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The Best of Boards, the Worst of Boards: The Not-for-Profit Experience
Adam Quinton
Board Member, Adjunct Professor, and Start-Up Investor/Advisor
Introduction
The not-for-profit (NFP) sector in the United States is, most people sense, a substantial part of the U.S. economic and social structure. Arguably many do not know that the sector is, collectively, a giant! Consider the following:1
- There are 1.6 million 501(c) organizations in the United States.
- They employ over 10 percent of the total workforce.
- 25 percent of the U.S. population volunteer time to NFPs.
- NFPs are the beneficiaries of approximately $400 billion of annual giving.
With this scale and reach into the lives (and wallets) of so many citizens the good governance of NFPs is crucial to ensuring their ongoing impact and public support.
The legal construct and hence roles and responsibilities of the board of a NFP bear many similarities to those of their for-profit cousins, including the duties of care and loyalty. However, there are also significant differences. Most important is the overarching importance of the board's fiduciary duty since NFPs are custodians of contributed funds. In the United States, regulatory oversight is primarily conducted at the state level by the charities offices of the various states' attorney generals either on their own (27 jurisdictions) or with another state agency (in 24 others).2
Day-to-day decision making is the responsibility of the staff. The role of the NFP board is to guide the CEO and leadership team and provide organizational oversight, meaning:
- “Watchful and responsible care” of the strategy, short and long term, of the NFP and ensuring it remains in accordance with its stated mission,
- Ensuring good stewardship of the resources of the NFP, not least financially, through oversight of financial controls, the audit, physical assets, and the endowment if there is one, and crucially, as with any board,
- Monitoring the performance of the CEO and selecting a new leader when the time comes.
The frame within which this is executed in a for-profit context is simple: value maximization for shareholders. But in the NFP world there are no shareholders. Hence, in years where an NFP produces a financial surplus, there are no owners to whom some portion of that surplus can be distributed. Rather the NFP board's goal is mission maximization: ensuring that the human and financial resources of the organization make the greatest possible contribution to the delivery of the NFP's mission.
Just as with a for-profit, an NFP is answerable to its clients in the sense that their ongoing success requires that clients appreciate and approve of the job the NFP is going. But often those clients are diffuse and marginalized. In many cases their voice is not a loud one, if they have one at all. And with no external shareholders to answer to, the NFP and its board experience less (zero in fact) “discipline” from that area, too: There are no shareholders to vote out of office a nonperforming NFP board member, and no opportunity to vote the entire board out of office by accepting a hostile takeover bid.
NFP board members commit their time and energy to an organization and are subject to the legal liability that comes with any board service yet, unlike their for-profit peers, they receive no compensation (other than the psychic rewards of progressing a mission they support). In fact, they typically pay to be on the board, in the sense of literally providing money from their own pockets to support the “contribution revenue” of the organization. Further, they often solicit friends and other contacts to do the same.
Given the mix of these similarities, yet also major differences, NFPs present a set of unique governance challenges, well summed up by Lesley Rosenthal:
in the nonprofit setting, misconceptions about corporate governance abound. Are board members primarily fundraisers? Cheerleaders? A rubber stamp to legitimize the actions and decisions of the executives? Do they run the organization to the extent staff is unable? Are they window-dressing to spruce up the organization's letterhead? If they are rich or famous, must they attend board meetings? How do they know whether they are doing a good job, or when it is time to go?3
Because of tensions and dilemmas such as these, the NFP context can bring out the best, and sadly also the worst, of the governance issues and challenges that any board can face.
The Best of Boards
On the plus side of the ledger, high-performing NFP boards have strong institutional disciplines and values that set a context for the way individual board members conduct themselves—a high-quality institutional “tone at the top.” Naturally they fully live up to their legal and regulatory obligations. But, of course, no organization can perform at its best without high-quality individuals who live the organization's values plus are fully engaged and forward-looking. The environment for any NFP is constantly evolving in terms of service provision, funding needs and sources, risks and opportunities, its accounting and legal context, and more. Hence the high-performing board goes beyond checking the boxes to anticipating what future boxes need to be created and addressed.
