LeadingAge Magazine · May-June 2017 • Volume 07 • Number 03

Stewardship: Balancing Risk and Responsibility

May 16, 2017 | by David Tobenkin

For mission-driven organizations committed to maintaining viability for the long term, stewardship requires both cautious preservation and a willingness to take risks to change for the future. Here is a look at how some providers achieve that balance.

Since becoming president and CEO of Seattle-based provider Transforming Age (formerly Presbyterian Retirement Communities Northwest) in 2014, Torsten Hirche has led his $100 million revenue organization through a series of dramatic changes: acquisition of a group of senior housing communities in Minnesota that have more residents than Transforming Age already served; a name change and rebranding campaign; acquisition of a consulting company; renewed philanthropy efforts through its foundation; and affiliations with like-minded nonprofit senior living organizations.

While some might wonder whether such a trajectory of dynamic change would conflict with the duty of prudence to carefully protect the organization’s solvency, assets and core business, Hirche says such growth is both prudent and important to ensuring sound stewardship.

“I think relevance, impact and stewardship go hand-in-hand, and that we need to take risks in order to serve our mission now and into the future,” Hirche says.

Transforming Age photo
Transforming Age has made dramatic changes recently, including the purchase of a group of senior housing communities in Minnesota that more than doubles the number of residents the organization serves. Transforming
Age believes taking these risks is necessary to allow it to fulfill its mission in the future. Photo courtesy of Transforming Age.


Balancing Prudence and Risk

Finding the right stewardship balance between risk-taking and prudence is a critical challenge for the management and boards of directors of aging services providers.

Some experts say nonprofit aging services providers, particularly smaller and medium-sized ones, tend to err on the side of prudence, sticking with what they know how to do well because of limited financial and managerial resources, and to avoid making bad decisions. But doing so may create its own risk: having their communities become outdated and uncompetitive compared to for-profit providers and more aggressive nonprofit operators that are capturing an increasing share of the aging services market.

“I’m not sure that [providers] understand how fast the environment is changing,” says Mario Mckenzie, a Charlotte, NC-based partner at CliftonLarsonAllen LLP. “For-profits are rapidly acquiring market share and there are a wide variety of new advances in technologies that can improve communities and their services, and particularly an individual’s ability to stay home. Nonprofits tend to act in a very conservative fashion in part because [of] their natural fiduciary role (often times focused on the safeguarding of assets) and many times may exhibit a restrictive view of what the mission of the organization calls for. They worry an opportunity to acquire a new community or expand into a new region will jeopardize the entity. I work my way backwards with them to explore whether there is a solid strategic reason to expand or grow, and then address obstacles to that strategy, which sometimes [can be] fear.”

An example of good stewardship is the use of outside expertise for financial feasibility studies, market studies and construction audits, says Amy Runge, a partner and national practice leader for long term care at accounting firm Moss Adams LLP.

“Construction audits have identified and prevented construction overruns and erroneous charges which can add up to hundreds of thousands to sometimes millions of dollars when not properly monitored, depending on the size and scope of the project,” Runge says.

“I see a lot of organizations seeking to refurbish, add on, or affiliate or merge with another organization,” Runge continues. “To ensure an organization is serving as a good steward to its stakeholders, we guide them by delving into what they are trying to accomplish more carefully to see if there are competitive holes in the marketplace that need to be filled, or to dispel incorrect assumptions they may have. For example, many organizations consider adding home health services operations, but when we research the marketplace, we may find there is already a wealth of [such] providers in the community and it may not behoove them to get into that. We have tools and processes that can evaluate what services seniors are purchasing in any particular geographical area and what the market needs might be. We can overlay that information with ‘big data’ to evaluate referral networks and population demographics to help paint an accurate picture.”

There are definitely bad outcomes associated with taking risks. “Unfortunately, I have seen examples of organizations where the board or members of the community pushed to add additional services or get into new businesses, and they didn’t invest the time up front to see if there was a need for that or do due diligence, and ended up totally failing or losing money,” Runge says.

There are also structural steps that providers can take to better analyze risk and potential actions, such as having risk and compliance boards that examine those issues, she says.

