A Question of Trust

Trust.

It is a difficult thing to talk about trust in the midst of an increasingly bitter labor dispute.  Obviously, at this point both sides are feeling a lack of trust, which is only to be expected.  I have no doubt both sides could assemble a lengthy list of betrayals large and small, each one backed up with lengthy justifications which may or may not be… well, justified.

But one recent exchange has jumped out at me as speaking to a larger point.  In this on-air debate, President Michael Henson of the Minnesota Orchestra asked Kevin Watkins from the musicians’ negotiating committee in effect, “We trust you to play your instruments, so why don’t you trust us to run the organization with solid financial leadership?”

Well, I hardly speak for Kevin or the musicians as a whole, but I can certainly explain why I don’t uncritically trust management’s word on the Orchestra’s finances.

1.  You hired a PR firm to report your financial position.  At a glance it may seem unfair to criticize you for hiring a PR firm to manage bad news—that is, after all, exactly why you hire a PR firm.  For similar reasons, you hire a lawyer to help you with a legal concern or a doctor to help with a medical concern.  But this goes far beyond massaging bad press; you hired this PR firm to dictate financial policy.  To refresh our memories, your board minutes reveal you wanted to end the past fiscal year with a deficit that would “prove” your need for a new business model and that the old way of doing things was coming apart.  So you consulted your PR firm to find just such a total, and withdrew a sum of money from the endowment that would result in just such a deficit—a shortfall of $6 million.

This deficit is entirely artificial, even contrived.  You could certainly have drawn down more, as you had been doing that for several years to “prove” you had a balanced budget.  Back then, you needed to make your finances look good because you were a candidate for state bonds, but now to make a case for organizational poverty you post a deficit in a pre-determined amount.  I get that other organizations did excessive draws during the recession, but that’s not the point here.  Also, we can argue about whether it was wise to have done these excessive draws in the past, or to have excessive draws in the future—but the fact remains that you altered your  profit and loss sheets not from purely financial considerations but as part of a deliberate attempt to enhance your position at the negotiating table.  So you’ll forgive me if I don’t uncritically trust your financial statements now.  What other “facts” been dictated by a PR firm? To what degree?

2. The 990s.  Board spokesman Doug Kelley has said in interviews that the musicians have the 990s—the tax documents the Orchestra must file with the IRS and make public every year as a non-profit.  He has gone on to state, more than once, that these documents are the “gold standard” for reviewing an organization’s financial health.  This is not entirely true.  Nor is an audit much better.  These documents are a snapshot in time, and hardly give a scope of an organization’s overall financial situation, and they inherently look backwards.  In personal terms, would you give a person a new credit card based on his or her last year’s tax returns?  Or a home improvement loan?  Or a mortgage?  Of course not—you would look at the family’s credit score, current employment, expected income, debt load, number of credit cards, car payments and so forth.  You would analyze their financial capacity right now, not just their personal ledger sheet from a year ago.  And so it goes for an organization.  The musicians are perfectly justified in requesting to see your assumptions, your projections and your aspirations.  What is the holistic view of where you think, realistically, the organization will be in a year?  Five years?  What are your priorities?  Your insistence that they base their response on the woefully inadequate 990 makes it seem that you are hiding something.

A secondary point also comes from Doug Kelley made on a previous appearance on Almanac: the statement that the administration should be trusted because no one lies on their tax returns.  This is an astonishing statement, really.  It seems almost embarrassing to point out that income tax evasion is a serious problem as old as taxation itself… one that has led to the creation of the IRS to enforce compliance with tax law.

3.  Questionable public testimony. When you testified before the state legislature to secure $14 million in state bonds, you were not entirely forthright about your finances.  I get that your testimony was not an outright lie, but you clearly presented yourself as being financially sound, and pointed to years of balanced budgets to support your claims of financial strength.  Yes, the legislators didn’t press you hard enough on your finances, but you gave an incomplete account of yourselves—it’s clear that you had been pulling extraordinary draws from the endowment to balance your budget.  You yourself freely claim that these amounts were unsustainable, and done primarily to create good optics for your presentation.  Is this legal?  I concede it is.  Was this politically astute?  Sure.  Was it effective?  Obviously.  But that doesn’t mean that outsiders observing the situation wouldn’t wonder if all your other financial statements—and your statements about finances—were not similarly  made up of spin, half-truths and political posturing.   As State Representative Jim Davnie (DFL-Minneapolis) said, “I can assure Mr. Henson that it is not just the musicians who have lost trust in the Minnesota Orchestra management.”