We can identify high-performing NFP boards by characteristics they typically exhibit at an institutional level in these four areas:
- Values and culture
- Composition
- Structure
- Processes
Of course, in addition, they are composed of:
- High-performing individuals
1. Values and Culture
With respect to values and culture, these boards will:
- Have a strong culture that pervades the board and flows through to the organization. Whatever rules, processes, and structure a board might have they are for naught if the culture of the board is weak. What makes for a strong culture? Integrity is vital: All must be committed to ethical behavior. So, too, is open communication: Board members must be willing and unafraid to express their opinions. Respect: Members must hear out opinions where they differ, engage in thoughtful and fact-based discussion, and respect (and support) not just individuals but collective decisions they may not personally agree with.
- Have a board chair who makes sure all board members have a voice and their views are heard. The board chair has a tough task at an NFP since her or his fellow board members will be brimming with passion, as will the CEO. Keeping board discussions focused and moving along on a timely basis requires the skills of a diplomat, a firm one at times! But, especially since NFP boards typically meet less frequently than for-profit boards (its members receive no compensation after all), the high-performing board chair will be especially sensitive to giving all members a chance to contribute in a more limited space of time.
2. Composition
When it comes to board composition, they:
- Benefit from diverse members from the for-profit and not-for-profit worlds whose talents differ but whose values are strongly shared. Too often NFP boards are a friendly collection of people who get along well because they are all like each other. That might be a recipe for comfort but is not a recipe for innovation and strong oversight. Superior decision making comes from diversity of experience and opinion on the board.
- Capitalize on domain expertise of board members in areas important to all the operations of the NFP. While a small board might have to be selective in the key areas that board members represent in terms of expertise, a larger board will actively manage its membership (through the governance committee) so that all the domains that impact the NFP in a material way have an expert board voice. Again, this mix will depend on the NFP but will include issues such as fundraising, technology, financial and legal matters, real estate, marketing, HR practices, public affairs, and more.
3. Structure
As it relates to structure, they:
- Conform with best practice in the separation of the board chair and CEO roles. This is particularly important in cases where the founder of the NFP is still the CEO. Without this separation, the chair/CEO can set the board agenda they want and stifle debate in a way that greatly impairs the board's ability to do its job.
- Have a committee structure that allows for both oversight and mission support. The larger the board the more committees of the board can be staffed to provide in-depth input on key areas of the NFP's activities. Some of these are generic such as finance, audit, governance, and development. Others will vary depending on the NFP's activities and structure. For example, with a large staff a personnel committee to support the internal HR efforts might make sense, and for an NFP with large investments in buildings or facilities, a real estate committee. Additionally, when the committee infrastructure goes beyond say three or four key members the high-performing board will think about creating an executive committee which has powers to act on behalf of the board in many instances and is comprised of the chairs of all the major board committees. Finally, the best of board establishes charters for all these committees that succinctly define their duties and responsibilities.
- Apply term limits on boards for board service. Term limits are often a contentious topic and there are strong views for and against. Many argue that they are an important factor in maintaining diverse leadership, bringing in fresh ideas and adding new donors. While opponents worry that term limits may mean losing a strong board member when their terms come up, proponents point out it can be a blessing when it serves to transition out board members whose service is limited and not contributing to the organization. Whether there are term limits or not, best of boards will divide members into “classes” or roughly equal size that come up for reelection on a staggered, most likely three-year basis.
4. Processes
Among best practice operational practices, they:
- Have a process to recruit new board members on a targeted basis in the context of pre-identified skills, connections, and resource needs. This is the obvious consequence of awareness of the needed areas of expertise, which won't find their way onto the board unless there is a solid process for: (a) identifying specific needs; (b) targeting likely candidates to fill those needs, and of course (c) successfully bringing those candidates on board. The overall high-performing board, or governance committee if there is one, will keep a matrix constantly up to date that shows where there are current or emerging expertise gaps and a plan to fill them.
