Effective governance in nonprofit organizations

By Marcus Coetzee, July 2013.

All non-profit organizations have governance structures. In some organizations these structures are a source of insight, leadership and inspiration. In others they are a source of ineffectiveness, frustration and conflict.

This essay will present the three primary roles of these governance structures (referred to as ‘boards’ throughout), as well as the key factors that correlate with the effectiveness of these structures.

The directors elected to these boards have three primary roles: the first is to ensure that the organizations they are governing are compliant with various laws and procedures; the second is to ensure that they are managed responsibly; and the third is to ensure that they perform.

Now let us examine each of these roles in more detail.

Firstly, directors must ensure that the organization is compliant. All organizations must comply with various laws (e.g. Non-profit Organizations Act and Companies Act). They must also comply with their own founding documents (e.g. Deed of Trust, Memorandum and Articles of Association or Constitution) and the policies and procedures that have been approved. Finally, these organizations must comply with various ethical principles to prevent conflict of interest and so forth. In my experience, directors in the non-profit sector are very good at fulfilling this role and following the required procedures.

Secondly, directors must ensure that the organization is run responsibly and make sensible strategic decisions to fulfil the organization’s mandate and prevent disaster. Directors must therefore monitor the decisions of senior management and ensure that they are wise. Directors must ensure that senior managers have a good understanding of the organization’s strategic context and are making appropriate decisions to protect the organization’s future. In my experience most directors are also good at fulfilling this role. However, this role brings its own challenges. Too often I encounter directors who are overly zealous and require that they are consulted on all management decisions. Such directors’ undermine the performance of the organization while neglecting their own responsibilities. I’ve always advocated that directors who do not trust a senior manager’s ability to make decisions should either learn how to trust the manager or get rid of him or her.

Finally, directors must ensure that an organization performs and is able to increase its social impact and financial performance. Depressingly, I encounter very few boards that admit that they succeed in this arena. When I ask directors how much of their desired impact their organizations are having, the answer is normally in the region of 10% – surprisingly this particular number has cropped up consistently over the 10 years I’ve been asking it. More importantly, when I ask directors what percentage of their efforts currently go into each of the three roles (i.e. compliance, responsibility, performance) directors normally give ratios in the region of 70:20:10. In contrast, when I ask directors how they believe they should spend their time, they normally give ratios in the region of 10:20:70 respectively – the exact reverse of what is happening. In other words, most boards I’ve encountered have judged themselves poorly with regards to their performance role.

Over the years I’ve asked directors and governance experts what they believe makes an effective board. Typical answers were that there should be a certain number of directors and meetings, and that these structures should be of a certain size and adhere to various policies and procedures, and so on. Answers have tended to deal with the basic structure and bureaucracy of governance – topics that documents such as the King 2 Report on Corporate Governance and various guidelines for the non-profit sector usually to focus on.

I suspect that people have a tendency to study the easily observable characteristics of effective boards and to draw conclusions based on these observations. I also suspect that people spend too much time studying governance in mature organizations which have had ample time to establish the required administrative processes. What people fail to notice is the large number of ineffective boards that share the same characteristics. This oversight has led to the common perception that adopting these structural characteristics will make a board more effective when this is not necessarily so.

So what does scientific evidence say about factors that improve board performance? One of my favourite pieces of evidence is an article called ‘The coming revolution in corporate governance’ by Richard LeBlanc and James Gillies which was published in the Ivey Business Journal in 2003. After an extensive literature review, these authors found very limited scientific evidence in decades of literature that these various structural components of a board correlate to its performance. Rather they discovered that the profile of directors (i.e. ‘strategic experience that matches the organization’s needs’) and how well they work together and make decisions are factors that are most likely to correlate with improved board performance.

The implications for non-profit organizations are clear. Firstly, we must realize that the role of boards extends beyond the compliance functions. Secondly, boards should monitor but not micro-manage the decisions made by senior management, and take action if these managers are not performing. Thirdly, boards should make sure they have directors who are performance orientated and who have strategic experience that matches the organizations current and future needs. Furthermore, the chair of the board must have the ability to get the directors to work together effectively.

Most importantly, remember that if strategic topics are not dominating the boards’ discussions, then the warning bells should be ringing.

Marcus Coetzee is a business strategist who helps leaders to think clearly about the future.

Cultivating strategic clarity.

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