substantially higher than it would today?
MR. TIERNEY: There are many organizations and institutions—our own Bridgestar is an example—that are starting to address this problem. This kind of infrastructure is going to be essential if the sector is going to have access to the supply of leaders that it really needs. And there are no short cuts.
We need over 600,000 new leaders. We might find ways on a tactical basis to find a few dozen leaders here or there, but we need to have thousands of new leaders. Where do we find 600,000 leaders? Well, we may have to access new pools of talent. We know, for instance, that there is a demand for people with business skills, whether they are mid-career executives, baby boomers, recent MBA graduates, or graduates of schools of public policy and administration. We know that some segments of those populations have both the motivation and the capability to serve in these leadership positions. The problem is in identifying the most qualified potential candidates and helping them cross the bridge from one sector or industry to another.
We know that we absolutely cannot afford to have top leaders leaving the nonprofit sector. So what do we do to increase the career mobility of talent within the sector? We might have people in health care that could be outstanding at running a charter school, but they’re not going to end up in the short list of any search because they don’t have the right resume or know the right contacts.
An important fact is that nonprofits typically recruit two out of three leaders from outside their organization. Nonprofit organizations are, by and large, small and lack the capacity to develop next-generation leaders; there are few leadership supply lines for COOs, for example. In sharp contrast, business typically recruits only one out of three senior executives from outside their organization; they have the ability to develop internal supplies of leaders. So nonprofits have to fight for talent twice as often.
Also, mobility in the nonprofit sector is a lot lower because most jobs are filled by people who know other people. In the nonprofit sector, 85 percent of jobs are filled through personal networking. In business, you have databases, you have the $20 internet search, and you’ve got loads of information available to identify and attract talent. That’s generally not the case with the nonprofit sector.
I think members of the Roundtable can ask themselves this question: Is there something we can do to help address the leadership deficit? They may already be doing that, by the way, for their city or their state. For example, there is an effort in New York City to dramatically increase the supply of leaders in New York-based nonprofit organizations over the next decade. Our country needs many more such efforts.
If together we don’t address this fundamental leadership need over the next five or ten years, our communities and the causes we care about will suffer for it.