By LAURIE PATTON | 18 July 2017
It’s time for not-for-profits – their directors and their senior executives – to have a good look in the governance mirror. And it would be a good idea for the members of NFP’s to critically assess the governance practices of their boards. Perhaps we even need to look at changing the relevant laws to ensure better governance of the sector?
Too many NFP boards are dominated by people who have hung on limpet-like for too long – precluding others from contributing and defending past policies and practices long deserving review. Too few actually understand modern governance principles.
The NFP sector performs a vital role delivering services that meet important social needs. It provides a voice for some of our most disadvantaged groups and individuals. NFP status also allows organisations of professionals to represent their members under a regulated legal framework. The sector oversees the collection and expenditure of hundreds of millions of dollars of other people’s money, sourced either from member fees, personal donations or government grants. So it’s critical NFP’s are well run according to the highest levels of good governance – and with a high level of transparency.
NFP’s and for-profit companies are both corporate entities and the boards of both are subject to the same basic governance and legal requirements under the corporations laws – acting in the best interests of the company, avoiding conflicts of interest, etc.
The success of any organisation is dependent on the quality of its leadership. In both for-profits and not-for-profits effective leadership must start at board level. Boards select the CEO and set the tone of the organisation’s culture. They are ultimately responsible for its financial performance, its adherence to numerous laws and regulations and the achievement of its core purpose.
Processes by which NFP board members are selected vary, but in too many cases do not include a rigorous assessment of skills, and in particular a requirement to demonstrate an understanding of corporate governance principles. For this reason, many NFP organisations suffer at the hands of inexperienced directors who allow questionable actions on the part of co-directors, staff and volunteers, and/or boards that fail to develop appropriate policies to ensure transparency and ethical behaviour.
One of the perennial challenges for NFP boards is reconciling the respective roles of directors and management. The same issue exists in the for-profit sector, however the generally higher level of corporate governance knowledge limits the frequency of disputes on this score, as does the jointly shared imperative of delivering a profit.
Some NFP boards appoint one of their number as an executive director rather than employ a CEO. This is especially common in smaller NFP organisations with limited financial resources. On other occasions a NFP might vest executive powers in their chair. Both options are entirely legal and reasonable according to the circumstances, however there needs to be a clear differentiation between executive and non-executive actions.
Difficulties can arise when a CEO is employed by an interventionist board or where the directors allow a non-executive chair to unnecessarily intervene in operational matters. For this reason good governance protocols and a transparent process established by a board cognisant of corporate governance principles is highly desirable.
For member-based organisations, there needs to be a balance between the need for a certain amount of confidentiality in respect of board deliberations and the right of members to know what is being done on their behalf.
There are a variety of types of NFP director. This list is probably not exhaustive and of course some directors will exhibit the characteristics of more than one of these types.
Enthusiastic amateurs with great commitment
Being an expert in the field of endeavour of an organisation is a valuable but insufficient qualification for board membership. In fact, in the absence of other relevant skills an overly passionate subject matter expert might not appreciate many of the broader risks associated with decisions being made. They may fail to see the ‘big picture’ and are likely to be overly keen on maintaining the status quo and resistant to change – especially when current circumstances favour them or their organisation.
Anyone looking to develop a career as a non-executive director will be advised to seek a NFP board appointment as a starting point. Others see a directorship with their respective professional association as something that “looks good on my resume”. People using their board role for career advancement are likely to avoid advocating or supporting the hard decisions often required at board level. They can be excessively prone to seeing issues through the prism of their personal experience or expectations.
Conflicted owners of related businesses
Directors owning or running businesses in the NFP’s field of endeavour carry an inherent conflict of interest. Too many NFP boards and their less experienced directors fail to recognise when this is the case. Boards should have processes in place to at least acknowledge and reveal conflicts, which should be routinely recorded in meetings minutes. However, acknowledgement is not necessarily sufficient to avoid unacceptable consequences. Conflicted directors should ideally not take part in discussions relating to the conflict and certainly should not be permitted to vote on them. In some cases an ongoing conflict of interest might justify disqualification from appointment or, if already appointed, a requirement to resign. The most obvious example of an inherent conflict of interest is where a director, or an organisation with which they are involved receives income, directly or indirectly, from the organisation.
Relevance deprivation syndrome sufferers
Too often, people who have not achieved their life goals or professional ambitions find consolation in a NFP board appointment. The problem here is that any personality and behavioural weaknesses that have limited their progression thus far are likely to be exhibited in lacklustre and/or dysfunctional board performances.
Narcissists with menace
Occasionally downright unreasonable people somehow make it onto NFP boards. The expression ‘two-faced’ probably explains why these people are not necessarily seen for what they are by others with whom they’ve only previously had fleeting encounters. The problem here is there’s no easy mechanism for a board to modify the behaviour of narcissists with menace, much less remove them. The majority of their co-directors will often suffer in silence to the detriment of board performance and at the expense of the organisation.
Well-balanced individuals lacking sufficient knowledge and/or experience of corporate governance
This category probably describes the overwhelming majority of NFP directors. It’s for this reason that most NFP boards manage to do their job with satisfactory overall effect. However, for the reasons discussed in this article they can hold back the board and the organisation from maximising performance.
Well-balanced individuals with well-honed knowledge and/or experience of corporate governance
Regrettably, there is often an insufficient number of people like this on NFP boards.
NFP boards need to ensure proper governance principles and processes are in place. Directors and prospective directors should be required to demonstrate minimum levels of corporate governance knowledge and experience, or a willingness to undertake governance training. Mandatory governance training would be a good idea, as would a review of board performance conducted by an external governance expert from time to time.
NFP boards should also be required to pay greater attention to conflicts of interest on the part of their directors. They owe this to their members and to all those who benefit from or rely on the services they provide – and help fund the organisation.
And board renewal, through fixed term limits, should be entrenched in NPF constitutions.
(Laurie Patton has managed a range of for-profit and not-for-profit companies, large and small, and has served on both for-profit and not-for-profit boards. He is a Fellow of the Australian Institute of Company Directors and a member of the Institute of Community Directors Australia. This article, slightly updated, was first published in Probono News.)