Case study
Aarav02
AlbertaOrchestrasTurnaround.pdf
AWARD-WINNING CASE — This case won the Best Case Award at the Administrative Sciences Association of Canada (ASAC) Case Competition, 2007.
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9B06M064 TURNING AROUND ORGANIZATIONS IN A CRISIS: THE CASES OF TWO MAJOR ALBERTA ORCHESTRAS Tom Ewart prepared this case under the supervision of Professor Tima Bansal solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2006, Ivey Management Services Version: (B) 2010-04-08 In 2002, the Calgary Philharmonic Orchestra (CPO) and the Edmonton Symphony Orchestra (ESO) each faced a financial crisis that threatened their existence. The Calgary Philharmonic and the Edmonton Symphony were the two major professional orchestras in the Canadian province of Alberta. Both non- profit orchestras had similar revenue levels and long histories in their similarly-sized cities. They also had similar financial difficulties. By the end of the 1990s, many North American orchestras, in cities of all sizes, were facing bankruptcy. Some people blamed the American Federation of Musicians, which had been called “an international union every bit as power hungry as any in the public sector.”1 Others blamed irrelevant business models, poor governance, bad management, and decreasing public and government support. By 2005, the Calgary Philharmonic and the Edmonton Symphony balanced their budgets. To recover from their respective crises, the CPO’s Transitional Leadership Team (led by the Board Chair, Interim Executive Director, and Chair of the Players Association), and the ESO’s Managing Director, Elaine Calder, had each made a series of decisions that they felt were best in their respective contexts; however, observers were divided on which organization was best positioned for stability and growth in the future. CALGARY PHILHARMONIC ORCHESTRA: SEEKING A NEW BUSINESS MODEL The Calgary Philharmonic Orchestra was formed in 1955 from the merger of the Alberta Philharmonic and the Calgary Symphony. At first, its audiences were small but enthusiastic. By 2001, it was performing for approximately 90,000 people per year in Calgary and around the world. In 2002, the CPO had 65 musicians and performed a wide range of musical styles, including classics, baroque, popular music and music geared to children. Structurally, the orchestra consisted of four groups: the musicians, the management staff, the volunteer board members, and an 80-member volunteer chorus.
1 “Grasping the Baton,” The National Post, April 26, 2002, A19.
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Page 2 9B06M064 THE CITY OF CALGARY Located approximately 100 kilometers east of the Rocky Mountains, the City of Calgary was a centre of bustling business activity (see Exhibit 1). It had been described as “cosmopolitan,” “Americanized” and “transient.” Most of Alberta’s oil and gas money flowed through Calgary and it was home to the second largest number of corporate head offices in Canada, particularly in the oil and gas sector. In 2002, the region’s 1.1 million inhabitants were relatively young (see Exhibit 2) and among Canada’s richest. The average disposable income per capita was Cdn$32,000,2 having grown at a compound annual rate of five per cent over the last five years. The population and disposable income per person were forecast to grow by 1.8 per cent and 3.2 per cent, respectively, over the same period. RECENT CHALLENGES AT THE CPO Although its home city was booming economically, the CPO faced significant challenges in the late 1990s and early 2000s. The Transitional Leadership Team, in place through the turbulent period of bankruptcy protection and the re-start of the 2002-03 interrupted season, explained some of the systemic problems:
The CPO had been plagued by repeated financial crises over its 50-year history. The organization had survived these with no particular plan beyond emergency fundraising. . . In some years there were modest surpluses, while other years deficits were greater than $1 million. By the end of 2002, the accumulated operating deficit was between $6 million and $7 million. . . . . Typically, like most symphony orchestras, the CPO would encroach on the next year’s subscriptions by collecting subscription money early and spending it. In addition, the endowment3 was periodically raided when there were serious cash flow or other temporary financial crises. The tendency to raid the endowment was institutional. Prior to bankruptcy protection, the CPO Foundation’s Trustees were all members of the CPO board, with a few extras. The CPO board had effective control of the Foundation and the disposition of its resources. Some of the Trustees had contributed significantly to the endowment.
While the CPO’s endowment had over $2 million invested in 1997, only $900,000 remained in 2002. Striking a Minor Chord with Musicians By mid-year 2001, the CPO’s board realized that its business model was unsustainable and that a crisis was looming. CPO posted a deficit of $650,000 in its fiscal year ending June 30, 2001 (see Exhibit 3). The orchestra’s labor contract with its union, the American Federation of Musicians of the United States and Canada, also expired that month. At the time, the average base pay of orchestra members was $40,000 per year. As part of ongoing contract negotiations, the CPO’s precarious financial position led its board to ask musicians for a number of immediate and ongoing concessions: a reduction in salary, a reduction in the season from 41 weeks to 38 weeks, and cuts to other benefits that totaled a 16 per cent reduction in overall compensation. The proposal also included eliminating one contract position, which was vacant at the time,
2 All funds are in Canadian dollars unless otherwise noted. 3 Endowments are common in the performing arts. They typically refer to permanent funds which, when invested, provide the organization with a steady stream of annual income.