Adapting to New Realities

Appropriately balancing risk and outcomes can be challenging, says Diana Jamison, chief financial officer of Episcopal Senior Communities (ESC), which operates 6 life plan communities and 4 affordable housing communities in Northern California.

Episcopal Senior Communities photo
At Canterbury Woods, residents spearhead an annual Earth
Day observation. Photo courtesy of Episcopal Senior

“In balancing risk and prudence, you walk a fine line,” says Jamison. “You can be so prudent that you end up not addressing outdated communities. This may give you a strong balance sheet but leave you with aging communities, which puts your organization in danger of not remaining viable in your marketplace.”

One difficult decision ESC faced was how to address slow sales at Canterbury Woods, its life plan community in Pacific Grove, CA, after the 2007-2009 recession. Though Pacific Grove is in an attractive location adjacent to the ocean, ESC discovered that individuals were primarily looking for month-to-month commitments rather than lifetime contracts. After evaluating the pros and cons, in 2013 the community was converted from lifetime contracts to month-to-month agreements. The large risk posed by the move, in addition to a potential negative reaction from long-term residents, was that the new financial model would deprive the ESC system of entrance fees needed to pay debt and fund capital needs, Jamison says. She says that risk was tenable because ESC is a system with one balance sheet. “If we didn’t have a strong system to cover our capital needs and debt load, that would have been a tremendous risk.”

The risk paid off. “The market reacted well and we went from an occupancy level in the low-to-mid 80s to 97%,” Jamison says.

Another move ESC has taken to make the risk of acquisitions tenable has been to establish a member organization that can take on the financial risks of new ventures. ESC used this mechanism to purchase a community that was losing money. “That ensured we did not put ESC’s core business assets at risk while we turned around the operations of the acquired community,” Jamison says. ESC also used the member organization to take on its 2007 affiliation with Lytton Gardens, an affordable housing community in Palo Alto, CA. Jamison says this affiliation improved ESC’s ability to reach greater market share in the affordable arena without exposing the obligated group to financial risk.

As for Transforming Age, Hirche says there were a variety of reasons why the 800-resident Washington State organization acquired a larger, 1,000-resident portfolio in another state.

“The communities were held by a real estate company, and in contrast, we are a mission-driven organization,” Hirche says. “Ultimately, the acquisition helped us diversify our mission from a demographic, geographic and economic standpoint since the portfolio consists of rental communities with an affordable housing component. It also increases our financial resources and adds the skills, knowledge and expertise of more than 450 new team members. Compared to a standalone community, the portfolio is easier to operate and Minnesota fits within our travel time from Seattle goal.”

As for the name change to Transforming Age, Hirche says the organization concluded that it was important to better reflect its broader mission to challenge assumptions and misconceptions about the senior population, highlight its array of services to serve them, and make clear the organization’s mission to advocate for them, Hirche says. That includes services provided by GSI Research and Consulting, its acquired research and consulting arm that helps other senior housing and services providers with market research, management, repositioning and development services.

Mckenzie says it is important for nonprofit aging services providers to seek such affiliations and larger strategic transactions earlier rather than later, as they weaken.

“Being strong allows you to say no and to guide the post-affiliation strategy,” Mckenzie says. “Many wait too long and end up weak and with few options. Competing to be the cheapest is not where you want to end up. The goal is to think strategically and ask whether an affiliation can serve as an accelerator of strategies or result in higher quality, service levels, or other improvements.”

Stewardship Best Practices: a Checklist

1. Understand the underlying purpose of the organization as a prelude to establishing what degree of risk-taking is appropriate. Ensure that stakeholders consider the potential risks of no change, as well as those posed by change.

2. Consider using experts to help identify and explore ways to mitigate the risks of new ventures.

3. Seek to share the risk of new ventures and expansions through collaborations with other aging-services providers.

4. Establish structural mechanisms to address the risk of new ventures, such as risk and compliance boards.

5. Maintain vigilance in monitoring ongoing sources of risks, and outcomes related to risky ventures.

David Tobenkin is a writer based in the Washington, DC, area.