- Ensure alignment of expectations before a new member commits to the board. Given the voluntary and purpose-driven nature of board service some boards understandably find the issue of setting expectations, meaning the duties and obligations of new members, a challenge. However, the best-performing boards know that not setting expectations clearly before a prospective board member commits is a recipe for discomfort and worse, possibly for years. To tackle this head-on the best of NFP boards has a clear set of expectations it can outline, on no more than one side of the paper (if printed!), to share with incoming board members so there is absolutely no doubt or opportunities for misunderstanding about the expectations of the role. Specifically, this one-side expectations guide will cover issues such as: number of (and length of board meetings) per year, number of committee assignments per board member if any, any events where board member attendance is highly desired (e.g., an annual fundraising gala), and the tricky issue of the “give/get.” The give/get being the minimum amount of money each board member is expected to bring in to the organization on an annual basis through some combination of giving (i.e., writing checks with their own money) and getting (i.e., donations secured by the board member from others through means such as a corporate donation match, getting a friend or contact to purchase tickets for a fundraising event, etc.).
- Have annual board member work plans and conduct annual reviews. Each board member does a simple self-evaluation and meets with a member of staff (perhaps the director of development) to determine their plan for the year. This plan outlines their planned annual gift, what committees they serve on, what events they will take a role in, their program interests, and what inspires them to stay actively involved. It allows for self-reflection and gives the nonprofit the opportunity to engage the board member in a direct conversation about how the board member can best serve the organization and how the staff member can best facilitate that purpose.
- Track board member engagement and are prepared to have the “difficult” conversations when merited. The governance committee of the best of boards will develop a framework for tracking board member engagement—which will be aligned with the upfront annual review. Some data points are obvious and easy to monitor, for example, board and committee meeting attendance records, personal giving, and attendance at NFP events. Others require more effort and sometimes judgment but are important for a full picture, for example, “gets” in addition to “gives.” (What financial or pro bono resources did the board member bring to bear for the NFP in a given period in addition to her or his own person contribution?) Or what personal time did they commit, for example, meeting with the NFP's HR director to help her or him construct a new compensation plan. An annual scorecard that captures these factors serves two purposes. On the one hand, it allows the governance committee to see which board members are having a material impact on the organization (for which they should be thanked and applauded). On the other, it provides an insight into who is not contributing (in the broadest sense of the term) as hoped—the result of which might be a conversation with the board chair that establishes the individual would like to contribute in other areas or maybe has personal circumstances that are short-term constraints on their ability to support the organization as they would like. And finally, that conversation could establish the fact that the individual has too many competing activities, no longer has the desire to commit the time needed to the mission, is “burned out” or whatever, which becomes the entre to a mutually agreeable separation from the board.
- Use executive sessions at the beginning or end of board meetings to discuss and raise questions and concerns about the performance of executives, including the CEO. Executive sessions are a vital part of the board's execution of its responsibilities because only at this point can the members have a free and frank discussion about executive performance. This should include a formal annual review of the CEO. This review ensures proper oversight, as well as continues to help the CEO grow in their skills and ability to lead the organization. The CEO or governance chair typically leads the review process, with written input from each board member. The executive committee of the board meets to discuss the overall evaluation and discuss more specific and confidential issues—not least compensation.
- Plan for succession planning in good time. It is one thing planning a smooth succession. But the preplanning is a key focus of best-performing boards, too. Planning needs to begin long before a CEO is nearing retirement or looking for a change. Many CEOs don't plan until their decision is made and if they leave a short time afterwards, a great deal of knowledge is lost in the transition and years of building relationships could cause the organization to stall or falter. A strong CEO will see the benefit to building a strong senior team to help ensure a smooth transition. Also, it's wise to think about CEO transitions in the context of other potential transitions (i.e., chair and board executive team transitions) so that the number of moving parts is limited and the execution risk of the change commensurately lowered.
- Conduct broad-ranging strategic review every five years or so. Although most NFPs will not change their fundamental mission, the environment in which they operate, the needs of clients, and so on, are not static. By stepping back, as a board and with the senior leadership team, on an occasional basis (every 5–10 years) to reassess and if necessary allow for a recalibration (or reaffirmation) of the organization's priorities and long-term goals, it stays relevant and can also serve to reenergize all concerned.