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Page 3 9B06M064 from the total number of contracted musicians. The elimination of this one position was the main obstacle that led to a four-week lock-out. The president and CEO of the orchestra took a 15 per cent pay cut and the rest of the administrative staff took a 2 per cent pay cut. The board also committed to raising at least $10,000 themselves. After a limited number of negotiating sessions which included the use of a mediator, the musicians rejected the proposed contract and were locked out on October 7, 2001. Following a month of pickets, street concerts and negotiations, the CPO’s musicians returned to work on November 7, 2001, after agreeing to an 8.4 per cent pay cut in the 2001/02 season and a further 2.4 per cent pay cut in the 2002/03 season. They also agreed to a shorter season and one less paid vacation week in the 2002/03 season. (This amounted to a base salary of $38,950 in the 2002/03 season.) The number of musicians was to remain the same at 65. The musicians accepted a one-time payment of $2,500 each to make up for income lost through the four weeks of the lock-out. Eight months later, at the 2002 fiscal year end, the CPO posted another $650,000 deficit. The CPO’s Organizational Diminuendo By early September of 2002, as the CPO’s 2002/03 season4 began, it was clear that the organization’s business model was unsustainable. Ticket sales were down, despite repeated appeals for public support. The local press frequently reminded Calgarians that the orchestra had internal problems (e.g. the recent labor strife) and declining external support (subscriptions had fallen from 14,000 in 1997/98 to 3,000 in 2002). Another major factor in the bankruptcy protection filing was the fact that the CPO did not have sufficient cash to cover payroll to December and its line of credit was tapped out at $1 million. CPO’s board was in a position of financial liability and their insurance would not kick in unless the organization filed for bankruptcy protection. Directors could be liable for breaking the law (e.g., not paying wages and salaries), breaching contracts (e.g. not repaying loans) or for tort (e.g. irresponsibly releasing an employee). The CPO filed for bankruptcy protection on October 14, 2002, suspending all performances and laying off all musicians and staff. Musicians were informed of the bankruptcy protection via email after it had already occurred. Donna Finley, a strategic planner and change management professional, was recruited to the Transitional Leadership Team four days later to replace the outgoing president and CEO who had been fired. Finley explained the board’s reaction to the crisis:
The people who were on the board at the time decided to address the fundamental root causes of the problems that plagued the organization for over 20 years. A number of board members were very committed to making the difficult changes that were necessary. Management was effectively being changed out at the time and had minimal involvement in the renewal process.
REBUILDING THE CPO Finley and the board, under the watchful eye of the receiver, began rebuilding the organization, starting with the administrative staff and management team. The management ranks were largely decimated. Before the crisis, there were approximately 20 full-time equivalent positions in the back office [staff and management]. When I arrived, a skeleton team existed because most had quit or had been laid off. 4 The CPO and the ESO seasons typically ran from early September to mid-June.
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Page 4 9B06M064 The Transitional Leadership Team assessed the resources available to the CPO. The week following the bankruptcy protection announcement, several external consultants were engaged to immediately boost the management expertise of the organization and help with the rebuilding process. Finley listed some of the external experts and explained their roles:
Targeted organizations were recruited into the renewal process. Some were compensated, some were partly compensated, some gave freely of their time. For example, Framework Partners Inc., provided the leadership for strategy development, project management, and change management. I was subsequently recruited as Interim Executive Director and to provide fundraising support. A receivership company and a law firm acted as the CPO’s legal counsel advising on lapsed contracts, the receiver’s offer to suppliers and customers, and litigation arising from these activities. Communications Inc. was engaged to help with external communications, rebranding and undertaking an organizational shift in marketing strategy. These external experts worked along with the musicians and other volunteers, contributing to the Renewal Plan and its initial implementation. They infused fresh energy, pride and capability into the organization. With these external professionals, volunteer musicians and board members, the CPO put together working groups to address a number of critical issues. This effort culminated about two months later, in the third week of December, when we produced a plan for renewal that was acceptable to the receiver, funders and broader community. The Renewal Plan was as much a sales and marketing document as it was a strategy document.
The CPO’s Transitional Leadership Team took their renewal plan to the public, seeking community support for the rebuilding process. Over the next six weeks, the CPO raised $1.6 million in working capital, including $850,000 from the private sector and wealthy individuals. CPO also secured financial support from the municipal, provincial, and federal governments. The federal government, through Canadian Heritage, and the City of Calgary each made a $250,000 grant. The Alberta government, via the Alberta Foundation for the Arts, advanced $250,000 against future grants. This infused the organization with $750,000 in cash. As part of the Renewal Plan, the musicians agreed to waive any claims for compensation owed over the term of the bankruptcy protection and to complete the current interrupted season under the existing contract terms. However, it was necessary to negotiate a new contract for the following two seasons. As Finley explained:
The level of fixed costs was unsustainable — very few of the costs were variable, giving the organization little flexibility. What changed with the Renewal Plan was the formula based pay of musicians and staff. Both took a 20 per cent pay cut from the rates of September 2002. We signed a three-year agreement with two quid pro quos. First, we agreed to retain the orchestra size at 65 musicians despite much pressure by funders to reduce the size. Second, we introduced a variable pay component based on financial performance in new markets (this equated to the surplus). These actions took some of the fixed burden off the revenue expense statement and provided for its contingent return to the musicians and staff, after some annual reinvestment in the CPO’s infrastructure. It’s a surplus sharing scheme.
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After having the Renewal Plan accepted by the Court of Queen’s Bench of Alberta, my priorities were focused on hiring the permanent management team and initiating the implementation of the Renewal Plan.
