Non-Profit Board Governance: The Elephant in the Room

Last week, I answered this question on LinkedIn posed by Frank G. Scarpaci of Project Designworks, a boutique management consulting firm headquartered in San Diego, CA.

What are the top three obstacles to effective nonprofit board governance?

My answer:

1. Board micromanagement because they don't trust management and perhaps they don't really understand how to manage and delegate.

2. Board members not understanding how non-profits operate and what their role is vis a vis management. Too often, Board members from the for-profit field believe they are smarter and more capable than the non-profit staff.

3. Chief Executives not being viewed as co-owners of the non-profit and respected as much as for-profit CEOs are respected. Non-profit CEO's are too often viewed as the "hired help."

My first two sentiments were echoed by most of the other 13 responses (see them at www.linkedin.com/answers/non-profit .

Lack of clear roles and expectations seems to be the primary obstacle to effective non-profit Board governance. This makes sense, given the history of non-profits - or charities as they were known originally. We basically are dealing with an anachronistic governance model that is based on condescension both to charity beneficiaries and charity staff.

When charitable institutions began in the mid-19th century, they were an evolution from volunteer efforts by wealthy men and sometimes women. In New York City, the first charity organization was the Association for the Improvement of the Condition of the Poor. Begun by a group of wealthy businessmen, the AICP grew out of "friendly visits" to poor families to identify and then ameliorate some of their problems as well as preach to them about the error of their ways. When these men realized they could no longer sustain their level of involvement, they began to hire women to carry out the visits, and they took on the role of Board of Governors. The role of that Board was to direct the daily work of the hired help. And being on this and other charitable Boards was very much like belonging to an exclusive club of insiders - socially desirable and prestigious, while not accountable to any larger group of stakeholders.

Other charities began with similar motives and assumptions about the role of the Board. Boards ran everything, and did not assume that their staff were professionals. It was only in the mid to late 20th century that charities became known as non-profits, and that staff were hired on the basis of their skills and expertise. While there were many causes for this - not least of which were emerging social issues that demanded attention and care - I believe Board members became increasingly unable to devote time to charitable work and the management of staff. It was necessary and easier to hire staff to which they could delegate the management of daily operations. Obviously, the Board members gave money to pay staff (as little as possible...) and to endow many organizations.

For example, the AICP evolved into the Community Service Society of NY which continues to this day funded in part by a multi-million dollar endowment. CSS has a refreshed mission - Fighting Poverty, Strengthening New York - and a highly skilled CEO (David R. Jones) and professional staff.

(For a great history of non-profit governance, see www.boardsource.org.)

In 1964, the American Bar Association drafted the Model Nonstock Corporation Statute, that changed the standards by which non-profit Boards operated to be similar to that of for-profit corporations. Boardsource says: "Nonprofits could do anything for-profits could do — except distribute their surpluses in the form of dividends." I'm sure this contributed to the growth of the idea that nonprofit organizations should be "run like a business." After all, if they are governed as corporations are, then shouldn't their management match their governance?

As non-profits proliferated and grew more complicated, they required more skilled managers. And professional managers disliked what they viewed as interference by Board members who could not possibly know much more than the surface facts about the organization's work.

This continues today, as non-profits grapple with society's most intractable and important issues, like hunger relief, housing, health care, education, violence prevention, youth development, child care, and more. Legal, ethical and practical concerns and mandates make the top management's work complex. Board members, who spend at most 10-20% of their time on charitable purposes, cannot hope to even begin to grasp the challenges and conundrums faced by management every minute of every day. Small wonder that executive leadership resents Board members who second-guess and question managerial decisions.

Further complicating matters is the radical cutback in government funding for many non-profits since the early 1980's. All of a sudden, non-profits had to get much better at raising money and delivering services, sometimes for a fee. And the primary role of Board members unofficially changed from overseeing management to raising money.

Yet the governance structure of CSS and every other non-profit remains basically untouched. Any Board member - regardless of his or her contribution level - gets an equal say in questioning management. No Board member is required by law to be a member of, knowledgeable about or accountable to the constituency served. Board members resist raising money until they are practically forced to give, get, or get off - usually by staff with reluctant support from the Board leadership. Giving and raising money How Board members are selected is usually a matter of who volunteers, who knows whom, and who has the most clout and access to resources.

