Governance

• Governance

          -What is governance?

The two roles of support and governance encompass different tasks. In the role of supporters board members strive to ensure the success of the organization. Boards raise money, bring contacts and clout to the organization, provide special skills such as in law or accounting, and act as ambassadors to the community. The many books, articles and seminars on the subject testify to the emphasis on helping boards help--on strengthening organizations by means of board assistance.

The governance role, on the other hand, has as its goal protection of the public interest. Governance responsibilities for boards include selecting the top executive (the Chief Executive Officer) and assessing his or her performance, reviewing and authorizing plans and commitments, ensuring compliance with legal and contract requirements, and evaluating the organization''s work.

Both of these board roles are distinguished from that of management, the province of the Chief Executive Officer.

          What is the role of governance?

In the aftermath of every "nonprofit mismanagement" news story is the question: Why didn''t the Board do something? Yet the boards of the United Way of America, Covenant House and others did not do any less than most nonprofit boards. The reality is that most nonprofit boards are ineffective in their governing function. Only when gross mismanagement occurs does a failure at governance come to the fore.

The overlooked reason is that the prevailing "team" model for the relationship between boards of directors and their staff is only half of the story. "Team" members are understood to bring different skills and play different roles to support and build the organization, working toward common goals. But while board members should and do act as supporters and builders, they have another role to play as questioners and monitors of the organization. As part of the team, the board stands with their well-intentioned organization as it operates in a demanding world. In contrast, in their governing role, the board must stand outside the organization and hold it accountable to the public interest.

Both these roles--supporting and governing--are critical to effective work by nonprofit organizations. Rather than try to eliminate the contradictions and tensions of their governance role, boards must find techniques for strengthening their independence and creatively using this tension for the good of the organization and the purpose it was created to serve.

          What is the role of governance in planning and budgeting?

The planning process on the board of a nonprofit mental health clinic provides an instructive example of board governance under the conventional model. The last five years have seen large numbers of nonprofits develop strategic plans. Boards struggle with mission statements, goal statements, outcome statements. They try to "set program directions" and program objectives. Through examining this process, a more realistic and limited definition of the board''s governance role can be developed.

         Some of the factors mitigating against meaningful board planning include:   

• The board members are "lay," neither mental health professionals nor clients of the mental health clinic. As a result, they do not bring with them independent experience with the field, issues surrounding case management or licensing, funding opportunities and client needs.
• Board members from corporations, small business and churches seldom have the time to develop a deep enough grasp of the organization''s strengths, weaknesses, and environment to make informed planning decisions.
• Many key decisions have in effect been made by staff already, in response to funding cuts, new licensing requirements, or the opportunity to hire a person with unusual qualifications.

As a result, planning by the mental health clinic board tends to devolve into either a minor re-working of staff-made plans, or simply a mechanism for organizing the board''s supporting role in implementing the plan. This latter is not unimportant, but it is not governance.

A parallel dynamic in the budgeting process was pointed out by John Carver in Nonprofit Management and Leadership. The budget approval process tends to lean either towards minor revisions of staff-made budgets or to rubber stamping. The conventional budget approval process often leaves board members with the uneasy feeling they have approved something they don''t fully understand.

To balance the dual roles of governance and support roles in planning and budgeting, the board needs to ask a different set of questions.

First, rather than attempting to develop the plan, the board should focus on the quality of the plan. Boards should ask what information was used in planning, and require clearly stated assumptions about the most critical issues facing the organization and clearly stated strategies for dealing with these issues. What will be accomplished? How will we know? Are these the right things to be accomplish? Why? One doesn''t need to understand internal combustion to make a sound, informed decision about which car will best suit your transportation needs and meet your budget. The board is buying a plan and a budget; it must be able to determine whether it is getting the plan that will best meet its organization''s needs.

Second, once the board has "bought" the plan, and it delegates management of the plan to staff, it needs to see what it is getting for its money. This involves careful evaluation, oversight and monitoring of the activities and results achieved.

To do a good job of monitoring, the board should supervise independent program evaluations, and contract independent management evaluators as well. In other words, the board needs to acquire independent information, a "second opinion."

        What are some practical ways to strengthen governance?