4.  Questionable data.  Another serious problem is the questionable bases of the few financial projections you’ve made public.  In your strategic plan, you base your future financial goals on the two specific years:  2008-2009.  You go on to make projections based on financial outlooks made during this same time, citing Giving USA as your source.  But those years represented the heart of the Great Recession, which hit non-profits—and specifically arts organization—particularly hard.  But things have changed.  The market is at record highs.  Giving USA notes that arts funding has fully recovered to pre-recession levels and continues to experience rapid growth.  As I spelled out in detail, other orchestras have experienced huge surges in ticket revenue and fundraising in the last few years.  But by all appearances you continue to base your forecasts on the grim reality of 2008-2009.  This doesn’t help your credibility.

5. Unclear definitions.  One ongoing point of contention is that in your analyses and projections you generally refer to “average” salary as a key metric.  This is odd—does any company think of salary in terms of a single average that ranges from the CEO to the mail clerk? How helpful would it be to look at an average of the salaries of all the staff members of Orchestra Hall, from Michael Henson down?  Think about it in personal terms: when you apply for a job, are you provided with an average salary for the company or the actual rate of pay for the specific position? It is the musicians’ base salary that is the critical metric here… the real-world rate that forms the basis of musicians’ salaries and dictates the overall payroll.  What is that figure? Worse, even though you repeatedly use “average” salary as a talking point, you haven’t released the formula for how such a number is calculated.  Forgive me, but this seems like more PR positioning.

6. Unanswered questions.  There are still areas of your financial reporting that raise questions.  All orchestra endowments took a hit in the 2008 recession, but the Minnesota Orchestra’s seemed to take a particularly brutal, disproportionate beating.  Why?  Documents show that the Minnesota Orchestra sold many securities at a $14 million loss in 2009 and hasn’t revealed what those securities were or how much they’re worth now. No other American orchestra saw a loss like this. Why?  The “independent” financial analysis you commissioned revealed that two very big ticket items, underfunded pensions and bond debt repayments of $9.3 million, weren’t addressed in your financial plans.  Why?

Let me point out one clear reason why it is not enough to uncritically trust management’s position is the cautionary tale of Minneapolis’ Southern Theater.

The Southern was widely seen as one of the most brilliant arts organizations in the Twin Cities, providing innovative original programming and serving as a home for a variety of smaller arts groups.  It’s annual budget topped $1 million.  It was supported by a range of donors and large foundations, including the prestigious McKnight Foundation, which in addition to regular support provided a large sum of money to the Southern to re-grant to the various artists and choreographers who performed there.  As an artistic leader in the community, its future looked bright, despite the hard times brought on by the 2008 recession.

Unfortunately, this was all a house of cards.

In 2011 the cards collapsed, and it was revealed that the organization was overleveraged and underfunded.  The Southern’s debt spiraled out of control; the organization had, in fact, been funneling McKnight’s pass-through grants—originally designed  for its clients—to pay for its own operating expenses, leaving the intended recipients without their money.  This development was all the more shocking because it was so unexpected… the Southern had been making rosy projections up until the final crisis.  Furious at the misuse of its funds, the McKnight Foundation demanded an immediate return of the $370,000 it had provided the Southern—funds which have not yet been repaid.  The scandal outraged the community and all other sources of funding dried up.  Within a week, the organization collapsed, and today the Southern exists solely as a rental space with one paid staff person.

Like the Orchestra, the Southern had a board of directors with managerial skill and personal resources.  Like the Orchestra, it filed 990s and submitted to annual audits, as required of all non-profits.  None of this made a difference.

In light of this situation, I’m sure you can understand why I think it wise to double check the management’s assertions… and its math.