Mike Bregazzi, a former energy sector executive and consultant, was hired as the president & CEO in July 2003. His new slate of staff meant that the CPO did not have much institutional memory or continuity. That brought many challenges, but it also brought opportunities. Finley explained:
There were few barriers from the past. The new team could play its own game. They could be creative and inventive, not just follow past procedures. And at the personal level, the organization could be staffed with people who were synergistic and sympathetic, people who could work together.
While some musicians were skeptical that the CPO would ever achieve enough of a surplus to enable them to realize variable pay, others were optimistic that they would eventually see surplus sharing. For the musicians, though, the main goal had been achieved: maintaining the artistic integrity of the orchestra, which was directly related to maintaining the number of contracted musicians at 65. Bregazzi was confident that the surplus would be realized by the third year.
A New Model for Stewardship Each of the four groups— the musicians and their conductor, the chorus and their conductor, staff and management, and the board — was an integral part of the CPO’s operations. Each contributed in unique ways to the CPO experience. When Bregazzi joined the organization in mid-2003, he explained the limitations of having the board too heavily involved:
When I came on, the CPO board (for the last decade) was a hands-on board . . . . It was an operating board, not a governance board. There were board committees for everything: marketing, planning, development, programming . . . six to eight in total. They covered all parts of CPO’s operations. What emerged from the renewal process was. . . a board that was not as involved in operations matters. Emerging from [bankruptcy protection] in February of 2003, the board was reduced in number [33 members down to about 15] and changed in design, with only two standing committees, finance and governance[(instead of seven], and no executive committee. [The Plan also called for the Foundation’s board to be separated from the CPO’s board in order to avoid any conflict of interests.] I wrote a document that described the interface between board and management (see Exhibit 4). The appropriate delegation of administrative things went to management, who were hired to do the job. I insisted on that when coming on, that the new board would let those things go. That was the key change: hands-on to hands-off board.
Positioning for Sustainability In February of 2003, the CPO’s performances resumed after an enforced hiatus of four months. Although the organization’s expenses exceeded revenues by $1.4 million in the 2002/03 season, it succeeded in
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Page 6 9B06M064 raising $1.6 million in working capital, which eliminated its deficit. Unfortunately, by this time the CPO had exhausted most of its endowment. Even with the new variable pay plan, the Transitional Leadership Team recognized that without a steady stream of investment income, the CPO was at real risk of falling back into financial difficulties. Consequently, in late 2003, Bregazzi and the CPO board created three mechanisms to generate reliable income from investments. First, the CPO built an $800,000 financial reserve with the help of donors. Second, some of the CPO’s community supporters helped to develop a $3 million to $4 million loan trust. In this scheme, donors loaned their assets (e.g. bonds) to the CPO; the income earned on the assets (i.e. interest) was paid to the CPO. “The drawback,” explained Bregazzi, “is that there is essentially no security attached to it. The assets are held by the lender, who directs the income to us. There is the hope that lenders will in time become donors and convert loans to donations.” Third, the CPO rebuilt and restructured its Foundation. By the end of the 2004/05, the Foundation had a market value of close to $13 million after being depleted to about $900,000 just prior to bankruptcy protection. The changes at the CPO improved its financial health. By the end of the 2003/04 season, the CPO had eliminated its accumulated deficit. Most significantly, box office revenues were up from about one-third in 2001/02 to 40 per cent in 2004/05. During the same timeframe, government grants were down from about one-third of revenue to 23 per cent, with increases in fundraising, sponsorships and special events totaling 37 per cent. These financial indicators highlight that the organization’s refocus on the needs of customers and the community occurred and was, indeed, proving successful. By the end of its 2005 season, the CPO had posted its third consecutive surplus and had an accumulated surplus of over $360,000. As he pondered retirement in late 2005, Bregazzi mused about the CPO’s future prospects:
We’re way too much hand-to-mouth. We’re by no means secure as we enter new seasons. We’ve had modest surpluses in the last two years, but they weren’t sufficient to trigger payouts [to musicians and staff]. We’ll make a surplus and likely pay out this year. But we’re still way too dependent on that kind of existence. [To ensure our future,] we certainly have to maintain the artistic quality. We have got to make sure that the product is not only a good, reliable product, but that it is constantly inspected, updated, refreshed and appealing to the changing needs of the consumer. You can’t just keep playing music written by a bunch of dead guys. Also, we must maintain the goodwill of the buyers out there. And the buyers are manifold, they’re not just the people buying the tickets at the box office. They are people like Imperial Oil, and Talisman and Royal Bank who are buying our space. They are advertising with us. We call them sponsors, but what we’re doing is becoming part of their advertising within the community. So we have to maintain their goodwill, and with their goodwill, their support. Sponsorships are a significant, if not substantial, part of our income. Similarly, when it comes to donors we have to maintain their goodwill and support by continuing to review, revise and revisit our product offerings. That is something that we hope to do.