The board-staff relationship is a paradoxical one. When acting in their governing role, the board must stand above staff and be the "boss." But when acting in their supporting role, board members act to support and assist staff-led work.

Some boards become so excited about their roles as governors that they mistake governance for close supervision of management and begin meddling in minor management affairs. In other cases, as boards govern more, they shirk their supporting role. The challenge is to fulfill both roles, not simply switch from one to the other.

In short, boards have some inherent limitations in their ability to govern, including lack of time, lack of familiarity with the field, and lack of material stake. These limitations have been supplemented by the sector''s nearly exclusive emphasis on the board''s supporting role and by a human tendency to avoid conflict. A first step towards an effective board is acknowledgment of the paradox, and the need to perform both functions equally well. A failure to govern as well as support is a transgression both against clients and the wider community.

            Practical ways to strengthen governance:

1.  Have auditors and program evaluators report to the board. Agencies frequently hire two types of independent evaluators: CPA auditors and program evaluators. But in both cases these independent professionals are typically chosen by staff (often with just a cursory approval by the board), report to staff, and work as partners to staff in the staff''s relationship with the board. Instead, such evaluators should make their reports directly to the board and to the staff. Auditors should be selected by and report to the board or the board audit committee.

2.  Hire independent management evaluators. In addition to auditors and program evaluators, boards need unbiased sources of information about management as well. One of the most difficult tasks for boards is the evaluation of the CEO. On one hand a board can''t interview staff about their opinions, but on the other hand, problems are created when a board obtains all its information from the person being evaluated. An independent evaluator might interview staff, and, for example, if there were several allegations of sexual harassment, would report to the board that such charges exist.

3.  Make governance an explicit part of meetings. Boards should affirm their responsibilities in both support and governance. Board agendas should be clearly marked "Governance Items," and "Supporting Items." Among the qualities we should seek and reward in board members are critical thought, discernment, questioning attitude. When someone raises an objection or concern, or votes against the majority, the board president should make a point of going up to that person and expressing appreciation for the seriousness and courage to make the point.

4.  Consider board stipends. To give a signal about the importance and seriousness of board work, we should take another look at the corporate practice of payments for board service. Much of the nonprofit sector has summarily dismissed such stipends: isn''t the board supposed to raise money? Some large nonprofit institutions already pay board members $200/meeting, but smaller organizations could consider small stipends such as $15/meeting. Such stipends reimburse board members for expenses, and demonstrate visibly that the agency places a real value on board support and governance. (Some board members may choose to contribute their stipends back to their organizations.)

5.  Consider a paid secretary to the board. Local government councils and commissions often have their own staff, separate from the agency staff that reports to the Chief Administrative Officer. Boards of many nonprofits have far-reaching responsibilities, and board officers may not have personal secretaries they can assign to board support. A paid board secretary, perhaps working only a few hours a week, can act as the board''s facilitator, reminder, educator. Duties might include: board correspondence, obtaining information from staff or others at board request, clipping from professional journals for the board, minutes and follow-up for the board, meeting arrangements, and helping new officers with their responsibilities. Having their "own" staff can help board members be better supporters as well as governors.

6.  Recruit governors. When recruiting, boards should seek members who are good governors as well as those who are good supporters: people who know clients as well as people who know philanthropists, people familiar with nonprofit management as well as those familiar with business, operational volunteers as well as fundraising volunteers, people who ask critical questions as well as people who cheer. A diverse board such as this will keep the agency rooted in the world it serves as well as in the world in which it raises funds. In many cases, governors and supporters may turn out to be the same people once governing responsibilities are recognized and valued as much as supporting responsibilities are.

• Boards/Board Members

        Why don't boards govern all the time?

              Boards govern in CRISIS

Despite the obstacles and uncertainty, boards strive to perform their governance roles well. They make valiant efforts to read and understand financial statements. They listen attentively to reports about client-centered methodologies and new x-ray machines. They give up Saturdays for board retreats. When agencies are in crisis, boards go further. They give up weekends to attend emergency meetings where hard questions are asked; they sort out financial problems, and meet with disgruntled funders and clients. They seek out a wide range of informants: funders, staff, colleagues in the field, and members or other boards. When serious charges are brought to boards about CEOs, boards often hire independent investigators or analysts to report on charges of sexual harassment, racial or gender discrimination, alcohol or drug abuse, or mis-use of funds. In crisis, boards realize that while they can''t manage, they must govern. And to do so they need information sources that are independent of executive staff; they need their own, diverse channels of information.

