The Best Way for Boards to Operate

For the past several years, Congress and state officials have been threatening to impose new regulations on nonprofit groups and their boards, but legislators and regulators cannot ensure the viability and integrity of nonprofit organizations. That’s the time-honored job description of trustees, chief executives, and senior managers.

Even if nonprofit groups earned A+ grades on the reports submitted to the government or prepared by ratings groups, that does not mean that those organizations won’t still face tough times if their boards and managers aren’t properly taking care of business.

Theories abound about the ideal attributes of trustees and size of boards, and no one answer suits the needs of all groups. Even so, some basics apply to every organization.

The first law is that micromanagers need not apply. Short of a crisis situation, boards that perpetually get in the CEO’s backfield create chaos by transmitting mixed signals about who is in charge day in and day out.

Here are some of the other attributes of good trustees:

• Authentic commitment to the enterprise and ability to shoulder the burdens of trusteeship, including reasonably faithful attendance at board meetings and willingness to serve conscientiously on key committees. The nominating committee, in conjunction with the board chair, should periodically review the performance of trustees. Term limits are another way to ensure that the board is stocked with trustees who have the will and wherewithal to contribute to the organization.
• Expertise that augments the skills of senior management in such crucial areas as finance, deal making, and marketing. For instance, enterprising nonprofit groups may contemplate entering into joint ventures with for-profit entities. Corporate trustees who do transactions like these in their sleep are an indispensable asset in appraising the merits and risks of unconventional deals.
• A worldview that helps management detect and comprehend relevant and noteworthy trends that might not be spotted from inside the organizational bunker.
• Personal wealth, institutional resources, or influential contacts that help the organization generate critically important grants, contracts, or endowment gifts. To be utterly crass about it, most nonprofit boards need at least some well-heeled trustees who are invited to serve with the explicit understanding that they are expected to either give their own money, win it from others, or quit.

• Some lawmakers and others have suggested that perhaps major donors who have a building named after them or get other perks for their donations should not serve on the boards of groups they support to prevent any conflicts of interest. However, major benefactors are the lifeblood of nonprofit institutions. Barring them from board service would be foolhardy and could destroy the financial underpinnings of the entire nonprofit world. The wiser course is full transparency and a tough code of ethics.

• Financial acumen to ensure that management cannot pull the wool over directors’ eyes and that the organization meets all audit, tax, and reporting obligations.
• Diversity. Ethnic and gender diversity matter enormously because they greatly enrich deliberations and help keep the organization in touch with the real world. The National Urban League, where I served as president, espoused age diversity as well. The bylaws required that some trustees be younger than 35. While managing a board meeting with Fortune 100 CEO’s and young professionals on the ascent made for some anxious moments, each group got a kick out of the other’s presence and profited from the mutual exposure.

Once the right board is assembled, the most important task for trustees is to select a CEO, set compensation, evaluate performance, and bid adieu to the CEO when the best interests of the organization demand new leadership. The front end of the succession process is obviously critical and must be handled with great diligence and thoughtfulness.

In recruiting leaders, boards should also focus on two pivotal responsibilities that generally garner less attention than administrative skills, namely those of chief dreamer and chief strategist for the organization. “All administration all the time” by the CEO won’t suffice in today’s dynamic environment, where no niche, no market share, and no source of support dare be taken for granted terribly long lest it be snared by a competitor.

Easily the most delicate and potentially distasteful aspect of succession is for boards to determine when it is time for the chief executive to step aside. Oftentimes, poor performance triggers the transition. Other CEO’s who have enjoyed a solid run may respond to an internal body clock that tells them it is time to pass the baton.

Nonprofit groups need to be headed by people who don’t know any better.

I speak from personal experience when I say that once CEO’s have been around the track many times, they invariably moderate their expectations because they know better. The organization’s strategies grow stale, and staff skills may slowly atrophy. That is when it’s time for energetic and innovative new leaders who are determined to scale new heights — because they don’t know any better. That’s progress.

A related task for trustees is to assess whether the organization has capable senior managers in key operating posts like program, finance, development, and human resources.

It is in the nature of domineering leaders to dominate and control all interactions with the board. But trustees should insist that senior managers appear before them on occasion so the board can appraise their interpersonal skills, operating styles, and knowledge. Unselfish CEO’s who regularly expose their senior managers to boards motivate their troops and help reassure their trustees that the team is up to the task.

Aside from ensuring that the leadership of an organization is as good as it can be, trustees must also be kept up-to-date and urged to weigh in on the tough strategic and operational challenges and choices that chief executives are wrestling with, what keeps them awake at night, and what strategic options they are considering.

Part of this process entails a regular effort to assess the risks an organization faces. An organization’s leaders should analyze the practices that, if grievously mishandled, could place the organization in harm’s way or even threaten it with extinction.

The trustees should review and assure themselves that the core operations are in good order. And they should instruct managers to flag any serious risks the moment they materialize. Some matters may fall under the purview of a standing committee. Even so, the board as a whole should satisfy itself periodically on each count because if grave problems erupt, the entire board, not individual committees, will bear the brunt of criticism for flawed oversight. The areas of risk to be assessed might include:

Finances and spending controls. Are the appropriate systems and processes in place for internal and external audits? Is there suitable control over who can obligate the organization by authorizing contracts and outlays? Has management embarked on any highly risky ventures that could imperil the organization’s financial health? How robust are the protections against fraud?

CEO compensation and board perks. Are both within the bounds of acceptable practice and substantiated by a credible peer-group comparison survey? Are there any extraordinary arrangements, like sizable loans to CEO’s, that warrant close scrutiny and explicit board approval?

Legal, legislative, and regulatory matters. Are all taxes and pension obligations being paid in a timely fashion as well as other required reports to regulatory bodies? Is the organization complying with laws governing tax-exempt charities and lobbying by nonpartisan groups?

Ethics and reputation. Does the organization and its board have a strong culture, backstopped by a code of ethics that is enforced and by sanctions for those who transgress? Are there any foreseeable risks to the organization’s reputation by virtue of the actions of its trustees, employees, or affiliates?

Investment practices. Are the portfolios for endowment and pension funds invested prudently to provide the soundest results for the near-term and long-term needs of the organization? Is the pension fund sufficiently financed? Are earmarked funds adequately tracked and efforts made to ensure the money is used properly?

Human resources. Are the organization’s policies on hiring, dismissal, compensation, benefits, diversity, equal pay, sexual harassment, and all such topics in the best shape they can be? Are any potential problems looming on the horizon?

Even more important, organizations must ask tough questions about what role they play, and how good a job they are doing. Does the mission remain relevant or is it time to pause to consider an updated purpose? Is there a strategic plan for carrying out the mission and staying in tune with changing realities?

How is the organization doing in its main line of work? Are its programs well run and respected? Is the organization guilty of mission creep, namely trying to be more things to more people than it can possibly manage? Has it drifted or been shoved off course because of the way it obtains its operating budget?

Is the organization faithfully and effectively delivering on what it promises so that grant makers are satisfied and likely to renew support? What evaluation methods and metrics are used to gauge performance? Performance assessment goes to the heart of an organization’s credibility and viability. That’s why boards and senior management should routinely engage in this exercise together.

Trustees and senior managers who give such questions short shrift place the enterprise unnecessarily at risk. Governance grounded in robust and respectful board-management interaction is harder work than the old-fashioned approach where trustees just sign off on what executives want. The payoff for nonprofit organizations and the noble causes they serve amply justifies the investment of time and energy.

Hugh B. Price is a senior fellow at the Brookings Institution, in Washington. He has previously served as chief executive of the National Urban League and as a vice president of the Rockefeller Foundation.