Do Today’s Business Leaders Make Effective Nonprofit Directors?

Do Today’s Business Leaders Make Effective Nonprofit Directors?

By: Eugene H. Fram

The names of the new board nominees have been announced. They include several outstanding recruits from the business community. Will these new formidable directors perform well in the nonprofit environment? William G. Bowen, a veteran director in both the for-profit and nonprofit environments, raised the following questions about such beginnings in a 1994 article:*
Is it true that well-regarded representatives of the business world are often surprisingly ineffective as members of nonprofit boards? Do they seem to have checked their analytical skills and their “toughness” at the door? If this is true in some considerable number of cases, what is the explanation?

Are Bowen’s observations about directors’ questionable motivations for accepting director positions still applicable in the 21st century? He noted that some nonprofit directors accept board positions because they are dedicated to the organization’s mission, vision and values. But he also hypothesized that business leaders are sometimes motivated to join nonprofit boards for a variety of other reasons. They may regard board membership as a “vacation from the bottom line … or the enjoyment of a membership in a new ‘club’.” Also they perhaps join nonprofit boards to “soften” community perceptions that, as tough bottom-line executives, they also may care as much about human issues as they care about shareholder returns. (It would probably be costly or impossible to obtain objective data of this observation.) Press reports through the years, since 1994, have indicated that such attitudes still hold leadership sway in nonprofit organizations.

In today’s nonprofit environment, there may remain senior business leaders or groups who are less serious about the responsibilities incumbent upon board members, as noted by Bowen. If this is the situation, a high level of board permissiveness, allowed by business-oriented directors and others, is still causing a level of board dysfunction business leaders would never allow on their own boards.
Two examples of how permissiveness, apparently may have led to a relaxation of board responsibility:** In 2009 and 2012, two nonprofits (a YWCA and a youth center) declared bankruptcy. For several years prior to this event, both boards had ignored the “Red Flags” signaling budget problems. Evidently a permissive standard had existed, not holding budget planning to rigorous standards. The two groups, I assume, avoided seeing the signals because a permissive culture might have been in place, and thoughtful business leaders might have been co-opted by this relaxed culture.

Today, any experienced nonprofit director has probably encountered senior business leaders which don’t thoroughly apply their analytical skills in making decisions in a nonprofit environment, mainly rely on management for analysis, and seem to enjoy being overly concerned with operational minutiae.

My own early experience with board permissiveness occurred when I became a member of a board of a nonprofit responsible for a $12 million budget. Members of the board’s audit committee included volunteer directors employed by accounting firms. At the time, as it is today, it was common practice during discussions with the external auditors to have an executive session without management present, so the committee members could ask the external auditors for confidential appraisals about persons handling financial affairs and ask additional questions about the completed audit. (Example: Was management fully cooperative in providing audit information?) The nonprofit did not adhere to this practice, which could lead to IRS concerns, if audited. The knowledgeable auditors on the committee did not think the practice necessary for a nonprofit. This was permissiveness in action.

21st Century Reflections on Bowen’s Observations

Since Bowen’s 1994 observations, there have been some improvements. The Sarbanes-Oxley Act has driven some of the changes in audit committee’s procedures, overviews of internal controls, whistle-blower requirement, CEO’s & CFOs signatures attesting to financial statement accuracy, etc. Although not required by law, some larger nonprofits have adhered to all the provisions of the Act. I also feel business leaders now think more deeply about joining a nonprofit board, especially after the Penn State scandal and the reputation embarrassment the board encountered.

But does these changes indicate substantial change reducing the permissiveness in the nonprofit environment Bowen described? Anecdotally, here is a typical comment that I continue to hear, this one from the board chair large nonprofit with 300 employees. “We don’t expect the same standards of management performance that the business organization has.”

However, I am optimistic about the future. As nonprofit boards select more professional type CEO’s to lead their organizations, whether they are hired internally or externally, more change will take place. Hopefully, if boards want to retain these people, this movement should place some subtle pressures on board nomination committees to seek more candidates whose motivation is to focus on mission, vision and values, along with balanced budgets. A new breed should readily understand that this focus has the same meaning to nonprofit stakeholders, as a profit focus does to business stakeholders.***

* William G. Bowen (1994), “When a Business Leader Joins a Nonprofit Board,” Harvard Business Review, September-October. Bowen currently is president emeritus of the Andrew W. Mellon Foundation and former president of Princeton University in Princeton. He has served as an outside director for a wide variety of for-profit and nonprofit organizations.
** See blog-site “Nonprofit Board Crisis” for a backlog of similar field examples to those presented here.
*** For more detail on how this can be accomplished, see the third edition (2011) of “Policy vs. Paper Clips.” http://amzn.to/eu7nQl

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