Giving Back with Good Governance
Mar 28, 2021
From time to time, a Savvy Director reader has asked me to write about governance in the non-profit sector.
We can all agree that non-profit organizations (NPOs) play a vital role in our society. They provide services in many different areas including health care, education, religion, social support, industry and professional programs, amateur sports, and fundraising for medical research and public awareness.
These days, NPOs, like all publicly accountable organizations, face numerous challenges in a complex environment with heightened stakeholder expectations. Confronted with these challenges, well-governed organizations have proven to be more effective, and more likely to succeed, than poorly governed ones.
But directors on NPO boards may sometimes feel that those challenges and expectations are just too much. For example, a fellow director recently wrote to me as follows, inspiring the title of today’s blog post.
“When volunteers are recognized, it is for founding an organization, or raising money or longevity of commitment, but I have never seen anyone recognized for bringing strong governance practices to an organization. … I’m just not sure how many people feel that good governance is a way of ‘giving back’ to their community.”
This is a topic worth exploring. Why? Because these days good governance is more important than ever to NPOs.
Why good governance matters to NPOs
To accomplish their goals, NPOs require a robust system of governance, headed up by an effective board of directors. Good governance helps them focus on the activities that contribute most to their overall objectives, use their resources effectively, and ensure they’re managed in stakeholders’ best interests.
More and more, governments and funders are asking NPOs to provide information on their governance system to demonstrate that their money is being well spent and used for its intended purpose. And the media does not hesitate to report cases of NPOs suffering from poor governance. This kind of public scrutiny can damage an NPO’s reputation, detract from its fundraising ability, and hamper its ability to meet its goals.
Not only must NPOs be well governed, they must also be seen to be well governed. This is critically important in meeting today’s challenges such as reduced funding, more competition, increased demand for services, higher levels of complexity, heightened expectations, and rapid dissemination of information.
The Non-Profit Board
Non-profit and for-profit boards do have some differences, but they actually have a number of striking similarities. The article ‘For-profit and Non-profit Boards of Directors: Similarities, Differences, and Keys to Success’ from Acorn Advisors (listed under Resources below) offers a detailed comparison. Here’s a few highlights that struck me:
What’s the same (or similar)?
- Mission or Purpose. You might think that non-profits have a higher dedication to mission while for-profits are focused primarily on financial return. In fact, evidence shows that sustainable success for both kinds of organization is supported by a clearly articulated, well-understood mission, sometimes referred to today as core purpose or ‘why we exist.’
- Governing documents and policies. NPOs and business corporations both have written articles of incorporation, bylaws, and governing policies that are generally similar in design and address many common elements. For example, both types of boards need conflict of interest policies and codes of conduct.
- Fiduciary duties. Both for-profit and non-profit boards have two fundamental fiduciary duties so they can make decisions in the best interests of the organization and its stakeholders. These duties are the duty of care, which requires that directors exercise reasonable care and act prudently as a reasonable person would be expected to in similar circumstances, and the duty of loyalty, which requires that directors put the organization’s best interests ahead of their own.
- Board responsibilities. Both for-profit and non-profit boards have the same basic responsibilities ─ setting direction, delegating authority, and monitoring progress. They approve and oversee the execution of the organization’s strategic plan. They select, evaluate, and, when necessary, terminate the CEO (often called the Executive Director in the NPO world), and set the CEO’s compensation. Through their oversight, they ensure that operating plans exist, accurate financial statements are prepared, resources are allocated appropriately, and assets are safeguarded.
- Board structure. Boards are generally structured in a similar manner, with standing and ad-hoc committees to support the work of the board (although the actual committees may differ). Both rely on Terms of Reference or mandates to clearly articulate the role of the board and each committee.
- Director liability. Even though NPO board members are volunteers, their liability is the same as that of remunerated members of for-profit boards. To demonstrate that they have acted responsibly, directors must consistently act in good faith, in the best interests of the NPO, avoid conflicts of interest, and exercise due diligence in their oversight responsibilities.
- Finances and accounting. For-profit boards focus on profit margins, net earnings, stock price, and dividend rate. In contrast, many non-profit organizations rely on fundraising and grants. Topics discussed in non-profit boardrooms might include endowment draw, donor capacity, restricted and unrestricted gifts, and operating surplus or deficit. In addition, the accounting standards for each type of organization differ to reflect these financial realities.
- Director remuneration and financial obligations. For-profit directors are compensated in cash, company stock, and/or stock options. Non-profit directors are volunteers who receive no financial remuneration for their service. In fact, non-profit directors are generally expected to financially support the organizations they govern by making donations, supporting fundraising events, and contacting prospective donors. (The common phrase is “Give, get, or get off.”)
- Board composition. For-profit boards usually consist of experienced (often retired) professional and business people with extensive skills and deep expertise. For many, board work is their post-retirement career. For-profit board seats are sought after and openings are rare. On the other hand, non-profit boards seem to be always looking for board members. These boards may include retired business people, but are just as likely to include younger individuals who are still working full-time. Passion for the mission is a key selection criterion, along with subject-matter expertise, and civic leadership, but so is the willingness to provide financial support or having a network of influential potential donors.