EDMONTON SYMPHONY ORCHESTRA: ADJUSTING THE EXISTING BUSINESS MODEL Edmonton was justly proud of its orchestra, which had celebrated its 53rd birthday in 2005. The Edmonton Symphony Orchestra had a reputation for music education and for bringing classical music to northern Canada. It was nationally recognized for its performances and interactive youth-oriented programs and it
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Page 7 9B06M064 was the first symphony orchestra to perform in the Northwest Territories and on a First Nations reserve. It had 56 core musicians and performed a wide range of music. In September, 1997, the ESO moved into the Francis Winspear Centre for Music (Winspear) — an impressive concert hall located in downtown Edmonton. The same month, over 60,000 people visited the Winspear to welcome the city’s latest landmark. THE CITY OF EDMONTON Located nearly 300 kilometers north of Calgary and 300 kilometers east of the Rockies, the City of Edmonton was a government and university town, the provincial capital, and home to Alberta’s largest university. Many of the region’s one million inhabitants believed that they lived in a cultured city that enjoyed and supported the arts. The University of Alberta, founded in 1908, received much of the credit for bringing fine arts to Albertans. Population growth was expected to be marginal in the coming years, at approximately one per cent. Average disposable income per capita was approximately $26,500 in 2004 and was forecast to grow at between three per cent and six per cent until 2006. RECENT CHALLENGES AT THE ESO In the two years following the opening of the Winspear, the ESO enjoyed substantial community support and involvement. Its financial performance reflected that excitement. In 1999, the ESO’s chief executive officer left the symphony. His departure coincided with a fading of the euphoria from the Winspear. Trombonist John McPherson outlined some of the concerns that the musicians also had at the time:
Our perception was that [management and the board] were relying on the Winspear Centre to draw people in. The management and board were not proactively building fundraising strategies and taking a close look at their management style and promotion and marketing. We were coasting on the bubble that was created by the excitement of the new hall. Though things looked alright, there was a dysfunction that was creeping into the organization: lack of communication, lack of honoring all the different stakeholders. It felt fractured. And the numbers just weren’t adding up. After the hall was opened, it appeared to the musicians that the money that was coming in was going towards subsidizing the hall, the management was growing in terms of numbers, the percentage of the budget spent on the musicians’ salaries became smaller while the administration's share of the budget rose.
Moreover, like most other orchestras and performing arts organizations, the ESO could not survive on ticket revenues alone and it relied on government grants to make up the shortfall. Increasing costs forced the ESO to turn to fundraising to balance their working capital. Then, in 1999, several fundraising employees left the ESO, creating a gap in fundraising experience. The board saw a looming financial crisis, but did not respond decisively for several reasons. Board member Dick Cotter reflected on the situation the ESO faced:
A quick solution to cutting costs would have been to reduce the number of performances. But we superimposed the fact that we had a labor agreement with musicians and we didn’t
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want to file for bankruptcy to break the contract. . . . Superimpose on all that the fact that musicians did not have sufficient say in the organization. They were a large stakeholder and should have been better represented at the board level.
Conducting Disharmony Grzegorz Nowak was the ESO’s internationally renowned musical director and he had been with the orchestra since 1994. The musicians were generally very supportive of Nowak because they felt secure under his direction and believed that he brought out the best in them. Conversely, Nowak and the ESO’s board conflicted on many issues. One of these was his non-ESO commitments. A great part of Nowak’s time was spent with other orchestras in Europe; he was frequently away from the city and unable to help with community fundraising. Early in 2000, the ESO’s board decided that it would not renew Nowak’s contract beyond the 2000 season. Nowak responded with threats to sue for defamation and breach of contract and to start his own competing orchestra, a bigger orchestra that would offer musicians drastically increased pay and more opportunities to perform. The competing orchestra never materialized. Andy Sims, who had mediated past contract negotiations with the musicians, described the reaction in the orchestra:
The musicians saw this as an attack on their maestro (and without their input). It’s the musicians, not the board, who had the chief say in who was selected as the musical leader. So their view was that they should have a say in who is fired. The board clammed up and said nothing. And the board was not representative of the musical community, so the cues to the community that would normally bring support for their decision weren’t there.
Meanwhile, things were also in turmoil on the management side of the organization. By the 2000/01 season, the ESO’s services5 were up to 314 from 270 in the late 1990s, which increased the orchestra’s cost of remunerating musicians. The ESO had posted a $400,000 loss in June of 2001, creating a negative fund balance (see Exhibit 5). Five months later, the board replaced the chief executive officer with Elaine Calder (the position was later renamed to managing director). Calder brought strong financial and managerial skills and had experience dealing with performing arts organizations in crisis. She was determined to create a sustainable business model for the ESO. On February 14, 2002, the ESO’s musicians began a labor disruption,6 as McPherson explained:
You have to be very clear to separate the labor aspect from the artistic aspect. The product and the artistry, authenticity and the lineage of the product are held collectively by the musicians, including the conductors and soloists. You cannot reduce an orchestral thing to a business because there is this higher aspect — there is this artistic thrust that wouldn’t exist unless there was this draw for people to come and be moved and have an artistic experience. If negotiations with the board are always reduced to a labor negotiation, we lose the focus of what we’re here for. The crisis came from the fact that this organization was dysfunctional, it wasn’t just a battle between two forces. It was, how do we get everyone talking to each other, how do we get an artistic vision that everyone can buy into. Then figure out how the numbers add
5 Services include rehearsals and revenue-generating performances. 6 A strike is called a “labor disruption” when the workers do not have an agreement.
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up to create that. During the labor strife, the musicians were always holding to the fact that we needed to be consulted on artistic matters. It wasn't that we wanted to get paid more. We wanted input into the big artistic decisions that would go on.
