Board of Directors in Nonprofit Organizations

Last week in this series, we covered “The Roles of the Board of Directors in Nonprofit Organizations.” This week will continue to cover this topic, with an emphasis on specific duties.

Support and Evaluate the Chief Executive

The board should ensure the chief executive has the support they need to further the goals of the organization. The board and the executive director’s effective relationship within a nonprofit are ultimately the engine that makes the organization run. If this relationship is dysfunctional then the organization will be dysfunctional.

Leadership within a nonprofit is a joint effort by the board and the executive director. If they are not united, they will fail. The old saying united we stand divided we fall is true. Trust between the two and clarification of roles and responsibilities is what makes for a great working relationship.

In his book, “The Not-for-Profit CEO,” Author Walter P. Pidgeon Jr., describes what most nonprofit boards and executive directors now strive for: a balanced cooperative partnership.

“The relationship of the CEO with the volunteer leadership has been transformed into a partnership relationship. The leadership, both volunteer and professional, of successful nonprofits understands the administrative balance needed to get things done, the bonds are much more cooperative.”

Every nonprofit board has the ultimate authority to hire and fire its chief executive. “Balanced and cooperative” means boards and chief executives must continually work together to clarify their roles, set, and meet mutual expectations, and practice the fine points of bringing out the best in each other. With focused attention, the partnership model offers the promise to let loose the talent and enthusiasm of all the organization’s leadership.

Because the CEO is so central to the success or failure of the agency, evaluation of the executive by the board is an important component of the board’s responsibilities. A good evaluation process forces the board members to periodically sit down and tell their executive what is expected of them. It should not be a luxury to be evaluated, it is a necessity. Everyone needs feedback, good and bad.

Like any employee, executives also need praise and acknowledgment for work well done, and immediate feedback when problems arise. In the best situations, the board president and officers of the organization have established good working relationships with the executive where constant feedback flows in both directions. The formal annual evaluation is an important component of, not a substitute for, that relationship.

Board and Staff Relations

The key to an effective nonprofit organization operation depends on the partnership between the volunteers and staff. This partnership must be based on mutual recognition and respect one must have for each other. Developing positive relationships and establishing and maintaining trust is a strategic effort essential to organizational effectiveness. The power and potential of relationships must be more broadly recognized and endorsed.

The significance of connection, caring and meaning should not be lost in an overemphasis on more “business-like” practices. Trust is the basis of effective leadership. Nonprofit leaders are stewards of the well-being of individuals and our communities: board chairs and executive directors comprise the key leadership fulcrum of nonprofit organizations. The potential to leverage the board chair-executive director relationship and increase nonprofit organizations’ supply of meaningful, productive relationships is great and unrealized. Building and nurturing this relationship must be a priority.

Monitor and Strengthen Programs and Services

The board’s responsibility is to determine which programs are consistent with the organization’s mission and monitor their effectiveness. The typical nonprofit organizational structure is built around programs, that is, the nonprofit provides certain major services, each of which is usually formalized into a program. Program inputs are the various resources needed to run the program, e.g., money, facilities, clients, program staff, etc.

The process is how the program services are delivered, (e.g., clients are counseled, children are cared for, art is created, association members are supported, etc). The outputs are the units of service, (e.g., number of clients counseled, children cared for, artistic pieces produced, or members in the association). Outcomes are the impacts on the clients who are receiving the services, (e.g., increased mental health, safe and secure development, richer artistic appreciation and perspectives in life, increased effectiveness among members, etc). The outcomes are the “guiding light” for the organization and help it keep its direction. Therefore central funding agencies like the United Way are increasingly requesting outcomes-based evaluations from nonprofits.

A major responsibility of boards is to set strategic direction for nonprofits. The nonprofit’s board should be highly involved in authorizing and guiding initial direction for programs. Therefore, boards should be involved in the planning of programs. Clients and program users should be involved in the planning process to provide perspectives from their point of view. This involvement of clients and program users is a critical aspect of the marketing process as well because the clients are instrumental to the program’s successful implementation.

Many funding agencies insist nonprofits work together on developing successful collaborative efforts. In working together, there is an economy of scale, or sharing of resources, that lowers costs and focuses more resources on serving clients.

There are those nonprofit leaders who struggle with the notion of collaboration or sharing resources and control with other organizations. Collaboration takes time and effort for nonprofit leaders. If collaboration will better serve clients and better serving clients are the overall goal, then collaboration should be attempted.

Fiscal Responsibility and Oversight

Most executive’s and their chief financial officer’s will tell you folks with math anxiety are drawn to nonprofit board service. Executives will often hear their board members say, “Oh the accountant takes care of that. I don’t understand numbers, so I don’t get involved with those things.” Legally, that statement is not an option for board members.

The Duty of Care, embedded in corporation law, requires each board member take care to make well-informed decisions. Board members are not allowed to pass off some of their responsibilities just because they do not understand numbers.