- Board meetings. For-profit boards tend to schedule their meetings around the financial cycle – quarterly meetings are common. Board and committee meetings are lengthy – sometimes two or three full days in a row - with voluminous pre-reading required. Non-profit meetings are often (but not always) shorter and more frequent. They tend to be scheduled in the early morning, over the lunch hour, or in the evening to accommodate the schedules of working people. The volume of pre-reading material is often less to try to reduce the time commitment for volunteer board members.
Challenges for NPO Boards
NPO boards face some unique challenges. Here are just a few.
- Public sector NPOs. Public NPOs, such as colleges, universities, hospitals, etc., typically receive most, if not all, of their funding from government. Government often has the right to approve directors, or it may actually appoint board members directly. Government may also exert direct oversight over a public NPO if it believes there is a failure in governance. Even when things are going well, government will exert influence on the board. This relationship imposes limits on the board’s autonomy.
- Time commitment. Although directors of NPOs serve as volunteers, their responsibilities are generally no different than those of directors of for-profit organizations. If NPO directors find themselves unable, or unwilling, to devote the required time and effort, they should voluntarily resign from the board. If not, the board chair may ask them to resign.
- Performance measurement. NPOs struggle with typical performance measures. Traditional financial measures are often not applicable, and, in any case, they don’t tell the whole story. While NPOs need to measure donations, memberships, grants, expenses, etc., most of all they need to be able to explain their impact – what difference do they make and what is the value they bring to the world?
- Attracting management talent. NPOs typically have fewer financial resources when competing for talent, and there is often stakeholder scrutiny on things like compensation. In the case of public sector NPOs, government’s interest in management compensation can go beyond mere scrutiny to outright control. As a result, when hiring, NPOs may emphasize non-financial benefits and intrinsic rewards.
- Director recruitment. Recruiting and retaining qualified independent directors is challenging for any organization, particularly for NPOs where directors are not compensated. One strategy for building a balanced, diversified and fully committed board is to recruit younger professionals looking to acquire directorship experience, share their knowledge, and contribute to their community. For these individuals, serving on a non-profit board might be a stepping stone for paid board work later in their careers.
- Financial literacy. Because NPO directors are recruited from many different sources, they may lack certain business skills, in particular financial literacy. Directors need to be financially literate, especially those who sit on the audit or finance committee. At a minimum they should be able to read and understand financial statements, and understand how they impact the organization. Many NPO boards try to provide financial literacy training to their directors to address this skills gap.
- Director independence. Good governance requires that a majority of board members be independent. Because smaller NPOs have difficulty attracting enough qualified directors from outside their organizations, their boards might include members of management and others from within the NPO. These non-independent directors should only participate in a non-voting capacity and refrain from being part of any related oversight or decision.
What motivates NPO directors?
With all those challenges, why would anyone want to serve on a NPO board anyway? Research has found that board members volunteer for both altruistic and personal reasons, which can be grouped into six categories:
- Enhancing self-worth.
- Learning through community.
- Helping community.
- Developing individual relationships.
- Making unique contributions to the board.
The question is addressed by Grant MacDonald in his excellent article ‘Motivating Board Members: It’s Complicated.’ (See the link under Resources below.) MacDonald offers advice for tailoring the board experience to the needs of specific individuals. He even has a one-page Board Motivations Exercise that can help board members identify and then discuss their motivations for serving. He makes the following suggestions:
- Make your board more visible to your organization and its stakeholders. For example, have a list of board members on the website and report on board matters in newsletters.
- Encourage board members who are still building a career to list their service on their resumes and LinkedIn page.
- Invite a board member to a meeting with a funder even if they are just along as an observer.
- Have the board set some goals for itself and suggest that directors lead the initiative.
“The motivation for board service, as it turns out, is complex because most individuals are motivated by both altruistic and personal reasons for joining and serving on a board. Understanding what is important to board members and helping board members understand what is important to each other could be of value. Knowing this can help in strengthening the board as a team and in generating director energy around and away from the board table.” - Grant MacDonald, Governinggood
- Take the time to learn what constitutes a non-profit organization in your jurisdiction. If you're located in Canada, you can start by checking out the first two links in the Resources section below.
- Clearly articulate to yourself why good governance matters to your organization and to the non-profit sector as a whole.
- Learn what differentiates NPO boards from for-profit boards- and what they have in common.
- Consider your own motivation for serving on an NPO board. What are your altruistic and personal reasons for being there?
- Explore the motivations of your fellow directors as a way to strengthen your board’s dynamics and build teamwork.
For more great resources about the non-profit sector, check out the DirectorPrep Resource Hub. In particular, the Books and Websites pages include sections devoted to non-profits.
Leave a comment below to get in on the conversation.
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.
Share Your Insight: How has your NPO board responded to its unique challenges?