The current governance system essentially requires nothing of Board members other than their willingness to show up at some meetings. Yet somehow this group of people is invested with amazing responsibility and power - both far greater than that possessed by paid staff. In fact, the Internal Revenue Service recommends an active Board of Directors:

The Internal Revenue Service encourages an active and engaged board believing that it is important to the success of a charity and to its compliance with applicable tax law requirements. Governing boards should be composed of persons who are informed and active in overseeing a charity’s operations and finances. If a governing board tolerates a climate of secrecy or neglect, we are concerned that charitable assets are more likely to be diverted to benefit the private interests of insiders at the expense of public and charitable interests. Successful governing boards include individuals who not only are knowledgeable and engaged, but selected with the organization’s needs in mind (e.g. accounting, finance, compensation, and ethics)... Organizations that file Form 990 will find that Part VI, Section A, Lines 1, 2 ,3, and 7 ask questions about the governing body.

Unfortunately, there is no oversight of non-profit Boards to ensure that this standard is met. The IRS does no monitoring except of whether an organization pays its payroll taxes and files its 990. Only non-payment of taxes gets an organization in trouble, though - and Boards are not held responsible while paid staff are. States' Attorneys General have legal oversight of non-profit fundraising but not of their Boards. Secretaries of State (or similar officials) approve incorporation, including checking to make sure there are the requisite minimum three incorporating Board members. But those Board members can be anyone over age 18. After incorporation, no one checks on anything.

There have been numerous scandals involving misuse of funds by paid executives of non-profit organizations. When those arise, other Boards of Directors tend to go into panic mode and increase the second-guessing and micro-management, as if this will help protect them from such embarrassment. For that really is the only consequence for Board members - embarrassment that they didn't have adequate oversight systems in place. Directors & Officers insurance protects Board members from most personal liability for any financial damage. There are no shareholders to vote Board members out of office. Consequences only come when other civic leaders and elected officials step in and demand that Boards resign and/or remake themselves. But no one can force these Boards to do that. If they refuse, there is no recourse. The only real punishment that can happen is for donors to pull out their funding or cease making contributions. I suppose there's a lot of good to a "market-based solution" yet somehow there's something wrong about so much money being entrusted to such unqualified people who have zero accountability.

John Carver developed a very interesting governance system, the Carver Policy Governance Model. I sat on the America's Second Harvest Board when it adopted that model. And in so many ways, it is a great model. Here's a description from the Carvergovernance.com website.

Policy Governance® is an integrated set of concepts and principles that describes the job of any governing board. It outlines the manner in which boards can be successful in their servant-leadership role, as well as in their all-important relationship with management. Unlike most solutions to the challenge of board leadership, its approach to the design of the governance role is neither structural nor piecemeal, but is comprehensively theory based. The model covers all legitimate intentions of corporate governance codes (including Sarbanes-Oxley), but in a far more comprehensive, theory-based manner.

In contrast to the approaches typically used by boards, Policy Governance separates issues of organizational purpose (ENDS) from all other organizational issues (MEANS), placing primary importance on those Ends. Policy Governance boards demand accomplishment of purpose, and only limit the staff's available means to those which do not violate the board's pre-stated standards of prudence and ethics.

Researchers Barbara E. Taylor, Richard P. Chait & Thomas P. Holland wrote in the September/October 1996 Harvard Business Review (“The New Work of the Nonprofit Board,” p 36):

“Too often, the board of a nonprofit organization is little more than a collection of high-powered people engaged in low-level activities. But that can change, the authors say, if trustees are willing to discover and take on the new work of the board. When they perform the new work, a board’s members can significantly advance the institution’s mission and long-term welfare. Doing the new work requires a board to engage in new practices. First, the board must go beyond rubber-stamping management’s proposals and find out what issues really matter to the institution.”

Taylor and colleagues characterise this “new work” as requiring finding out what matters which means board and management together determining the issues and the agenda, making the CEO deal with big ideas, having the board understand who the important stakeholders are and developing relationships with them, consulting many sources of knowledge and information, board and management together deciding what should and can be measured and what can’t and needn’t be and above all organising around and acting on what matters and not on what doesn’t! They also observe that many boards are too prone to focus on others for resisting change when they themselves are no different. Correctly they assert that entrepreneurs and industrial captains are seldom effective because they are unused to working with others cooperatively.

As the non-profit sector continues to grow, it is attracting more and more people who want to "make a difference." Many start on Boards and end up as staff. All of them say the same thing: "I never knew what a pain in the *** a Board could be! I apologize for all I did to staff." I wonder if there ever will be a non-profit governance structure that makes sense for all involved and affected parties.

PS Des Griffin from Australia has some interesting things to say about museum governance.