Do Today’s Business Leaders Make Effective Nonprofit Directors? Revised & Updated

Do Today’s Business Leaders Make Effective Nonprofit Directors? Revised & Updated

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. (See: Nonprofit Board Crisis.com)

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. Similar cases abound 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 and micromanagement.

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 do 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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7 comments

  1. Thanks for this piece, Eugene. I have worked in and with plenty of orgs and since NYC is so heavily weighted to the financial sector, I always got taken through my paces with boards of larger organizations. Truly operated like a business. In smaller boards, I did notice top business leaders being a little more relaxed about things.

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    1. Having worked in NY, I know it is a unique culture and understand that the financial group on its way up may want to show prowess for networking purposes. One anomaly, the last time I checked, the CEO of Carnegie Hall still had the ED title!! Thanks for extending the discussion.

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  2. What are the duties of a non-profit board member? Does the member have the tools to do the job? Does the member have the character to commit the time and effort to the organization to conscientiously carry out his/her duties? Most non-profit boards upon which I have served have had a mix of business leaders, practicioners and donors. Business leaders should have a great deal to contribute to the fiduciary responsibility of the board. Business leaders who have a passion for the mission have been the most effective board members with whom I have had the pleasure to work. Undoubtedly some of them are there for the wrong reasons and are less committed and engaged. However it is meaningless to lump them all into a single category and question their collective value. I would hate to think where the non-profit boards would be without the business leaders who dedicate their time and treasure to making them successful.

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    1. Bill: Coming from a business background, I agree. However, nonprofits have a problem separating the wheat from the chaff on their boards and even when they do, hesitate to remove the chaff because it may create interpersonal conflict.

      You alsomay be interested in these articles and links, if you haven’t already seen them.

      Blog site http://bit.ly/yfRZpz Book: http://amzn.to/eu7nQl

      http://bit.ly/OvF4ri http://bit.ly/13Dsd3v

      frameugene@gmail.com
      The nonprofit governance model in the book is based on: building trust between the board and management, eliminating redundant board committees; eliminating board micromanagement; focusing the board on policy & strategy and having a robust board evaluation focused on outcomes and impacts, not processes. It has been adopted or adopted by thousands of nonprofit boards.

      Many ways book can be used: Adopt or adapt the model; Reference source for board issues; Training tool board development; Motivational tool for director engagement; Reference to understand board governance & compliance obligations. A leader’s guide is available for the book for those who want to use it as a base for collegiate/ continuing education classes or for short seminars that appeal to board members and CEOs.

      BTW: My partner on the book is a professional writer. The material in the book is however, is based on my extensive field experiences as a NFP board director and consultant. All examples reported have a fact base without embellishment. The material is presented in story line format for interesting and easy reading.

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