The primary role of the Board of directors of an entity is to steward the owners’ investments in that entity. I served on several boards of directors in many countries, including public companies in Japan, (NLM) and Malaysia (Alcom), non-public subsidiaries of former Alcan Inc., in Australia, Bermuda, Brazil, Canada, China, India, Jamaica, Korea, UK, USA. Besides, I was on several nonprofit entities’ boards in Canada. Typically, a few days before board meetings, I received huge binders of “board papers” with data mostly irrelevant to assess the organization’s intrinsic performance. At those meetings, executives’ presentations showed either things were wonderful, or results weren’t good, but better than similar firms. Bottom line: Interpreting data management presented at boards of directors’ meetings challenged me.
Members of the Board of Directors Must Understand the Business
I was one of two Alcan executives on the board of the US$4.5 billion public Japanese company, (NLM), in which Alcan had a significant minority stake. Because we lived in Canada, understanding that business challenged my colleague and I. Therefore, we agreed that the only way we would grasp NLM’s performance was to move to Japan. So, we set up an office in Japan, not to interfere with day to day operations, but to enable us to represent Alcan’s interest effectively. Happily, that approach worked well.
Meanwhile, early in my tenure on other boards, my colleague and I indicated to management the information the board needed, and requested a simple, focussed, set of metrics on one page. When management provided those critical success factors, the atmosphere in meetings changed from a dog and pony show to an accountability meeting—a major change.
Some Members of the Board of Directors Need Specific Skills
Often, I noticed needed skills didn’t decide board membership in for-profit and nonprofit entities. Instead, situational factors such as regional representation, influential local or national people, need for prestige, and so on, did. Consequently, sometimes, the right people wasn’t on board. My experience matches a 2015 survey of nonprofit board of directors by David F. Larcker et al from Stanford Graduate School of Business, in collaboration with BoardSource and GuideStar that reported the following, among other things:
Our research finds that, unfortunately, too often board members lack the skill set, the depth of knowledge, and the engagement required to help their organizations succeed. Nonprofit boards would greatly benefit from a more rigorous process for setting goals and measuring performance.
Other key findings in this study include the following:
- Too many directors lack a deep understanding of the organization
- Most boards lack formal governance structure and processes
- Eighty percent claim to formally evaluate the performance of the executive director. However, 39 percent do not establish explicit performance targets against which his or her performance is measured
- Many directors are not engaged, do not understand their obligations
Board of Directors Must Understand the Mission
Many studies show mixed results correlating mission statements with nonprofits’ performance. But a 2015 study of mission statements and performance in nonprofits found that mission statements mattered. It concluded that “…organizations’ mission statements have a significant impact on organizational performance, and organizational commitment was a positive moderator in that relationship.” (Patel et al, 2015).
Clearly, board members need to understand the mission and the entity’s major goals. Besides, they should be passionate about the mission, and set realistic metrics to monitor the CEO or executive director’s performance.
Still, the main governance issue is choosing board members. In 2006, Eric Hayden looked at five nonprofit health care organizations in Massachusetts that “succumbed to serious financial problems in the 1990s.” His study concluded that nonprofits should guard against two major structural problems. First, folks with potential conflicts of interest should not dominate boards. Second, a board’s allegiance mustn’t be misplaced. (Hayden, 2006).
Several studies suggest that the higher the number of internal members on a nonprofit board the less effective the board. Also, they show that where the CEO is a member of the board, his salary is about 10% higher than if he wasn’t. Even so, with the CEO on the board, it tends to focus more on fund-raising than monitoring the entity’s results. (Du Bois, C., et al, 2007). This fits my experience exactly.
Choosing NonProfit Board of Directors
Non profits must ensure board members have the right character, are passionate about the mission, are not in a conflict of interest, and understand their responsibilities and accountabilities. Further, to get an effective board they should apply the same diligence to selecting board members as they do to hiring a senior executive in that organization. I suggest these are important questions and reflections to consider when setting up a nonprofit board:
- Why does the organization exist?
- What’s the role of the board?
- What’s the individual and collective legal responsibilities of the board?
- What specific roles does the board need? Define them clearly.
- How many members and what competencies are needed? Surprisingly, research shows the size of the board is not an important factor when other areas are in place.
- What’s the relationship of the CEO to the board? How many internal members, and what positions, if any, will the board allow?
- What’s the compensation of external board members?
Ultimately the organization exists to fulfil a specific mission. As well, it must have clearly defined values and goals.
- Select members based on character first, and specific skills second. Board members in a Christ-centred entity should fit requirements in 1 Timothy 3.
- Choose the best people for the board from a diverse population; but don’t try to fill a diversity quota; don’t force diversity.
- Each person should understand her legal responsibility and commit formally to discharge her activities to the best of her abilities.
- Each potential member should understand that even if not paid, she must honour her commitments. Moreover, agreeing to serve means not having time (an absurd deflection excuse) to discharge board duties is not an acceptable excuse.
- The chair of the board, and each board member, must commit to putting people first and fundraising second.
- Christian leaders in nonprofits and churches tend to avoid conflicts, allowing difficult situations to fester for as long as possible–that’s my experience. Therefore, politically correct folks and those afraid to confront conflicts gracefully but speedily, should be barred from board leadership roles.
- Provide training for each board member to explain nuances of the organization: it’s vision, mission, values, fund-raising approach, and strategy.
Other Board of Directors’ Issues
- Transparency: The organization must be open about activities except where confidentiality is essential.
- Predictability: Leadership should be predictable and not let money and situations lead and decide their actions: They must do what’s right always and deal with the consequences.
- Punctuality: Board members must respect everyone’s time?
- Meetings: Meetings must have starting and end times, agendas showing individual’s responsible for each agenda item, and end with clear responsibilities and timeframes for follow up items. Start on time; don’t wait for late arrivals.
- Funding: The nonprofit entity must commit to not coerce people for money; for example, it should not show advertising exploiting poor kids in fly infected places, or other similar situations to raise funds.
- Financial accountability: The entity must maintain proper books, accounts, and reporting systems. Even if not required legally, books need to be audited by an independent professional.
- Performance metrics: The board must agree a set of metrics (critical success factors) that captures the organization’s performance and the CEO should report them clearly, concisely, and fluff-free, at each meeting.
Fundamentally, criteria for choosing board of directors in profit and nonprofit entities are the same. Select people of character committed to the mission, and qualified for specific roles identified by the organization.
Nonprofit organizations can play a major role in many areas of society: the arts, education, health care, and so on. However, in addition to needing professional management, each needs an effective governance structure routed in a carefully selected board of directors. Too often these entities hire unqualified leaders who spend most of their time fundraising and not taking care of the mission.
Du Bois, C., Caers, R., Jegers, M., De Cooman, R., De Gieter, S., & Pepermans, R. (2007). The non-profit board: A concise review of the empirical literature. Zeitschrift Für öffentliche Und Gemeinwirtschaftliche Unternehmen: ZögU / Journal for Public and Nonprofit Services, 30(1), 78-88. Retrieved from http://www.jstor.org/stable/20764647
Hayden, E. (2006). Governance failures also occur in the non-profit world. International Journal of Business Governance and Ethics, 2(1), 116-128.
Larcker, G et al (April 2015), https://www.gsb.stanford.edu/faculty-research/publications/2015-survey-board-directors-nonprofit-organizations
Patel, B., Booker, L., Ramos, H., & Bart, C. (2015). Mission statements and performance in non-profit organisations. Corporate Governance, 15(5), 759-774.
© 2017 Michel A Bell
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