“While it is uncommon in an established nonprofit for a board leader to carry out day-to-day bookkeeping or financial duties (such as making journal entries), board members must exercise overall responsibility for the fiscal dealings of the nonprofits they serve.” (Ford, 2010)

Solid financial policies are essential for every organization, nonprofit or otherwise. Because nonprofits have a higher level of fiscal responsibility to their communities, developing strict policies are fundamental. No matter how much you trust the organization’s staff; policies must be put in place to decrease the probability of embezzlement and to provide a guarantee to donors and the community that the organization takes a responsible approach to its financial management.

As an example, in one organization the board discovered after a period of time, the financial statements presented to them at board meetings did not accurately reflect the financial temperature of the agency. After a lengthy investigation and audit, it was discovered restricted endowment funds were inappropriately used (and without the boards knowledge) to pay annual operating expenses.

This was an example of not only the board falling asleep at the wheel, but the staff leader exercising unethical and illegal behaviors. The board either did not ask the right questions of the executive, and/or the finance committee was incompetent or too trusting of the staff leader.

Ideally, board members should have a keen interest in the fiscal affairs of the nonprofit, including its overall, current financial position, the reliability of the reports the board receives, and the effectiveness of the nonprofit’s management of funds. Not only should board members require ongoing and complete financial reports from finance staff but also the board should hold staff accountable for meeting the standards of timely reporting (for example, providing financial statements no later than three weeks after the close of the prior accounting period).

The board should work together with the staff to determine which financial reports will give them the information it needs in a format that is understandable. The finance committee is responsible for in-depth analysis of the financial reports, but that committee is made up of those with financial expertise, so it’s not so hard for them to do this work. Once they have completed their analysis, they should translate the information into reports all board members can understand.

All nonprofit boards must take seriously their responsibility for being accountable to the members and donors that support them. The only way to do that is to make sure all board members clearly understand this responsibility and how to carry it out with respect to financial matters.

Lastly, board members should ask critical questions about the financial information they receive, including budgets, cash flow statements, the annual Form 990 and annual, sometimes audited, financial statements. If there is any indication that board members do not understand the fiscal picture of the agency, then it should be quickly addressed with prompt training and assistance.

David Sorkin, former CEO of the Bernikow Jewish Community Center, said, “First and foremost the board must understand its legal fiduciary responsibilities and the consequences of abdicating these responsibilities. The consequences of a divergence of this responsibility often lead to misunderstanding between the CEO and the board, divergent opinions on the financial outcomes and potential mistrust between the CEO and the board.”

Ensure Legal and Ethical Integrity

Almost every day, it seems, newspaper headlines call out the details of another corporate scandal. Those leaders in the nonprofit world are tempted to think that they are above such wrongdoings and the associated headlines. Nonprofit leaders, after all, are altruists who are uncorrupted by the desire for profit. Their motives are so noble, how could anyone question their actions?

Regrettably, nonprofits are managed by people with the same collection of ethical standards as the rest of the world and have their share of immoral individuals. In past years, the Nature Conservancy, the Red Cross, a handful of United Way chapters, and local foundations in several communities have found themselves the target of negative headlines. Such ethical lapses or perceived ethical lapses undermine the trust the community holds in the entire nonprofit sector.

Most people are sickened with the deceitfulness and unprincipled behaviors exhibited in the business world today. The board is ultimately responsible for adherence to legal standards and ethical norms. The greatest threat to the nonprofit sector is the betrayal of public trust and the disappointment of public confidence. Board and staff must take ethical decisions and behavior seriously, removing any personal issues from their agendas to address constituent needs.

“After all, they set a public example for all to learn about making ethical choices, to think analytically and to believe they can make a difference through their language and actions.” (Holster, 2004) Boards need to execute the right decisions, not the easy or convenient ones.

The purpose of the nonprofit organization’s existence is to benefit the community as opposed to the private interests of their board or staff members. The mission of a charitable nonprofit expresses the way that the organization will fulfill its community benefit purpose.

Appropriately, board members are often referred to as “trustees,” which reinforces the concept that the assets of a nonprofit are entrusted to the oversight of its board members who have a legal duty to ensure the nonprofit uses those assets to fulfill its stated mission.

Courage to face the truth and correct wrongdoing is the most important attribute an executive and one’s volunteer leaders brings to the job. Until nonprofit boards all recognize the organization exists not for individual gain but for the betterment of all, agencies will turn dreadfully away from its primary purpose and mission.

Sorkin agrees with this perspective. “Any misdirected or lapse in ethical behavior puts the mission of the organization in considerable jeopardy. Ethical leadership is not only the responsibility of the board but also the organizations employees. Organizations must implement adequate checks and balances to ensure that ethical standards are identified and adhered to.”

In general, discussions about nonprofit ethics cover the topics of honesty, transparency, conflicts of interest, fundraising issues, and treating employees, volunteers and clients with respect. It should go without saying that employees, volunteers and members should all be treated with respect. Nonprofits should never engage in discrimination or harassment. These are not difficult ethical issues; unfortunately, they are sometimes difficult for ordinary humans to follow.

Next week in this series, we’ll cover “Building a Competent Board in Nonprofit.”

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