Board of directors in NonProfit Organizations – Choosing Members

The primary role of the board of directors of an entity is to steward owners’ investments in that entity. I served on several boards of directors in many countries representing former Alcan Inc. Some were publicly listed, such as our affiliated companies in Japan (NLM) and Malaysia (Alcom). Others were non-public subsidiaries in Australia, Bermuda, Brazil, Canada, China, India, Jamaica, Korea, UK, USA, and elsewhere. Besides, I was on several nonprofit entities’ boards in Canada. Typically, a few days before board meetings, I received huge binders of “board papers” with data mostly irrelevant to assess the organization’s central performance. At those sessions, executives’ presentations showed things were wonderful, or results weren’t good, but better than similar firms. Bottom line: Interpreting data that management presented at boards of directors’ meetings challenged me. 

Members of the Board of Directors Must Understand the Business

Board of directors
Board of directors

I was one of two Alcan executives on the board of the US$4.5 billion public Japanese company, NLM, in which Alcan held a significant minority stake. Because we lived in Canada, understanding that business challenged my colleague and me. Therefore, we agreed that the only way we would grasp NLM’s performance was to move to Japan. So, we set up an office in Japan, not to interfere with day to day operations, but to enable us to represent Alcan’s interest more effectively. Happily, that approach worked well.

Meanwhile, early in my tenure on that and other boards, my colleague and I indicated to management the information the board needed and requested a simple, focussed set of metrics on one page.  When management provided those critical success factors, the atmosphere in meetings changed from a dog and pony show to an accountability meeting—a significant change.

Some Members of the Board of Directors Need Specific Skills

Often, I noticed needed skills didn’t decide board membership in for-profit and nonprofit entities. Instead, situational factors such as regional representation, influential local or national people, need for prestige, and so on, did. So, sometimes the right people weren’t on the board. My experience matches a 2015 survey of nonprofit’s board of directors by David F. Larcker et al. that reported the following, among other things:

Our research finds that, unfortunately, too often board members lack the skill set, the depth of knowledge, and the engagement required to help their organizations succeed. Nonprofit boards would greatly benefit from a more rigorous process for setting goals and measuring performance.

Other key findings of this study include the following:

  1. Too many directors lack a thorough understanding of the organization.
  2. Most boards lack formal governance structure and processes.
  3. Eighty percent claim to evaluate the performance of the executive director formally. However, 39 percent do not establish explicit performance targets to measure the executive director’s performance.
  4. Many directors are not engaged, do not understand their obligations.

Board of Directors Must Understand the Mission

Many studies show mixed results correlating mission statements with nonprofits’ performance. But a 2015 study concluded that “…organizations’ mission statements have a significant impact on organizational performance, and organizational commitment was a positive moderator in that relationship.” (Patel et al. 2015).

To be sure, board members need to understand the mission and the entity’s primary goals. Besides, they should be passionate about the mission, and set realistic metrics to monitor the CEO or executive director’s performance.

Still, the central governance issue is choosing board members. In 2006, Eric Hayden looked at five nonprofit health care organizations in Massachusetts that “succumbed to serious financial problems in the 1990s.”  His study concluded, arguably the obvious, that nonprofits should guard against two major structural problems. First, folks with potential conflicts of interest should not dominate boards. Second, a board’s allegiance mustn’t be misplaced. (Hayden, 2006).

Several studies suggest that the higher the number of internal members on a nonprofit board the less useful the board. Also, they show that where the CEO is a member of the board, his salary is about 10% higher than if he wasn’t. Even so, with the CEO on the board, it tends to focus more on fund-raising than monitoring the entity’s results. (Du Bois, C. et al. 2007). This finding fits my experience exactly.

Choosing NonProfit Board of Directors

Nonprofits must ensure board members have the right character, are passionate about the mission, are not in a conflict of interest, and understand their responsibilities and accountabilities. Further, to get an effective board they should apply the same diligence selecting board members as they do hiring a senior executive. That said, I suggest nonprofits consider these matters before choosing a board of directors:

Board

  1. Why does the organization exist?
  2. What’s the role of the board?
  3. What’s the individual and collective legal responsibilities of the board?
  4. Do board members need to carry out specific roles? If so, define them.
  5. How many members and what skills should board members possess? How many internal members, and what positions, if any, will the board allow them to hold? Interestingly, research shows the size of the board is not important when other areas are in place?
  6. What’s the relationship of the CEO to the board?
  7. What’s the compensation of external board members?

