The corporate governance spotlight that has shone brightly on public companies now is beginning to illuminate nonprofit boards. In the wake of external pressures to adopt the reforms outlined in the Sarbanes-Oxley Act, many nonprofit organizations are taking a much more disciplined approach to building and running their boards. Adding to the external pressures is the recent legal action brought forth by attorney generals in New York, Missouri and Illinois regarding nonprofit executive compensation, heightening the need for nonprofit boards to continually make the right strategic decisions.
The degree to which nonprofit boards are adopting best practices appears, however, to be somewhat dependent on the mission and size of the organization. Boards that historically have possessed a substantial amount of professional expertise, such as larger healthcare systems and academic institutions, may have less to alter when reviewing their corporate governance practices. “I think corporations could learn a lot from the more progressive nonprofit boards,” explains Bill Kreykes, former CEO of several major nonprofit hospital systems and currently the chairman of Trinity Health, a $5-billion nonprofit organization that runs nearly 50 hospitals and more than 360 outpatient facilities. “For years, Trinity has been conducting thorough board evaluations. We are constantly evaluating the board’s role, the effectiveness of committee charters and individual performance. This process has greatly strengthened the board and the relationship between the board and the CEO.”
While historically nonprofits have been very effective in developing a diverse slate of directors that reflect their constituencies, community and mission of the organization, a number of these boards may need to take a harder look at their board composition to support stronger corporate governance practices. Today, we are witnessing more nonprofit boards, like Trinity, embracing the same governance practices as public companies — with many evaluating current and potential directors to make certain the necessary business skills are at the table. In fact, we have noticed a surge in the number of nonprofit organizations turning to executive search firms to help improve the professionalism — both in composition and in best practices — of their boards.
Today’s nonprofit director
Unlike corporate directors, nonprofit directors must have a particular passion for the organization’s mission. But, increasingly, nonprofit directors must bring the skills and experiences required of a corporate director. How the best practices compare board by board, however, is dependent almost entirely on the board’s sector and mission. However, there are certain attributes and best practices that are ideal for all nonprofit directors to possess.
Foremost, nonprofit boards require directors who are personally compelled by an organization’s mission. “Nonprofit directors join because of their initial interest and commitment to the mission,” says Dr. Judith Rodin, president of The University of Pennsylvania and who has served on the boards for the Brookings Institution, Catalyst, Philadelphia Chamber of Commerce, Innovation Philadelphia, Aetna, AMR Corporation, Electronic Data Systems and Comcast. “This passion is critical, especially because directors need to act as ambassadors for the organization, which requires both a financial and time commitment.”
Along with a passionate commitment to the organization, today’s nonprofit directors need to possess a strong set of business skills, with a particular focus on finance as a direct result of Sarbanes-Oxley. The larger the board, hopefully, the more likely they will have the necessary expertise in audit, budgeting, finance, governance and diversity.
“The impact of Sarbanes-Oxley has been very positive for Trinity. The role of the CEO and the chair at Trinity has always been separated, but today we have a renewed discipline surrounding the audit committee,” says Kreykes.
Elizabeth McCormack, who serves on many nonprofit boards, including the MacArthur Foundation, agrees. She says, “The need for qualified directors to sit on or chair the audit committee has never been higher. No matter the size or sector of the nonprofit board, this understanding and knowledge is crucial.”
In the end, the similarities between what’s needed in a nonprofit director versus a for-profit director are greater than the differences. “My corporate board experience taught me that nonprofit directors, just like corporate directors, can be supportive of the mission, while also asking the critical questions about strategy and finance and evaluating if the board is doing its job,” says Dr. Rodin.
Challenges facing boards
While there are many nonprofit boards that are adopting the best practices of the corporate world, there are many others that are just beginning to review their composition and operating structure. Based on our experience, there are a number of obstacles that nonprofit boards often encounter when trying to enhance their governance practices.
First, resistance to change is high. What may serve an individual’s interest may not be best for the organization in the long term. This is especially true in organizations where nonprofit directors see their contributions as personal investments and they want to know their thoughts are being heard. If they perceive their voice is being taken away or diminished, they may be less likely to adopt the new practices.