Calder, her management team, and her board wanted desperately to reach an agreement with the musicians so that they could return to work and generate revenue for the nearly insolvent ESO. To help resolve the conflict, the ESO and its musicians solicited the aid of symphony-goer and lawyer, Andy Sims, who they saw as an unbiased, credible mediator. Sims described how he perceived the conflict:
The strike was not about money. It was about the feeling that the musicians’ interests had suddenly taken a nosedive in the organization. They too had been working on opening the Winspear and they thought things would be grand when it was built. But they were being asked to tighten their belts when they moved into Winspear. Superficially, the strike was about money, but mostly about lack of respect.
ESO’S TURNAROUND BEGINS The labor disruption ended on March 25, 2002, with a one-year contract that froze administrative and management staff salaries and held musicians’ per service fees at current rates. More importantly, explained Calder, “was the creation of a Governance Review Committee that was charged with finding a way of giving the musicians significant influence in the ongoing operation of the orchestra.” The Committee included two representatives selected by the musicians, two selected by the board, and Sims as the chair. Although the Committee took months longer than expected to produce the first draft of its report (which was never finalized because the parties reached an agreement between themselves), the process immediately showed all concerned that the ESO’s leaders were looking for a balanced, consultative way to solve the crisis. The trust that was created in simply forming the Committee led to further incremental gains. Trust within the ESO was improving and Calder was working hard to ramp-up fundraising, control costs, recruit new board members and explore options for reducing the number of services. And yet, the ESO still lost nearly $900,000 in the 2001/02 season. But the ESO’s growing debt did not erode the resolve of its musicians, management and the board to turn the organization around. In August 2002, Calder formed a Programming and Search Committee to find a new music director. The musicians were asked to elect the majority of the committee’s members and it immediately began meeting on a weekly basis to plan the 2003/04 season and start headhunting. McPherson described the committee’s teamwork:
We had to do a good job. Everyone knew that. There was no time for politics or showboating because the next season had to be programmed by November. It became a healthy, working committee. We had from August until November to not only start looking at the conductors that we wanted to look at, but also to program a season. It was obvious that we had taken on a very important role in the organization and we had to take everything into consideration, for example, what shows would be popular for the audience. We had to immediately absorb the administration’s viewpoint into our decision- making. Of course, we don’t want the organization to flounder financially, but it pains us to our souls to have it flounder artistically. Our happiness is more based on the artistic side than it is on the financial side. The working of that committee showed both the
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administration and the musicians that we could function together as a unit and make good, healthy decisions through the entire organization.
The orchestra soon began seeing payoffs from its efforts to raise funds and strengthen its board. In October of 2002, the ESO received a $250,000 donation, which greatly improved the ESO’s cash flow. In January of 2003, W.D. (Bill) Grace, a well-respected chartered accountant and financial executive, joined ESO’s board. ESO eventually limped through the 2002/03 season, posting a surplus of $24,000. This was a great relief to the ESO and its supporters, who did not want to remind the greater community of its financial woes. In the middle of 2003, the ESO negotiated a three-year agreement with musicians that held the number of services at 291 and kept per-service fees constant for one more year, followed by two years of four per cent fee increases. A Critical Decision A small budget surplus was forecast for the 2003/04 season. But Calder knew that even if the organization made the surplus, its financial future was far from secure. In November 2003, Calder met with Grace to decide what action should be taken: stay the present course, launch a crisis fundraising campaign, or shorten the season and negotiate salary decreases for musicians. Moreover, filing for bankruptcy was a legitimate option given that the ESO could not generate enough surplus to eliminate its large deficit. In the end, Calder and Grace decided that the best action for the ESO was to stay the course. ESO later posted another marginal surplus of $28,000. The organization was breaking even and its staff and musicians were reinvigorated and optimistic. Improving the ESO’s Governance Sims described the ESO’s board leading up to the crisis:
Two to three years before the strike, in my view the board had become quite weak. . . . They are not democratic organizations. Boards are recruited, not voted in. So the questions become: Who do you get on your boards? Where do you get them from? And why are they there? Talking about the effectiveness of a board, if a board ends up being populated by a significant number of people who are there because its good for their careers, their contacts or if it’s got nothing to do with the music, you get a board that is disconnected from its job function and from the constituents that make the organization work. . . I don’t think the board in the late 1990s knew why it was there. . . . The fundraising had dropped right off, because you get all this money to build the building, and it’s easy to do that, but after that, raising money to pay the gas bill is not as spectacular. There was a period of relative ineffective activity on the board.
Two key changes were made to the ESO board during this time of crisis, changes which reflected the shift in relationships within the orchestra. First, the board size was increased from 11 to 17 and the number of musicians on it increased from one to three. This made the musicians truly part of the organization’s strategic decision-making process. Second, an Artistic Review Committee was created to review conductors’ performance and ensure that musicians had a voice in determining whether or not their contracts were renewed.
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Page 11 9B06M064 Looking to the Future By the ESO’s 2005 fiscal year end, box office revenue was up by 15 per cent on 2004 and it had dramatically increased sponsorships. More importantly, the ESO sold 75 per cent of available tickets over the season, up from a low of 65 per cent in the 2001/02 season. At the end of the 2005 season, the ESO posted its third consecutive surplus and had reduced its accumulated deficit to just over $560,000. The slow but steady upward trend continued into the 2005/06 season, with attendance rate and revenue over expense forecasted to reach 78 per cent and $250,000, respectively, by season’s end. EVALUATING EACH TURNAROUND: HOLD YOUR APPLAUSE Both the CPO and the ESO faced crises in 2002 that threatened their existence. Both organizations survived, although their turnaround strategies differed drastically. While both organizations appeared stable in 2005, their leaders readily admitted that their business models were imperfect. Observers often wondered why the organizations took different turnaround approaches and which was best positioned for the future.