If boards can act to overcome some of their limitations and act effectively as governors in time of crisis, what are some reasons why they don''t act that way in normal times?

             And the rest of the time?

When Kenneth Dayton drew a line between governance and management in his famous paper, "Governance is Governance," he called for boards to stop meddling in the management of agencies. If anything, boards have taken his sound advice too literally. These days boards are reluctant to call staff to question about anything.

Some reasons why boards don''t govern all the time include: lack of time, lack of independent information, and lack of familiarity with the "business." But in addition, another important factor is at work: a desire to avoid tension and conflict.

When boards act in their governance and oversight roles, uncomfortable questions may be asked; tensions may enter the room. It takes a lot of nerve for a board member to challenge a staff recommendation in a board meeting. New board members are often quiet, waiting until they know more before speaking up. But long-time board members too are reluctant to appear adversarial, not "with the team."

In fact, when asking probing, "tough" questions, board members may feel guilty. Is it fair to question staff competency in fundraising when I''ve only made an average contribution myself? Is it being distrustful to ask for a list of salaries and comparable salaries in similar organizations? Does my admiration for a competing organization''s programs reflect a lack of loyalty to my own organization?

A subtle cause of this avoidance of conflict is the emphasis on a smooth working partnership. Boards often view tension as a symptom of an illness which everyone must work to avoid catching. Conflicts should be smoothed over. Staff frequently see board members with serious questions as obstacles at best, enemies at worst. (This is exacerbated when board members who don''t do much as supporters still want to ask questions.) As a result, some boards neglect this responsibility all together and act as a rubber-stamp for the director. Just as often, boards will allow one or two members to be the chronic complainers without allowing them any real influence.

The wider nonprofit community has colluded with this avoidance through the scant attention given to the governance role in books, academic papers and other management literature. A small industry has grown up around board training and consulting. While consultants and trainers have done a great deal to help boards raise more money, they have done little to help boards be more effective as governors. One reason is that they have been hired to help the board support the organization, not to help it govern.

In crisis, the emphasis on a smooth working relationship takes a back seat to the need for action and straight answers. It is "okay" in a crisis to ask tough questions. In normal times, boards need to learn how to use the authority they are willing to assert in times of crisis.

A second reason boards don''t govern is that, at least narrowly speaking, it is not in the interest of executive staff to have an active, governing board. Supporters help the manager get the job done; governors often make the job harder. The governance role is an outsider''s role, holding the organization, and specifically the executive staff, to high standards of performance. While most nonprofit managers work hard to do a good job, it is not in any manager''s personal interest to make her own job harder.

Finally, except very infrequently, the consequences for inadequate governance have not been borne by nonprofit leaders as individuals. The most extreme consequence for poor governance is organizational failure. However, board members are unlikely to have their careers or status in the community affected as a result of organizational failure, and the executive director can usually find another job. The big losers are the people or community purpose the organization was designed to serve. Nonprofits are often perceived as weak and struggling. Supporters are recruited to help it survive, not to rein it in. In short, there has been no one holding boards accountable: a lack of governance hasn''t really mattered to board members as individuals.

       What's wrong with the "ideal" board member?

When most board members and executive directors dream of their ideal board member they envision someone who contributes money, obtains contributions from others, helps the organization get media coverage and political contacts, bring specialized expertise, and helps diversify the board''s composition. This ideal board member also identifies with the organization, is liked and admired by staff and other board members, "fits in." These characteristics describe a board member who can help provide the critical support agencies need to succeed.

But the very qualities that make board members good supporters are often qualities that limit their ability to carry out their governance responsibilities. In particular, board members are recruited to bring assistance and skills from other sectors of society, and are typically unfamiliar with both the program field and with the business of nonprofit management.

Because board members typically come from outside the program field, they are limited in their ability to know what trends, factors and technologies exist in the field; in short, they are limited in their ability to plan, to evaluate, to determine strategies, to see whether they are achieving success. For example, board members of a homeless shelter for youth are unlikely to know what similar programs serving disadvantaged youth are offered by other local agencies. Board members of a mental health agency may not be aware that the treatment field is moving away from their agency''s methods. Board members are typically informed (by staff) about their own programs, and often less aware of work done by overlapping, competing organizations.