- Work with the CEO to set broad goals, specific annual priorities, and annual performance metrics. Building board and leadership team consensus about goals for the organization can be a key outcome from a strategic review session. But regardless, the best of boards work with the senior staff team to distill broad objectives into discrete goals, program performance outcome measures, and priorities for the CEO and management team. Outcomes achieved are clearly measured and circulated to the board and compared to the previously determined metrics in each case. This allows the board to have a more meaningful discussion about organizational (and individual senior staff member) performance. Further, only by constructing, tracking, and reporting on performance in this way can an NFP satisfy the most results-oriented donors. Many are now asking to see performance outcome measures to evaluate the effectiveness of the NFP and confirm that their philanthropic dollars are generating a concrete return on investment.
- Conduct annual performance reviews of the CEO and her or his direct reports. Armed with transparent goals, objectives, and performance metrics the board can (initially in executive session) conduct a fact-based annual review of the CEO and other senior staff. At least periodically, these should be 360-degree reviews to ensure the board (or HR committee) gets a complete assessment of the performance of top management. Action plans for the CEO and direct reports can then be established based in areas that would benefit from improvement. These are typically communicated to the CEO by the chair or board executive committee head on a one-on-one basis. The CEO in turn is responsible for delivering the assessment and recommended action points to his or her directs.
- Build strong institutional processes, structure, and relationships to sustain the organization through transitions of leadership. Not-for-profit boards are no different from for-profits in that their single most important responsibility is to hire (and, in the worst-case scenario, fire) the CEO. But a successful transition of leadership does not end with the CEO signing their contract. The high-performing board will be prepared to commit more time during the period of transition both to support the incoming CEO (and help educate her or him on the culture and values of the organization) as well as ensuring a sense of continuity for key outside (donors and other stakeholders) as well as inside (senior staff) constituencies.
- Review compensation levels for executive employees. This can be done via a personnel committee and reported back for full board discussion. The exercise will involve benchmarking the compensation of all members of the senior leadership team (typically the CEO and her or his direct reports) against a group of comparable organizations. This effort signals the board's seriousness with respect to its fiduciary duties (since senior staff compensation is a major expense) but also its desire to respect the contribution of the CEO and senior staff by compensating them fairly, not least by being mindful of market rates for their roles. Further, such a review allows the best of board to reward strong performance in a considered way—by using the data gathered to inform its decisions on whether to award, and at what level, bonuses for excellent performance on the part of the CEO or other senior executives.
- Ensure that the organization has competent accountants and auditors and that there is good tracking and implementation of “donor intent.” A key element of the NFP “duty of care” is the responsibility of board members to ensure the organizations' assets are managed and spent appropriately. Making sure competent accountants and auditors are in place is essential to fulfilling that objective. And, for organizations that receive temporarily or permanently restricted gifts, the best of boards will make sure that there is a thorough process for tracking these restricted gifts and ensuring that their disbursement is consistent with the original intent of the donors.
- Collectively monitor external developments, economic, regulatory, social, and others that may impact operations or the mission. The effective execution of the oversight function of the board requires that collectively and individually it is alert to external developments that bear upon the organization. Again, this is where the mix of knowledge/skills and diversity of experience of the board is crucial—it means each board member can be “on alert” but from many differing perspectives.
5. High-Performing Individuals
To ensure these institutional best-of-board practices become a reality requires the best of board members. These high-performing individuals are:
- Able to devote sufficient time to prepare for board meetings and review board packages in advance. Board work is not a sinecure. To exercise their fiduciary duties in an appropriate and diligent manner, board members simply must commit the time. If they can't devote the time required, they shouldn't accept or stay on a board. And this means more than expending face time attending meetings; it means time spent on preparation in advance through reading board (and committee) info packs. Only by that advance work can the member come to a meeting prepared to ask the right questions and, crucially, not waste other people's time by using valuable meeting space filling in their own ignorance.
- Aware of the importance of familiarizing themselves with the organization and its operations to better orient themselves to understand the blindspots. A high-performing board member is one that goes beyond their own area of expertise (“I am a real estate person so I will just focus on that”) and consciously makes an effort to gain an understanding of all the key parts of the NFP's operations and people. (Often the most insightful observation on any given topic doesn't come from the domain expert, but the informed outsider who sees the context of an issue and can assess it from a new perspective.)
