Corporate Governance Principles Make Sense to Nonprofits
A blue-ribbon group of public directors, people like Warren Buffett, has developed a nine page “manifesto” that presents commonsense operating principles for boards of publicly traded companies. Their objective is, “To provide a basic framework for sound, long-term oriented governance.” * My immediate response to the document was that about half of the guidelines can be easily translated into useful advice and/or caveats for nonprofit boards. The benefits as suggested by a Chinese proverb are, “A wise man learns from his own experiences, a wiser man learns from the experiences of others.”
Following is how I have applied this advice:
- In bold, I have taken “poetic license” showing how some of the principles might appear had they been written with a nonprofit board audience in mind. Examples: Customer was changed to stakeholder; profit was changed to mission.
- In italics, I have listed one important nonprofit issue that relates to the principle’s applications.
- Reviewing these bolded items and each their supporting comments should generate productive board discussions at board retreats/seminars and a check list for board change at other times. These modified principles and my suggested applications can also be used to generate discussions in graduate courses on nonprofit governance/management.
- Director’s loyalty should be to the external stakeholders and the nonprofit. A board must not be beholden to the CEO, management or staff. It is not unusual for nonprofit directors to assume that they represent the CEO, management and staff.
- It is important to recognize that some of the best ideas, insights and contributions can come from directors whose professional experiences are not directly related to the nonprofit’s vision. Charitable and human service boards tend to recruit directors from these ranks. Professional and trade associations need to expand their thinking in this direction.
- Collaboration and collegiality are critical for a functioning nonprofit board. While directors should have a modicum of passion for the nonprofit’s mission, recruiting independent thinkers, those who will not “go along to get along” is vital. Robust board discussions, with occasional “no” votes by some directors is a hallmark of a thinking board.
- Director candidates should be drawn from a rigorously diverse pool. It is not unusual for the pool of nonprofit candidates to be drawn from a stable of friends, family and colleagues of current/former directors, people who will be readily available. Recruitment committees need to be more creative.
- A nonprofit is more likely to attract and retain strong directors, if the board focuses on big-picture issues and can delegate other matters. A common problem with many nonprofits is that they retain the micromanagement culture of the startup organization long after it is an appropriate format.
Building Meetings & Operations
- An agenda focus needs to be on forwarding–looking discussion of the mission and its impacts. Nonprofit agendas quite often default to discussions of current operational topics. Perhaps a lead director (http://bit.ly/13Dsd3) is needed whose responsibility is to keep agenda topics on forward-looking items?
- The performance of the current CEO and other key members of management and succession planning for each of them needs to be on agendas more often. There is wide acceptance of the view that nonprofit CEO performance assessment can be improved and research data show that succession planning efforts for CEO and other senior managers are very modest. Senior management bench strength can be evaluated by the nonprofit board through an assessment of key employees and direct exposure to those employees.
- Significant risks, including reputational risks are critical items for the agenda. Nonprofit boards are traditionally conservative because they are responsible for tax, foundation or charitable resources. Risk levels of nonprofit boards “vary greatly depending on their sizes and other similar factors”. However the huge success of the Alzheimer’s Association with its “Ice Bucket Campaign” has given many nonprofits reason to review development risk taking.
- Standards of performance, such as maintaining and strengthening of the nonprofit’s culture and values, are clearly agenda items. Both for-profits and nonprofits have begun to establish behavioral outcomes as performance measures. Because there can be a big discrepancy between outcomes and impacts, many foundations and other donors are asking for impact evidence of performance, a significant challenge for many nonprofits.
- A board should be continually educated on the impacts the nonprofit is creating and changes in it mission arena. Board education is often delegated to the nonprofit CEO, who in turn places a low priority on it.
- As authorized and coordinated by the board, directors should have unfettered access to management, including those below the CEO’s direct reports. The principle was introduced by Sarbanes-Oxley in 2002 as a suggestion for public boards. It should also be a significant principle for nonprofit boards.
- Directors need to commit substantial time and energy to the role. Like business directors nonprofit directors can have personal liabilities for inadequate due diligence or due care. However, on top of these corporate responsibilities, nonprofit directors also need to be involved in the preparation of the Form 990 and be aware of the perils of violating the Intermediate Sanctions Act. http://www.icnl.org/research/journal/vol18iss1/index.htm
- A board should have a well-developed committee structure with clearly understood responsibilities. Nonprofit boards should be able to limit themselves to three to five standing committees, if meeting discussions center on policy and strategic issues. http://amzn.to/eu7nQl
- Board refreshment should always be considered to ensue that the board’s skill set and perspectives remain sufficiently current and broad in dealing with fast changing nonprofits dynamics. “But the importance of fresh thinking and new perspectives should be tempered with the understanding that age and experience often bring wisdom, judgment and knowledge.”