Good Governance for Nonprofits

Developing Principles and Policies for an Effective Board

Authors: Fredric L. Laughlin , Robert C. Andringa
Pub Date: 2007
Your Price: $24.95
ISBN: 0814474527
Format: Hardcover

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Chapter 1

Got Good Governance?

All nonprofit boards have one thing in common. They do not work.
—Peter Drucker

Since you are looking at a book entitled Good Governance for Nonprofits, chances are that you are a board member, a CEO, or a staff member of a nonprofit organization. If so, you are in good company. There are almost two million nonprofit organizations in the United States, all of which have boards and most of which have someone functioning as the CEO. Tens of thousands of these nonprofits have sizable staffs.

While you may not agree totally with Peter Drucker's rather stark assessment of nonprofit boards, we suspect that you can think of areas where your board could be more efficient and effective. Here again, you would not be alone. There is no perfect board. Members and officers of nonprofit boards, assisted by authors and consultants, are training critical eyes on the structures and processes of their boards and coming away with lists of areas for improvement—in some cases rather long lists. The problem, therefore, given the usually limited human and financial resources of nonprofits, has become less a matter of what needs to be done and more a question of how one attacks this to-do list in a systematic way.


Four Organizations That Have Done It

Here are four nonprofit organizations whose boards were confronted with a list of improvements in their governance model. In Chapter 12, we have documented the course of action that each of them took to address its list. For now, we will simply introduce the four organizations and their situations.

These organizations have very different missions that affect the lives of very different constituencies. They are unlike in size, age, complexity, and geographical reach. The profile of their boards is also different, as are their bylaws. Yet for all of their dissimilarities, these organizations share the common experience of following a course of action that has led to marked improvement in the way their boards govern their organizations. We call that course of action a roadmap, and in this book we describe what it is, why it so effective, and how any nonprofit board can take advantage of it.


Who Needs a Roadmap to Good Governance?

Your organization may not match any of these nonprofits well. You may be on the board of a large hospital, a small museum, or a medium-sized boys and girls club. Your organization may have a staff comprising several hundred paid professionals or a handful of unpaid volunteers. You may be governing a mature organization or one that is just starting up. Your reach may be the world or simply your neighborhood. Your organization may be dedicated to growth or content to serve at its existing level. Whatever the profile of your organization, it deserves good governance—and the roadmap can get you there.

"What about 'working boards'?" we are often asked. "Our organization is a decent size, but we don't have staff, and we rely on the board members to conduct the programs, do the fundraising, even keep the books. We aren't a 'governing board' that needs to worry about the role of the board, the role of the CEO (which we don't have), or policies for this and that. Our board governs by doing."

Our response is that all boards are "governing boards" in that they share the same fiduciary responsibility for their organization. A working board is a governing board whose members also carry out some or all of its activities. Perhaps we can illustrate this more clearly by demonstrating the different roles that board members can play by using a simple analogy.


The Three Hats of Nonprofit Board Members

Figure 1-1 describes three "hats" that may be worn by nonprofit board members, a hat being a symbol of the role that the board member is playing at the time. The first of these is the governance hat, which is worn only when the board member is attending a board meeting or committee meeting. All board decisions are made while wearing this hat. This is the hat that you are wearing when you are looked at by the IRS and the state in which your organization is registered. These and any other regulatory agencies hold you accountable for how well you serve in your governance role.

Imagine that there's a hook on the door of your boardroom that holds another hat. When you as a board member walk out of a board meeting, you exchange your governance hat for your volunteer hat, which is essentially what you wear whenever you are outside board or committee meetings. In addition to your board duties, you may very well be a resource for the CEO and the staff, possibly providing personal counsel, offering a particular expertise, or just generally helping out. If you are a board member for an organization that has few staff members, you may find yourself volunteering often. Regardless, if you are not in a board meeting or a committee meeting, you are wearing your volunteer hat. And rather than the CEO working for you, as a volunteer, you are working for the CEO or her staff.

How about the third hat—the implementer hat? This is a variation on the volunteer hat in that the board member is serving in a direct staff role, not a governing role. The distinction here is that a board member wears an implementer hat when he is carrying out a specific task that the board has authorized him to do. For example, a board member wears the volunteer hat when he is helping the CEO in fund-raising, but let's say that the board appoints her, by board resolution, to actually be in charge of fund-raising because there is no one else to do it. For that specific task, the board member would be wearing an implementer hat.

For board members who essentially serve as the staff for their organization, it is important that they know what role they are playing at any given time. They work together as a governing board, then function more independently to implement the board's policies.

In summary, all nonprofit boards have the responsibility to govern. Some boards may require more of their board members, but none should require less. And it's that governance function that is the focus of the roadmap. Because all boards have a duty to govern, and because our roadmap serves the governance function, we believe that the roadmap applies to all nonprofits, regardless of their budget, size of staff, or complexity of operations. In other words, whether a nonprofit has many staff or no staff, at least the board members need to learn how to govern.

The next question is, how does one measure the quality of governance in a nonprofit organization? Further, is there a continuum along which a board can move its governance from good to great? There are several definitions of "good governance," which it may be helpful to explore before getting directly into the roadmap.