- Willing to experience the mission directly. A best of board member will not only attend board meetings and fundraisers, but also program-related events and even volunteer their time to the actual execution of the mission. That could mean delivering meals to the homeless, tutoring children, visiting the museum, sitting in on a lecture, etc.). An important consequence is that when they are promoting the organization they can tell “stories” that call directly on their experience.
- Alert to the need for and monitor internal controls necessary for legal compliance, the shortcomings of which can undermine the mission. Few people join an NFP board with a view to being compliance officers! Yet lack of proper process around ostensibly simple issues like client information confidentiality can lead to bad outcomes. Top-performing boards will keep an eye on the relevant legal controls to reduce the risk of such adverse outcomes to a minimum.
- Conscious of the need to actively look out for and proactively address reputational risks to the organization. The good name and reputation of any NFP is essential for its continued success whether it is because of its standing with those whose life its services improve or with the ongoing loyalty of donors without whose support the mission could not be sustained. The best of board members will be constantly alert to reputational risks and work with staff to preempt or, if necessary, respond to them.
- Highly motivated volunteers with a strong personal buy-in to the mission and meaning of the NFP. Board service in an NFP is not a “job” in any conventional sense; rather it is a passion project. Board members will not give their time and their best efforts unless they are committed to the mission of the organization. It must align with their values and give meaning to their lives. The board member who seeks to serve on a board just to “look good” is never going to be the right person to staff the best of boards. Hence a fundamental consideration for the governance committee in selecting and recommending new members to the board for approval must be whether candidates truly have that buy-in.
- Highly motivated to support the mission of the NFP with their own financial resources. On the best of boards the members will all make giving to that organization a priority in their personal philanthropy. That doesn't mean every board member must be writing big checks, rather that they give an amount that is meaningful in the context of their own personal philanthropy and personal circumstances.
- Committed to taking their independence and fiduciary responsibilities seriously and asking the “tough” questions of staff. Mindful of the lack of shareholder discipline that exists in the for-profit context, there is even more onus on NFP board members to exercise their fiduciary duties—no third party will do it for them (other than perhaps than a state attorney general's office if someone files a complaint against the NFP). Every board member is individually responsible for being a steward of the NFP's assets. No one on the board can say: “I am not a numbers person, XYZ can keep an eye on that.” Hence, every single high-performing board member needs to have a basic understanding of not-for-profit accounting and review the annual and quarterly financial statements with a keen eye. If there are things the board member doesn't understand, or that “don't look right,” then it is their duty to ask questions of staff even if that is uncomfortable (for either side). The board collectively reviews and approves the annual budget—each board member needs to be able to cast their vote in support from a position of knowledge and understanding.
- Compelling advocates for the NFP with current and potential external stakeholders. On the best of boards the members are also the best of PR agents. The good work that an NFP does often speaks for itself. But it never completely speaks for itself. Given their commitment to and passion for the mission of the NFP, top-performing board members will be powerful (and proactive) advocates for the organization to their own friends and contacts, to the media, and to other outside constituencies. They are active in making important connections for the NFP to potential partner organizations, and so on. In doing all of this they willingly enhance the prestige and profile of an NFP by enthusiastically attaching their own stature to the organization.
- Role models as donors themselves, driving funding for the NFP. On a high-performing board, all members will live up to their responsibility to contribute personally to the financial needs of the organization by meeting, or exceeding, any explicit give/get; 100 percent board contributions to the regular unrestricted giving “annual fund” is a sine qua non. But, beyond that, board members will support annual galas and other fundraisers during specific campaigns, mindful of the fact that outside donors are encouraged (or not) by firm evidence that board members believe deeply enough in the organization to get their money out of their wallets and show it. After all, if the board members aren't contributing, why should someone else?
- Sensitive to, and appreciative of, the fact that employees of an NFP are often themselves mission driven and willing to take lower compensation than might be available to them in the private sector. The actual day-to-day work of an NFP is done by the CEO and her or his staff, not the board. A high-performing board should, of course, seek to hire and support a top-class CEO and encourage her or him to develop a top-class team beneath them. But the NFP world is different from the for-profit environment that many board members inhabit, and they need to be sensitive to that.
