Table of Contents
Nonprofit Boards: Unique Challenges and Differences
The Impact of Applying Corporate Models to Nonprofit Boards
Tailoring Governance Tools for Nonprofit Boards
The Makeup of Nonprofit Boards: Skills and Expertise
Financial Incentives: Contrasting Nonprofit and For-profit boards
Good Governance: Navigating Crises and Challenges for Nonprofit Boards
Investing in Effective Governance: Nonprofits' Dilemma
Unique Budgeting Challenges and Considerations for Nonprofit Boards
Accountability: Nonprofit Boards and Stakeholders
Linking Strong Governance to Organizational Success and Resilience
Assessing Board Composition and Skills for Effective Governance
Balancing Skills and Training for Non-Profit Board Effectiveness
Enhancing Governance in Non-Profit Boards: Strategies and Considerations
Nonprofit Boards: Unique Challenges and Differences
What happens when you take a model coming from well-resourced and highly professional industries and apply it to areas without the level of expertise or resources needed to implement it effectively? In most cases it doesn’t turn out how you hoped, and sometimes you end up worse off than before. This is the case for many non-profit boards that attempt, laudably, to improve their governance but with tools and methods developed and geared towards boards of large companies. Non-profits, sometimes referred to as charitable organizations or non-government organizations, are generally incorporated organizations that are set up for the good of some community and have a purpose other than generating a profit. They can produce a financial surplus, though any surplus funds must be used towards the work of the organization and not distributed as dividends. Ultimately non-profit organizations are very different from their for-profit counterparts. To be effective, non-profit boards need to work and improve in a way that is both suitable to their particular capacity and to helping their specific organization succeed.
The Impact of Applying Corporate Models to Nonprofit Boards
One of the most impactful differences between boards of most non-profits compared to the boards of most for-profit companies is the makeup of the board. The typical board member with the typical non-profit organization is not someone who holds an MBA or has an executive role as their day job. They more broadly represent the community in terms of education, professional background, and experience. While there are many great volunteer board members with strong business acumen, they are vastly outnumbered by peers with often little to no experience with financial oversight, risk management, human resources, strategy, or policy. This does not make non-profit boards worse, nor does it mean they necessarily have less capacity or potential, but it does mean they need different tools and approaches to improving their governance.
Tailoring Governance Tools for Nonprofit Boards
Non-profit board members are typically not compensated for their work other than for expenses (with very few exceptions) and most of them have no financial incentive at all in the organization’s success. For-profit board members, however, almost always have financial motives tied to their work as a board member. This is often in the form of compensation, and more importantly, their ownership in the company and the connection between good governance and their own personal wealth. Why do financial incentives matter? Well, it is generally not difficult to justify the added time and effort needed for good governance at the business level. Investing the time as a board member and the resources of the organization in training, governance reviews, evaluations, and board support staff is very reasonable if it will bring financial value.
The Makeup of Nonprofit Boards: Skills and Expertise
For the non-profit board member, putting the needed “extra” time into ongoing development, strategic retreats, and generative conversations is taking more time away from other priorities. While being on a for-profit board is not likely someone’s only job, it is a role with financial motivations tied to it and people will usually prioritize this work in a similar way to a regular job. But for the non-profit board member, their volunteer obligations are often deprioritized in favour of many other activities in ways that roles with financial incentives are not. Plus, far too many non-profit board members are recruited with the disingenuous promise that their commitment would be limited to a couple-hour long meeting eight to ten times per year. Such a limited investment does not allow for good governance let alone continuous board improvement and exploration of new governance tools and methods.
Financial Incentives: Contrasting Nonprofit and For-profit Boards
Non-profit organizations also struggle with investing the organizational resources required to have truly effective governance. Every dollar that goes towards board member development is one less dollar going towards the organization’s mission. Every minute spent on governance is a minute less invested in the operational work of the organization. Putting money and other resources into the board can be a very tough pill to swallow for most organizations and many organizations struggle to be able to justify these investments. But while good governance can be important for ongoing effectiveness of the organization, its true value may be in helping organizations weather threats and other challenging situations.
Good Governance: Navigating Crises and Challenges for Nonprofit Boards
The connection between good governance and managing crises has been well-documented in the financial services industry. Non-profit boards do not need to oversee the same kinds of risks as banks and insurance companies, but they do face frequent challenges. Managing through downturns in revenue, losing the senior staff member, regulatory change, labour strife. These are all major issues that have posed enormous challenges to organizations in the past, but challenges that strong boards with clear roles and the right tools are able to easier navigate.
