Board of directors in NonProfit Organizations – Choosing Members

The main task of the board of directors (board) of an entity is to steward owners’ stakes in that firm. It must rely on leaders to give members data on time to carry out this role. During my 32 years’ career, I served on boards in many countries representing my former employer, Alcan Inc, now part of Rio Tinto. Two firms were public: in Japan (NLM) and in Malaysia (Alcom). Other boards were private companies in Australia, Bermuda, Brazil, Canada, China, India, Jamaica, South Korea, UK, USA, and elsewhere. Outside work, I sat on a few nonprofits’ boards in Canada. 

Often, I got “board papers” in huge binders a few days before meetings. The volume of material didn’t allow a proper review of the firm’s performance in the short time before the meeting. At those sessions, executives always put a positive spin on poor results by stressing stressed better results than peers. They tried to take our focus from their operations to their peers. The message was: though we are not performing well, we are better than our peers. This presentation style made it more difficult to test the firm’s results. Data that management showed at board meetings always challenged me because there wasn’t enough relevant context. 

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. So, we agreed that the only way to grasp NLM’s performance was to move to Japan. So, we set up an office in Tokyo, not to interfere with day-to-day operations, but to enable us to represent Alcan’s interest better. That approach worked well.

Early in my term on that and other boards, my colleague and I showed management the reports we needed. We asked for a simple, focused set of metrics on one page. When they provided those critical success factors, the climate in meetings changed. Now, leaders had to account for what we said was vital for our job as board members. These sessions became accountability meetings—a significant change.

Some Members of the Board of Directors Need Specific Skills

Often, I saw that skills the board needed didn’t decide who would be a board member in for-profit and nonprofit entities. Instead, factors such as regional representation, notable local or national people, need for status, and so on, did. Thus, sometimes the wrong people were on the board. My experience matches a 2015 survey of nonprofit’s board of directors by David F. Larcker et al. that said:

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

Studies show mixed results correlating mission statements with nonprofits’ performance. But a 2015 study concluded:

“…organizations’ mission statements have a significant impact on organizational performance, and organizational commitment was a positive moderator in that relationship.” (Patel et al. 2015).

Board members need to understand the mission and primary goals of the firm. The mission should stir passion in each member. Otherwise, why is she on the board? Further, the board must set realistic metrics to track the CEO or executive director’s performance. This performance review is a vital part of the board’s stewardship role.

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

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

Choosing NonProfit Board of Directors

Nonprofit leaders and patrons must seek board members with passion for the mission. This is crucial. Vital, too, is having folks with the right character, and no conflict of interest. Board members must know their roles and most of all, their accountabilities. To get an active board, leaders and patrons must apply the same diligence when they choose board members as they do to hire a senior executive. That said, nonprofits should 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? 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?

The organization exists to fulfill a particular purpose–its mission. And it must have defined values and goals.

Board Members

  1. Select members based on character first, and specific skills second. 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

Criteria to choose board members in profit and nonprofit firms are the same. Owners or sponsors must select people of character devoted to the mission. This must be number one. Next, the entity should set base qualifications for special roles such as finance and audit. These skills with the right character must override other traits the board set for members. The goal is to recruit the best folks for the board.

Nonprofits play a vital role in society: in the arts, education and healthcare. But they need good leaders. Besides, each entity needs a valid governance structure built on a capable and active board of directors. Too often these entities hire unqualified leaders who spend most of their time fund-raising. This approach takes them outside the firm which operates sub-optimally. This leads to a vicious cycle: waste leads to greater fundraising, causing the CEO to spend more time away from the firm. In these conditions, a funds’ shortage is a blessing to get the CEO’s attention.

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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Stewardship in business

Michel A. Bell

Michel A. Bell is a former senior business executive, author of six books (including Business Simplified released in 2018), speaker, and adjunct professor of business administration at Briercrest College and Seminary. Michel is a Fellow of the Chartered Certified Accountants (UK), holds a Masters of Science in management degree from Massachusetts Institute of Technology and a Doctor of Business Administration honoris causa from Briercrest College and Seminary. He is founder and president of Managing God's Money.

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