- Conscious of the importance of playing a thoughtful and diligent role in recruiting a new CEO for the organization. If the single most important role of the board collectively is hiring a new CEO, then it follows that the single most important function of an individual board member is playing their part in the process. That means helping identify suitable candidates at the appropriate time, being willing to help with due diligence, especially interviews of the candidate and/or references, and applying their best judgment in selecting the one right person for the job.
- Willing to go above and beyond what is required. Whatever the criteria one can list for best-performing board members there is always “white space.” What more can they do that goes beyond the basics? The best board members will be looking for creative new ways to raise money, not just excel at supporting the current ones. They will be recommending ways to expand and enhance the mission and impact of the NFP, rather than sticking with the status quo. They will go above and beyond.
The Worst of Boards
On the minus side of the ledger, the worst of NFB boards tend to have attributes that are the opposite of the positives described above, and to do so with no ill intent on the part of the members themselves. In fact, many of the factors that contribute to bad NFP board outcomes stem from the fact that they can be too “comfortable,” too “easy-going” and reluctant to exert discipline on members who are doing their board work for passion and not hard compensation.
Characteristics of Underperforming Boards
At the institutional level these boards exhibit some if not many of the following characteristics, namely that they are:
- CEO/founder dominated to a deleterious extent. This is the entry-level “good news, bad news” issue for many NFPs. The CEO/founder will have committed enormous passion and energy to starting and driving her or his NFP forward to achieve great things—that is the good news. The bad news is that the founder/CEO takes that as a license to call all the shots, ignore board advice, and, in the worst cases, lose sight of the boundaries between the NFP and its assets, and their own. After all, it is “their” organization isn't it? Avoiding those pitfalls requires self-awareness on the part of the CEO that is often lacking. At a practical level, it means that the founder/CEO can tend to dominate board discussions not least by grandstanding their own achievements, controlling and often limiting the flow of information to the board and so on. This is especially true when the board chair and CEO roles are combined. The flipside of this among individual board members is that they can mistake a sense of duty of loyalty to the CEO/founder as being higher priority than their duty of care to the organization. Also, that they suspend their critical faculties and assume that “the CEO knows best” even when there is evidence to the contrary.
- Too much of a friendly social club. This is a particular problem for young, founder-driven (and -led) NFPs. I start my NFP to solve a problem I feel needs addressing. I need to set up a board to establish a governance structure, but who is going to join? My NFP has limited to no track record or profile, limited to no resources! Naturally I reach out to friends and associates who know me and ask them to join me in the mission; they sign up out of loyalty for me and their desire to support something I feel passionate about. There is nothing wrong with that; indeed it is the way most NFP boards come into being. But this initial board is made up of the “Friends Of” (FO). In fact, many probably know each other. The board risks being as much a social club as anything. A pleasant experience to be part of, but not a group that is going to question the founder in a serious way, not one that is going to “rock the boat.” Needless to say, this is not sustainable in the long term because it comes with such obvious flaws and is simply not appropriate should the NFP expand.
Additional Shortcomings of Underperforming Boards
More specifically a worst of board will likely have some of the following shortcomings. It can:
- Seek to avoid conflict. Obviously, this can manifest itself in terms of one-way communication at board meetings (the CEO reports out, everyone cheers). Further, a nonperforming board will typically not meet in executive session at which questions about executive performance might be aired. And even if it does, those discussions will be cursory and quickly veer off topic to less contentious matters. The conflict-avoiding board will also be uncomfortable with taking decisive action to refresh and rejuvenate the board if a member's commitment fades or does not live up to the expectations set out for them when they joined. And in the “where the rubber hits the road” category, the nonperforming board will be unwilling to call out an underperforming CEO who might be fully committed to the mission of the NFP, yet not executing at the level the organization needs or deserves.