A different problem is posed by unfamiliarity with nonprofit management. Nonprofits are a fundamentally different type of business from either large corporations or small businesses. For example, a restaurant losing money all year can''t hope to make it up with a big fundraiser or grant at the end of the year. A manufacturer can drop a product line without the ill social consequences of a social service agency dropping a service. Business people from the private sector have many skills to offer nonprofits, but expertise in nonprofit management is not always one of them. In particular, three areas important to nonprofit success are unfamiliar to business people: volunteer management, indirect cost rates, and financial strategies based on contributed rather than earned monies.

One additional limitation on board effectiveness is simply the lack of time that board members have to work with the agency. Board members are generally achievers with many responsibilities. Even a dedicated board member finds it difficult to attend board and committee meetings, study materials, and attend organizational functions. In response, organizations try to keep meetings short and have fewer of them per year. Yet the assumption continues that meaningful planning and governance can take place on a board that spends only a few hours a month considering the issues.

        Are corporate boards any different?

Boards of directors governing for-profit corporations face many of these same obstacles. They are busy and short of time; they lack familiarity with the field, and they may not be managers. The question was posed to a partner in a venture capital firm who sits on five corporate boards in which her firm has an equity interest. How does such a board member tell if the company is well managed? Although she doesn''t know as much about microchip production or about the market for frozen pizzas, she must act to direct and oversee the growth of the company.

Her answer: because of her unfamiliarity with the field and its markets, she reads trade journals and industry publications. To supplement the information received from management, she reads reports from consultants and analysts hired to assess the company''s operations. She uses all the means available, including informal impressions from walking through the plant or a chance conversation with an employee on the line, to obtain independent information. She follows up on rumors of mismanagement or takeovers. In short, she keeps her eyes and ears open all the time for information. With $1 million of her firm''s money invested, she makes the time and gets enough information.

Corporate boards have one important advantage over nonprofit boards in their oversight, governance role. They have two ready measures that can be used to measure performance: profit and market share. In contrast, successful performance in a museum, drug treatment program or family counseling program is much more elusive.

Perhaps a bigger difference though is that corporate board members like this venture capitalist also have a material stake in the success of the organization. If nonprofit board members each had $100,000 of their own money invested in their own organizations, would they find more time and more information?

        Do boards ever fire Executive Directors?

You''re on the board of an organization where some of the board members--including yourself--are increasingly wondering whether your executive director is really up to the job. The Program Director has made some "off-the-record" comments about the executive director to some of the board members. You feel like you need to do something--but you don''t want to get into a big battle. It would help if you understood more about whether and how organizations ever fire their executive directors.

Sometimes it is necessary for a board to fire the executive director, and a board is to be commended for taking the responsibility of ensuring that the organization has the right CEO. In rare occasions everyone on a board agrees that the executive director should be fired, such as in instances of embezzlement or unethical behavior. But more often, over time board members increasingly get indications that the director is either not doing the job or causing problems for the agency.

The prospect of open conflict with the executive director is so dismaying that many board members who are dissatisfied with the director''s performance choose instead simply to resign when their terms expire. Dissatisfaction with the executive director often appears first as rumblings, such as a staff member complaining to a board member about morale, or committee members confiding their concerns to one another.

Now that such rumblings have appeared, the board should hold an executive session and establish an investigative committee to clarify the content and extent of the dissatisfaction, and determine what general approach is appropriate. If, for example, there are rumors of sexual harassment, the committee (or a consultant) can interview staff and volunteers and determine whether the rumors are frivolous or whether they require a more formal investigation. Or, the committee may find that the executive director simply doesn''t understand the approach the board wants to see taken. In such an instance the board may choose to set up a series of meetings with the executive director to clarify directions and improve communication.

If you find you have strong reservations about whether the executive director''s performance is satisfactory, the board should establish a committee to work more closely with the directory in a supervisory capacity. Beginning with letting the executive director know the extent of dissatisfaction on the board, the committee can document the problems and take steps to improve the director''s performance.