Again, I say that trust often breaks down in a labor dispute—particularly one as long and ugly as this one.  But the above points show that this is more than a he-said-she-said debate… there are legitimate reasons why an outsider would not trust your financial positions.  And it isn’t just me saying this; nearly everyone observing this dispute has urged you to submit to an impartial, independent financial analysis.

I can’t speak to all the points of contention in this dispute, but I say with conviction that if you were to engage in an independent analysis, and to back up your assertions with independently verifiable data, many more people would be willing to trust you.  This really is an easy fix.

As Ronald Regan once said, “Trust—but verify.”

Xochipilli

The Triple Bottom Line—A New Business Model for the Orchestra

For some time, my wife has been talking about a business concept she has used with great success at her job—the triple bottom line.  I have to say, the more I’ve learned about it, the more impressed I’ve become… and since leaders at the Minnesota Orchestra have clearly indicated the need for a new business model, I’d like to suggest they take a closer look at this one.  Done right, this new strategy could benefit everyone and greatly strengthen the organization.  Some readers may not be familiar with the concept, so let me explain.

The triple bottom line (TBL) was first introduced by John Elkington back in 1994 as a way to look more holistically the true cost of doing business.  Elkington’s idea was that businesses have tended to focus exclusively on the profit and loss sheet, which has unduly narrowed their thinking and kept them so focused on short-term gains that they were crippling long-term success.

Elkington proposed a new way of thinking that measured three indicators to advance the goal of sustainability in business practices. The three measures are: profit (the economic value created by the company, or the economic benefit to the surrounding community and society), people (the fair and favorable business practices regarding labor and the community in which the company conducts its business) and planet (the use of sustainable environmental practices and the reduction of environment impact).  The “3Ps” became the cornerstone of his argument. (The Economist has good intro to the concept here.)

Shortly thereafter, Andrew Savitz and Karl Weber came out with a book, The Triple Bottom Line, that expanded Elkington’s idea by representing the three “bottom lines” as intersecting circles. The areas of intersection are termed “sweet spots,” meaning synergetic opportunities. For example, when power efficiency is improved, profits are improved due to lower power cost, while the environment benefits through reduced carbon dioxide emissions. So, improvements in the planet and people “bottom lines” are not necessarily at the expense of the profit “bottom line”.

triple-bottom-line1

There are two primary features of the TBL.  First, the emphasis is on broad-based sustainability, which forces a business to look beyond a quarterly report and to think of the real-world costs of doing business over a much longer period of time.

Second, it is predicated on the idea that what you measure is what you get, because what you measure is what you are likely to pay attention to.

This new balanced scorecard approach has been adopted by many businesses, including FedEx-Kinkos, Nike and Tesco; it has also been adopted by non-profits and governments across the country.

Let’s look at the 3Ps more closely.  Most companies instinctively understand the idea of profits.  But the Profit bottom line is more than that.  Profit is seen in terms of total value, with all input costs deducted, including tied-up capital; it also factors in risk management, capital efficiency, margin improvement, growth enhancement and return on investment. Further, profit in this case is seen as what economically benefits not just the individual company, but the society at large.

The second pillar is the People bottom line, which examines labor, the community and the region in which a corporation does business. In this mode of thinking, all workers are seen as company’s asset, but so are the community members at large; therefore, in addition to keeping its own labor force engaged, healthy, happy and productive, the business ensures its policies do the same for the entire community.  This makes it easier to recruit workers, cultivate customers, encourage advocates, forge greater bonds with vendors/suppliers, build networks and improve the workers’ quality of life when they are outside the office.  Businesses that incorporate this bottom line into their business plans seek to increase benefits for all stakeholders in an equitable way, without prioritizing one group (i.e. upper management) or marginalizing another.

Planet is the bottom concerned with environmentally sustainable business practices, achieved by maximizing benefits while minimizing detriments. This can range from electronics recycling to business plans that discourage the use of dangerous chemicals or destructive practices. Triple bottom line companies look at the entire life cycle of their actions and try to determine the true cost of what they’re doing in regards to the environment. They take pains to reduce their energy usage, dispose of any toxic waste in a safe way, try to use renewable energy sources and avoid producing products that are unsafe or unhealthy for people and the planet (no… another production of The Nutcracker around the holidays does not qualify as unsafe or unhealthy, regardless of what you may think).