Defining "Good to Great" in the Nonprofit World

I do not consider myself an expert on the social sectors, but . . . I've become a passionate student. I've come to see that it is simply not good enough to focus solely on having a great business sector. If we only have great companies, we will merely have a prosperous society, not a great one. Economic growth and power are the means, not the definition, of a great nation.¹
Jim Collins

Over the past decade, few books have enjoyed the success of Good to Great, the immensely readable, valuable work by Jim Collins. The credibility of the book stems largely from a straightforward and robust technique for (1) defining "great" and (2) identifying those characteristics that great companies have in common. In describing the behaviors and characteristics of great companies, Collins uses catchy metaphors such as Hedgehogs and Flywheels as well as memorable labels such as Level 5 Leadership and BHAG (Big Hairy Audacious Goals). These terms have become part of the vocabulary in business classrooms and boardrooms. They have also served as reference points and rallying cries for leaders who seek the long-term performance results of the "great" companies.

Further, the Good to Great concepts were instructive to more than those in the private sector. It wasn't long before leaders, writers, and consultants dealing with nonprofit organizations began applying them to nonprofit issues and situations.² Four years after Good to Great, Collins published Good to Great and the Social Sectors, a monograph about relating the Good to Great concepts to nonbusiness organizations. He was prompted to write the monograph because he estimated that:

He goes on to say that it will be another decade before research similar to his study will support a definition of great in the social sector; but he adds:

The remainder of his monograph is a thoughtful application of his Good-to-Great concepts to the social sector. He illustrates how the same principles that characterize great for-profit companies can work for nonprofit organizations—even though Collins is careful not to claim that applying these principles will guarantee the same degree of performance improvement as he saw in the private sector.


Good-to-Great Governance?

The application of metrics to an organization's performance in the marketplace is one thing, but how does one go about measuring performance in the boardroom? In the Good-to-Great study of for-profit companies, the implication is that the leadership of the board and of the organization is often indistinguishable, and rightly so, as it is common practice in the private sector for the CEO of the company to also be the chair of the board.⁴ Therefore, as helpful as the Good-to-Great model is in giving us sound principles of leadership and organizational behavior, even in the nonprofit world, it offers little advice on nonprofit governance. We may learn from Collins what will lead to organizational excellence, but we are left on our own as to what will lead to excellence in governance, either in the for-profit or in the nonprofit world.

Nor are we given much encouragement from studies that are designed to answer the specific question of which model or checklist of actions is the most effective form of governance for a nonprofit organization. For example, a few years ago, an academic study summarized its finding this way:

Good Governance? Who Says So?

While there is no magic meter that will give us a reliable reading of quality of governance in the nonprofit sector, there is no shortage of material suggesting how to conduct an evaluation of a nonprofit board. Books, articles, and web sites abound with advice on how to improve nonprofit governance. Most of the material on evaluating governance, however, consists of lists of best practices. For example, two organizations that are well known and respected in the field of nonprofit governance are:

Governance Matters, formerly the Alliance for Nonprofit Governance (ANG), which serves nonprofit organizations in the New York City area with the objective of improving board governance by fostering an open exchange of ideas and information among a broad cross section of the nonprofit community

BoardSource, formerly the National Center for Nonprofit Boards, which is dedicated to increasing the effectiveness of nonprofit organizations by strengthening their boards of directors

Each of these organizations has developed a list of principles or indicators of nonprofit governance quality, which are summarized in Figures 1-2 and 1-3. Like so many consultants in the field of nonprofit governance, Bob has developed and refined his own list (shown in Figure 1-4), which we call the "Attributes of Excellence."

FIGURE 1.2. Twelve Principles of Governance that Power Exceptional Boards.*

1. Constructive Partnership

2. Mission Driven

3. Strategic Thinking

4. Culture of Inquiry

5. Independent Mindedness

6. Ethos of transparency

7. Compliance with Integrity

8. Sustaining Resources

9. Results Oriented

10. Intentional Board Practices

11. Continuous Learning

12. Revitalization

*BoardSource, Twelve Principles of Governance That Power Exceptional Boards (BoardSource: Washington, DC, 2005): website = www.board source.org

FIGURE 1.3. Nonprofit Governance Indicator Guide.*

1. Board Effectiveness (5)

2. Board Operations (8)

3. Strategic Planning (4)

4. Program Effectiveness (4)

5. Stability of Funding Base (5)

6. Financial Oversight (7)

7. Constituent Representation (2)

8. External Relations (4)

9. Evaluation of the Organization’s Operations and Impact (2)

*Taken from the following page of the Governance Matters® web site http://governance1.web132.discountasp.net/web/NGIG/print.aspx The purpose of the list is to assist grant makers as they assess the quality of nonprofits that may be seeking grants for their organizations. The numbers in parentheses show the indicators of good governance that are listed under each of the nine main categories.

