Monday, September 21, 2009

Board Governance of Nonprofits

Below is a reprint of an article I wrote that was published recently by Charity Channel.

After many years of working in the trenches of the nonprofit sector, in June of last year something extraordinary happened to me. It was as if I was grabbed by the collar and lifted up to a high mountain, where for the first time, I got to see all the nonprofit “trenches” people work in. I have learned a tremendous amount this past year, in addition, I have been given an opportunity to voice what many think but often can not say because they are on the inside of the sector. Charity Navigator takes no money from any of the charities we evaluate. As a result, we have more latitude than many to speak from the “outside” less restrained by vested interests and political maneuvering.

So here let me speak plainly about some of the dirty little secrets about many nonprofit Boards and how they govern – they often do it badly and in some cases they do not govern at all. On the one hand (more typical in my experience), you have uninvolved Boards (no governing at all). They abrogate almost all governing responsibility to the CEO who is usually more than happy to take the power and run with it. The CEO then is largely unaccountable and, not surprisingly, we see all kinds of scandals in the sector as self interest trumps mission. At the other extreme, you have micromanaging Boards. In these tough economic times, I think this type of Board is on the rise. The agency starts running deficits and suddenly the Board begins to awaken from its slumbers and questions everything. They can then swing to getting into agency minutia that is inappropriate. They often can place unrealistic expectations on the CEO and staff leadership to raise funds in this difficult environment, when they are unwilling to play the critical role of helping to make it happen. Another variant of this (with or without deficits as the instigator) are the arm chair Boards who believe that, since they made a lot of money in the for profit sector, they need to teach the idealistic and na├»ve nonprofit leaders how to manage. A good antidote to that would be to have every Board member read Jim Collins supplement on the Social Sector for his book – Good to Great.

In one sense, for profits and nonprofits are like comparing apples to steak, they are both the same in one sense (organizations or food) but not even remotely similar in certain fundamentals. It is true that there are plenty of valuable skills that for profits and nonprofits can learn from each other, but the hubris of some Board members to assume that for profits have all the answers, is quite appalling.

So whether it is the fault of the CEO or the Board members themselves, the bottom line is that many nonprofit Boards are an unmitigated disaster. So much for the problems, now what is to be done about it? It gets us to Charity Navigator’s plans for modifying our rating system of evaluating nonprofits. We believe that for an individual to become a wise social investor (a donor with their eyes wide open); they need to consider three components when looking at a nonprofit (by implication the nonprofits should be managing and focusing on all of this!):

1. Financial health – what Charity Navigator currently evaluates (see our web site for more information on this at http://www.charitynavigator.org/). We encourage you to go over these matters with your Board and develop a dashboard where you benchmark your financial performance against standards such as ours.
2. Accountability – measures of transparency, governance and management best practices are encompassed here. A good resource for thinking about this (another document to give your Board) was developed by the Nonprofit Panel and is called Principles of Good Governance and Ethical Practices, they also now have a workbook to help you implement all of them).
3. Outcomes – more precisely outcome indicators and other evidence of nonprofit high performance. Every nonprofit needs to implement a performance management system that includes meaningful outcome indicators. A good place to learn about these matters is the Center for What Works. Another great resource is the Alliance for Effective Social Investing (http://www.alleffective.org/). If you go to the resource page you can find a tool that measures the potential to create social value. Test your organization against these standards to get an idea how you are doing in this regard. Also you can subscribe to my blog (http://www.kenscommentary.org/) where we are hosting a forum about outcomes.

A good, effective and high performing Board should be fully engaged in the development of a theory of change process to laser in on what truly matters for the nonprofit to be effective. The key components of their ongoing oversight should include the three measures listed above. However, the fundamental starting point of all of this is those of you who are reading this, the nonprofits management leadership. You are the ones who must have the integrity and ethos of transparency. In other words, if you do not support and encourage the Board to become actively engaged, it will not happen. That is a critical weakness of our sector. If the staff leadership is unethical, everything else can fall apart. So the most critical job of the Board is to hire an ethical CEO who believes in the three components listed above.

Of course, you do not get to hire the Board, so once the agency has the right CEO doesn’t mean the problems of poor Board governance have been resolved. As Jim Collins would say, one of the first steps to developing a great organization is to get the poor performers off the “bus” and recruiting high performers to get on. So a critical role for the good CEO is to help in Board recruitment and training to make this the case for the Board.

At the end of the day, as the emphasis on measuring meaningful nonprofit performance grows, I think one of the longer term consequences will be an improvement in Board governance. Why? Because I believe that poorly governed nonprofits are far more likely to have poorly performing programs. As the movement calling for performance measurement grows and becomes the gold standard for funding, poor performing nonprofits will wither on the vine. Charity Navigator will be there to chronicle and evaluate the good, the bad and the ugly. We also hope to be there as a critical friend to you, on the journey to higher performing nonprofits and a better world.

6 comments:

Gary said...

Ken,

A real good start. As you note, all of the three have subsets that should be explored. Climbing the mountain is daunting, but with a general consensus and commitment it is certainly doable. Leadership and follow-though are central to the success mix.

Gary

Ken Berger said...

Gary,

To climb the "mountain" I agree with you that capable leadership (ethical, persistent, passionate, visionary, etc.) is a critical first requirement for an organization to even begin walking up the road of becoming a high performing nonprofit.

Rollin A. Van Broekhoven said...

Ken,

Good piece here with valuable insights. Thank you also for the recommendation on the Jim Collins book. I do like the balance you identified between the three components for evaluating a nonprofit organization. While you and I might disagree on some of the elements of Charity Navigator rating schemes, as we discussed in London during the Values Impact conference, I like what you have written here, and continue to enjoy the journey learning from you.

Rollin
http://rvanbroekhoven.blogspot.com

Ken Berger said...

Rollin,

Regarding our rating "scheme", we have recently formed an Advisory Panel (see the list in the About Us section of the Charity Navigator web site), to help us. They will not only provide feedback on our plans to add measures of accountability and outcomes, but also review our existing financial metrics.

Tom Bailey said...

I stumbled across your blog after calling in about getting specific research on charities. You have a first class orginization.

I like what you are saying here but coming from the viewpoint of for profit business vs. non-profit the thing that I look for in both is passion and integrity from the CEO if they have both of those boards are less important. If the CEO has integrity issues those are not illiminated by having a board in either for profit or non-profit.

The other point is that in non-profit what is their true agenda?

I love what you are saying in a number of your posts.

Best regards

Ken Berger said...

Tom,

I am very glad you stumbled in this direction!

I fully agree that to have a high performing nonprofit, it begins with capable and passionate agency leadership. However, it also requires a firm commitment to creating an outcome driven organization and an understanding of the importance of a performance management system to drive that passion you mention, into real results.

That helps to answer your question - What is the true agenda of nonprofits? In a nutshell, I believe that for many the agenda has been to grow (call it the growth motive vs. the profit motive). Our hope is that as the public realizes that growth for growths sake is not good, we will move toward the impact motive.

There is plenty for you to read on my blog about outcomes (meaningful and sustainable results that improve lives and communities), which is the focus most nonprofits need to have to begin to move toward impact.