- Suffer from material conflicts of interest that go unchecked because they “support the mission.” For example, I am on the board and have a relationship with a printing company my sister runs. The NFP needs printing work done, and I recommend my sister's business and report and that we will get a “good rate” because she is eager to help such a great organization. So, the CEO puts that into motion. All good? No! Is the NFP really getting a good rate? Unless there was an attempt to get competing quotes and get a sense of arm's-length pricing, we simply don't know. In fact, my sister might not be offering attractive pricing at all, so what I have done is advantage a family member at the expense of the NFP's finances.
- Be large and unwieldy, or too small and underpowered. Boards that are constructed on an FO basis are not constructed through a process that seeks to optimize their effectiveness and contribution to the success of the organization. What skills do we need? What types of people will make the board most effective? Since there is no underlying logic to their construction (other than FO), they can be too small (just a few friends banding together) or too large (a happy social club where everyone feels able to free-ride on the efforts of others and meet occasionally for a board meeting over a convivial lunch). They will tend to lack experience in areas important to the operations of the NFP (e.g., technology, legal matters, real estate, marketing, HR practices). Filling those gaps requires forethought and a conscious effort to identify board members who will make the board a complete team, not merely a collection of individuals brought in on an ad-hoc basis through personal relationships.
- Suffer irregular and inadequate attendance, which is not disciplined especially in the case of “prominent” members. Whatever the size and composition of a board it can't exercise its fiduciary duties if folks don't show up. With limited to no sanctions for poor attendance (as the CEO I can't cut your pay; you don't get any—in fact through your individual donations you likely pay the NFP money!), and given the general social club/don't-rock-the-boat atmosphere, having a “hard” conversation with the friend that I asked to join the board is not easy. A further, potentially toxic factor develops if there are one or more “prominent” members of the board who don't take their responsibilities seriously, including not showing up. Besides setting a bad example if they are not called out, this behavior can create bad feelings with other board members who are putting in the time.
- Be used by some members as a vehicle for personal “virtue signaling” or self-promotion as opposed to genuine commitment to the organization and its mission. A factor behind the actions (or lack of) of the noncontributing prominent member can be that they really only on the board to burnish their resume: “Look at the good things I am doing.” This speaks to the importance of board member selection. In the worst-performing boards this is ad hoc and unstructured—allowing the self-promoters to potentially slip through the cracks.
- Suffer from free riding/social mooching, especially in the context of the board's fiduciary responsibilities. On even the worst-performing NFP boards members will give lip service to their fiduciary duties, but leave the hard work of studying financial statements, querying expenditures, and so forth, to others. Besides the fact that in so doing members are not fulfilling their own legal obligations, members who free-ride put an unfair burden on their colleagues. Further, if the entire board free-rides, then there is no oversight at all. Of course, this issue comes back to the unusual feature of NFP service, namely that the incentives and rewards of membership are not tangible but rather psychic, that is, members are (typically) not compensated and hence have limited skin in the game. But that in no way absolves them of responsibility to exercise their legal duties.
- Have an inadequate committee structure, which leads to inadequate oversight, especially of financial controls and areas like whistleblower policies and protections. A successful NFP will grow in terms of scale and complexity and, before too long, it is impractical for the full board to pay adequate attention to all areas requiring advice and oversight on a collective basis. Hence the need for subcommittees of the board that can dive deeper into key topics such as finance, development, or marketing, assisting staff and keeping the full board updated on their work and findings. Identifying and staffing these committees is a key issue not least given board member time constraints and the need to balance oversight with not creating excessive red tape. But a mismatch between organizational scale and complexity and an underpowered subcommittee infrastructure means that oversight and advisory functions will be fulfilled on a cursory and inadequate basis.
- Fail to seek independent, outside support when needed. Whatever the attributes of a board, and the talents and expertise of an NFP's staff, issues will arise where outside expert opinion is needed. An overconfident leadership team and board will avoid seeking out that advice, for example, an employment attorney on a complicated staff compensation issue. That can be often rationalized based on avoiding additional costs. NFPs after all are not usually flush with excess cash. But, whereas the worst of board will duck the issue, the best of board will help guide the organization to secure advice where needed, often identifying advisors willing to provide their services pro-bono.