The Richard Ivey School of Business gratefully acknowledges the generous support of Alberta Performing Arts Stabilization Fund in the development of these learning materials.
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Exhibit 1
GROSS DOMESTIC PRODUCT GROWTH1
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Calgary Edmonton Alberta Canada
Exhibit 2
POPULATION AGE DISTRIBUTION, 2004
0%
2%
4%
6%
8%
10%
12%
0- 4
5- 9
10 -1
4
15 -1
9
20 -2
4
25 -2
9
30 -3
4
35 -3
9
40 -4
4
45 -4
9
50 -5
4
55 -5
9
60 -6
4
65 -6
9
70 -7
4
75 -7
9
80 -8
4
85 +
Calgary Edmonton
1 At market prices. Sources: City of Edmonton, Edmonton Socio-Economic Outlook, 2005–2010 (September 2005); City of Calgary, Calgary & Region Socio-Economic Outlook: 2005–2010.
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Exhibit 3
CPO’S FINANCIAL STATEMENTS, 2000 TO 2005 Years ended June 30, 2000-2005
2005 2004 2003 2002 2001 2000 REVENUES:
Ticket sales 2,460,492$ 2,118,907$ 1,245,638$ 2,166,410$ 2,066,314$ 2,332,151$ Other earned income 185,264 479,783 412,153 403,016 858,915 503,015
2,645,756 2,598,690 1,657,791 2,569,426 2,925,229 2,835,166
Donations and sponsorships 2,617,718 2,276,843 849,540 1,641,192 1,288,788 1,985,146 Grants 1,659,967 1,770,180 1,632,114 1,978,757 1,759,390 1,496,033 Special events, net 420,081 400,757 182,092 430,961 308,832 394,159 Investment and other income 567,547 357,953 105,544 129,185 346,479 248,220
7,911,069 7,404,423 4,427,081 6,749,521 6,628,718 6,958,724 EXPENSES:
Personnel 4,889,228 4,757,494 3,824,251 5,526,051 5,662,732 5,718,583 Production 652,650 601,735 400,775 468,635 721,577 434,998 Marketing and ticketing 1,941,634 1,384,406 792,321 891,551 528,056 386,980 Administrative 343,470 469,325 689,514 397,149 265,007 241,848 Financial 4,028 3,379 66,389 84,394 89,060 85,802 Depreciation and amortization 45,186 47,887 52,709 54,149 44,383 50,868
7,876,196 7,264,226 5,825,959 7,421,929 7,310,815 6,919,079
EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES 34,873 140,197 (1,398,878) (672,408) (682,097) 39,645
Restructuring: Restructuring grant assistance - - 750,000 - - - Donations - - 862,097 - - - Forgiveness of ticket subscription liability - - 518,001 - - - Forgiveness of accounts payable and accrued liabilities - - 283,693 - - -
Transfer from Foundation - - - - (55,000) APASF working capital deficiency grant - - - - 150,000 APASF working capital reserve grant - - - - 100,000 Non-depreciable capital contribution - - - 35,000 -
Increase (decrease) in net assets 34,873 140,197 1,014,913 (672,408) (647,097) 234,645
Net assets, beginning of year 326,763 186,566 (828,347) (155,939) 491,158 256,513
NET ASSETS (DEFICIENCY), end of year 361,636 326,763 186,566 (828,347) (155,939) 491,158 Source: Company documents.
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Exhibit 4
EXCERPTS FROM THE CPO GOVERNANCE POLICY I. ROLE OF THE BOARD/PRINCIPLES OF GOVERNANCE The role of The Calgary Philharmonic Society (CPS) governance Board is to: • Articulate the CPS vision; • Develop high-level strategies for the organization; such strategies to be reviewed annually; • Approve the organization’s longer term business plan and annual budget; • Work as a whole, and have the ultimate accountability for, and authority over, CPS’s resources and
activities; • Speak with one voice – once the Board has approved an action through a resolution, it becomes
CPS’s official position and all Board members are bound by it; • Communicate its vision to the Society’s membership, community and regions it serves; • Define board governance policies for the organization; • Be responsible for its own management, including board recruitment, orientation, agenda
development, evaluation and meeting management; • Hire, supervise and release only one employee – the President and CEO; the President and CEO
hires, supervises and releases all other CPS employees; and • Participate in raising funds in accordance with the current CPS fund development plan IV. GOVERNANCE POLICIES A. Executive Authority 1. The President and CEO may allow no practice or circumstance that violate commonly accepted
business and professional ethics or common business prudence. 2. Staffing
a. The President and CEO shall have at least one senior staff member substantially familiar with board and executive officer activities.
b. Paid staff and volunteers shall not be subjected to unfair, undignified, or unsafe treatment and conditions.
c. Staff compensation and benefits shall not deviate materially from those prevailing in comparable markets.
d. The President and CEO shall be responsible for establishing levels of compensation for the staff. 3. Financial
a. The financial condition of the CPS should not result in jeopardy or disruption of program integrity. b. The President & CEO will determine what constitute early warning signals of financial
difficulties and promptly notify the Board c. The President & CEO will not budget for an annual deficit. d. The President & CEO shall hold operating capital in compliance with an investment policy
approved from time to time by the Board. e. Restricted contributions shall not be used for any purpose other than that specified by the donor. f. Payroll, source deductions, and GST payments shall be remitted in a timely manner. g. Funds will be received, processed and distributed under sound financial controls and accounting
processes will conform to GAAP. 4. Assets
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Exhibit 4 (continued)
a. Insure the Society’s assets, including the music library, against theft and casualty losses to at least 80 percent replacement value and against liability losses for officers, directors and staff.
b. Ensure sufficient equipment maintenance. c. Protect property, information and files from loss or significant damage.
