Are Powerful CEOs Right for Nonprofit Organizations?

By: Eugene Fram

David Larcker and Brian Tanya, Stanford University Professors, have come to the following conclusions about CEO power and raise some pertinent questions about the role of the board, based on research mainly centered on for-profit organizations.*

The research literature clearly shows that having a powerful CEO creates the potential for him or her to abuse this position to extract personal benefits or engage in excessive risky activities. At the same time, the research also shows that (CE0) power is often critical to the successful completion of tasks and the achievement of corporate objectives (and nonprofit missions). To this end, powerful CEOs can ultimately be a success or a failure. Are shareholders (stakeholders of nonprofits) better or worse off with a powerful CEO?

While it is the role of the board of directors to oversee management, at some point the board must empower management to make decisions. Where should it “draw the line” between giving its CEO discretion and providing appropriate oversight? How much power is too much power?

My Response Related to Nonprofit Organizations:**

The board of directors establishes and monitors corporate policy. The board operates through the chief executive whether it be an ED or a president/CEO. The CEO, in turn, executes policy and is responsible for the prudent and creative operations of the organization. In this role, the CEO exercises leadership resulting in the effective and efficient use of board and non-board members’ time.

The Board’s Responsibilities:
Directs Management
• Establishes long-term organizational objective and outcomes.
• Sets overall policy affecting strategies designed to achieve objectives, outcomes and impacts.
• Employs the CEO
Judges Management Actions
• Robustly evaluates short-term (annual) and long-term performance of management
• Determines whether policies and strategies are being carried out, whether outcomes and impacts are being achieved
Approves management actions
• Critically reviews, approves or disapproves proposals in policy and strategic areas (for example, major capital needs or expenditures and major contracts)
• Provides formal recognition and acceptance of executive decisions when related to operational actions.
Advises management
• Acts in an advisory or consultative capacity on operations when sought by management
Receives information from management
• Regularly receives reports on the organization (e.g., performance, program development, external factors, concerns)
Acts as a public, community or industry resource to management
• Keeps the organization attuned to the external environment in which it operates
• Partners with the CEO to develop funding

Comments
This model attempts to “draw the line” by listing all the board responsibilities necessary to develop an effective and efficient nonprofit organization. All other issues not reserved for the board fall under the responsibilities of the CEO. Thousands of nonprofits have successfully adapted or adopted it. It provides for significant operational powers for the CEO that must be counterbalanced by fair and rigorous assessment, conducted annually, of the CEO and operational outcomes/impacts. The way the line between board and CEO is drawn also allows for a high level of nonprofit organizational professionalism, flexibility and building a trusting environment, with mutual respect for all involved. It also should engender a significant level of trust between the staff and the board, a significant requirement to maximize organizational impact. In summary, it allows a nonprofit to eliminate the “parent-child” relationship between board and management found in many nonprofits.

The line allows a new working environment with some different challenges related to maintaining board involvement and organizational formality. Personal gratification is more immediate for board members when they are working with operational rather than policy/strategic questions. AS a result under this model, board members require ongoing attention from the chair and CEO to heighten their motivation. For staffs, the relationships will become more formal, which may cause staff concerns. But this is a natural outcome for any growing organization.

In summary, there has to be a substantial level of trust between the board and CEO to delegate the level of operational powers described above.

*Is a Powerful CEO Good or Bad for Shareholders? (2012), Stanford Closer Look Series, November 13th.

**Eugene Fram & Vicki Brown (2011), “Policy vs. Paper Clips: How using the corporate model makes a nonprofit board more efficient and effective.” http://amzn.to/eu7nQl