If performance doesn''t improve over time, and the director is fired by the board, the ongoing documentation can help deter a lawsuit against the agency by the former executive director. No level of documentation can guarantee that a lawsuit won''t be brought, but an agency holds a stronger position in court and in the community if personnel policies have been followed, if steps have been taken to improve performance, and if those steps are documented as having failed.

If, after appropriate investigation and deliberation, a board feels that the executive director should leave the organization, it may choose first to have the board officers approach the director and suggest that a resignation would be welcome. Many executive directors under pressure prefer resignation to being fired, and some board members feel that a resignation leaves the organization in a better light than termination does.

Whichever is chosen, board action to terminate or to accept a resignation should be put into the minutes. The board should document whether there is any severance pay, any remaining tasks to be completed by the departing executive director, and close any other financial relationship. The board should develop a straightforward explanation for the resignation which can be communicated to staff, volunteers, funders, and others in the community.

         Should an Executive Director be a member of the board?

You''re hiring a new executive director and your first choice wants to be a member of the board. She feels board membership will give her the stature she needs to represent the agency in the community. Some board members are against the idea, while others (mostly corporate folks) think it''s fine. Should the executive director be a member of the board?

If you grant her wish, your new executive director might regret being a member of the board. If, for example, your board is split on an issue, her vote would mean voting against half her board.

State laws vary on this. In California, for instance, the law permits staff members to be on nonprofit boards as long as 50% or more of the board members are neither staff nor "interested parties" (such as relatives of staff). Most for-profit corporations have their CEOs (Chief Executive Officer) as the Chair of the Board. Organizations with board members familiar with that corporate model, and organizations that expect their directors to lead the board, are more likely to have executive directors on the board.

Before agreeing to board membership for the director, the board should discuss the impact on sensitive matters such as performance review, salary and contract negotiation, and board-staff relations. There may be other ways to give the new executive director the stature she feels she needs: perhaps a series of coffees introducing her to community leaders, a more significant role in working with the board than the previous director experienced, or a printed announcement of her selection. What ever you decide, you and the director should review and reconsider the decision in a year.

Sample Letter from board accepting resignation of Executive Director

Dear _____:

On behalf of the board of directors of XXX, I am writing this letter to tell you that the board received your letter of November 15 and has accepted your resignation from the position of executive director as of November 30, 1995.

By November 30, you will submit a final expense reimbursement request for the period of your employment, and return to the office the fax machine which you have been keeping at your home.

Your final paycheck, along with a check for accrued vacation, will be issued on November 30, and represents final payment from the XXX organization for your services.

Sincerely,
YYYY
President, Board of Directors

       How can we get board members to help with fundraising solicitations when they've never done it before, or had a negative experience fundraising in the past?

First, we don''t agree with the conventional wisdom that all board members on all boards should raise money. Each board needs to determine an appropriate role for itself in the organization''s overall strategy. Even if fundraising solicitations are a part of that strategy, it may not be appropriate for every board member to be involved.

But if your board has decided that all board members should help raise money, then it''s to everyone''s advantage to ensure positive experiences. If we think about fundraising solicitation as door-to-door sales, it may well be unappealing to most folks. When properly managed, fundraising means simple explaining to another why the organization''s work is important, and personally meaningful. Whether or not the request results in a substantial gift, the organization will have a new friend.

Find out more about what negative experiences board members have had previously. Perhaps they were sent to speak to a hostile or cold prospect. Perhaps they didn''t have the information to answer questions, or perhaps they were the wrong individuals to have asked those prospects. Perhaps they simply didn''t have the preparation or practice time to learn to ask successfully for money.

In our experiences training board members in fundraising, we''ve found that if staff can provide the proper support in prospect selection and solicitor training, most board members can have successful experiences. Not only does this give the board member a euphoric feeling, but seeing the impact of, say $5,000, on the organization''s services strongly reinforces the connection between the agency''s goals and the act of seeking support for those goals.

If the board has agreed that every board member needs to be involved in solicitation, and some individuals feel uncomfortable with solicitations, it may be appropriate to suggest that they reconsider, without stigma, their participation on the board. Such individuals can contribute in other important ways to the organization. If fundraising is a central responsibility for the board, new board members should be recruited with the experience, contacts, or willingness to learn that will be helpful in the future.

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