B. Board – Executive Relationship All Board authority delegated to staff is delegated through the President and CEO. 1. The President and CEO is accountable for CPS’s attainment of vision and objectives and compliance
with Executive Authority. 2. The President and CEO is authorized to establish all further policies, make all decisions, take all
actions, establish all practices and develop all activities. 3. Only decisions of the Board are binding upon the President and CEO. 4. In the case of Board members or committees seeking information or assistance absent Board
authorization, the President and CEO will respond at his sole discretion. 5. The President and CEO shall advise the Board if in his/her opinion, the Board is not in compliance with
its own policies and practices. 6. The Board will conduct an annual formal evaluation of the President and CEO. C. Board Process Meetings • Minimum 4, maximum 10 per annum; • The Board is the sole authority over its own agenda; • Material related to the agenda will be given to board members with adequate lead time for review and
preparation; • Only those issues which are within the Board’s chosen areas of responsibility shall occupy Board time;
and • Board members are obligated to prepare for meetings and to participate productively in discussion. Individual Board Member Responsibilities • Understand, support, and champion the CPS vision and objectives; • Understand the fiduciary responsibilities of Board membership; • Show due diligence at meetings; • Attend and participate in meetings to the full; • Be prepared for meetings; • Consistently act in good faith; and • Stay within the roles and responsibilities of a Board and do not encroach on staff responsibilities. Board Chair • Ensure the integrity of the governance process; • Be the lead director and effectively lead board meetings; • Ensure meeting content includes only those issues which, according to Board policy, clearly is the
Board’s business; and • Ensure timely, fair, orderly, effective and thorough deliberation at board meetings. Committee Principles The Board will have two standing committees, the Governance Committee and the Finance & Audit Committee, and such other ad hoc, limited term, committees as may be required from time to time. (Committee responsibilities omitted.) Source: Company documents.
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Exhibit 5
ESO’S FINANCIAL STATEMENTS, 2000 TO 2005
30-Jun-05 30-Jun-04 30-Jun-03 30-Jun-02* 5-Jun-02 5-Jun-01 5-Jun-00 REVENUE Earned revenue Subscriptions 1,702,575 1,555,296 1,576,696 1,620,458 1,704,474 1,443,972 1,406,767 Single tickets 1,020,462 804,595 927,017 951,512 1,069,871 1,283,095 1,054,054 Contract services 296,595 512,603 413,300 429,203 443,342 442,989 432,790 Box office 583,773 491,296 446,677 591,803 445,812 515,957 484,836 Concert Hall - - - - - 506,856 498,553 Other 117,976 94,334 82,456 136,904 208,913 222,686 135,078
3,721,381 3,458,124 3,446,146 3,729,880 3,872,412 4,415,555 4,012,078
Development revenue Sponsorships 872,259 864,849 885,296 472,937 607,251 677,711 718,754 Special events 295,987 409,313 420,247 402,406 328,023 301,508 308,273 Private 373,472 405,101 339,375 304,000 260,185 293,011 239,013 Alberta Performing Arts Stabilization Fund - - - 100,000 - - Contributions from ESO Foundation - 67,388 - - - 90,116 32,977 Corporate 38,953 52,880 30,403 15,634 39,051 46,031 48,240 Foundations 98,609 30,018 34,840 27,223 32,161 31,800 65,826 Deficit Redution Campaign 26,400 27,255 358,169 - - - - Contributions from ESO Associates 15,000 25,000 20,000 35,000 20,000 30,000 30,000 Loges 13,500 18,116 5,274 13,418 10,410 12,684 21,543 Loss on administered funds - - (20,939) (10,465) (3,879) - -
1,734,180 1,899,920 2,072,665 1,360,153 1,293,202 1,482,861 1,464,626
Grant revenue Alberta Foundation for the Arts, operating 785,693 812,446 725,000 712,000 682,000 670,000 660,000 Canada Council, operating 695,000 695,000 695,000 695,000 695,000 480,000 480,000 City of Edmonton, operating 320,000 205,000 200,000 142,000 117,000 116,000 116,000 City of Edmonton, festivals 37,000 32,000 30,000 30,000 30,000 24,900 34,900 Other 29,934 - - 42,326 127,595 83,531 142,529
1,867,627 1,744,446 1,650,000 1,621,326 1,651,595 1,374,431 1,433,429 7,323,188 7,102,490 7,168,811 6,711,359 6,817,209 7,272,847 6,910,133
EXPENSES Artistic 4,697,848 4,699,477 4,474,041 4,914,898 4,578,153 4,157,441 3,871,422 Marketing 970,653 1,032,596 1,230,724 1,090,031 1,137,836 1,068,649 958,645 Box office 440,142 425,078 383,964 484,844 486,322 582,808 563,468 Administration 408,298 387,132 387,562 407,374 398,114 326,315 316,213 Special projects 296,743 210,156 308,904 209,386 180,831 143,048 175,557 Production 259,267 191,867 199,391 229,262 207,951 213,968 208,129 Development 132,573 128,058 159,919 261,578 240,877 212,746 204,497 Concert Hall - - - - - 506,856 498,553 Donation to ESO Foundation - - - - - 45,329 103,421
7,205,524 7,074,364 7,144,505 7,597,373 7,230,084 7,257,160 6,899,905
EXCESS OF REVENUE OVER EXPENSES 117,664 28,126 24,306 (886,014) (412,875) 15,687 10,228
Transfer from dissolution of ESO Foundation - 429,314 - - - - -
Operating Fund Balance, beginning of year (684,412) (712,538) (736,844) (350,830) 62,045 46,358 36,130 Amount transferred to internally restricted fund - (429,314) - - - - -
OPERATING FUND BALANCE, end of year (566,748) (684,412) (712,538) (1,236,844) (350,830) 62,045 46,358
* The June 30, 2002 figures are for the 13 months between June 5, 2001, and June 30, 2002. Source: Company documents.