While there are numerous similar lists from other organizations and publications, these three demonstrate what all these lists seem to have in common, i.e., they recite what good boards do. To illustrate this point, let's look at the BoardSource example and read some of the statements that BoardSource makes concerning its list of principles. In the preamble to its booklet entitled The Source: Twelve Principles of Governance That Power Exceptional Boards (The Source), BoardSource offers this encouragement: "Follow these 12 principles and advance the common good with uncommonly good work." The editors go on in the preamble to cite actions and behaviors of boards that they consider exemplary and then ask, "How does a board rise to this level? Are there standards that describe this height of performance?"

To answer these questions, BoardSource turned to a panel of experts, who drew on their collective experience and arrived at twelve principles that, in their view, characterize high-performing boards. As shown in Figure 1-2, these principles are written at a high, somewhat conceptual level, and even BoardSource calls them "aspirational." To help bring these principles to a more practical level, each of them is broken down into two segments: (1) how responsible boards practice the principle, and (2) what these boards use as a source of power. For example, a responsible board that practiced the principle of constructive partnership would (1) "delegate operations to the chief executive" and (2) use "trust, candor, and respect" as a source of power. The outcome would be a board that "faces and resolves problems early," which, according to the panel of experts, is one of several characteristics of exceptional boards.⁶

FIGURE 1.4. Attributes of Excellence in Nonprofit Governance.

An excellent Board commits to:

1. Work with the CEO so that the board and CEO do not compete. Rather they serve separate, complementary roles and function as partners in a trust relationship.

2. Adopt a clear mission, which it supplements with the values and strategies to accomplish its mission.

3. Select a CEO who is equipped to advance the mission within board established policy parameters. Then the board governs in ways that support, compensate, evaluate and, if necessary, terminate the CEO, keeping the best interests of the organization in mind.

4. Elect a chair who is able and willing to manage the board and to maintain the integrity of the structure and process that the whole board has determined is best, leaving management to the CEO.

5. Define the criteria for new members; then select, orient, train, evaluate, and reward board service for those who give their time, talent, and treasure.

6. Govern through policies documented in a well-organized Board Policies Manual (BPM) of 15–20 pages, which is constantly improved as the board learns and adjusts to changing internal and external factors.

7. Form committees that speak to the board, not for the board and that do board-related work rather than supervise or advise staff on their work.

8. Insist on great meetings, which include good staff material in advance, time for social interaction and learning, and agendas that are focused on improving the BPM. Oral reports are limited to allow at least half the meeting time for board dialogue.

9. Be accountable through legal, financial, and program audits; observance of the law; avoidance of conflicts of interest; assessment of results; self-evaluation of the board as a whole and of individual board members; and appropriate transparency in dealing with its stakeholders.

10. Pursue excellence by keeping board members forward-looking and focused on outcomes/results, on disciplining themselves, and on effectual change so that they recognize, appreciate, and enjoy the process of governance.

This last point illustrates how difficult research can be in the nonprofit world. At the end of the day, even the BoardSource panel of experts is left with a framework where its conclusion rests on its own consensus definition. An "exceptional board," the panel says, is, well, one that does exceptional things—like "faces and resolves problems early."

While academics may prefer the data-supported rigor of Good to Great, there is still much we can learn from lists of best practices in nonprofit governance. We believe, for instance, that all three lists mentioned here—Governance Matters's indicators, BoardSource's principles, and our attributes—are excellent points of reference against which to compare a nonprofit board. And remember that these are only three of scores of such lists, many of which would also be valuable for measuring quality in governance.

No, our concern is not so much with the lack of definition of "great" or "exceptional" boards, but rather with how one moves into that category, i.e., how a nonprofit board goes from good to great. To be fair to BoardSource and most of the other publications listing best practices in the nonprofit sector, the purpose of The Source is to list the twelve principles, not to tell people how to implement them. And perhaps BoardSource was thinking about the "how" when it published The Nonprofit Policy Sampler (Policy Sampler), which is:

The Policy Sampler is a reference book that discusses how board policies can be developed in some forty-nine different areas of nonprofit governance, which are assembled into eight different categories. The book comes with a CD of sample policies that can be tailored to a board's particular situation. It is an effective reference that will be useful to nonprofit leaders who want some help in drafting policies. In the end, however, the Policy Sampler goes only partway in moving the nonprofit board from good to great.

In its preface, the Policy Sampler says that:

The parenthetical comments "or should be" are not ours, although we certainly support their insertion and we wholeheartedly agree with the overall statement. In fact, it does well to describe the premise for the book you are now reading, because while the Policy Sampler gives plenty of good advice on how to write policies, it offers little guidance on how to develop a policy manual. In a sense, it is a list of ingredients without the recipe to show how the ingredients go together. If we were asked to edit the preceding quote from the Policy Sampler, we would say:

The operative term in our amended quote is "Board Policies Manual" (BPM), which, as we will explain in the rest of this book, is the key element in a plan to implement best practices in nonprofit governance. A BPM will never have the glamor of Collins's BHAG, but if it's incorporated into the roadmap that we lay out in Chapter 2, nothing we know of is more efficient in moving a nonprofit board from good to great.

© 2007 Fredric L. Laughlin and Robert C. Andringa.
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