Governance as a Key Strategic Asset

By Anthony Knerr

Over the past few years, a disturbing number of nonprofits have been the subject of embarrassing failures, investigatory probes and ethical lapses. These have ranged from major financial irregularities to stunning “flame-outs” by chief executive officers; self-enrichment by private foundation trustees to misallocation of donated funds; excessive compensation arrangements to college athletic scandals. Other nonprofits seem to have lost their way, beset by significant erosion of membership or audience, bedeviled by recurring budget deficits or hamstrung by apparent irrelevancy of mission or program.

Nonprofits with superior governing boards tend, on balance, to be far more effective.

But for all those nonprofits that are tripping, stumbling or falling, there are scores of others that have never been in better shape, organizations that are blessed with record admissions, unprecedented fundraising successes, ever stronger applicant pools or growing numbers of volunteers: Girls Scouts of America, Museum of Modern Art, Princeton University, March of Dimes Birth Defects Foundation, to name just a few.

Why do some nonprofits have such significant– and often public–difficulties whereas others are able to tackle successfully even the most serious issues? While superb executive leadership is always critical, the experience of ANTHONY KNERR & A SSOCIATES suggests that a primary reason is outstanding governance*. Nonprofits with superior governing boards tend, on balance, to be far more effective, focused and financially sound than those with weak, confused or inappropriate ones. They are far less likely to run into major disputes with their chief executive officers, have conflicts of interest or self-enrichment problems or experience significant, continuing budgetary woes.

Superbly governed nonprofits continuously take the long view: they are clear about, and believe wholeheartedly in, their missions; they think and act strategically, focusing on the future rather than the past or present; and they look regularly for independent external validation of the relevance, quality and effectiveness of programs and initiatives and promptly make appropriate changes and improvements as needed.

These organizations have boards that are toughminded in regulating and evaluating themselves. These boards insist upon the highest ethical standards in all of the organization’s activities, initiatives and operations. At all times and on all occasions, these boards focus on what is best for the organization rather than what may be pleasing, enticing or persuasive to any one individual, be that person a board member, CEO, key staff person or an important donor. They look to their CEOs for effective realization of mission and programs and insist that their CEOs and his or her staff are “best of league.”

Organizations that match strong executive leadership with vigorous and effective boards are far less likely to run into significant or insurmountable problems, even though they may be challenged by changing economic circumstances, new competitive pressures, major shifts in public policy or community interest or new demands for improved accountability or transparency. On the other hand, weak boards with strong CEOs are often held hostage to one individual’s values, ambitions and perspectives–which may or may not be in the organization’s (or the CEO’s) long-term interest. And weak boards with weak CEOs will typically find themselves slipping further and further into difficulties, requiring significant transformation and reconstruction to regain their way.

The Board Perspective

Part of the reason that superb governance is so critical to organizational effectiveness is that the board of any organization simultaneously represents the long view–no other component of any organization can, or should be, the custodian of both its history and its future–and embodies its fiduciary responsibilities.

A nonprofit must continually be in touch with its heritage, core values and defining principles, as it looks boldly into the future to determine how it can best manifest its mission, perhaps in ways that are quite different than its historic roots or continuing traditions.

By the same token, all nonprofits have been chartered to help the common weal–and thus their boards are acting as fiduciaries on behalf of society to undertake their particular mission. It is this fiduciary trust that is essential to the management of endowment and other assets entrusted to the organization. It is likewise this fiduciary trust that requires the board to be vigorous in the discharge of governance.

Because boards are responsible for the longer term health and viability of the organization, they play a particularly important role in strategy: in setting it, wrestling with it, revisiting it and monitoring its realization. Undertaking the hard work of thinking strategically positions an organization to be wellprepared for both opportunity and adversity–as well as for the tactical work of raising money. Being clear about an organization’s identity, objectives and ambitions is central to understanding–and taking advantage of–competing opportunities as well as achieving long-term financial stability.

Organizations need to have boards that will foreshadow the kinds of tough questions that external stakeholders will ask.

The board’s ability to think and act strategically cannot happen without a determined effort by the CEO. Some nonprofit organizations do not see their boards as helpful or important, but as some variation of necessary evils to be endured. Thus, they do not actively engage them in discussing and adopting sound strategic directions; they do not ensure that board meetings uniformly address important substantive matters; they do not provide their board members with clear analysis that will lead to vigorous, informed discussion and debate.

Just as boards should not be confined to the creation of policy divorced from strategy, so, too, boards that exercise strong fiduciary responsibility should not be seen as a nuisance or improperly interfering with the management of the organization. In this present new age of heightened accountability, boards can and must exercise a tough-minded oversight function, standing in for the external stakeholders who may be even tougher. This is clearly impossible if the board is not actively and continuously engaged as a genuine strategic asset that can make for smarter, more informed decisions, more effective reach and improved fund-raising.

In a climate of heightened accountability and demand for greater transparency, organizations need to have boards that will foreshadow the kinds of tough questions that external stakeholders will ask. It is always better to have them answered “in the family” than outside of it. Boards that do not ask tough questions do their institutions no favor.

The Board-CEO Relationship

The best nonprofits understand that governance and management play different, though complementary roles, and must be well-matched in strength, vigor and energy. In these nonprofits, the board and CEO have a professional relationship of mutual respect, clarity and candor as well as, in many cases, a good personal relationship.

But the wise board continually asks questions, is probing and inquiring in order to satisfy itself that the organization is truly delivering on its mission. It wants to have an analytic base for its decisions, not just intuition; it seeks to understand both the upside and the downside; it is curious about other possibilities, approaches and models.

Positioning the board to function at this substantive level requires a significant commitment from the organization. It means that communications between the board chair and CEO are frequent–at some leading nonprofits they are even daily–with no surprises between the two at any time and under any circumstances. It also means the board and the CEO have a shared vision of what “success” looks like that is tied to ongoing performance measures that give concreteness to progress. Further, the board chair and the CEO share a common understanding of what a successful board meeting looks like–one that is routinely and regularly defined by the quality of discussion, engagement, and decision-making–and act as a team to bring about the best in the board and its meetings.

The Rewards of Superb Governance

Some nonprofits are worried that they are—or will be—unable to attract excellent board members in the wake of the Federal Sarbanes-Oxley legislation, increasing competition within the nonprofit sector and the concerns of some about personal liability in serving on any board of directors. But interestingly enough, those organizations that have understood the importance of superb governance are finding that there are plenty of attractive candidates around and they are taking extra steps to thoughtfully identify, screen and nominate them, with excellent results. Involved boards are more engaged boards and more engaged boards are more likely to make significant investments.

Engaged boards are more likely to make significant investments.

As the race is increasingly to the swift, thoughtful and farsighted nonprofits, those organizations that recognize—and invest in developing—superb governance will have a significant strategic advantage and will increase greatly the odds of their continued relevancy, effectiveness and financial stability.

* This perspective is informed by experience with a wide range of clients spanning the cultural, education and human services sectors, as well as extensive analysis of organizational effectiveness and governance across a broad spectrum of different types of nonprofits. Included in this analysis were universities and colleges, arts and cultural organizations, social service agencies and health and medical institutions, as well as nonprofits of different sizes, origins and ages.

STRATEGY MATTERS © No 2
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