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Exhibit 6
EXCERPT FROM ESO’S GOVERNANCE REVIEW COMMITTEE DRAFT REPORT The mandate [of the Governance Review Committee] speaks of significant influence several times but mostly without specifying how and when that influence is to be exercised. The one exception relates to the voting abilities of core musicians acting as Directors, which we address under the next heading. Despite the fears of some, virtually no one advanced the view that the members of the Orchestra should be, had the skills to be, or would want to be running the Board or the administration themselves. While many felt there was inadequate recognition of the variety of skills and experience present in the Orchestra, there was general recognition that what the players do best is play, and that administration, management and fundraising requires the skills of others to create a successful whole. Rather, what many hoped for is that those undertaking such activities would understand, be sympathetic to, and supportive of an appropriate musical vision, and of the musicians’ long-term interests. Significant influence goes beyond a right to be heard, and goes well beyond token representation. However, it does not translate to a right to decide and to have either the individual or collective opinions of musicians prevail in all events and in all cases. In most situations the objective must be to bring the best ideas to the table and to have the best choices made after rational examination. There needs to be a recognition that the organizations are not debating societies. Decisions have to be made effectively, often quickly and often by persons charged with the decision making task and not by committees or by votes. While we favour and recommend an organization that is more collaborative than hierarchical, we still recognize that a division of labour and responsibility is sensible and inevitable. We have already commented on the fact there is no one “musicians’ view” on many issues. There is a difference between the musicians’ influence being brought to bear collectively and the opinions of individual musicians. The one is no more legitimate than the other, but the form influence takes must vary with the type of decision being made. As we described above the musicians already have one important vehicle for achieving significant influence within the organization. That is the bargaining process for the EMA agreement. We see nothing in our mandate and no policy reason why that should change. The style of bargaining, the degree of give and take, the level of trust and the frequency all could, and perhaps should, change; but the process of bargaining itself is still a healthy one. This bargaining forces the core musicians through the EMA and through their ratification process to make, amongst themselves, some difficult choices about their bargaining priorities. In any bargaining situation the “management” side always wishes they could deal with the other side’s most reasonable spokespersons and often wonder why the positions they hear in negotiation don’t always jive with their own views of what the other side really wants. The same longing often works in reverse. The answer lies in the fact that any bargaining committee has to broker the differing views within the group it represents and come up with proposals and ultimately a settlement which the entire group can live with. Their ability to do this is often dependent on the other side’s respect for their exclusive right to speak for the group. Such bargaining and the brokering of interests involved can be end run by influencing the committee’s constituents directly. The same is true in reverse. Once the Employer has established a bargaining committee from the Board or management or both, there needs to be a basic respect for that committee’s role and responsibilities. In our view the major issues currently dealt with in the EMA agreement should continue to be dealt with through periodic (but hopefully less frequent) negotiations. On these issues musicians need to speak with one voice and be bound, collectively, to whatever agreement the majority of musicians choose to accept. It is up to the musicians themselves through their own organization to come to their collective decisions, and to take responsibility for the import those decisions have on the overall institution of which they are a part.
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Exhibit 6 (continued) However, it is possible and desirable, despite this type of collective representation in negotiations, to involve the musicians in the organization’s broader decision making in other ways. The influence they would gain there would be more individual, involving a putting forward of many views and drawing from the best. It is the influence that comes from being a part of an inclusive, collaborative and open orchestral organization that welcomes the voluntary input and enthusiasm offered by its professional musicians. The third type of influence is that achieved by having the right (and responsibility) to help identify and select the persons empowered to make decisions for the organization, i.e. the Board of Directors. This comes, however, without any resulting right to tell those persons what decisions they should then make. In this organization the Board must make some very difficult choices. The significant influence we see musicians having in this respect is the right to significant influence in putting forward the best people to do the job required. This is why we recommend that their influence be exercised through the nomination process rather than through membership controls. What would be unhealthy is the notion that, having picked those best board members, including some musicians, the core musicians should then also expect these persons to act as their delegates. Their duty must be to carry out their duties in an independent way like every other board member. Once appointed they assume the same responsibilities no matter which group put them forward for consideration. Source: Company documents.
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