Individuals on Underperforming Boards
When it comes to the individuals on the worst of NFP boards, their personal shortcomings can include the following:
- Failing to assert their independence and, as a result, falling short of their fiduciary duties and duty of care. This is the entry-level issue for each and every board member. As a board member, your duty of care and loyalty is individual, not collective. Each and every individual is charged with the responsibility of being a thoughtful and active custodian of the NFP's assets, good name, and so on, and to make it a priority above other considerations. It is all too easy for board members to “go with the flow” and not question decisions where they disagree, and not dig deeper into financial reporting matters they find unclear or troublesome. That makes for a more harmonious life but is a disservice to the NFP and puts them in breach of their own individual duties. (This shortcoming can be particularly pernicious if cliques of board members develop. This can militate against independent thinking, indeed lead to groupthink, when members draw comfort from shared views within the clique and, as a result, check their independent judgment at the door.)
- Failing to commit the time required to become familiar with the organization and its staff, other than the CEO and chair, and relying on other board members to read the board packages and prepare for meetings. All board service requires time, not just at meetings but before and around them. The worst of board members will not commit that time and if that means they are not adequately familiar with the NFP and its people, and they don't review materials in advance of meetings, and so on, they are doing little more than keeping a board seat warm for the next person who does.
- Being less familiar with legal obligations and risks which uniquely pertain to NFP status, specifically in relation to self-dealing. A board member with a successful career in the private, educational, or other sectors can add significant value to an NFP and its board. However, they do not necessarily come with an understanding of the legal construct of NFPs. They must take the time to acquire that expertise themselves or better, the NFP must be conscious of onboarding new members in a way that advances that understanding. Importantly board members need to be aware of the prohibition on “self-dealing”: deriving personal gain from interactions with the NFP (including loans). In turn this requires NFPs to establish conflict-of-interest policies that board members review and then sign an annual statement of compliance (and disclosure). Of course, NFP legal requirements are not static. In the United States, regulatory oversight is primarily at the state level by the local attorney general's office. State-level regulations can and do change over time. It behooves individual board members, as well as the organization, to stay alert to those changes.
- Lacking experience in, and hence struggling with, the more complex business and operational model that many NFPs exhibit. NFPs do not just differ from other organizations on a legal basis; they have other differences, too, for example, revenue derived from service provision that can be supplemented if not exceeded by contribution revenue (itself derived from the easily quantifiable cash but also less straightforward items like gifts of goods or services) and investment income (drawn down from an endowment if the NFP is lucky enough to have one). Appreciating and assessing those various revenue sources and their differing volatilities is just one example of a business model that often lies outside the prior experience of many new NFP board members.
- Undermining external support if board members themselves are not personally contributing to the NFP financially. As we have discussed, in most NFPs board members are expected to play a key role in fundraising, including contributing from their own resources. Indeed, many institutional donors make 100 percent participation by board members a criterion for their giving. Of course, board members' circumstances can change over time, but not giving at all, at any level, can undermine the development of the NFP if the 100 percent goal is not achieved.
- Being insensitive to, and failing to appreciate, the fact that employees of an NFP are often themselves mission driven. This can mean making demands of them which would be appropriate in the private sector but which come across as overbearing and demotivating in an NFP context
Additional Resources and Acknowledgments
For further reading on NFP corporate governance there are many excellent resources. For example, Boardsource (www.boardsource.org) provides a comprehensive set of guides and research on a full range of NFP governance topics.
I would like to thank Paul Downs (partner, Hogan Lovells), Dee Falvo (senior vice president, CCS Fundraising), and Georgia Wall (board chair, Graham Wyndham) for their comments and suggestions, which were invaluable in the preparation of this chapter.
About the Author
Adam Quinton has been a board member at International House New York for over a decade. He has served on the executive, development, finance, investment, and communications committees. He is an adjunct professor at Columbia University, School of International and Public Affairs (SIPA).
In the start-up space, Adam has invested in, advised, and been on the board of a number of early stage companies.
He is chair of the North American Jury for the Cartier Women's Initiative and a mentor for the 92Y “Women in Power” Program. He was formerly a #1-ranked sell-side investment analyst at Merrill Lynch and manager of investment research professionals on a global basis.
Notes
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