Investing in Effective Governance: Nonprofits' Dilemma
On the topic of roles of the board, this is another area that non-profit boards differ in some key ways from their for-profit counterparts. Accountability for the typical for-profit board has traditionally been seen as primarily to shareholders (although this is rapidly changing). For non-profit boards, the accountability has traditionally been to a much broader range of stakeholders. Non-profits have many people who are impacted by the work of the organization, and impacted differently than shareholders of a for-profit company generally would be. There are clients and staff, partner agencies and collaborative groups. There are those who support the organization financially or through volunteering, and there are governments who heavily subsidize them. Many organizations count the community itself as a key stakeholder. Therefore, the boards of non-profits need to strive to be accountable in some ways to all of these stakeholders.
Unique Budgeting Challenges and Considerations for Nonprofit Boards
Budgeting in non-profits is also typically quite different from the average for-profit. The board of a non-profit is usually working with more predictable sources of revenue such as grants from governments and foundations, as opposed to sales of products and services. Nonprofits also generally have less flexibility in their budget schemes due to an often-disproportionate amount of the budget that goes towards salaries. Non-profit boards also do not need to worry about setting dividends for shareholders as all surplus funds of the organization stay within the organization to help it further its mission
Accountability: Nonprofit Boards and Stakeholders
What does this mean for integrating director development and the use of effective governance tools and methods by nonprofit boards? Overall, there must be the acknowledgment that capacity limitations are real and cannot be easily overcome. The fact that it is difficult to get more time out of board members will not change overnight. Yet boards can often do much more to engage and stimulate board members. They need to ensure that the work of individual board members bring value for their time and effort, both for themselves and the organization. Discussing the role of the board and individual board members can help them see the importance of the board’s work and keep them more engaged.
Linking Strong Governance to Organizational Success and Resilience
Another way to facilitate buy in for efforts to improve governance is to consider how to forge a clearer connection between developing stronger governance and a more successful and resilient organization. This can be challenging based on the limited exposure most people have to different organizations. What is going on in one board room may be very different from another and it is difficult to recognize the impacts of good governance. But ensuring a solid understanding of what good governance looks like, along with determining tasks and goals for the board can help better expose the work of the board and how it can mitigate risk and set good direction for the organization. Provide an opportunity to discuss past board experiences and consider how to avoid the bad ones and capitalize on the good experiences. Based on the experiences of most board members, the value of good governance will quickly become obvious.
Assessing Board Composition and Skills for Effective Governance
Boards also need to understand their makeup and the gaps in knowledge needed to be an effective board. They must determine what areas of expertise the board should be recruiting for and what areas of understanding the board should study up on as a whole. A Tool such as a board skills matrix that maps out identified skills that the board needs and gaps in key skills can be very helpful. Then the board can determine whether they want to train for the skills or recruit for the skills.
Balancing Skills and Training for Non-Profit Board Effectiveness
Non-profits will not have, nor do they need to have, a complete slate of board members with strong financial and business acumen. But most non-profit board members have little to no experience running a business or managing organizational financials, for example. Training for non-profit boards need to simultaneously meet them where they are at but also ensure a strong enough understanding of the topic to do their job on the board and, in this case, effectively scrutinize financial reports and business plans. There are numerous tools to help board members succeed such as mentorship for less experienced board members from board leaders, and using expertise from beyond the board on committees.
Enhancing Governance in Non-Profit Boards: Strategies and Considerations
Finally, non-profit boards must seek out tools and supports that are best suited to the non-profit sector or to smaller organizations overall. Complex tools and platforms that an organization has neither the time nor the ability to utilize are likely to be far more of a burden than they are worth. So what should non-profit leaders consider when trying to improve their governance?
Here are some tips
- Try to find tools that are geared towards non-profits, and small and medium-sized businesses
- Seek out experts and consultants with experience working in and with the non-profit sector
- Build network with other non-profit leaders to see what has worked for them
- Connect with your local volunteer or non-profit centre to see what they recommend
- Hold a robust discussion about the commitment of time, energy, and resources that can be dedicated to improving your governance
- Utilize work plans to spread governance improvement efforts over a stretch of time without missing out on key activities
There is no silver bullet for non-profit board improvement. Each organization is different and may require unique tools and methods for working. But adopting tools and methods developed and geared towards large businesses with resources, staffing, and incentives that greatly differ from the typical non-profit is a recipe for failure.
