Whenever a large nonprofit gets into financial or other trouble, regulators and the public ask “where was the board?” Why did not the trustees step in earlier to head off the severity of the problem? Often the root cause of the trouble is a failure to adapt to major changes in the external environment. For example, a change in the economy, in the demographics of a major constituency or in the philanthropic environment. Just as often, the problem is a failure in execution, which is hard to see at the board level unless management reports it. The boards of most failing or severely distressed nonprofits exhibit a number of common characteristics, all of which are avoidable.
“I don’t know anything about this world.” Many trustees, even those very experienced in business or the professions, enter service on a board accepting the idea that they don’t know anything about higher education, or performing arts, or scientific research, or helping the homeless, or whatever is the focus of the nonprofit.
“You don’t understand how this world works.” In turn, when trustees ask questions based on their business or professional experience, the staff sometimes turns away perfectly legitimate questions by saying “that’s not the way we do it here – this is a nonprofit and we are mission-driven.”
The financial reporting system is different. Nonprofit financial reporting is different from ordinary GAAP and the onboarding process of many nonprofits does not educate new trustees about how it works.
Some trustees serve on a nonprofit board for social reasons and are not interested in being engaged in the short-term or strategic challenges faced by the management. They think of their function as primarily financial support and do not put in the time or effort to master the principal drivers of either the finances or the work of the organization.
Other trustees believe that their background and experience can be applied without change to the nonprofit and try to dictate on operational matters rather than focusing on oversight.
Some nonprofit CEOs and staff think of the board as something to be held at arm’s length rather as partners in a common enterprise. In turn, trustees sometimes think of senior staff as something less than senior executives and “management.” The result is a lack of communication and a resulting lack of alignment between the board and the staff.
Many nonprofits, even some very large ones, have poor processes for operational and financial reporting, which results in board members not getting the information required to perform their oversight function and ask the right questions.
Some nonprofits have extremely large boards, with as many as 50-75 members, which tends to diffuse responsibility and accentuate passivity at the board level.
A glance at these factors shows that they are interrelated, and each exacerbates the others. The result is often a relatively passive board, and board meetings become staff-driven dog and pony shows. The staff does not mention the worst-case outcomes of potentially serious problems, especially those that result from a failure of execution, until they are close to crises, there is little meaningful discussion of exciting but risky opportunities and alternative strategies. Sometimes many experienced business men and women and professionals do not prepare carefully for board meetings and do not insist on getting the kind of data and information they would demand on a private sector board.
When the president or executive director finally comes to the board with a crisis, the board’s first response is often “why didn’t you warn us about this?” The rejoinder is typically “why didn’t you listen to what I was telling you?” Then the experienced trustees often form special committees to oversee the details of operating matters – a micromanagement role for which they are not fully qualified because they have not mastered the “business” of the organization or its external environment.
How do you avoid the pitfalls?
Corporate boards have many directors who knew nothing about the industry when they first joined. But they are experienced in business or a profession and they undertake to learn the key drivers of the company and the industry and how they are affected by changes in the external environment. There is no reason why trustees of a nonprofit cannot do the same. They should do so, since they may be held legally and morally accountable if it fails.
If you join a large nonprofit board intending to be relatively passive, make sure that the key committees are active and qualified. Of special importance are the executive committee, the audit committee, the finance committee, and the committee most involved in the mission of the organization. As a rule of thumb, the larger the board, the more the actual oversight is carried out by committees. Ask to attend as an observer a few meetings of committees on which you are not a member. If you are not satisfied with the quality of the governance and you sense that the organization is not healthy, consider either speaking up and playing a more active role or resigning.
Insist on getting the data, information and reports that you need to understand the financial health of the organization and the extent to which it is achieving its mission. Materials relating to board meetings should arrive sufficiently in advance for you to be able to read and consider them carefully prior to the meeting. You should also receive reports in between board meetings.
If you are not satisfied with the management’s answer to an important question, or do not understand the answer, keep probing.
Make sure that the CEO has a clear vision of where he or she is taking the organization over the next 3-5 years and a plan to get there The plan should have metric goals and clearly stated qualitative goals, both coupled with dated milestones and strategies to achieve the goals. There should be written reporting, at least quarterly, on progress on the plan and an explanation of the remedial steps to be taken if the organization is falling behind.
The organization should have a risk management process to annually assess potential risks and both their likelihood and degree of probable impact. It should be approved by the audit committee and discussed with the full board at least once a year.
If you have serious doubts about the performance of the CEO or senior management, speak to the board chair about them.
Use theGovernance Questionnaire attached below as a checklist of issues to consider as you think about the way the organization is governed.
What’s the bottom line?
Service on a nonprofit board should be taken as seriously as service on the board of a well-run public corporation.