The size of nonprofit boards also can pose a challenge to implementing change. Many nonprofit boards are quite large, with up to 50 to 60 members. In order to have a board that is run effectively — and to attract and retain key directors who can make meaningful contributions — organizations may need to reduce the number of directors.
This often is a sensitive issue, as organizations do not want to offend powerful donors and others who have provided support for the institution. In many cases, if the number of board members cannot be reduced, boards may need to reexamine the committee structure to ensure the majority of work is being handled effectively and efficiently. To better manage this issue, some nonprofit boards will meet only three or four times a year as a full board; whereas the executive committee meets five to seven times a year, working through many of the strategic decisions.
The final obstacle to embracing best practices in corporate governance is updating new skills when the board doesn’t change frequently. Just as with corporate boards, new skills are needed regularly for nonprofit boards, which require new directors to be added and others to be let go without making it disruptive to the organization. Some nonprofits manage turnover through strict term limits. Term limits not only allow more people to serve, but they also give boards the opportunity to review the types of skills and experiences that would best serve the board.
Managing transformation in board composition
In addition to overcoming the inherent challenges associated with improving governance in a nonprofit environment, the transformation of a nonprofit board also requires the support of the CEO and the chairman. Depending on the level of the board’s sophistication, there are a number of steps boards can begin taking.
- Retool the board: An often difficult and painful process, which requires a critical assessment of both board composition and process.
- Devise a split: Create a management board (one that handles the policy/oversight/hiring/firing of CEO) and a fundraising/ support board (e.g. “friends of the organization”).
- Outside expertise: Bring experts in on a short-term basis to work on specific committees. This is an interesting transitional solution when necessary skills are absent from the board; it’s also a good way to educate others sitting on the board. However, this is not a long-term solution and it most often occurs when compensation expertise is required.
- Staff support: Put staff and resources behind major board initiatives. Healthcare organizations and professional societies that operate more like a corporate board are well-known for utilizing these resources.
- Internal development: Implement board orientation and education for new directors. “Penn has a significant board orientation program. It is not good business to just parachute new directors into the organization — not only is it a negative experience for the new director, but it disturbs the flow of the meeting. We also assign mentors for new directors and hold board retreats every few years. We have adopted many of these programs as best practices from the for-profit sector,” says Dr. Rodin.
Attracting the right director
Given the evolving role of nonprofit boards, identifying and attracting the right director is crucial. When recruiting new directors, be cognizant of the following factors:
- Time: Nonprofit boards are notorious for frequent and lengthy meetings. To attract business-minded directors, boards need to reevaluate both issues to make sure they are in line with director expectations while not diminishing the required oversight.
- Passion: Directors have to be attracted to the mission and believe in it. They join because they are drawn to the mission, so it’s critical that the meetings are useful and mission-relevant.
- Prestige: Directors want to be part of a prestigious nonprofit organization; a board’s brand is very important. However, serving on the board of a nonprofit cannot be viewed and/or sold as a hobby; there needs to be a high level of commitment.
- The role of compensation: While not critical, as most “traditional” nonprofits do not remunerate trustees/directors, this may become more important in the future. Given the increase in responsibility and time requirements, both traditional and more disciplined nonprofits realize that director compensation may come into play.
- CEO: Believing in the CEO of the organization, in many cases, may be as important as the organization’s compelling mission.
Conclusion
The number of nonprofit boards that are starting to reexamine their board practices and composition continues to grow. Today’s nonprofit boards — from large universities to small human service or arts organizations — are embracing governance best practices and want to ensure that each director brings the necessary professional and business skills to the boardroom.
But as McCormack points out, “the increased scrutiny on nonprofit boards may cause some members to mistake their role. Rather than making sure that the CEO is managing, the board may try to manage the organization. This would be a big mistake.”
“The best way to avoid this situation is to be proactive — ensure that the right people are selected for the board from the very beginning,” concludes Kreykes. “We have taken this approach at Trinity and, as a result, our directors come to the meetings with a focus on the broad strategic challenges and issues facing the organization.”
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