Ultimately the organization exists to fulfill a particular purpose–its mission. As well, it must have clearly defined values and goals.

Board Members

  1. Select members based on character first, and specific skills second. Even so, board members in a Christ-centred entity should have traits mentioned in 1 Timothy 3.
  2. Choose the best people for the board from a diverse group, but don’t try to fill a diversity quota.
  3. Each person should know her legal responsibility and commit formally to discharge them to the best of her abilities.
  4. Each potential member should understand that even if not paid, she must honor her commitments. Moreover, agreeing to serve means not having time to discharge board duties is not an acceptable excuse. Rather, it’s an absurd, subliminal deflection tactic.
  5. The chair of the board and each board member must commit to putting people first and fund-raising second.
  6. Christian leaders in nonprofits and churches tend to avoid conflicts, allowing difficult situations to fester for as long as possible. Therefore, bar from board leadership roles politically correct folks and those afraid to confront conflicts, gracefully and speedily.
  7. Provide training for each board member to explain the vision, mission, values, fund-raising approach, and strategy.

Other Board of Directors’ Issues

  1. Transparency: The organization must be open about activities except where confidentiality is essential.
  2. Predictability: Leadership should be predictable and not let money and situations lead and decide their actions; they must do what’s right always and deal with the consequences.
  3. Punctuality: Board members must respect everyone’s time.
  4. Meetings: Meetings must have starting and finish times, agendas showing individual’s responsible for each agenda item, and end with clear responsibilities and timeframes for follow-up items. It’s important to start on time and not wait for late arrivals so you don’t disrespect those who came early.
  5. Funding: The nonprofit entity must not coerce people for money. For example, it should not show advertising exploiting poor kids in fly infected places, or use similar situations to raise funds.
  6. Financial accountability: The entity must maintain proper books, accounts, and reporting systems. Even if not required legally, an independent professional should audit the books.
  7. Performance metrics: The board must agree a set of metrics (critical success factors) that captures the organization’s performance, and the CEO should report them clearly, concisely, and fluff-free, at each meeting.

Conclusion

Fundamentally, criteria for choosing members of boards of directors in profit and nonprofit entities are the same. Owners or sponsors must select people of character committed to the mission, and qualified for specific roles identified by the organization.

Nonprofit organizations can play a significant role in many areas of society: the arts, education, healthcare, and so on. However, in addition to needing professional management, each requires an effective governance structure rooted in a carefully selected board of directors. Too often these entities hire unqualified leaders who spend most of their time fund-raising and not taking care of the mission.

References

Du Bois, C., Caers, R., Jegers, M., De Cooman, R., De Gieter, S., & Pepermans, R. (2007). The non-profit board: A concise review of the empirical literature. Zeitschrift Für öffentliche Und Gemeinwirtschaftliche Unternehmen: ZögU / Journal for Public and Nonprofit Services, 30(1), 78-88. Retrieved from http://www.jstor.org/stable/20764647

Hayden, E. (2006). Governance failures also occur in the non-profit world. International Journal of Business Governance and Ethics, 2(1), 116-128.

Larcker, G et al (April 2015), https://www.gsb.stanford.edu/faculty-research/publications/2015-survey-board-directors-nonprofit-organizations

Patel, B., Booker, L., Ramos, H., & Bart, C. (2015). Mission statements and performance in non-profit organisations. Corporate Governance, 15(5), 759-774.

© 2017 Michel A Bell

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Michel A. Bell

Michel A. Bell is a former senior business executive, author of five books, speaker, and adjunct professor of business administration at Briercrest College and Seminary. Michel graduated from Massachuetts Institute of Technology with a masters of science in management. He is founder and president of Managing God's Money, a private mission devoted to teaching biblical stewardship of time, talent, money and other resources. Visit Managing God's Money

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