An ethic of corporate social responsibility is a powerful reason to develop a new business plan focused on the triple bottom line.  It’s not, however, the only one. Many studies, including this one by MIT  show how corporate sustainability leads to greater profits.  But there is more.  The TBL has been shown to improve employee retention and employee engagement.  Interestingly, it’s also clear that more engaged employees create a more effective culture of social responsibility; thus, there is a feedback loop between the right employees and the right corporate culture that benefits everyone.

The Orchestra would benefit greatly from the adoption of the triple bottom line as a guiding force.  I leave it to more informed minds to discuss how the Planet bottom line would work in practice (I assume the Orchestra hasn’t made it a habit of dumping mercury into the pond on Peavey Plaza), but let me speak to the other two areas.

In terms of profit, I recognize that the Great Recession has been hard on the Orchestra, with all its revenue streams getting clobbered at once.  But rather than to simply cut $5 million from the musicians’ salaries, look at the whole picture over time.  Consider that the musicians are not just personnel; they are also your product.  What would happen if another company made a similar divestment, like a taxi company instantaneously eliminating 20% of its fleet of cabs?  When you consider the long-range, you have to take into account that such cuts could seriously hamper the quality of your product, which over time could lead to serious declines in ticket sales.  Will you, then, have to spend greater and greater sums of money on marketing to attract audiences while simultaneously dropping ticket prices? Will a loss of quality make it similarly difficult to fundraise, as donor apathy sets in?  Will such steep cuts also make recruitment and retention proportionately more difficult, and therefore more costly?  For example, you’ve also stated that each year you tend to lose three musicians to attrition.  What happens if that rate doubles, and stays at a higher rate for several years as disgruntled musicians leave?  Also consider that the people leaving will most likely be your brightest stars, because they’ll have the most options.  Will this compound the problem?  Auditions are a lengthy, costly process—what kind of a drag will this be on productivity?

Factoring the people side of the equation, the current trajectory is grim as well.  Without assigning blame, it must be clear that this dispute has created an angry, divided workplace for everyone.  This can have all kinds of ramifications.  At this point, I suspect even innocuous requests made to the musicians will fall on deaf ears—they probably have no interest in doing any sort of helpful outreach, offering advice, or entering into discussions unless they are contractually obligated to do so.  This is a huge loss of wisdom, institutional knowledge, fresh perspectives and talent.  And it is particularly alarming for an organization that requires communal precision—on and off the stage—to survive.  Again, how will this impact productivity and product quality?

But this will have other implications, too.  I’ve argued here  that personal connections are critical to an organization’s success, and the musicians are your best ambassadors to the broader community.  These connections are critical because the outside community is the key to most of your sources of revenue.  Besides the endowment, which is clearly outside your hands, your business depends on community members buying tickets and contributing money.  Community support leads to government and corporate contributions as well.

I’ll say this too—when you look at the broad picture, you have a duty to build an appetite for classical music as an art form, too.  And I don’t mean this in a floofy, artsy-fartsy kind of way, but as a real business obligation.  I cringe at those who call classical music a dying art form, but I also recognize that classical music’s market and audience share is limited.  It has to be grown for your long-term survival as an organization; no business can survive without R&D, and this is your version of it.  With long-term sustainability as your mantra, you have to engage in school concerts, educational programs and community outreach as a long-term business investment.  This will obviously build your audience base, but it will also help create a pool of potential musicians, staff members and donors as well.  How many members of your board of directors are there because they had experience with hearing a great concert live? Or playing an instrument, no matter how briefly?

The Minnesota Orchestra has stated repeatedly that it needs a new business model to survive.  In that spirit, I urge you to take a long look at the triple bottom line as a way to more holistically measure success.  It’s a change in mentality, but it is critical to look beyond short-term profits—you must include people, the planet, and profits as part of your model.  It is not enough to recognize these things as being important; you must assign them real-world values, and monitor how you deliver them with an eye to long-term sustainability.

Because—in case I haven’t made myself clear—I really do want you to be here for the long-term.

Xochipilli